MBSL821D Supply Chain Modeling & Design PDF

Supply Chain Modeling & Design
Course Design
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Advisory Council
Chairman
Dr Parag Diwan
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Members
Dr Kamal Bansal Dr Anirban Sengupta Dr Ashish Bhardwaj
Dean Dean CIO
Dr S R Das Dr Sanjay Mittal Prof V K Nangia

VP – Academic Affairs Professor – IIT Kanpur IIT Roorkee
SLM Development Team

Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
Dr K K Pandey
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Print Production
Mr Kapil Mehra Mr A N Sinha

Manager – Material Sr Manager – Printing
Author
R P Mohanty
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
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Course Code: MBSL-821D
Course Name: Supply Chain Modeling & Design
Version: July 2013
© MPower Applied Learning Enterprise

UNIT 20: Case Study
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Contents
Block-I
Unit 1 Introduction to Supply Chain Modeling & Design ....................................................... 3
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Unit 2 Network Optimisation.................................................................................................. 21
Unit 3 Multiple Criteria Decision-making Tools .................................................................... 31
Unit 4 Supply Chain Performance .......................................................................................... 41
Unit 5 Case Studies.................................................................................................................. 47
Block-II
Unit 6 Distortion in Supply Chain .......................................................................................... 57

Unit 7 Sourcing & Supplier Selections.................................................................................... 67
Unit 8 Inventory Planning and Management (IP&M) ........................................................... 81
Unit 9 Designing World Class Warehouse & Material Handling.......................................... 99
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Unit 10 Case Study .................................................................................................................. 115
Block-III
Unit 11 Packaging Design ....................................................................................................... 121

Unit 12 Green Supply Chain ................................................................................................... 131
Unit 13 Vehicle Routing Problems .......................................................................................... 139
Unit 14 Transportation Planning............................................................................................ 147
Unit 15 Case Study .................................................................................................................. 159
Block-IV
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Unit 16 Supply Chain Information Systems........................................................................... 167

Unit 17 SCOR Modeling .......................................................................................................... 187
Unit 18 Manufacturing Supply Chain Design Strategy......................................................... 195
Unit 19 Retail Supply Chain Design....................................................................................... 201
Unit 20 Case Study .................................................................................................................. 215
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Block-V
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Unit 21 Supply Chain Design for Logistics Service Providers .............................................. 223
Unit 22 Supply Chain Organisation Design ........................................................................... 229
Unit 23 International Business Strategy................................................................................ 237
Unit 24 International Marketing and Logistics ..................................................................... 251
Unit 25 Case Study .................................................................................................................. 263
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Glossary ............................................................................................................................................ 273
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UNIT 1: Introduction to Supply Chain Modeling & Design
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Notes
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BLOCK-I
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Detailed Contents Supply Chain Modeling & Design
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Notes
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UNIT 1: INTRODUCTION TO SUPPLY CHAIN
___________________ UNIT 3: MULTIPLE CRITERIA DECISION-MAKING
MODELING & DESIGN TOOLS
___________________
Introduction
z z Introduction
z Evolution of Supply Chain Management
___________________ z Analytic Hierarchy Process (AHP)
z Concept of Supply Chain Management

___________________ z Data Envelopment Analysis (DEA)
z Supply Chain Network z Goal Programming (GP)

___________________
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z Value Engineering (VE)
z Location Model and Gravity Location Model
___________________
___________________ UNIT 4: SUPPLY CHAIN PERFORMANCE

UNIT 2: NETWORK OPTIMISATION
z Introduction
z Introduction
___________________
z Reliability
z Linear Programming and its Formulation
___________________
z Inventory Turn
z Transportation Model Using Spreadsheet
___________________
UNIT 5: CASE STUDIES
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Unit 1
3
Notes
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Introduction to Supply Chain
___________________
___________________
Modeling & Design ___________________
___________________
Objectives ___________________
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After completion of this unit, the students will be aware of the following
___________________
topics:
___________________
\ Evolution of Supply Chain Management
\ Supply Chain Network ___________________
\ Definition of Supply Chain Management ___________________

\ Network Modeling Using Spreadsheet: Capacitated Plant ___________________
\ Location Model and Gravity Location Model
Introduction
Historically built on procurement, operations and logistics
foundations; Supply Chain Management exceeds these traditional
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concepts. Supply Chain Management is involved with integrating
three key flows, between the different stages, across the
boundaries of the companies:
z Flow of information,
z Product/materials, and
z Funds.
Members of the supply chain act as partners who are "linked"
together through both physical and information flows. It is this
that makes an effective supply chain. The flows that involve the
transformation, movement, storage of goods and materials and
money are called 'physical flows'. These flows are easily visible.
The physical flows are reinforced by information flows. Information
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flows are used by the various supply chain partners to coordinate

their long-term plans, as well as efficiently control the day-to-day
flow of goods and material to the supply chain.
In essence, the supply chain enables the flow of products, services,
and information go both up and down the chain. Successful
integration or coordination of these three flows produces improved
efficiency and effectiveness for business organizations.
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'Supply Chain Management' can be defined as the active
Notes
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Activity management of supply chain activities to maximize customer value
___________________
Prepare a chart explaining and achieve a sustainable competitive advantage. It represents a
integrating three key flows.
___________________ conscious effort by the supply chain firms to develop and run
___________________ supply chains in the most effective and efficient ways possible.
___________________
Evolution of Supply Chain Management
___________________
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___________________
The 1990s were a decade that brought in a quantum jump in many
areas of management. One major area of great change was in the
___________________
fields of materials management, procurement, physical
___________________ distribution management and business logistics. These disciplines
___________________ went through several evolutionary stages.
___________________ Traditional procurement, physical distribution management and

materials management in the 1970s, evolved into logistics
management in the 1980s. Logistics Management consolidated the
traffic and transportation activities of the firm. Logistics then
evolved into Supply Chain Management in the 1990s. Supply
Chain Management combined the activities of Materials
Management and Logistics.
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This change began in the 1960s and 1970s. With growth of
computer capabilities, new systems to handle material
requirements were devised. The first of these was Material
Requirement Planning (MRP). This was followed by
Manufacturing Resource Planning (MRPII). These systems
brought about recognition of the importance of the impact of high
levels of inventories on manufacturing and storage costs. As the
sophistication of inventory tracking software grew, it became
possible to further reduce inventory costs.
The concept of the supply chain had already been proposed by
Forrester in 1958. However, the first widely recorded use of the
term supply chain management came about in a paper published
by Keith and Webber in 1982. Globalization and intensified
competition, in the 1990s, finally made organizations realize the
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potential benefits and importance of strategic and cooperative

supplier-buyer-customer relationships. The concept of these
partnerships or alliances emerged as US manufacturers tried to
compete with the Japanese and experimented with Just-in-Time
(JIT) and Total Quality Management (TQM).
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This led manufacturers to purchase from a select number of
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certified, high-quality suppliers with excellent service reputations.
As they found this strategy successful, they started giving only their ___________________
best suppliers most of their business, and in return, they expected ___________________
these relationships to help generate more sales through
___________________
improvements in delivery, quality, and product design and to
generate cost savings through closer attention to the processes, ___________________
materials, and components they used in manufacturing their ___________________
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products. With quality suppliers, firms also found it beneficial to ___________________
involve them in their new product design and development activities
___________________
as well as in cost, quality, and service improvement initiatives.
___________________
The success in the materials function led companies to understand
the necessity of integrating all key business processes among the ___________________
supply chain participants. This encompassed the distribution ___________________

network. As finished goods are the value added products of the
supply chain, they constituted a huge investment in inventory,
often greater than that of raw materials and components. This
encouraged the thought of enabling the supply chain to act and
react as one entity, from suppliers to the retailers.
Companies saw the benefits in the creation of alliances or
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partnerships with their customers. In time, when market share
improved for its customers' products, the result was more business
for the firm. Developing these long-term, close relationships with
customers meant holding less finished product safety stock (as
discussed earlier about the Forrester effect) and allowed firms to
focus their resources on providing better products and services to
these customers. Today, logistics is viewed as one important
element of the much broader supply chain management concept.
Supply chain management, as explained above, has evolved along
two parallel paths:
(1) The materials and supply management emphasis from
industrial buyers, and
(2) The transportation and logistics emphasis from wholesalers
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and retailers.
For the manufacturing firm, the supply chain management focus is
on the impact of high levels of inventories on manufacturing and
storage costs. For the wholesaling and retailing industries, the
supply chain management focus is on location and logistics issues
more often than on manufacturing.
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Sharing information with supply chain partners through EDI and
Notes
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the Internet has enabled firms to integrate stocking, logistics,
___________________
materials acquisition, shipping, and other functions to create a
___________________ more proactive and effective style of business management and
___________________ customer responsiveness starting out from the source of raw
materials right up to the user of the final product.
___________________
One major change that has taken place is in the manner in which
___________________
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management now treats functions and processes. From the
___________________ functional view, i.e. viewing it as a departmental activity;
___________________ management studies started looking at these functions as parts of
___________________
business processes.
___________________ What are the differences between a function and a business

process? The distinctions between functions and processes are
___________________
explained below.
A business function is:
z A group of business activities that together completely support
one aspect of furthering the mission of the business.
z It is ongoing and continuous.
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z It reflects the organizational component responsible for the
activities.
z It is concerned with what has to be done to operate the
business.
A business function does not include how the work is carried out.
Examples are purchasing, stores, receipt, materials management,
etc.
In contrast, a business process is:
z A task or group of tasks carried out to furthering the mission
of the business.
z It is executed repeatedly.
z It has a beginning and an end.
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z It is only concerned with what has to be done.

z It is described in terms of inputs and outputs.
A business process addresses the question of how work is
organized and managed across the organization i.e. grouping
similar activities together. A business process does not include the
organizational component responsible. Examples are aggregate 7

planning, material requirement planning, and supply chain Notes
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Activity
management, etc. ___________________
Prepare a report on basic and
Supply chain relationships can be quite complex. Instead of the extended supply chain.
___________________
process view, we will start with the functional view. It is easier to
___________________
understand the workings of Supply Chain Management if we start
with this traditional view of supplier-buyer relationships as ___________________
reflected by the materials function. The concepts and the ___________________
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relationships that will be discussed will also be applicable to ___________________
Supply Chain Management.
___________________
Check Your Progress ___________________
Fill in the blanks: ___________________
1. Supply Chain Management is involved with integrating ___________________

three key flows, between the different stages, across the
…………… of the companies.
2. …………… enables the flow of products, services, and
information go both up and down the chain.
Concept of Supply Chain Management

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There can be various types of supply chains. There is a basic
supply chain, and an extended supply chain. The definition of a
basic supply chain is: a set of three or more companies directly
linked by one or more of the upstream or downstream flows of
products, services, finances and information from a source to a
customer.
An extended supply chain includes suppliers of the immediate
supplier and customers of the immediate customer, all linked by
one or more of the upstream and downstream flows of products,
services, finances, and information.
SELLER BUYER (a)

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SUPPLIER SELLER BUYER (b)
Figure 1.1: (a) Traditional Supplier-Buyer Relationship,

(b) Basis Supply Chain
Figure 1.1 shows a traditional seller-buyer relationship (a) and a

basic supply chain (b). An extended supply chain is the supply
8 chain shown in Figure 1.2. An extended supply chain consists of a

Notes number of relationships. These are called tiers. The simplified
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___________________ version of the supply chain of Kalyani Breweries, exemplifies this.
___________________ 2nd tier 1st tier
supplier supplier
Distributor Retailer
___________________
Kalyani Final
Supertech UBSN
NALCO Breweries DSIDC customers
Ltd.
___________________ Industries
___________________
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Transportation companies
___________________
Supertech
Industries
___________________
___________________ Figure 1.2: A Simplified View of Kalyani Breweries Supply Chain

___________________
For the product to reach a typical customer who goes to the shop to
___________________ buy beer, these linkages and the steps necessary to bring the
product to him are not probably apparent. Take cans, for example.
National Aluminium (NALCO) extracts the aluminium ore and
converts it into aluminium metal. The aluminium metal is shipped
to Supertech Industries at Bangalore, who convert the aluminium
into cans. Supertech Industries supplies cans to Kalyani
Breweries. As Supertech Industries supplies directly to Kalyani
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Breweries, it is a first-tier supplier in the supply chain. Using the
same logic, NALCO is a second-tier supplier. It is the supplier of a
supplier.
The beer is produced from other raw materials, such as barley,
hops, yeast, and water. Aluminium cans from Supertech Industries
used to contain the product and combined with cartons, to produce
the packaged beverage. Kalyani Breweries then sells the packaged
beverage to UBSN Ltd., the distributor, who in turn sells the
finished good to retailers like DSIDC. Transport carriers, who
move the inputs and outputs from one place to the next along the
supply chain, provide the logistics support.
In the example given, we see that goods and information flow
travels both ways. In other words, members in a supply chain are
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both customers and suppliers, with respect to these flows.

The appropriate design of the supply chain will depend on both the
customer's needs and the role of the stages involved. This
relationship, we have described above, reflects a single strand in
the supply chain. In a typical supply chain, there are many more
participants than the ones shown above. Regardless of the number
and different types of suppliers a firm uses to satisfy its
requirements, the overall structure and its essential interfaces and 9

control processes have to be identified, irrespective of how vast and Notes
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complex the system is. ___________________
Any operation or facility in one supply chain arrangement may ___________________
also be a part of different supply chains. For example, as was
___________________
mentioned earlier, Dabur is a part of the supply chain for
consumer care products, consumer health products, food products, ___________________
and home products. ___________________
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A supplier typically participates in numerous different supply ___________________
chains, which may involve a wide variety of industries and ___________________
customers. In the case of the mail order business, such as
___________________
Amazon.com, the company maintains an inventory of product from
which it fills customer orders. In the case of retail stores, the ___________________
supply chain may also contain a wholesaler or distributor, the ___________________

store and, the manufacturer. The final consumer is always
considered a member of the supply chain.
There can be many types of supply chains. For example, a
third-party logistics (3PL) provider may be a member of two supply
chains where it is performing the logistics activities between
companies that conventionally compete with each other. An
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example of an even more complex relationship could be the case of
Reliance Communications. Reliance Communications might find
Nokia to be a customer in one supply chain, a partner in another, a
supplier in a third, and a competitor in still a fourth supply chain.
This multiple supply chain phenomenon also explains the complex
nature of the network created by many supply chains.
In large enterprises, like Dabur, involved in marketing a broad
product line to numerous customers – engaging in basic
manufacturing and assembly, and procuring materials and
components on a global basis, the supply chain is very complex.
However, for any supply chain, there is only one source of revenue,
the customer. Logically, the sources of cost are all flows of
information, product, or funds. Thus, the appropriate management
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of these flows is a key to supply chain success. The conceptual

framework of a supply chain is shown in Figure 1.3.
In evaluating the success of the supply chain, the links between
the manufacturer and the retailer have to function at a desired
level. Even when the performance at earlier stages of the supply
chain is outstanding, this is not important – if the product is not
available to support retail sales. This is because the end customer
10 is the only source of revenue for the supply chain and the linkage
Notes is the ultimate test to the success of the supply chain.
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 1.3: Conceptual Diagram of a Supply Chain
The basic objective of Supply Chain Management is to maximize

the supply chain profitability. A more successful supply chain will,
therefore, have higher profitability. The profitability of a supply
chain is the difference between what the customer pays for the
final product and the costs the supply chain expends in filling the
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customer's request.
FMCG major Hindustan Lever has reduced its inventory from
about 45 days to less than 5 days; Mahindra & Mahindra has been
able to reduce its inventory by 20–50 days, while in LG's case, the
reduction has been around 30 days. These companies attribute a
significant part of their success to the way they manage the
operations of their supply chain.
Check Your Progress

Fill in the blanks:
1. There is a …………… supply chain, and an ……………
supply chain.
2. An …………… supply chain includes suppliers of the
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immediate supplier and customers of the immediate

customer, all linked by one or more of the upstream and
downstream flows of products, services, finances, and
information.
Supply Chain Network 11

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A logistics channel is defined, "as the portion of the logistics Activity
___________________
network that adds value by making the product available in a Prepare a slide presenting
details of logistics channel.
manner the customer wants it." The concept of channels has long ___________________
been used to analyse and understand the functions of marketing ___________________
and distribution. Different parts of the business – customers,
___________________
products and orders – require different logistics channels. The
overall goal of logistics channels is to figure out how to meet the ___________________
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majority of customer needs without having to mass customize on a ___________________
customer-to-customer basis. ___________________
The logistics channel system is the basis on which buyer/seller ___________________
relationships have to be analysed to understand buyer
___________________
expectations, interaction of marketing and logistics activities, and
subsequent customer service performance. The institutional, ___________________
behavioural, and physical dimensions of channel activity influence

many of the marketing and logistics decisions made by
management.
How does one decide on the logistics channels? It is helpful to look
at what level of customer service competitors are offering. A
customer service/logistical audit normally is used to show what
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level of customer service performance customers expect as well as
what is currently being offered. A gap analysis then shows the
difference between expected performance and actual performance
and highlight changes that must be made.
Once the gaps are identified and the customer service level is
defined, the next step is to look at the channel structure. The
logistics channel structure displays how many levels there are
between the supplier and the customer. It also identifies how many
distribution points there are in the network. This should also tell
us if a logistics network re-design is necessary to meet customer
service goals. For example, if a furniture retailer wanted next-day
delivery to its customers, it may want to consider having
warehouses in regions that have close proximity to its major
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market areas.
Network Modeling Using Spreadsheet: Capacitated Plant

Network-flow models are more prevalent than one might expect,
since many models not cast naturally as networks can be
transformed into a network format. Let us illustrate this
possibility by recalling the strategic planning model for aluminium
12 production developed. In that model, bauxite ore is converted to

Notes aluminium products in several smelters, to be shipped to a number
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___________________ of customers. Production and shipment are governed by the
following constraints:
___________________
___________________ ∑ ∑ Qsap − M s = 0 (s = 1, 2, …, 11), …(1)

a p
___________________
∑ Qsap − Esp = 0 (s = 1, 2, …, 11; p = 1, 2, …, 8), …(2)
a
___________________
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___________________ ∑ Qsap − dap (a = 1, 2, …, 40; p = 1, 2, …, 8), …(3)
s
___________________
ms ≤ M s ≤ ms (s = 1, 2, …, 11),
___________________
esp ≤ Esp ≤ esp (p = 1, 2, …, 40).
___________________
___________________ Variable Qsap is the amount of product p to be produced at smelter

s and shipped to customer a. The constraints (1) and (2) merely
define the amount Ms produced at smelter s and the amount Esp of
product p (ingots) to be ‘‘cast’’ at smelter s. Equations (3) state that
the total production from all smelters must satisfy the demand dap
for product p of each customer a. The upper bounds of Ms and Esp
reflect smelting and casting capacity, whereas the lower bounds
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indicate minimum economically attractive production levels.
As presented, the model is not in a network format, since it does
not satisfy the property that every variable appear in exactly two
constraints, once with a +1 coefficient and once with a −1
coefficient. It can be stated as a network, however, by making a
number of changes. Suppose, first, that we rearrange all the
constraints of (1), as
( )
∑ ∑ Qsap − M s = 0,
p a
and substitute, for the term in parenthesis, Esp defined by (2). Let
us also multiply the constraints of (3) by (−1). The model is then
rewritten as:
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∑ Esp − M s = 0 (s = 1, 2, …, 11), …(4)
p Notes
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∑ Qsap − Esp = 0 (s = 1, 2, …, 11; p = 1, 2, …, 8) …(5) ___________________
a
___________________
∑ Qsap = −dap (a = 1, 2, …, 40; p = 1, 2, …, 8) …(6)
s ___________________
ms ≤ M s ≤ ms (s = 1, 2, …, 11), ___________________
___________________
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esp ≤ Esp ≤ esp (p = 1, 2, …, 8).
___________________
Each variable Esp appears once in the equations of (4) with a +1 ___________________
coefficient and once in the equations of (5) with a −1 coefficient;
___________________
each variable Qsap appears once in the equations of (5) with a +1
coefficient and once in the equations of (6) with a −1 coefficient. ___________________
Consequently, except for the variables Ms, the problem is in the ___________________
form of a network. Now, suppose that we add all the equations to
form one additional redundant constraint. As we have just noted,
the terms involving the variables Qsap and Esp will all vanish, so
that the resulting equation, when multiplied by minus one, is:
∑ M s = ∑ ∑ dap …(7)
p a p
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Each variable Ms now appears once in the equations of (4) with
a +1 coefficient and once in the equations of (7) with a −1
coefficient, so appending this constraint to the previous
formulation gives the desired network formulation.
The network representation is shown in Figure 1.4. As usual, each
equation in the model defines a node in the network. The topmost
node corresponds to the redundant equation just added to the
model; it just collects production from the smelters. The other
nodes correspond to the smelters, the casting facilities for products
at the smelters, and the customer–product demand combinations.
The overall supply to the system, ∑ ∑ dap , as indicated at the
a p
topmost node, is the total production at the smelters, and must

equal the demand for all products.
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In practice, manipulations like these just performed for

re-expressing problems can be used frequently to exhibit network
structure that might be hidden in a model formulation. They may
not always lead to pure network-flow problems, as in this example,
but instead might show that the problem has a substantial
network component. The network features might then be useful
14 computationally in conjunction with large-scale systems

Notes techniques that exploit the network structure.
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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Figure 1.4: Network Formulation of the Aluminium
Production-planning Model
Finally, observe that the network in Figure 1.4 contains only a

small percentage of the arcs that could potentially connect the
nodes since, for example, the smelters do not connect directly with
customer demands. This low density of arcs is common in practice,
and aids in both the information storage and the computations for
network models.
Check Your Progress

Fill in the blanks:
1. A ……………. is defined, "as the portion of the logistics
network that adds value by making the product
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available in a manner the customer wants it".

2. Different parts of the business – customers, products
and orders – require different …………….
Location Model and Gravity Location Model 15

Notes
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The location decision is the basic building block of network design. Activity
___________________
It reflects the warehousing strategy and the networking Prepare a report on location
decisions.
requirements of the organization. Therefore, these two decisions ___________________
are interlinked to a large degree. ___________________
There are a number of location theories. The most commonly used ___________________
is the Neo-classical Location theory.
___________________
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The Neo-classical Location theory identifies competition as the ___________________
general regulator of economic behaviour, which includes a rational
___________________
pattern to determine the location of facilities. The firm should be
located where revenues cover or exceed costs. This is a ___________________
requirement for economic survival. The theory focuses solely on ___________________

economic variables, especially transportation and labour. It
___________________
develops deductive generalizations on where the firm should
locate. It assumes economic laws based on rational behaviour.
It is strategically important because it commits significant
resources of the organization. Great care and consideration should
be given to the long-term implications.
The basic approach to forces shaping the decision on the location of
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a single firm is reflected in the Least Cost Theory.
The Least-Cost Theory was proposed by Weber (1909). Weber
considered transportation costs to be the primary factor
influencing plant location decisions. In this approach, two factors
were considered. The first was to identify the minimum transport
cost location. The second was to seek the best location with respect
to savings in labour costs. However, the emphasis in this approach
lies in minimization of transportation costs.
Alternative location option
Initial
Factors relevant to the facility screening
being planned. of locations
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Screen location options using Screen location options

factor and location rating analysis. using cost-benefit analysis.
Final selection
process
Best Location Choice
Figure 1.5: Choice of Location

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In Figure 1.5 summarizes the various steps taken to correctly
Notes
make the facility location decision as visualized by the Least-Cost
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___________________ Theory. Though there could be numerous factors that go into the
___________________ facility location decision, some of them specific to the special
requirements of the organization, some typical factors that affect
___________________
the decision are shown in the figure. However, both the services as
___________________ well as the manufacturing sector, have specific problems. These
___________________ also need to be considered when deciding upon the location.
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___________________ In the service sector, the capacity to deliver the service to the
___________________ customer must first be determined then the service can be
produced. What geographic area can you realistically service? For
___________________
example, a hotel room must be available where the customer is and
___________________ when that customer needs it – a room available in another city is
___________________ not of much use to the customer.
Karim, a specialty restaurant in Delhi, had opened outlets in the
major upcoming markets in Delhi, Noida and Gurgaon. In the
malls that are coming up in and around Delhi, you see well-known
names like Marks and Spencer, McDonalds, Geoffrey, Nike, etc.
These are all decisions related to capacity. The location for
particular franchise outlet is driven by the consideration of
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geographic coverage. If you want to have intensive distribution
then the number of facilities that you have in a particular
geographical location is very important.
The primary parameters on which the geographical location
decisions are based for service products have been enumerated
below:
1. Purchasing power of customer drawing area,
2. Service and image compatibility with demographics of the
customer drawing area,
3. Competition in the area,
4. Quality of the competition,
5. Uniqueness of the firm's and competitor's locations,
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6. Physical qualities of facilities and neighbouring businesses,

7. Operating policies of the firm, and
8. Quality of management.
In the case of the service sector, especially for FMCG products, the
establishment of distribution centres is a key decision where cost of
transporting and placing products in the consuming centres is 17

critical. However, transportation may not be a key parameter for Notes
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many FMCG firms in the location decision. ___________________
Markets that are highly competitive also encourage long-term ___________________
inter-company alliances. An example is two major manufacturers
___________________
of branded lamps, one has manufacturing facilities in the north
and the other has manufacturing facilities in the south. ___________________
The companies manufacture and package each other's products in ___________________
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their factories for distinct geographical areas thereby providing ___________________
cost benefits to each other.
___________________
The assumptions of the arguments of the least cost theory are that
___________________
the geographical areas, consumer preferences and production
inputs are uniform for all locations in terms of labour, technical ___________________
resources and capital cost and availability. Despite this limitation, ___________________
a large number of industries use this approach in locating their
establishments, especially heavy industries and many products in
the FMCG sector.
In the case of heavy industries, raw materials form the bulk of
transportation costs. Transportation of raw materials poses as a
major cost and therefore these industries are generally located
)U
close to raw material sources. Examples are Tata Steel and
Rourkela Steel Plant, which are located in the middle of a region
that has enormous reserves of iron ore and coking coal and
reasonable amounts of limestone and dolomite. Similarly, Maihar
Cement, JP Cements, Ambuja East cement plants are located close
to major limestone deposits.
For manufactured products, production may take place at a
location, and then the goods are distributed to the customer. Very
often, you want to locate your operation close to that source of raw
material. In aquaculture, for example, the incubation of the salmon
egg and the first stage lifecycle of the fish are done in fresh water.
Therefore, it is advantageous to locate hatcheries where there is an
abundance of fresh water.
(c
Centre of gravity modeling allows the best location(s) to be

identified from a supply chain logistics viewpoint, considering both
inbound and outbound flows. Detailed scenario modeling can then
be carried out for combinations of locations, taking into account
transportation requirements, space costs, staffing costs and other
local factors.
18
Notes Check Your Progress
S
___________________ Fill in the blanks:
___________________ 1. The location decision is the …………… building block of
___________________ network design.
___________________ 2. The …………… theory identifies competition as the

general regulator of economic behaviour, which includes
___________________
PE
a rational pattern to determine the location of facilities.
___________________
___________________
Summary
___________________
A supply chain is a network of facilities and distribution options
___________________ that performs the functions of procurement of materials,
___________________ transformation of these materials into intermediate and finished
products, and the distribution of these finished products to
customers. Supply chains exist in both service and manufacturing
organizations, although the complexity of the chain may vary
greatly from industry to industry and firm to firm.
Supply chain management is typically viewed to lie between fully
vertically integrated firms, where the entire material flow is owned
)U
by a single firm and those where each channel member operates
independently. Therefore, coordination between the various
players in the chain is a key in its effective management. Cooper
and Ellram [1993] compare supply chain management to a
well-balanced and well-practiced relay team. Such a team is more
competitive when each player knows how to be positioned for the
hand-off. The relationships are the strongest between players who
directly pass the baton, but the entire team needs to make a
coordinated effort to win the race.
Lesson End Activity

Prepare a report on ‘The physical flows are reinforced by
information flows’.
(c
Keywords
Supply Chain Management: Management of material and
information flow in a supply chain to provide the highest degree of
customer satisfaction at the lowest possible cost.
19
Neo-classical Location Theory: It identifies competition as the
Notes
S
general regulator of economic behaviour, which includes a rational
pattern to determine the location of facilities. ___________________
Logistics Channel: The portion of the logistics network that adds ___________________
value by making the product available in a manner the customer ___________________

wants it.
___________________
___________________
PE
Questions for Discussion
___________________
1. Explain the concept of supply chain network.
___________________
2. Discuss networking modeling using Spreadsheet concept. ___________________
3. Elaborate least cost theory. ___________________
4. What do you mean by supply chain management? Explain the ___________________

three key flows connecting with this concept.
5. Discuss the conceptual diagram of a supply chain.
6. Explain the parameters on which geographical location
decision are based for service products.
7. Explain the supply chain network.
)U
Further Readings
Books
B. C. Arntzen, G. G. Brown, T. P. Harrison, and L. Trafton, Global
Supply Chain Management at Digital Equipment Corporation,
Interfaces, Jan.-Feb., 1995.
Ballou, R. H. 1992, Business Logistics Management, Prentice Hall,
Englewood Cliffs, NJ, Third Edition.
Breitman, R. L., and J. M. Lucas, 1987, PLANETS: A Modeling
System for Business Planning, Interfaces, 17, Jan.-Feb., 94-106.
M. A. Cohen and H. L. Lee, 1985, Manufacturing Strategy
(c
Concepts and Methods, in Kleindorfer, P. R. Ed., The Management

of Productivity and Technology in Manufacturing, 153- 188.
M. A. Cohen and H. L. Lee, 1988, Strategic Analysis of Integrated
Production-Distribution Systems: Models and Methods, Operations
Research, 36, 2, 216-228.
20
Web Readings
Notes
www.isye.gatech.edu/~spyros/courses/IE3103/Intro.ppt
S
___________________
www.isye.gatech.edu/~spyros/courses/IE3103/Syllabus.htm
___________________
lcm.csa.iisc.ernet.in/scm/supply_chain_intro.html
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 2: Network Optimisation
Unit 2
21
Notes
S
Activity
Network Optimisation
Prepare a chart explaining
___________________
basic concept of linear
programming.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Linear Programming and its Formulation ___________________
\ Common Characteristics of LP Problems ___________________
\ Transportation Model Using Spreadsheet
___________________
\ Methods used in Solving Transportation Problems
___________________
___________________
Introduction
Linear Programming (LP) is an optimization technique. It is one of
the most widely used quantitative techniques of decision-making.
It is extensively used for process and capacity decisions, such as
determination of the optimum product mix. It is also used for
location, aggregate planning decisions; minimization of
)U
transportation costs; selection of investment portfolio; production
scheduling etc. We will examine its use as a model to provide
solutions to transportation problems.
Linear Programming and its Formulation

One important application of Linear Programming has been in the
area of physical distribution (Transportation) of resources from one
place to another, to meet a specific set of requirements. It is easy to
express a transportation problem mathematically in terms of an
LP model, which can be solved by the Simplex Method.
Common Characteristics of LP Problems

The Classic Transportation problem applies to situations in which
(c
a single product is to be transported from several sources to

several sinks. Let there be m sources s1, s2, …, sm having ai (i = 1,
2,…, m) units of supplies or capacity respectively to be transported
among n destinations having bj (j = 1, 2,…,n) units of requirements
respectively. Since we are trying to minimize the transport cost, we
know that the "sense of optimization" is to minimize.
22
z Let Z denote total transportation cost
Notes
S
___________________
z Let xij denote the no. of truckloads to be shipped from cannery i
to warehouse j.
___________________
___________________
z Let cij denote the cost of shipping a truckload from cannery i to
warehouse j.
___________________
___________________ z The general form of the objective function is then
PE
m n
Minimize Z = ∑∑ c ij x ij
___________________
i= j i= j
___________________
___________________ z Where m is the number of supply centres and n is the number

of demand points
___________________
___________________
z The specific constraints to the objective function for our
example are:
n
∑x
j =1
ij = si for all i = 1, 2 ….., m
∑x
i =1
ij = d j for all j = 1, 2 ….., n
)U
xij ≥ 0 for all i and j
All LP problems have certain characteristics: (a) Predefined
objective, (b) Given constraints, (c) Linearity, (d) Certainty about
the parameters, (e) Additivity, (f) Divisibility, and (g) Non-
negativity. These characteristics are explained below:
Predefined Objective
LP is applied when there is a single predefined objective. It cannot
be applied to decisions that have multiple objectives. In such cases,
goal programming can be used, which is an extension of linear
programming. For example, the object may be optimization of
production capacity. In the case above, the objective is to minimize
total transport cost.
(c
Given Constraints
All decision problems are constrained by internal or external
conditions. Constraints are limitations imposed by the
environment in achieving the objective. In LP, the constraints are
known, and the goal achievement is subject to limitations governed
by the constraints. For example, the constraints may be limitations 23

of manufacturing capacity; backorders and shortage of resources. Notes
S
We also have constraints on our supplies and demands. ___________________
For each demand location, we have to deliver exactly the amount ___________________
demanded ___________________
___________________
Non-negativity
___________________
PE
Finally, it is assumed in a LP model that the decision variables
___________________
cannot take non-negative values. This is a realistic assumption.
Algorithms to solve LP have been developed in the light of ___________________
non-negativity assumption. We can't truck negative truckloads of ___________________
merchandise. Although this isn't part of the formulation, we must
___________________
ensure that our supply equals our demand. If this isn't really true,
we can fudge it by adding "dummy" locations to take up the extra ___________________
supply or give the extra demand.
Divisibility
It is assumed in a LP model that the level of activity related to any
or all of the decision variables can be fractions. This assumption
may not be realistic in many cases. For example, if decision
)U
variables in a problem are various models of dwelling houses, it is
not possible to construct it in fractions.
i. Integer Solutions Property: For transportation problems
where every si and dj has an integer value, all the basic
variables (allocations) in every basic feasible solution (including
an optimal one) also have integer values. However, we don't
need integer constraints.
ii. Feasible Solutions Property: As long as supply equals
demand (as stated above), there will be feasible solutions.
Linearity
Linearity or proportionality in a LP model means that the objective
function and all the constraints are linear functions of the decision
(c
variables. The constraints are also linear functions of decision

variables. This means that the objectives and the constraints can
be represented by straight lines.
24
The CTP formulation is a linear program.
Notes
S
z Each function is a linear function
___________________
z There are many variables
___________________
___________________ Certainty
___________________ In all LP problems, the decision variables and the constraints are
___________________ known with certainty. For example, the profit associated with each
PE
unit of product or the processing capacities of each of the
___________________
departments are known with certainty.
___________________
___________________
Additivity
___________________ Any change in the level of activity of the decision variable does not
affect the rate of profit or resource utilization of any other activity.
___________________
It means that the total profit (or cost) of various products is equal
to the addition of the profit (or cost) of all the products separately.
Though there is no relationship between the profit contributions of
two different activities, the total profit is sum of profit from all the
activities. Similarly, in the case of constraints, the total time taken
by all the products in any of the manufacturing department is
equal to the total of the time taken by all the products separately.
)U
The steps of the simplex methods while cumbersome manually, can
be executed quickly and accurately with readily available computer
software packages. Most spreadsheets have built-in optimization
routines. MS Excel has an optimization tool called the 'Solver' in
the tools menu.
Check Your Progress

Fill in the blanks:
1. Linear Programming (LP) is an ……………. technique.
2. The ……………. problem applies to situations in which a
single product is to be transported from several sources
to several sinks.
(c
Transportation Model Using Spreadsheet

Special algorithms, called the transportation method, have been
developed, and successfully used for solving such physical
distribution problems. The transportation method is a modification
of the simplex method that takes advantage of certain
characteristics of the CTP and related problems.
25
The transportation method for solving the physical distribution or
Notes
S
transportation problem is an iterative procedure. Where the total Activity
supply and the total requirements are exactly equal, it is a simple ___________________
Prepare a report on
method. The initial allocation is made and then the second applications of transportation
___________________
method.
allocation is made. If the second allocation does not result in any
___________________
cost savings or turns out to be higher cost allocation, the initiate
allocation is optimal. If, on the other hand, the second allocation ___________________
turns out to be more cost effective, third allocation is made. If the ___________________
PE
third allocation does not show any cost saving, second allocation is ___________________
the optimum. This process is shown in Figure 2.1.
___________________
___________________
STAR
___________________
___________________
Make the Initial
Allocation
Make another
Allocation
No Yes
Is this more Cost Stop. You have
Effective Optimal Solution
)U
Figure 2.1: Iterative Procedure of Transportation Method
In transportation problems, we minimize the cost of transportation

from factory to warehouse. These methods have also been applied
for solving other problems that are similar in structure to the
transportation problems, such as factory or warehouse location,
production scheduling, media scheduling, salesperson routing,
workforce scheduling, and so forth.
In handling such problems, as many transportation tables are set
up as there are location choices, treating them as separate
transportation problems. When the final solution of the problems is
arrived at, the one with the least cost points to the optimum
location.
(c
However, location problems are handled slightly differently than

simple transportation problems. Transportation tables are set up
for each of the location options. Each choice is treated as a separate
transportation problem. The final solution of each of the problems
is compared and the problem that provides the least cost solution
is the optimum location.
26
A typical transportation problem is shown in Figure 2.2. It deals
Notes
S
with sources where a supply of some commodity is available and
___________________
destinations where the commodity is demanded. The classic
___________________ statement of the transportation problem uses a matrix with the
___________________ rows representing sources and columns representing destinations.
___________________
D1 D2 D3 Supply
___________________
PE
S1 3 1 M 5
___________________
S2 4 2 4 7
___________________
S3 M 3 3 3
___________________
Demand 7 3 5
___________________
___________________
Figure 2.2: A Typical Transportation Problem
The algorithms for solving the problem are based on this matrix
representation. The costs of shipping from sources to destinations
are indicated by the entries in the matrix. If shipment is
impossible between a given source and destination, a large cost of
M is entered. This discourages the solution from using such cells.
)U
Supplies and demands are shown along the margins of the matrix.
The classic transportation problem has total supply equal to total
demand.
There are three methods used in solving these types of problems:
z North-West Corner Method,
z Least Cost Method, and
z Vogel's Approximation Method.
We will be using the North-West Corner method and Vogel's
Approximation in this text. The only difference between the
least-cost method and the northwest-corner method is in the choice
of entering variables. Here, the strategy is to always select the cell
with the smallest cij value among all remaining cells as the
(c
entering cell. Ties are broken arbitrarily.
North-West Corner Method

The north-west corner rule consists of dispatching to the
destination the minimum of the amount available in a source and
amount required in the destination and either any excess amount
in the source is dispatched to any of the remaining destination or
any shortfall towards the requirement of the destination is made 27

good by availing them from any other source, as the case may be. Notes
S
An overview of the solution process is given below: ___________________
z Set up the transportation simplex tableau ___________________
___________________
Iterate
___________________
1. Compute optimal solution by Stepping Stone Method
___________________
PE
2. Test for optimality
___________________
A. If optimal, Stop.
___________________
B. If not optimal, make changes to the solution,
___________________
and go to Step 1.
___________________
z What is the Simplex Tableau?
___________________
It is a way of visualizing our problem to assist in finding
the optimal solution
Problem Title (Rental Car Problem)
One row for each Supply location
One column for each Destination location
)U
Supply and Demand Totals
Supply = Demand
z What are the empty boxes in the middle?
Each empty box in the centre represents a decision
variable xij.
The empty box holds two things: Cost and Either a Basic or
a Non-Basic.
Costs are easy…they are constants. Make little boxes in the
upper left corner of the ij cells and put the given cij values in
the little boxes.
The variable values are harder. xij variables with an
(c
assignment are called basic variables. A basic variable is being

used to send some stuff from a supply to a demand. Basic
variables ALWAYS have a circle or square around them. You
will (MUST) always have m + n – 1 basic variables.
xij variables without an assignment are called non-basic
variables. A non-basic variable value represents the rate at
28 which the objective function would change if some stuff went

Notes from this supply to this demand. Non-basic variables values
S
___________________ NEVER have a circle around them.
___________________ z Use the Northwest corner method to find an initial basic
___________________ feasible solution:
___________________ What is a basic solution?
___________________ A solution makes positive assignments to xij variables.
PE
___________________ xij variables with an assignment are called basic
___________________ variables.
___________________ xij variables without an assignment are called non-basic
___________________ variables.
___________________ What is a feasible solution?
One that doesn't violate any constraints.
Allocate minimum value of first row or column to north west corner square
Eliminate row or column whose capacity has been exhausted

Adjust corresponding supply and demand value
)U
No Yes
Check column capacity is
exhausted?
Move vertically one square Allocate Move horizontally one square

No as much as possible Adjust Allocate as much as possible
corresponding supply and demand value Adjust corresponding supply and demand value
If each each row and column are

traversed or Total Allocation =
Total supply value = Total
source value
Yes
End
(c
Figure 2.3: Iterative Procedure of Transportation Method
The flow chart is shown as Figure 2.3. As you can see, this is a
linear programming problem. However, the special structure of
Transportation Problem allows us to take a number of shortcuts.
Vogel's Approximation Method 29

Notes
Obtaining of initial feasible solution of a transportation problem by
S
using this method deals with first finding the difference between ___________________
lowest and next lowest transportation costs for each row and ___________________
column and then choose that row or column for which the
___________________
difference is largest; if the maximum difference is not unique,
an arbitrary choice can be made; finally find out that cell in the ___________________
selected row/column for which transportation cost is minimum. ___________________
PE
Now, enter the minimum of the amount available in the source and ___________________
the amount required in the destination in this cell. Omit either row ___________________
or column, depending on which requirement is satisfied (if a row
___________________
and a column requirements are satisfied simultaneously, omit only
the row or the column and not both) and repeat the whole process. ___________________
___________________
Check Your Progress
Fill in the blanks:
1. The ……………….. method is a modification of the
simplex method that takes advantage of certain
characteristics of the CTP and related problems.
2. The transportation method for solving the physical
)U
distribution or transportation problem is an
……………….. procedure.
Summary
Network optimization tasks range from keeping routers and
switches up to date to identifying and resolving data flow
bottlenecks. Network optimization allows administrators to
maintain agreed-upon SLAs.
Linear programming (LP or linear optimization) is a mathematical
method for determining a way to achieve the best outcome (such as
maximum profit or lowest cost) in a given mathematical model for
some list of requirements represented as linear relationships.
(c
Linear programming is a specific case of mathematical

programming (mathematical optimization).
Lesson End Activity

Compare and contrast: The North-West Corner Method, Least Cost
Method, and Vogel's Approximation Method.
30
Keywords
Notes
S
Network Optimization: It refers to the processes and utilities
___________________
that help a network administrator keep a network operating at
___________________ peak efficiency.
___________________
Transportation Problem: It is a modification of the simplex
___________________ method that takes advantage of certain characteristics of the CTP
___________________ and related problems.
PE
___________________
___________________
___________________ 1. Define Linear Programming Method with the help of example.

And explain their characteristics also.
___________________
2. Elaborate Vogel's Approximation Method.
___________________
3. Discuss the North-West Corner Method with its solution
process too.
4. Track out the three steps or processed used to define the
transportation problem.
5. Discuss the transportation problem with relation to the supply
chain management example.
)U
Further Readings
Books
L.V. Kantorovich: A new method of solving some classes of extreme
problems, Doklady Akad Sci USSR, 28, 1940, 211-214.
G.B Dantzig: Maximization of a linear function of variables subject
to linear inequalities, 1947. Published pp. 339–347 in T.C.
Koopmans (ed.): Activity Analysis of Production and Allocation,
New York-London 1951 (Wiley & Chapman-Hall)
J. E. Beasley, editor. Advances in Linear and Integer
Programming. Oxford Science, 1996. (Collection of surveys)
(c
Schrijver, Alexander, Combinatorial Optimization, Berlin; New

York: Springer, 2003. Cf. p.362
Web Readings
www.daywatcher.com/articles/what-is-network-optimisation
www.solarwinds.com/it.../what-is-network-optimization.aspx
www.cisco.com/.../optimization/network-optimization.../index.html
UNIT 3: Multiple Criteria Decision-making Tools
Unit 3
31
Notes
S
Activity
Multiple Criteria
___________________
AHP.
___________________
Decision-making Tools ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Analytic Hierarchy Process (AHP)
\ Analytic Network Process (ANP) ___________________
\ Data Envelopment Analysis (DEA) ___________________

\ Goal Programming (GP) ___________________
\ Value Engineering (VE)
Introduction
By organizing and assessing alternatives against a hierarchy of
multifaceted objectives, AHP provides a proven, effective means to
)U
deal with complex decision making. The goal is to structure the
problem into manageable problems. The problem, which is
unstructured, is broken up into sub-modules. Each sub-module is
further divided into an appropriate level of detail till the
unstructured problem transforms into a manageable problem.
Analytic Hierarchy Process (AHP)

Now, the issues can be organized both vertically and horizontally
under the form of a hierarchy of weighted criteria.
In Figure 3.1 shows the AHP model. To see how it works, let us
choose these eight areas that need to be reviewed to qualify a
supplier. The areas are:
1. Equipment capability: Is the supplier's equipment capable
(c
of producing the product?

a. Plant capacity and layout,
b. Manufacturing processes and experience,
c. Tool room facilities.
32
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
Figure 3.1: The AHP Model
___________________
2. Quality assurance: Is the supplier able to ensure a good
___________________
output?
a. Quality systems and past performance in quality,
b. Warranty and replacement of rejected items,
c. Inspection plans, inspection methods and testing
equipments,
)U
d. Support document availability.
3. Financial capability: Is it risky to do business with the
firm?
a. Return on total assets,
b. Current ratio and quick ratio,
c. Funds and cash flow analysis.
4. Cost structure: What does the item cost?
a. Product price,
b. Real profit margin,
c. Volume discounts,
d. Credit terms,
(c
e. Cash discounts,
f. Guarantee of price protection against inflation, etc.
5. Supplier value analysis effort: Is the supplier capable of
performing value analysis with the buyer's technical
personnel?
33
a. Design facilities,
Notes
S
b. Knowledge of cost reduction techniques.
___________________
6. Production scheduling production: What are the supplier's
___________________
production scheduling and manufacturing capabilities and
___________________
procedures?
___________________
a. Number and skills of workers,
___________________
PE
b. Number of executives and the staff morale,
___________________
c. Adaptability to change and dynamism, ___________________
d. Skill mix of supervisors of various departments. ___________________
7. Contract performance: How is performance measured? ___________________
a. Delivery lead-time, ___________________
b. Reliability in delivery,
c. Willingness to accept small orders,
d. Width of production level,
e. Depth of production line,
)U
f. Management information system,
g. Guarantees and after sales services,
h. Ready availability of spares,
i. Ability to face emergencies, etc.
8. The management and service aspects include:
a. Reputation of board members,
b. Corporate image and ability of management,
c. Length of time in business,
d. Industrial relations,
e. Integrity, honesty, and systems.
(c
AHP allows a better, easier, and more efficient identification of

selection criteria, their weighting and analysis, thereby simplifying
the decision cycle. It is flexible as it helps capture both subjective
and objective evaluation measures. However, by providing a
mechanism for checking the consistency of the evaluation measures
and alternatives suggested, it reduces bias in decision making.
34
AHP is very useful when the decision-making process is complex,
Notes
S
and when the decision cycle involves taking into account a variety
___________________
of multiple criteria. Simplifying the problem, by splitting it into
___________________ smaller parts, it minimizes common pitfalls of decision-making
___________________ process, such as lack of focus, planning, participation or ownership,
___________________ which ultimately are costly distractions that can prevent making
the right choice.
___________________
PE
___________________ Analytic Network Process (ANP)
___________________ A more general form of Analytic Hierarchy Process (AHP) which is
___________________ used in multi-criteria decision analysis is known as the analytic
network process.
___________________
A decision problem is structured into a hierarchy with a decision
___________________
criteria, goal and alternatives in case of AHP while the problem
gets structured into a network in case of ANP. A system of pair
wise comparisons is used by both for the weights’ measurement of
the components of the structure and ranking of the decision
alternatives.
Hierarchy vs. Network

)U
In the AHP, each element in the hierarchy is considered to be
independent of all the others–the decision criteria are considered
to be independent of one another and the alternatives are
considered to be independent of the decision criteria and of each
other. But in many real-world cases, there is interdependence
among the items and the alternatives. ANP does not require
independence among elements, so it can be used as an effective tool
in these cases.
Check Your Progress

Fill in the blanks:
1. By organizing and assessing alternatives against a
hierarchy of multifaceted objectives, …………….
(c
provides a proven, effective means to deal with complex

decision making.
2. AHP allows a better, easier, and more efficient
identification of selection criteria, their weighting and
analysis, thereby simplifying the ……………. cycle.
Data Envelopment Analysis (DEA) 35

Notes
S
The performance of manufacturing and service operations can be Activity
___________________
evaluated and improved upon by a tool called Data Envelopment Prepare a report on DEA.
Analysis. DEA is a multi-factor productivity analysis model for ___________________

measuring the relative efficiencies of a homogenous set of Decision ___________________
Making Units (DMUs). The efficiency score in the presence of
___________________
multiple input and output factors is defined as:
___________________
PE
Efficiency = Weighted sum of outputs/Weighted sum of inputs …(1)
___________________
Assuming that there are n DMUs, each with m inputs and s
___________________
outputs, the relative efficiency score of a test DMU p is obtained by
solving the following model proposed by Charnes et al. (1978): ___________________
___________________
___________________
…(2)
)U
Where,
k = 1 to s,
j = 1 to m,
i = 1 to n,
yki = Amount of output k produced by DMU i,
xji = Amount of input j utilized by DMU i,
vk = Weight given to output k,
uj = Weight given to input j.
The fractional program shown as (2) can be converted to a linear
program as shown in (3).
(c
…(3)
36
The above problem is run n times in identifying the relative
Notes
S
efficiency scores of all the DMUs. Each DMU selects input and
___________________
output weights that maximize its efficiency score. In general, a
___________________ DMU is considered to be efficient if it obtains a score of 1 and a
___________________ score of less than 1 implies that it is inefficient.
___________________ Check Your Progress

PE
___________________
1. The performance of manufacturing and service
___________________ operations can be evaluated and improved upon by a
___________________ tool called …………….
___________________ 2. DEA is a ……………. productivity analysis model for

measuring the relative efficiencies of a homogenous set
___________________
of Decision Making Units (DMUs).
Goal Programming (GP)

Goal programming is one of the most popular multi-objective
programming techniques. In this type of programming, goals
assume a new meaning of management desires while constraints
)U
refer to the environment condition wherein management make
their own decisions. The objective of GP is to search and identify
acceptable solutions. Another important fact is that GP is the
extension of LP. LP models maximise or minimize only one goal
into the objective function whereas GP caters to multiple goals.
However, before the profit objective, liquidity requirements must
be fulfilled. The computational procedure picks from the set of all
solutions that satisfy the constraints while maximizing or
minimizing the objective function. But the restrictive assumption
on constraint gives rise to a serious problem in this case and in a
situation where there are incompatible multiple objectives
specified as constraints, there may not be any feasible solution.
Representation of a Goal Programming Problem

(c
The general GP model can be mathematically expressed as:

m
Minimize Z = ∑ (y i + + y i − )
i =1
Subject to Ax – Iy+ + Iy– = b

x, y+, y– >= 0
37
where,
Notes
S
b is an ‘m’ component column vector containing b1,b2,…. bm, the Activity
___________________
Prepare a slide presenting
right hand side values of the goal equations.
objectives and features of GP.
___________________
A is an m × n matrix of technological coefficients associated with
___________________
the decision variables x1,x2….xn.
___________________
x, the column vector represents decision variables x1,x2,…xn.
___________________
PE
y+ and y- are m-component column vectors representing
deviations from goals. ___________________
___________________
I is an identity matrix of m × n order.
___________________
In order to find out whether over estimation or under estimation of
the goal is satisfactory, the manager should analyse every ‘m’ goal. ___________________
In case of over achievement, y+ will be depicted as the objective ___________________
function. In case of exact goal achievement, y+ as well as y– will be
represented in the objective function. Both these variables must be
ranked from the most important to the least important depending
upon their priorities. That means all relevant constraints should
be identified by the decision maker. These constraints should be
capable of defining the feasible solutions, expressing goals in terms
)U
of decision variables, defining the appropriate target values for the
goals and specifying the deviations from the target values, which
are relevant to the analysis. Objective function is to minimize
deviations from the set goals. Priorities can be established for each
of the goals in a number of ways.
Check Your Progress

Fill in the blanks:
1. In goal programming, ……………. assume a new
meaning of management desires while constraints refer
to the environment condition wherein management
make their own decisions.
2. The objective of GP is to ……………. and …………….
(c
acceptable solutions.
Value Engineering (VE)

Value Engineering is a systematic method to improve the "value"
of goods or products and services by using an examination of
function. Value, as defined, is the ratio of function to cost. By
38 either improving the function or reducing the cost, value can be

Notes increased. There is a primary saying in terms of value engineering
S
Activity
Prepare a report on value
___________________ that while pursuing value improvements, the basic function should
engineering. be preserved and not reduced.
___________________
In the United States, value engineering is specifically spelled out
___________________
in Public Law 104-106, which states “Each executive agency shall
___________________ establish and maintain cost-effective value engineering procedures
and processes."
___________________
PE
Value engineering is a technique in which the value of a system’s
___________________
outputs is optimized by crafting a mix of performance (function)
___________________ and costs. This practice has led to the identification and removal of
___________________ unnecessary expenditures in most cases, thereby leading to
increased value for both the manufacturer and the customer.
___________________
VE follows a structured thought process that is based exclusively
___________________
on "function", i.e. what something "does" not what it is. This is the
basis of what value engineering refers to as "function analysis".
Rational logic and functional analysis of relationships is used by
value engineering in order to increase value. It is considered a
quantitative method similar to the scientific method, which focuses
on hypothesis-conclusion approaches to test relationships, and
operations research, which uses model building to identify
)U
predictive relationships.
Check Your Progress

Fill in the blanks:
1. ……………. is a systematic method to improve the
"value" of goods or products and services by using an
examination of function.
2. ……………., as defined, is the ratio of function to cost.
By either improving the function or reducing the cost,
value can be increased.
Summary
AHP provides a proven, effective means to deal with complex
(c
decision-making and can assist with identifying and weighting

selection criteria, analysing the data collected for the criteria and
expediting the decision-making process. AHP helps capture both
subjective and objective evaluation measures, providing a useful
mechanism for checking the consistency of the evaluation
measures and alternatives suggested by the team thus reducing 39

bias in decision making. Notes
S
The Analytic Network Process (ANP) is the most comprehensive ___________________
framework for the analysis of societal, governmental and corporate ___________________
decisions that is available today to the decision-maker. The
___________________
Analytic Network Process allows both interaction and feedback
within clusters of elements (inner dependence) and between ___________________
clusters (outer dependence). Such feedback best captures the
___________________
PE
complex effects of interplay in human society, especially when risk
and uncertainty are involved. ___________________
Goal programming is an optimization programme. It can be ___________________

thought of as an extension or generalisation of linear programming ___________________
to handle multiple, normally conflicting objective measures. Each
___________________
of these measures is given a goal or target value to be achieved.
Unwanted deviations from this set of target values are then ___________________
minimised in an achievement function. This can be a vector or a
weighted sum dependent on the goal programming variant used.
As satisfaction of the target is deemed to satisfy the decision
maker(s), an underlying satisficing philosophy is assumed.
Lesson End Activity

)U
Discuss in group, any live example of value engineering concept
applicable in any business organisation.
Keywords
Value: It is defined as the ratio of function to cost.
Value Engineering (VE): It is a systematic method to improve
the "value" of goods or products and services by using an
examination of function.
Analytic Hierarchy Process (AHP): It is a structured technique
for organizing and analysing complex decisions.
Analytic Network Process (ANP): It is a process that allows one
to include all the factors and criteria, tangible and intangible that
(c
has bearing on making a best decision.

Data Envelopment Analysis (DEA): It is a non-parametric
method in operations research and economics for the estimation of
production frontiers.
Goal Programming (GP): It is a branch of multi-objective
optimization, which in turn is a branch of Multi-criteria Decision
Analysis (MCDA).
40
Notes
S
1. Discuss the concept of Goal Programming with the help of
___________________
examples.
___________________
2. What do you mean by Value Engineering?
___________________
3. How a general GP model can be mathematically expressed?
___________________
4. Explain the following terms:
___________________
PE
___________________
(a) Data Envelopment Analysis
___________________ (b) Analytical Hierarchy Process
___________________ (c) Analytical Network Process
___________________ 5. Elaborate the AHP model in detail.

___________________
Further Readings
Books
Conflict Resolution: The Analytic Hierarchy Process (1989), with
Joyce Alexander, New York: Praeger.
Prediction, Projection and Forecasting: Applications of the Analytic
)U
Hierarchy Process in Economics, Finance, Politics, Games and
Sports (1991), with Luis G. Vargas. Boston: Kluwer Academic.
Saaty, Thomas L. (1996). Decision Making with Dependence and
Feedback: The Analytic Network Process. Pittsburgh,
Pennsylvania: RWS Publications.
Saaty, Thomas L. (2005). Theory and Applications of the Analytic
Network Process: Decision Making with Benefits, Opportunities,
Costs and Risks. Pittsburgh, Pennsylvania: RWS Publications.
C Romero (1991) Handbook of Critical Issues in Goal
Programming, Pergamon Press, Oxford.
MJ Scniederjans (1995) Goal Programming Methodology and
Applications, Kluwer publishers, Boston.
(c
Web Readings
en.wikipedia.org/wiki/Multi-criteria_decision_analysis
univ.nazemi.ir/mcdm/Multi-Criteria%20Decision%20Making.pdf
www.worldscientific.com/worldscibooks/10.1142/8042
UNIT 4: Supply Chain Performance
Unit 4
41
Notes
S
Activity
Supply Chain Performance

___________________
various supply chain
___________________
performance measures.
___________________
Objectives
___________________
topics: ___________________
PE
\ Reliability ___________________
\ Inventory Turn ___________________
\ Cash-to-Cash Cycle in Days
___________________
\ Days of Sales Outstanding
___________________
\ Days of Payable Outstanding
___________________
Introduction
Supply chain performance measures can be classified broadly into
two categories: qualitative measures (such as customer satisfaction
and product quality) and quantitative measures (such as order-to-
delivery lead time, supply chain response time, flexibility, resource
)U
utilization, delivery performance, etc.).
Reliability
Delivery Reliability is one of the five key strategic attributes in
supply chain management according to SCOR-model developed by
Supply-Chain Council (SCC) to measure the supplier’s ability to
predictably complete processes as promised. It is measured by
perfect order fulfilment and demonstrates the degree to which a
supplier is able to serve its customers within the promised delivery
time.
Service reliability means consistently performing the service
dependably and accurately. Service reliability is the service "core"
to most customers. Portraying the reliability and consistency with
(c
which the service is delivered can take two routes. The first
involves emphasizing the technological superiority and
dependability of the process by which the service is produced – a
high-tech approach. While technological drivers such as advances
in telecommunications, satellite, digital, and web technology are
increasing the tradability of services. The second concerns the
42 consistent and dependable performance of the service personnel – a

Notes high touch approach. Continuous improvement is the key to
S
___________________ providing reliable service.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Supply chain performance measures can be classified
___________________ broadly into two categories: …………… measures and
PE
___________________ …………… measures.
___________________ 2. …………… means consistently performing the service
___________________ dependably and accurately.
___________________
Inventory Turn
___________________
Inventory Turnover or Inventory Turn refers to the frequency of
inventory cycles or turns over per year. It is one of the most
popular Supply Chain Metrics.
For calculating inventory turn, one of the most common methods is
the Annual Cost of Sales by the Average Inventory Level.
Example:
)U
Cost of Sales = $36,000,000.
Average Inventory = $6,000,000.
$36,000,000/$6,000,000 = 6 Inventory Turns
Inventory Turns can be a moving number as well. For example,
Rolling 12 Month Cost of Sales = $16,000,000.
Current Inventory = $4,000,000
$16,000,000 /$4,000,000 = 4 Inventory Turns
Projected Inventory Turns: Divide the "Total Cost of 12 Month
Sales Plan" by the "Total Cost of Goal Inventory."
Example:
(c
The Total Cost of 12 Month Sales Plan is $40,000,000.

Total Cost of Goal Inventory = $8,000,000
$40,000,000/$8,000,000 = 5 Projected Turns
43
Units, Cost Value or even Retail Value can be used to view turns.
Notes
S
But it should be ensured while using Units that the same unit of Activity
Measure is used in Numerator as well as Denominator. ___________________
Prepare a report on inventory
turns.
Results may vary from industry to industry but a typical ___________________
manufacturing company may have 6-8 inventory turns per year. ___________________
12 or more inventory turns per year or more can be seen in
___________________
companies having high volume or low margin.
___________________
PE
Cash-to-cash Cycle in Days ___________________
The cash-to-cash cycle (cash conversion cycle) is an easy to use ___________________
metric to calculate how long cash is tied up in the main cash
___________________
producing and cash consuming areas: receivables, payables and
inventory. ___________________
___________________
The Cash-to-Cash Cycle = Receivable Days + Inventory Days –
Payable Days.
Usually, the lower the number, the better is the cycle.
Cash-to-cash Cycle Calculation

This calculation is conducted from period financial reports in a
three step process:
)U
Step 1: Calculate Sales per day and Cost of Goods Sold (CGS) per
day
Sales per day on an annualized basis = Quarterly Sales × 4 ÷ 365.
CGS per day on an annualized basis = Quarterly Cost of Goods
Sold × 4 ÷ 365.
Step 2: Calculate Component Days
Receivable Days = Average Receivables for the Quarter ÷ Sales per
day
Inventory Days = Average Inventory for the Quarter ÷ CGS per
day
Payable Days = Average Accounts Payable for the Quarter ÷ CGS
per day.
(c
The results are show as whole numbers.

Step 3: Calculate the Cash-to-Cash Cycle
Cash-to-Cash = Receivable Days + Inventory Days – Payable Days
The cash to cash cycle is indicative of the business model a company
chooses to use and their effectiveness at executing the model.
44
In order to understand the dynamics of the business and to assess
Notes
S
the opportunities for improvement, cash to cash tracking between
___________________
different companies in the same industry segment or for different
___________________ time period is conducted.
___________________ Normally, the lower the Cash-to-Cash Days, the better, but too low
___________________ days in inventory can indicate service issues if the inventory is not
properly planned and managed and very high days in payables
___________________
PE
may result in issues with suppliers.
___________________
___________________ Days of Sales Outstanding

___________________ Days Sales Outstanding or DSO is a measure of the average
number of days that a company takes to collect revenue after a sale
___________________
has been made. If a company takes a fewer days to collect its
___________________ accounts receivable, the DSO number will be low. On the other
hand, a higher DSO indicates that the company is selling its
products to customers on credit and thereby taking a longer time to
receive money.
Days sales outstanding is calculated as:
Accounts Receivable
= × Number of Days
Total Credit Sales
)U
Or
⎡ ⎤
⎢ ⎥
Accounts Receivable ⎥
= ⎢
⎢ ⎛ Total Credit Sales ⎞ ⎥
⎢ ⎜⎝ Number of Days ⎟⎠ ⎥
⎣ ⎦
The cash required in running a business is of high importance.

Hence, the sooner a company collects its outstanding receivables,
the better it is. The quicker the sales gets converted into cash, the
greater is the company’s opportunity to put the cash into use
again, mainly to reinvest and thereby make more sales. The DSO
is important in determining whether a company is trying to
disguise its weak sales or is being ineffective in bringing money in.
(c
Most of the businesses look at DSO either quarterly or annually.
Days of Payable Outstanding (DPO)

Days of Payable Outstanding is an indicator of how long a
company is taking to pay its trade creditors. DPO is typically
looked at either quarterly or yearly (90 or 365 days). In other
words, DPO is a company's average payable period. It can be 45

calculated as: Notes
S
Accounts Payable ___________________
× Number of Days
Cost of Sales ___________________
Notice that the formula may also be written as: accounts payable / ___________________
(cost of sales/number of days).
___________________
PE
1. …………… refers to the frequency of inventory cycles or ___________________
turns over per year. ___________________
2. The Cash-to-Cash Cycle = Receivable Days + …………… ___________________

Days – …………… Days. ___________________
Summary
Supply chain performance measures can be classified broadly into
two categories: qualitative measures (such as customer satisfaction
and product quality) and quantitative measures (such as order-to-
delivery lead time, supply chain response time, flexibility, resource
)U
utilization, delivery performance, etc.).
Supply Chain measurements or metrics such as inventory turns,
cycle time, DPMO and fill rate are used to track Supply Chain
performance. Supply Chain Measurements can cover many areas
including procurement, production, distribution, warehousing,
inventory, transportation, customer service – any area of logistics.
However, a good performance in one part of the Supply Chain is not
sufficient. Every part must be well efficient in its manner.
Lesson End Activity

By assuming some imaginary figures, discuss the concept of Cash-
to-Cash Cycle in Days with example.
(c
Keywords
Days of Payable Outstanding (DPO): An indicator of how long a
company is taking to pay its trade creditors.
46
Days Sales Outstanding or DSO: A measure of the average
Notes
S
number of days that a company takes to collect revenue after a sale
___________________
has been made.
___________________
Inventory Turnover or Inventory Turn: It refers to the
___________________ frequency of inventory cycles or turns over per year.
___________________
___________________ Questions for Discussion
PE
___________________ 1. Explain the performance of supply chain management.
___________________ 2. What are the key features of a supply chain management?
___________________ 3. Discuss, in detail, the following terms:
___________________ (a) Reliability
___________________ (b) Days of Sales Outstanding
(c) Inventory Return
4. Discuss the concept of Days of Payable Outstanding.
Further Readings
Books
)U
Buzzell, R.D. and Ortmeyer, G. (1995), “Channel partnerships
streamline distribution”, Sloan Management Review, Vol. 36 No. 3,
pp. 85-96.
Corbett, C.J., Blackburn, J.D. and Van Wassenhove, L.N. (1999),
“Partnerships to improve supplychains”, Sloan Management
Review, Vol. 40 No. 4, pp. 71-82.
Croxton, K.L., Garcı´a-Dastugue, S.J., Lambert, D.M. and Rogers,
D.S. (2001), “The supply chainmanagement processes”, The
International Journal of Logistics Management, Vol. 12 No. 2,pp.
13-36.
Davenport, T.H., Harris, J.G., De Long, D.W. and Jacobson, A.L.
(2001), “Data to knowledge toresults: building an analytic
capability”, California Management Review, Vol. 43 No. 2,pp.
(c
117-39
Web Readings
lcm.csa.iisc.ernet.in/scm/coimbatore/node11.html
www.emeraldinsight.com/journals.htm?articleid=849174
www.sap.com/scpm
`
UNIT 5: Case Studies
Unit 5
47
Notes
S
Case Studies
___________________
___________________
___________________
Objectives
___________________
After analyzing these cases, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
PE
___________________
Case Study 1: Apple’s Innovation Supply Chain Design
Strategy ___________________
About five years ago, Apple (AAPL) design guru Jony Ive decided ___________________
he wanted a new feature for the next MacBook: a small dot of
green light above the screen, shining through the computer’s ___________________
aluminium casing to indicate when its camera was on. The ___________________
problem is that it is physically impossible to shine light through
metal.
Ive called in a team of manufacturing and materials experts to
figure out how to make the impossible possible, according to a
former employee familiar with the development who requested
anonymity to avoid irking Apple. The team discovered it could use
a customized laser to poke holes in the aluminium small enough
to be nearly invisible to the human eye but big enough to let light
)U
through.
Applying that solution at massive volume was a different matter.
Apple needed lasers, and lots of them. The team of experts found
a U.S. company that made laser equipment for microchip
manufacturing which, after some tweaking, could do the job. Each
machine typically goes for about $250,000. Apple convinced the
seller to sign an exclusivity agreement and has since bought
hundreds of them to make holes for the green lights that now
shine on the company’s MacBook Airs, Trackpads, and wireless
keyboards.
Most of Apple’s customers have probably never given that green
light a second thought, but its creation speaks to a massive
competitive advantage for Apple: Operations. This is the world of
manufacturing, procurement, and logistics in which the new chief
executive officer, Tim Cook, excelled, earning him the trust of
Steve Jobs. According to more than a dozen interviews with
former employees, executives at suppliers, and management
experts familiar with the company’s operations, Apple has built a
(c
closed ecosystem where it exerts control over nearly every piece of

the supply chain, from design to retail store. Because of its
volume and its occasional ruthlessness–Apple gets big discounts
on parts, manufacturing capacity, and air freight. “Operations
expertise is as big an asset for Apple as product innovation or
marketing,” says Mike Fawkes, the former supply-chain chief at
Hewlett-Packard (HPQ) and now a venture capitalist with
Contd…
48 VantagePoint Capital Partners. “They’ve taken operational

Notes excellence to a level never seen before.”
S
This operational edge is what enables Apple to handle massive
___________________
product launches without having to maintain large, profit-sapping
___________________ inventories. It’s allowed a company often criticized for high prices
to sell its iPad at a price that very few rivals can beat, while still
___________________ earning a 25 percent margin on the device, according to the
estimates of Piper Jaffray analyst Gene Munster. And if the latest
___________________
rumours are to be believed, Apple’s operational expertise is likely
___________________ part of what gives the company enough confidence to enter the
PE
notoriously cutthroat television market by 2013 with a TV set
___________________ that would tightly integrate with existing Apple software like
iTunes. The widespread scepticism over Apple’s ability to compete
___________________
in such a price-sensitive market, where margins are often in the
___________________ single digits, is “exactly what people said when Apple got into cell
phones,” says Munster.
___________________
Apple began innovating on the nitty-gritty details of supply-chain
___________________ management almost immediately upon Steve Jobs’s return in
1997. At the time, most computer manufacturers transported
products by sea, a far cheaper option than air freight. To ensure
that the company’s new, translucent blue iMacs would be widely
available at Christmas the following year; Jobs paid $50 million
to buy up all the available holiday air freight space, says John
Martin, a logistics executive who worked with Jobs to arrange the
flights. The move handicapped rivals such as Compaq that later
wanted to book air transport. Similarly, when iPod sales took off
in 2001, Apple realized it could pack so many of the diminutive
)U
music players on planes that it became economical to ship them
directly from Chinese factories to consumers’ doors. When an HP
staffer bought one and received it a few days later, tracking its
progress around the world through Apple’s website, “It was an
‘Oh s–’ moment,” recalls Fawkes.
That mentality, ‘spend exorbitantly wherever necessary, and reap
the benefits from greater volume in the long run’, is
institutionalized throughout Apple’s supply chain, and begins at
the design stage. Ive and his engineers sometimes spend months
living out of hotel rooms in order to be close to suppliers and
manufacturers, helping to tweak the industrial processes that
translate prototypes into mass-produced devices. For new designs
such as the MacBook’s unibody shell, cut from a single piece of
aluminium, Apple’s designers work with suppliers to create new
tooling equipment. The decision to focus on a few product lines,
and to do little in the way of customization, is a huge advantage.
“They have a much unified strategy, and every part of their
business is aligned around that strategy,” says Matthew Davis, a
(c
supply-chain analyst with Gartner (IT) who has ranked Apple as

the world’s best supply chain for the last four years.
When it’s time to go into production, Apple wields a big weapon:
More than $80 billion in cash and investments. The company says
it plans to nearly double capital expenditures on its supply chain
in the next year, to $7.1 billion, while committing another $2.4
billion in prepayments to key suppliers. The tactic ensures
Contd…
`
availability and low prices for Apple–and sometimes limits the 49

options for everyone else. Before the release of the iPhone 4 in Notes
S
June 2010, rivals such as HTC couldn’t buy as many screens as
they needed because manufacturers were busy filling Apple ___________________
orders, according to a former manager at HTC. To manufacture
the iPad 2, Apple bought so many high-end drills to make the ___________________
device’s internal casing that other companies’ wait time for the
___________________
machines stretched from six weeks to six months, according to a
manager at the drill maker. ___________________
Life as an Apple supplier is lucrative because of the high volumes
___________________
PE
but painful because of the strings attached. When Apple asks for
a price quote for parts such as touchscreens, it demands a ___________________
detailed accounting of how the manufacturer arrived at the quote,
including its estimates for material and labour costs, and its own ___________________
projected profit. Apple requires many key suppliers to keep two
___________________
weeks of inventory within a mile of Apple’s assembly plants in
Asia, and sometimes doesn’t pay until as long as 90 days after it ___________________
uses a part, according to an executive who has consulted for Apple
and would not speak on the record for fear of compromising the ___________________
relationship.
Not every supplier gives in. An executive who works with a major
parts manufacturer says that Apple’s bargaining tactics tend to
exert downward pressure on prices, leading to lower profits and
margins. After months of negotiations, the company declined a
$1 billion payment from Apple that would have required the
supplier to commit much of its manufacturing capacity to
Cupertino’s products. The executive familiar with these talks,
)U
who asked not to be named because the discussions were not
public, says that while deals featuring $1 billion in cash up front
are basically unheard of, his company didn’t want to be too
dependent on Apple–and didn’t want to help it deflate prices.
Apple’s control reaches its crescendo in the lead up to one of its
famed product unveilings, a tightly orchestrated process that has
been refined over years of Mac, iPod, iPhone, and iPad debuts.
For weeks in advance of the announcement, factories work
overtime to build hundreds of thousands of devices. To track
efficiency and ensure pre-launch secrecy, Apple places electronic
monitors in some boxes of parts that allow observers in Cupertino
to track them through Chinese factories, an effort meant to
discourage leaks. At least once, the company shipped products in
tomato boxes to avoid detection, says the consultant who has
worked with Apple. When the iPad 2 debuted, the finished devices
were packed in plain boxes and Apple employees monitored every
handoff point–loading dock, airport, truck depot, and distribution
centre–to make sure each unit was accounted for.
(c
Apple’s retail stores give it a final operational advantage. Once a

product goes on sale, the company can track demand by the store
and by the hour, and adjust production forecasts daily. If it
becomes clear a given part will run out, teams are deployed and
given approval to spend millions of dollars on extra equipment to
get around the bottleneck.
Contd…
50 Apple’s enormous profits–its gross margins were 40 percent last

Notes quarter, compared with 10 to 20 percent for most other hardware
S
companies–are in large part due to this focus on operations, which
___________________ is sure to remain a priority under Cook. The new CEO is known to
give colleagues copies of Competing Against Time, a book about
___________________
using supply chains as a strategic weapon in business. According
___________________ to Martin, the logistics executive, Cook uses a catchphrase to
hammer home the need for efficiency: “Nobody wants to buy sour
___________________ milk.”
___________________ The bottom line: Apple plans to double spending on its supply
PE
chain, to $7.1 billion, continuing its focus on streamlining and
___________________ controlling manufacturing.
___________________ Questions
1. Write down the facts and analysis of the above case.
___________________
2. What lessons have you learnt from Apple’s innovative supply
___________________ chain strategy?
___________________ Source: http://www.innovarsity.com/coach/bp_innovation_strategies_apple.html
)U
(c
`
Case Study 2: Subhiksha: Managing Store 51
Operations Notes
S
___________________
Founded in 1997, Subhiksha had grown from one store in 1997 to
more than 1000 retail outlets in 2008. It sold FMCG, grocery, ___________________
pharmacy, mobile products, and fruits and vegetables (F&V). It
was the largest supermarket and mobile retail chain in India with ___________________
presence in 90 cities. In 2008, organized retail accounted for about ___________________
4% industry share. Although organized retail was identified as
high-growth area by the middle of 2008, players who had entered ___________________
PE
the Indian retail had realized that organized retail in India was
going to be tough business. Various players (Reliance, Bharti, ___________________
Birla, and the Future Group) were experimenting with different ___________________
formats and models. Subhiksha decided to come up with its own
model which in its view was suitable to the Indian context. ___________________
Subhiksha targeted the middle and lower classes and not the
high-end customers. To do so, it operated with an everyday low ___________________
pricing model and located several smaller stores to move closer to
___________________
the customer. At the operational level, it constantly planned to
increase the supply chain process efficiency to deliver goods at low
prices.
Timeline
1997: started The Ascent, 1st store in Chennai which sold
groceries and medicine
March 1999: 14 stores in Chennai
)U
June 2000: 50 stores in Chennai
2000: ICICI ventures invests in Subhiksha
2002: 120 stores across the state of Tamil Nadu
2004: Change in principle. From “Consolidation” to “Expansion”
2005: Recruits personnel across the country
End 2006: 420 stores in Gujarat, Tamil Nadu, Delhi, Mumbai,
Andhra and Karnataka.
Feb 2007: 500 stores across the country
End 2007: Crosses 1000 stores across the country
The Crash October 2007: Subhiksha mulls a ` 350 crore IPO to
finance growth
December 2007: Subhiksha shelves IPO in view of uncertain
stock market conditions
April 2008: Plans foray into East market
(c
April 2008: Subhiksha plans private wholesale markets

June 2008: Subhiksha looks at alternate routes to generate cash
to fund expansion
September 2009: Reports on Subhiksha defaulting on vendor
payments, Employee salaries/Wipro takes 10% stake in
Subhiksha/ Subhiksha hints at large format Consumer durables
and IT stores
Contd…
52
October 2009: Tabloids report problems in the cash flows @
Notes Subhiksha/ Employees clamour for salaries/Vendors cutting off
S
supplies causes Subhiksha stores to go dry/ Subhiksha defaults on
___________________
rents for the stores
___________________ January 2009: RS admits Subhiksha needs ` 300 crores to keep
___________________ afloat/Subhiksha enters negotiations with property owners on
arrears and rentals
___________________ In 2009, Subhiksha planned to have a store at every 2 km and its
___________________ expansion plan also aimed to have 550 stores by the year end. The
PE
main attraction of the stores was that they were designed without
___________________ air condition, extravagant lighting or decoration. Moreover,
customers had to ask for product against touch and feel
___________________ experience offered by many stores. Another important aspect was
___________________
that the goods were 8–10% lower than maximum retail price.
Store keepers helped the customers in their buying decision.
___________________ One of the initial problems faced by the Subhiksha chain was
___________________
related to their pharmacy retail chain. It was faced with protest
against pharmacy discount strategy. There was frequent enquiry
about standard of drug by drug inspector and it even had a
conflict with drug maker Glaxo. This problem was overcome
through Subhiksha’s ICICI venture and initiation of home
delivery and online selling.
As far as Subhiksha’s manufacturing structure is concerned, the
goods were directly procured from the manufacturer. One
manager was recruited for every three stores. Supply chain
software was installed. There was a Chief Manager and Vice
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President who supervised the operations and goods were stored in
a well maintained godown.
There were several reasons behind Subhiksha’s retailing in
Chennai. Firstly, supermarkets don’t account for even 10% of the
groceries sold in Chennai. So, Subhiksha was among the few to
attempt this venture. Retailing in Chennai was successful due to
the following four reasons:
1. Proximity
2. Quality of groceries
3. Price of branded groceries
4. Availability of products
Subhiksha followed the model of sustainability wherein there was
no middleman was allowed to decrease the price. Survey
motivated them to go for this model. Subhiksha’s strategy
included availability, acceptability and affordability. In spite of
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following this policy, Subhiksha couldn’t last for the long. Its
downfall can be stated in the following steps:
In 2009, 8–10 per cent of stores that were unviable, closed
while the rest continued
On 30 January- 2009 managing director R. Subramanian said
that company needed cash infusion of ` 300 crore to get the
company back on track (property & salary dues).
Contd…
`
53
z Debt reached ` 750 crore.
Notes
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z In late December, Mr Kannan Srinivasan, a professor of
marketing at Carnegie Mellon University’s Tepper School of ___________________
Business, had resigned from Subhiksha’s board and in early
January marketing consultant Rama Bijapurkar, who is also ___________________
an alumnus of IIM-A like Subhiksha founder Mr R.
___________________
Subramanian, also quit the board
Crux of Problem ___________________
The company expanded too rapidly on a small equity base of ` 250 ___________________
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crore and grew the business, primarily through debt, to a level of
1,600 stores and 15,000 employees, and ` 2,300 crore in sales by ___________________
March 2008. It planned to raise money from FIIs which collapsed
___________________
when the “financial tsunami” happened.
The following are the reasons behind the downfall of Subhiksha: ___________________
1. Unmindful expansion across states from South to West and ___________________

North, rapid store expansion, rapid increase of personnel,
huge investments and cash flows. ___________________
2. Growth without consolidation, the year 2004 marked a

departure in Subhiksha philosophy from consolidation and
growth to uncontrolled growth. Very few stores would have
been profitable in terms of cash flows.
3. Whither Retail management: The focus was towards
multiplying turnovers and expansions happened without an
eye to principles in Retail and Customer Management. Staff
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service was shoddy and stores lacked a healthy appeal to
consumers. A Subhiksha store often looked like a Government
uniform pricing Store.
4. Uncontrolled increase in store and personnel were bleeding
the treasury. Turnover being the mantra, Subhiksha worked
on slim and zero margins, often invoking the wrath of other
players in the market Thus, cash outflows were high where as
inflows in terms of margins were non existent.
5. Mastering the Supply Chain A Wal Mart builds scale through
integrated supply chain, not by being a re-seller. Downstream
supply chain was not integrated. Bulk buying is not a source
of advantage. In effect, Subhiksha was being a reseller,
buying products from vendors and selling them at zero
margins.
6. Managing Vendors, Subhiksha tried to build scale on bulk
quantity purchases from vendors and a liberal credit term
extended to them.
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7. Inventory management. Credit defaults caused supply

breakages. Hence it led to situations where either there was
huge store inventories going bad or the stores simply did not
have stocks. Inconsistency resulted in customer
dissatisfaction with store franchise! Furthermore,
unrestrained practices like reselling to other retailers, made
companies squeeze supplies. In the rush to pump ROI and
Contd…
54 turnovers, Subhiksha stores ere resorting to indiscipline and

Notes wasteful practices.
S
8. Discounts as USP. The only USP was discounts which can
___________________
hardly be considered a sustainable competitive edge!
___________________ Footfalls, turnaround and turnover being the guru mantra:
Subhiksha never understood its consumers. In a rush to build
___________________ turnarounds and turnovers and meet targets, lower level
managers resorted to reselling it to retailers and emptying
___________________
their inventories. In effect, target pressures impacted the USP
___________________ since Consumers chose to buy from outside the store since the
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store was “sold out”.
___________________
9. Quality of ground level management. Personnel recruited to
___________________ run operations were locals. They had the tendency towards
dishonest practices in face of turnover pressure. They resorted
___________________ to scoring “own goals” by playing into the turnover traps.
Quality of store service was bad, adherence to rules of retail
___________________
were minimal.
___________________ 10. Diffused focus. Subhiksha sold fresh vegetables, medicines,
groceries, mobile phones, accessories and more thereby
lacking focus. The business model and the manpower were not
robust enough to handle such diversity.
Questions
1. Examine the various decisions made by Subhiksha and how
do they match (fit or align) with the business model of
Subhiksha?
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2. Identify the key challenges faced by Subhiksha. How
important is assortment planning and inventory management
for Subhiksha?
3. In what ways was Subhiksha different from a regular Kirana
or grocery store?
Source: http://www.slideshare.net/Manas.Ganguly/the-anatomy-of-a-bust?from=ss_embed
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UNIT 6: Distortion in Supply Chain
55
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-II
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56
Notes
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UNIT 6: DISTORTION IN SUPPLY CHAIN z Inventory
___________________
z Introduction z Demand Uncertainty
___________________
z Concept of Bullwhip Effect z Forecasting
___________________ z Efficient Order Quantities
z Beer Game
___________________
UNIT 9: DESIGNING WORLD CLASS WAREHOUSE
UNIT 7: SOURCING & SUPPLIER SELECTIONS
___________________ & MATERIAL HANDLING
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z Introduction z Introduction
___________________
z Strategic Sourcing z Storage Systems
___________________
z Designing Request for Proposal (RFP) z Order Picking Systems
___________________
z Designing Request for Quotation (RFQ) z Warehouse Management Systems
___________________
UNIT 8: INVENTORY PLANNING AND
UNIT 10: CASE STUDY
MANAGEMENT (IP&M)
___________________
z Introduction
z Performance Measures
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Unit 6
57
Notes
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Distortion in Supply Chain
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
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\ Concept of Bullwhip Effect ___________________
\ Quantifying Bullwhip Effect ___________________
\ Beer Game
___________________
___________________
Introduction
___________________
As the complexity of supply chain increases different stages of a
supply chain may conflict if each stage has a different owner. If
there is lack of coordination, it then results in total supply chain
profits that are less than what could be achieved through
coordination. As a result, each stage tries to maximize its own
profits, resulting in actions that often diminish total supply chain
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profits. Lack of coordination also results in information distortion
within the supply chain. The result of information distortion is
shown by the beer game and has been variously described as the
'Forrester Effect' or the 'Bullwhip Effect.'
Concept of Bullwhip Effect

The reason for the bullwhip effect is that each company in the
chain has incomplete information about the needs of others,
therefore it responds with a disproportional increase in inventory
levels. This, consequently, results in an even larger fluctuation in
demand relative to others down the chain.
When complete information is not shared between stages due to
conflicting objectives, information gets distorted as it moves within
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the supply chain. This distortion is exaggerated by the fact that

supply chains today produce a large amount of product variety,
creating what is called the bullwhip effect. The bullwhip effect
distorts demand information within the supply chain, with
different stages having very different estimates of what demand
looks like. The result is a loss of supply chain coordination.
58
Quantifying Bullwhip Effect
Notes
Figure 6.1 shows how the bullwhip affects the different stages of
S
___________________ the supply chain. Each stage of the supply chain, in trying to
___________________ optimize its local objective, takes actions that end up hurting the
performance of the entire supply chain. Based on consumer sale
___________________
numbers, the retailer makes orders on the wholesaler. The next
___________________
figure, Figure 6.2, shows the wholesalers order and the
___________________ corresponding manufacturer's order on its suppliers.
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___________________
1000- Consumer Sales at Retailer 1000- Retailer’s Orders to Wholesaler
___________________ 900- 900-
800-
Retailer Order
Retailer Order
800-
700- 700-
___________________ 600- 600-
500- 500-
400- 400-
___________________ 300- 300-
200- 200-
100- 100-
___________________
0 1 5 13 17 21 25 29 33 3741 0 1 5 13 17 21 25 29 33 3741
Time Time
Figure 6.1: Bullwhip Effect (a)

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Figure 6.2: Bullwhip Effect (b)
The beer game, at the end of the unit, is a demonstration of this

bullwhip effect, where even small fluctuations in demand or
inventory levels of the final company in the chain to propagate and
enlarge throughout the chain. It dramatically brings out the
distortions that take place in the supply chain and its negative
impacts on the different stages of the supply chain.
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The bullwhip effect increases manufacturing cost, increases

inventory cost, increases replenishment lead times in the supply
chain, increases transportation cost within the supply chain,
increases labour costs associated with shipping and receiving,
hurts the level of product availability and results in more stock
outs, and lower profitability. The impact of the bullwhip effect on
different performance measures is summarized in Table 6.1.
59
Table 6.1: Impact of Bullwhip Effect on Supply Chain Performance
Notes
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Performance Measure Impact of Bullwhip Effect
Activity
Manufacturing cost Increases ___________________
Inventory cost Increases origin and development of
beer___________________
game.
Replenishment lead time Increases
Transportation cost Increases ___________________
Shipping and receiving cost Increases
Level of product availability Decreases
___________________
Profitability Decreases
___________________
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Indicative of this effect are excessive inventories, low customer ___________________
service levels, inaccurate and untimely capacity planning, lost ___________________
income, increased transportation costs and ineffective production
___________________
scheduling.
___________________
In addition to the effect on performance, the bullwhip effect also
___________________
hurts relationships between different stages of the supply chain.
Each stage assigns blame to other stages of the supply chain
because each stage feels it is doing its best. This leads to a loss of
trust in the supply chain members and makes coordination efforts
more difficult. The fundamental challenge today is for supply
chains to achieve coordination in spite of multiple ownership and
increased product variety.
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The bullwhip effect moves a supply chain away from the efficient
frontier by increasing cost and decreasing responsiveness. A lack of
coordination impacts performance. The integration of supply chain
management systems is the solution. This has been the subject of
significant debate and discussion. As organizations seek to develop
partnerships and more effective information links with trading
partners, internal processes become interlinked and span the
traditional boundaries of firms.
Check Your Progress

Fill in the blanks:
1. The result of information distortion is shown by the
……………… game and has been variously described as
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the 'Forrester Effect' or the 'Bullwhip Effect.'

2. When complete information is not shared between
stages due to conflicting objectives, information gets
……………… as it moves within the supply chain.
60
Beer Game
Notes
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The Beer Game was developed at MIT in the 1960s. This game
___________________
simulates a simplified beer supply chain, consisting of a single
___________________ retailer, a single wholesaler which supplies the retailer, a single
___________________ distributor which supplies the wholesaler, and a single factory
with unlimited raw materials which makes (brews) the beer and
___________________
supplies the distributor.
___________________
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The supply lead time and order delay time between each
___________________
component is fixed. Each week, players try to meet the demand of
___________________ the downstream component. Any orders which cannot be met are
recorded as backorders, and are met as soon as possible. No orders
___________________
are ignored, and all orders must eventually be met.
___________________
At each period, each component in the supply chain is charged a
___________________
$1.00 shortage cost per backordered item. Also, at each period,
each location is charged $.50 inventory holding cost per inventory
item that it owns. The inventory at their facility and the inventory
in transit are owned by the suppliers both upstream and
downstream. Downstream means the direction of the supply chain
leading to the external demand, and upstream means in the
direction of the factory.
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Each supply chain member orders some amount from its upstream
supplier. It takes one week for this order to arrive at the supplier.
Once the order arrives, the supplier attempts to fill it with
available inventory, and there is an additional two week
transportation delay before the material being shipped by the
supplier arrives at the customer who placed the order.
The goal of the retailer, wholesaler, distributor, and factory, is to
minimize total cost, either individually, or for the system.
After you are logged into the beer game, the screen in Figure 6.3
appears. In this simulation, you take the role of a manager of one
of the components of the beer supply chain, either the retailer, the
supplier, the distributor, or the factory. This is called the
interactive role. The computer takes the remaining roles. In the
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example screen displayed above, the distributor is the interactive

role.
The game simulates a real life supply chain where you only have
the information regarding your role and the backorder at the
supply chain member immediately upstream from the interactive
supply chain member. That means members of the supply chain
are not exchanging information.
61
Game Manager Beer Game About Help
Notes
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0 My Order Graph
Last Week Back Order:
This Week Demand: 0 0 Report
This week Satisfied Demand:
0 Submit Order Exit the game ___________________
Retailer: Week 1 of 23
Game: BEERGAME
___________________
Inventory Daily One Daily Two
Wholesaler: week 1 of 23
___________________
Inventory Daily One Daily Two ___________________

Distributor: week 1 of 23
___________________
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Total Cost: 00
Inventory Daily One Daily Two Back Order: 0
Recent Order: 0 ___________________
Factory: week 1 of 23
Inventory Daily One Daily Two Back Order: 0

___________________
Message Board:
___________________
___________________
New Message: Send/Check Message
___________________
Figure 6.3: The Starting Screen of the Beer Game
Order of Events: The simulation is run as a series of weeks.

Within each week, first the retailer, then the wholesaler, then the
distributor, and finally the factory, executes the following series of
events, as the simulation proceeds upstream:
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1. Delay 2 at the start of the game is 0. When the game starts,
the contents of Delay 2 are moved to Delay 1, and the contents
of Delay 1 is moved to inventory. (If you see the screen, there
are 3 bits of information; Inventory, Delay 1and Delay 2.
Orders placed put in Delay 2, and backorders are shown in
Delay 1.)
2. Orders from the immediate downstream facility (or in the case
of the retailer, external customers) are filled to the extent
possible. An order consists of the current order and all
accumulated backorders. Remaining orders are backlogged, to
be met as soon as possible. The orders are filled to the Delay 2
location of the immediate downstream facility. This is the start
of the two week delay.
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3. Backorder and inventory costs are calculated.

4. New orders are placed. (In the interactive role, the user
indicates the desired order amount; in the automatic roles, the
computer places an order).
The sequence of events implies several things. First, once an
upstream facility fills an order, there is a two-period delay before
62 this material can be used to fill a downstream order. Also, there is

Notes a one period order delay. This means that if, for example, the
S
___________________ retailer places an order for 5 units in this period, the wholesaler
does not even attempt to fill the order until next period. This
___________________
period, the wholesaler attempts to fill the order from the previous
___________________
period. This can be considered a one period order processing lag.
___________________ Thus, there is a total of three periods of delays between when a
___________________ facility places and order, and when the results of that order arrive
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in inventory.
___________________
Also, there is no guarantee that an order will be met, even with
___________________
that three period lag. An upstream supplier can only fill an order if
___________________
it has the necessary inventory. Otherwise, it will backlog that
___________________ order, and attempt to fill it as soon as possible. The exception to
___________________ this is the factory. There is no production capacity lime so the
factory's order will always be filled in its entirety after the
appropriate delay.
At each weekly ordering point, you will have to decide how many
units to order. The information that is available to you is the
following:
z Your current inventory.
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z How much will arrive in one week (Delay 1)?
z How much will arrive in two weeks (Delay 2)?
z The size of your most recent order (recent order box).
z The demand you are currently facing (Order Entry Dialog).
z Previous demand you have been unable to meet, and have
backlogged (Order Entry Dialog).
z The amount you most recently supplied (Order Entry Dialog).
z The amount you ordered from your upstream supplier in prior
weeks which has not yet been shipped (your upstream
supplier's backorder box).
z Any historical information you have recorded or observed from
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the Reports menu.

If you view the Graph window when the simulation is completed,
however, you can observe some interesting impacts. For example,
Figure 6.4 shows typical data on the distributor. There is a
mismatch at each stage of ordering. The order, the back order and
the inventory show a large degree of mismatch. This mismatch
corresponds to the 'Forrester Effect'.
63
Notes
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Activity
___________________
Prepare a report on
development of beer game.
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
Figure 6.4: The Beer Game Results ___________________
There are more options available: the Cost Chart is shown in ___________________
Figure 6.5. Notice how the cost increases week by week. Normally,
this should either have been constant or should have declined with
time, if the supply chain processes were efficient.
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Figure 6.5: Typical Cost Chart
Although the value of managing each component of the supply

chain in order to maximize customer service and profits is clear to
most firms, the value of taking an integrated approach to
managing the entire supply chain is not so obvious. The Beer
Game is a role-playing simulation that tries to illustrate the
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disadvantages of not taking an integrated approach to supply

chain management.
The nature of organizations has been fundamentally changed by
the supply chain concept by its integrated approach. In this
concept, control is no longer based on direct ownership, but rather
based on integration between functions and companies. This
64 integration has consequences for the efficiency, seamlessness and

Notes profits of the supply chain. It also is a measure of the performance
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___________________ of the supply chain.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The Beer Game was developed at MIT in the …………..
___________________
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2. The supply lead time and order delay time between each
___________________
component is ……………..
___________________
___________________ Summary
___________________ For make-to-stock production systems, which are included in
___________________ different supply chains, the production plans and activities are
based on demand forecasting. The orders are supplied by stock
inventory, in which policy emphasizes the immediate delivery of
the order, good quality reasonable price, and the standard
products. The customers expect that delays in the order are
inexcusable, so the supplier must maintain sufficient stock. It has
been recognized that demand forecasting and ordering policies are
two of the key causes of the Bullwhip Effect.
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The Bullwhip effect is a wasteful phenomenon that occurs due to
lack of information across the supply chain. Basically the Bullwhip
effect is the safety stock for the safety stock; because suppliers hold
extra stock for their customers the same way retailers hold extra
stock for their customers. Suppliers need safety stock for the safety
stock.
Situations where information is not shared between the
manufacturer (with chained suppliers) and the retailers may cause
a heavier burden on the safety stock or a greater expenditure in
shortage cost. The negative effect on business performance is often
found in excess stocks, quality problems, higher raw material
costs, overtime expenses and shipping costs. In the worst case
scenario, customer service goes down lead time lengthen, sales are
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lost, costs go up and capacity is adjusted. An important element to

operating a smooth flowing supply chain is to mitigate and
preferably eliminate the Bullwhip effect.
Lesson End Activity

Trace out the limitations of bullwhip effects.
Keywords 65
Notes
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Bullwhip Effect: It occurs when the demand order variabilities in
___________________
the supply chain are amplified as they moved up the supply chain.
___________________
Beer Game: The game involves a simple production/distribution
system for a single brand of beer. There are three players in the ___________________
game including a retailer, a wholesaler, and a marketing director ___________________

at the brewery. Each player's goal is to maximize profit.
___________________
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___________________
___________________
1. Discuss the bullwhip effect.
___________________
2. Discuss the impact of bullwhip effect on supply chain
___________________
performance.
___________________
3. Elaborate the beer game concept in detail with the help of
diagrams and examples.
4. Explain the sequential events of beer game.
Further Readings
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Books
For a theoretical treatment of this subject, see: H.L. Lee, P.
Padmanabhan, and S. Whang, "Information Distortion in a Supply
Chain: The Bullwhip Effect," Management Science, 1997,
forthcoming.
M. Millstein, "P&G to Restructure Logistics and Pricing,"
Supermarket News, 27 June 1994, pp. 1, 49.
H.L. Richardson, "How Much Should You Outsource?,"
Transportation and Distribution, volume 35, September 1994, pp.
61-62.
Z. Schiller, "Ed Artzt's Elbow Grease Has P&G Shining," Business
Week, 10 October 1994, pp. 84-86.
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R. Mathews, "CRP Moves Towards Reality," Progressive Grocer,

volume 73, July 1994, pp. 43-44.
Lee, H.L. (2010). Taming the bullwhip. Journal of Supply Chain
Management 46 (1), pp. 7–7.
Supply Chain Management, S. Tayur, R. Ganeshan and M.
Magazine, eds., Kluwer, pp. 417–439.
66
Selwyn, B. (2008) Bringing Social Relations Back In:
Notes
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(re)Conceptualising the 'Bullwhip Effect' in global commodity
___________________
chains. International Journal of Management Concepts and
___________________ Philosophy, 3 (2)156-175.
___________________ Tempelmeier, H. (2006). Inventory Management in Supply
___________________ Networks–Problems, Models, Solutions, Norderstedt: Books on
Demand.
___________________
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___________________ Web Readings
___________________ lcm.csa.iisc.ernet.in/scm/coimbatore/node11.html
___________________ www.emeraldinsight.com/journals.htm?articleid=849174
___________________ www.umassd.edu/media/umassdartmouth/.../publications/pm_scm.
___________________ pdf
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UNIT 7: Sourcing & Supplier Selections
Unit 7
67
Notes
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Activity
Sourcing & Supplier Selections

___________________
essentials of firm’s strategy.
___________________
___________________
Objectives
___________________
topics: ___________________
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\ Strategic Sourcing ___________________
\ Designing Request for Proposal (RFP) ___________________
\ Designing Request for Quotation (RFQ)
___________________
\ Evaluations of RFQs
___________________
\ Selection of Suppliers
___________________
Introduction
Once the 'make or buy' decision has been made, the next step is to
decide on sourcing. The decision to source is determined by the
strategy the firm may have for that category of item.
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Strategic Sourcing
There are basically three sourcing strategies that are combined in
different ways. These strategies are:
1. Multi-sourcing Strategy,
2. Network Sourcing Strategy, and
3. Single Sourcing Strategy.
The strategic issues involved in each of these sourcing strategies
are discussed below.
Multi-sourcing Strategy
Traditional purchasing was dominated by a multi-sourcing
strategy. This meant that the firm had business relationships with
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a number of suppliers. The base of suppliers was large and the

duration of contracts was short. Suppliers would be sent enquiries
and they would respond with quotations, meeting the demands and
specifications of the firm, and negotiate with purchasing for the
contract.
68
From the buyer's point of view, the responsibility to maintain the
Notes
S
necessary technology, expertise, and forecasting abilities plus cost,
___________________
quality, and delivery competencies lay with the supplier. However,
___________________ dealing with several suppliers required a longer time in
___________________ negotiation that could often result in a delay or disturb the buyer's
production schedules.
___________________
The multiple sourcing was, therefore, a preferable and suitable
___________________
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purchasing alternative. Transactional relationships were the
___________________ desired outcome. In today's environment, multiple sourcing is
___________________ generally limited to and used for commodity items, non-strategic
___________________
buying and standard items.
___________________ There has been a change from the traditional model. The number
of suppliers to use for one type of purchase has changed to the use
___________________
of fewer, reliable suppliers and even to the extent of using sole or
single suppliers.
Network Sourcing Strategy

Many firms have successfully consolidated their supplier bases by
using a phased approach. This hybrid is often termed networking.
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In networking, bought in content of the final product is based on the
skills and specialized knowledge of different tiers of subcontractors.
The supply network is a hierarchical pyramid. The top tiered
suppliers are the most skilled and possess the most advanced
technologies, while the suppliers at the bottom have adequate skills
for their particular operations. Communication is shared between
the buyer and all the suppliers within the network.
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Figure 7.1: Network Sourcing

Generally, the suppliers at the first tier are largely responsible for 69
complete systems, whereas those at the lower tiers become Notes
S
subcontractors to the upper level suppliers providing individual ___________________
components. In this way, the number of supply sources can be
___________________
reduced and the impact of the network is enhanced due to the
___________________
transfer of technology between the firms.
___________________
Generally, manufacturing organizations with an assembly–type of
operation choose network sourcing as the sourcing choice. This ___________________
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sourcing alternative is particularly appropriate to industries with ___________________
a heavy reliance on a high purchased content of parts designed and
___________________
made uniquely for the particular assembler under consideration.
___________________
Automobile producers, such as Maruti or Hyundai, find this mode
of purchasing particularly beneficial. ___________________
Companies that have traditionally used vast numbers of suppliers ___________________

have successfully made the transition to best practice in supply
management by reducing their supplier base by 50 per cent or
more. However, it is not easy. Most companies and suppliers go
through three phases before achieving a healthy relationship.
Single Sourcing Strategy

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Single sourcing as a concept evolved from the work carried out by
the Boston Consulting Group (BCG) in the 1960s. The
breakthrough came while BCG was working for a major
manufacturer of semiconductors. In a study on the cost of
television components BCG found striking differences in the rate of
cost improvement between monochrome parts and colour parts.
This was difficult to explain since the same factory, the same
labour, the same processes were involved at the same time. BCG
explained the phenomenon through the experience curve.
BCG had earlier observed in many of their studies that producers
tend to become increasingly efficient as they gain experience in
making their product, and costs usually declined with cumulative
production. They came up with a hypothesis to explain how an
organization with the greatest accumulated volume of production
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will have the lowest cost relative to other producers in the market.
This explained why monochrome parts had progressed down a cost
curve to a larger degree than the colour parts. The accumulated
experience in monochrome parts was much greater than in colour
parts.
70
Notes COST
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1.00
___________________
.80
___________________
___________________ .64
___________________ .50
___________________ 10 20 40 60
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TOTAL EXPERIENCE
___________________
___________________
Figure 7.2: The Experience Curve
___________________
The experience curve is shown as Figure 7.2. According to the
___________________
experience curve concept, costs of value added decline
___________________ approximately 20 to 30 per cent in real terms each time
accumulated experience is doubled. If the growth rate is constant,
the cost decline continues indefinitely as long as the growth rate
continues. If the growth stops, costs continue to decline, but the
rate of decline is cut in half each time the accumulated experience
doubles.
The cost declines identified by the experience curve do not occur
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automatically. It is assumed that there is added investment in an
amount commensurate with the marginal cost of capital. Study of
the experience curve shows, if high return on investment
thresholds is used to limit capital investment, then costs do not
decline as expected.
BCG was able to collect the evidence on a wide variety of
semiconductors that were a part of the original study. Price data
supplied by the Electronic Industries Association was compared
with accumulated industry volume. Two distinct patterns emerged:
z In one pattern, prices, in current dollars, remained constant for
long periods and then began a relatively steep and long
continued decline in constant dollars.
z In the other pattern, prices, in constant dollars, declined
(c
steadily at a constant rate of about 25 per cent each time

accumulated experience doubled.
This pattern seemed to have applicability across the board.
Systematic cost differences arise between competitors because
some develop more knowledge about production than others.
This concept has important implications: if a company can
accelerate its production experience, it could gain a cost advantage 71

in its industry that would be difficult to match. Notes
S
Activity
___________________
Prepare a report on RFP.
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The decision to source is determined by the ……………..
___________________
the firm may have for that category of item.
___________________
PE
2. Many firms have successfully consolidated their
supplier bases by using a phased approach. This hybrid ___________________
is often termed as …………….. ___________________
___________________
Designing Request for Proposal (RFP) ___________________
A Request for Proposal is a document that an organization posts to ___________________
elicit bids from potential vendors for a product or service. There
are certain elements which are required while designing RFP:
An Overview of the Business Issue

The business issue or problem which is the main driving force
behind the purchase should be briefly described. One or two
)U
paragraphs are sufficient for providing the suppliers with a
summary of the project and the reason behind its initiation.
Description of Products or Services

The Request for Proposal should include a short description of the
required products and services. A good description would assist the
suppliers in making an excellent and highly focused proposal.
Detailed Business Requirements

Along with the product or services description, details about
business requirements also need to be outlined in the document.
These may include delivery guidelines, quality metrics, design
specifications, support requirements etc.
(c
Other Information Needed for Proposal

There is some other information as well which might be required
by the suppliers to formulate a proposal. This information is
mainly related to the internal operations of the organization and
may include demand projections, internal survey results, current
performance information, demand projections, usage metrics etc.
72
Approach Suggestions
Notes
An approach for the suppliers may be suggested in RFPs so that
S
___________________ the purchasing personnel are aware of their requirement.
___________________ However, if companies are looking for creative ways to approach
the problem, they may not have this section as they do not want to
___________________
drive the suppliers into a predetermined mold.
___________________
___________________ Performance Metrics
PE
___________________ If applicable, describe some performance metrics that will be used
to measure supplier performance of the contract in the future. This
___________________
will help suppliers get a quantifiable idea of what will constitute
___________________ excellent performance.
___________________
Proposal Format
___________________
The format and length of the proposal needs to be specified by the
RFP. Comparison of responses will be easier in case of a highly
structured format. Most RFPs encourage the suppliers to respond
in a point to point format and also specify the maximum length.
Selection Criteria
Essential information is contained in this section of the RFP,
)U
thereby making it important. This further clarifies the areas and
metrics. On which the suppliers’ proposals would be evaluated.
Timeline
The timeline should display the RFP creation date, the RFP send
date, the time period for questions, the due date for proposals, the
selection period, and the projected award date. This should all be
communicated as clearly as possible.
Point of Contact
The point of contact is the person that handles interactions with
the suppliers. This means that all supplier questions and
comments about the RFP will be directed to this person.
(c
Cost Breakdown
This is an optional section and may be included only to enable cost
comparisons wherein the suppliers are required to submit the costs
breakdown.
How to Respond 73
Notes
Special instructions are given on how to respond to the RFP
S
solicitation. These may include information on the address of ___________________
where to send the proposal. It should include the submission ___________________
format (hard copy, electronic, etc.). It should also specify any
___________________
additional submission requirements and can emphasize the
deadline. ___________________
___________________
PE
Check Your Progress
___________________
Fill in the blanks:
___________________
1. A ………….. is a document that an organization posts to
___________________
elicit bids from potential vendors for a product or
service. ___________________
2. The business issue or problem which is the main ___________________
………….. force behind the purchase should be briefly

described.
Designing Request for Quotation (RFQ)

A Request for Quotation is used for commodities, simple services or
)U
straightforward/uncomplicated parts with little or no room for
product or service differentiation between responding vendors.
Packaging options, delivery schedules etc. can be included as
negotiation points.
Sections of the Request for Quotation

The RFQ should contain the following sections. However, each
document will be different depending upon the type of company
and product searched for. Each section should be tailored as per
the individual needs.
1. Submission Details: Deadlines, mailing address of your
company, contact person for questions and clarifications.
2. Introduction and Executive Summary: This section should
(c
be written last after the entire document is finished. This is

used to provide prospective vendors with a brief overview of
your company and the requirements for your product or service.
3. Business Overview & Background: A brief overview of your
business, products and market sector that you cater to should
be given. This will assist in prospective vendors understanding
74 what business needs you are trying to fill with the vendor
Notes selection process. Also important background information that
S
Activity
___________________
Prepare a slide presenting will benefit the vendor when responding should be provided.
various packaging options.
___________________ 4. Detailed Specifications: This should be the longest section of
___________________ the document. For an RFQ this section should provide the
quantitative measures that you will be looking for in the
___________________
vendor's response.
___________________
PE
5. Assumptions & Constraints: Any assumptions and/or
___________________ constraints that the prospective vendors need to be made aware
___________________ of must be listed here. Failure in doing so will lead to
___________________
renegotiation of the agreement at a later date and the
possibility of straining the relationship between you and your
___________________
vendor.
___________________
6. Terms and Conditions: Any terms and conditions of the
contract must be listed in order for the vendor to make a fair
and honest response. These may include: financing options,
contract length, renewal options, warrantees, delivery
penalties, service levels, etc.
Evaluations of RFQs
)U
The following methodology should be used for vendor selection
decision.
1. Preliminary Review of all Vendor Proposals: Prior to the
evaluation and selection process, the vendor selection team all
the proposals are reviewed for completeness and clarity. The
submitting vendor should clarify any obvious omissions and
ambiguities to ensure through and efficient selection process.
2. Business Requirements and Vendor Requirements
Recording: The business requirements and then the vendor
requirements that were compiled in the first step are listed on
a spreadsheet. In order to arrive at a fair and equitable
decision a through and detailed listing of all requirements is
essential.
(c
3. Importance Value for Each Requirement Assigned: In

"Importance Value" using a scale from one to ten for each of the
requirements is assigned; where 1 is extremely unimportant
and 10 is extremely important. If the vendor selection team
cannot agree upon an importance value, then everyone's
individual value is accumulated and an "average" across all 75

members is calculated. Notes
S
4. Assignment of a Performance Value for Each ___________________
Requirement: This step may be the longest and most drawn ___________________
out process of the entire vendor selection process. A
___________________
"Performance Value" will need to be assigned by the team as
they believe that each vendor performs on each of the ___________________
requirements. For larger projects, each team member will have ___________________
PE
to be given time to evaluate each proposal in order to arrive at ___________________
a performance score for each objective.
___________________
5. Calculate a Total Performance Score: Finally, an
___________________
"Importance Value" for each requirement and a "Performance
Score" for each vendor on each requirement is achieved. Now, a ___________________
Total Performance Score for each vendor can be calculated by ___________________

multiplying the individual Importance Value by the vendor's
Performance Value. The sum of all an individual vendor's
Performance Score is totalled to arrive at a Total Performance
Score for the vendor.
6. Selection of the Winning Vendor: For the determination of a
vendor’s quotation, the Total Performance Score is not meant to
)U
be an absolute value. It is to be used as a guide to emphasize on
the differences between vendors and spark meaningful
discussion between team members. Quotations that knock
down orders-of-magnitude below the front runners can be
eliminated if the team agrees.
Selection of Suppliers
With the changing requirements of the marketplace, selecting
suppliers for strategic items on the basis of competitive bidding is
no longer valid. It is imperative that purchasing has the
appropriate configuration and focus. The configuration and focus
largely depends on its ability to select the best network so that the
function can perform at a more strategic level and contribute
better to the firm's competitive success. It is not easy to answer the
(c
question as to which one from the supplier base should be selected

as the most qualified. This assessment should be taken up by a
cross-functional team.
76
Notes Quality Reliability
S
• Technical • On-time delivery
___________________ Specification • Performance history Overview
• Properties • Warranty of Supplier
• Design • Availability of Spares Selection
___________________ • Product Life • Ability to face Criteria
• Dependability Emergencies
___________________ • Maintenance
Capability Financial Desirable Qualities

___________________
• Production • Product Cost • Management
Capability • Volume Discounts • Length of time in
___________________ • Technical Capability • Return on Assets Business
PE
• Design Capabilities • Funds and Cash • Reputation
___________________ • VE/VA Capabilities Flow Analysis • Attitude
• Operating Controls • Maintenance • Training
• Labor Relations • Integrity and
___________________ Honesty
___________________
___________________ Figure 7.3: Supplier Selection Criteria

___________________
Figure 7.3 graphically identifies some of the criteria in vendor
selection. These are discussed in greater detail below:
Quality: A significant change in the global manufacturing sector
is the quality revolution. Due to the growing demand for higher
quality products and services by consumers, manufacturers around
the world are becoming increasingly more quality conscious.
Businesses are realizing that they will have to provide high quality
)U
products and/or services at a competitive price in order for them to
compete in global markets.
Reliability: Reliability, after quality, is the most important
consideration. The responsibility of purchasing is to prevent
production line shutdowns resulting from longer-than-expected
lead times or inconsistent supply. The firm requires consistent,
on-time deliveries. The vendor's warranty and claim procedures
are also a reliability measure.
Capability: Capability reflects the potential vendor's production
facilities and capacity, technical capability, management and
organizational capabilities, and operating controls. These are
indicator of the vendor's ability to deliver both quality and
quantity of material in a timely manner. The evaluation should
(c
examine the vendor's physical capability to provide the material

the user needs on a consistent basis over an extended time period.
Financial: Financial considerations, in addition to price, include
the vendor's financial position.
This criterion becomes especially important in purchasing from
small scale and medium scale vendors. Transportation service is
one such area where the vendors are small and the financial 77
failure of such a supplier, especially if it is a single source, is a Notes
S
major problem and source of disruption in a supply chain. ___________________
Geographical Location: Another vendor selection factor is ___________________
geographical location. This factor is becoming increasingly
___________________
important due to many companies adopting JIT practices. The
issues involved in buying from distant vendors includes ___________________
transportation cost, the ability to fill rush orders, meet shorter ___________________
PE
delivery dates, provide shorter delivery times, and vendor ___________________
dependability. In the Maruti case that was presented earlier, the
___________________
company has located most of its vendors within a 100 km radius.
___________________
Other: The remaining vendor selection factors are the vendor's
attitude, integrity, corporate image, etc. Many of these attributes ___________________
are difficult to quantify, but these often affect the vendor selection ___________________
decision. Some factors may be dependent on the nature of the
product. For example, packaging is important for easily damaged
material, such as glass, but not important to buyers purchasing a
commodity that is not easily damaged, such as coal. Training aids
are important to a firm selecting vendors to supply technical
machinery such as machining centres, robots, etc., but not when
)U
purchasing seeking office supplies.
Check Your Progress

Fill in the blanks:
1. A ………….. is used for commodities, simple services or
straightforward/uncomplicated parts with little or no
room for product or service differentiation between
responding vendors.
2. Packaging options, delivery schedules etc. can be
included as ………….. points.
Summary
A Request for Proposal (RFP) is issued at an early stage in a
(c
procurement process, where an invitation is presented for

suppliers, often through a bidding process, to submit a proposal on
a specific commodity or service. The RFP process brings structure
to the procurement decision and is meant to allow the risks and
benefits to be identified clearly up front.
78
The RFP may dictate to varying degrees the exact structure and
Notes
S
format of the supplier's response. Effective RFPs typically reflect
___________________
the strategy and short/long-term business objectives, providing
___________________ detailed insight upon which suppliers will be able to offer a
___________________ matching perspective.
___________________ A Request for Quotation (RFQ) is a standard business process

whose purpose is to invite suppliers into a bidding process to bid on
___________________
PE
specific products or services. RFQ, generally means the same thing
___________________ as IFB (Invitation for Bid).
___________________
An RFQ typically involves more than the price per item.
___________________ Information like payment terms, quality level per item or contract
___________________ length are possible to be requested during the bidding process.
___________________ To receive correct quotes, RFQs often include the specifications of

the items/services to make sure all the suppliers are bidding on the
same item/service. Logically, the more detailed the specifications,
the more accurate the quote will be and comparable to the other
suppliers. Another reason for being detailed in sending out an RFQ
is that the specifications could be used as legal binding
documentation for the suppliers.
)U
The suppliers have to return the bidding by a set date and time to
be considered for an award. Discussions may be held on the bids
(often to clarify technical capabilities or to note errors in a
proposal). The bid does not have to mean the end of the bidding.
Multiple rounds can follow or even a reverse auction can follow to
generate the best market price.
RFQs are best suited to products and services that are as
standardised and as commoditised as possible, as this makes each
suppliers’ quotes comparable. In practice, many businesses use a
RFQ where an RFT or RFI would be more appropriate.
An RFQ allows different contractors to provide a quotation, among
which the best will be selected. It also makes the potential for
competitive bidding a lot higher, since the suppliers could be quite
(c
certain that they are not the only ones bidding for the products.
Requests for quotations are most commonly used in the business
environment but can also be found being applied to domestic
markets.
Lesson End Activity 79

Notes
S
Design a Request for Proposal/Quotation based upon the criteria
___________________
mentioned in this unit.
___________________
Keywords ___________________
___________________
Networking Sourcing Strategy: In networking, bought in
content of the final product is based on the skills and specialized ___________________
PE
knowledge of different tiers of subcontractors. ___________________
A Request for Proposal (RFP): It is a document that an ___________________
organization posts to elicit bids from potential vendors for a
___________________
product or service.
___________________
Questions for Discussion ___________________
1. Discuss the concept of strategic sourcing.

2. What are the three strategies of strategic sourcing? Discuss in
detail.
3. What do you meant by a request for proposal document?
)U
4. “With the changing requirements of the marketplace, selecting
suppliers for strategic items on the basis of competitive bidding
is no longer valid.” Elaborate this statement.
5. Name the methodologies that should be used for vendor
selection decision.
6. What are the sections required for the Request for Quotation?
7. How can you define RFP? What are the certain elements
required while designing RFP?
Further Readings
Books
Burt, David N., Donald W. Dobler, and Stephen L. Starling, World
(c
Class Supply Management: The Key to Supply Chain

Management, Boston, MA: McGraw-Hill Irwin, 2003.
Strategic Sourcing IIMM Compilation -IIMM May 2005.
80
Web Readings
Notes
S
www.deloitte.com/view/en_GR/gr/.../2-sourcing-procurement/
___________________
___________________
www.nahabit.com/sss.html
___________________ www.scvisions.com/.../PDFs/SCV%20Sourcing%20Strategy%2010-
07.pdf
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 3: Inventory Planning and Management (IP&M)
Unit 8
81
Notes
S
Activity
Inventory Planning and

___________________
details of inventory measures.
___________________
Management (IP&M) ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Inventory Performance Measures
\ Inventory Availability ___________________
\ Inventory Turnover ___________________

\ Inventory Modeling: Under Certainty Environment ___________________
\ Inventory Modeling: Under Uncertainty Environment
\ Forecasting
\ Efficient Order Quantities
\ Replenishment Schemes
Introduction
)U
Inventory measures reflect, in part, the success in structuring
systems to optimize the production rate, the lead time and the
scrap rate. Several aggregate performance measures can be used to
judge how well a company is able to control these factors and
utilizing its inventory resources.
Performance Measures
There are a number of indicators that suggest to management that
inventory management techniques could be improved. Some of
these indications are:
i. Increasing customer and distributor complaints accompanied
by a high rate of customer and distributor turnover and order
(c
cancellation;
ii. Increasing level of stockholding and decreasing stock turn
performance;
iii. Increasing level of backorders;
iv. Periodic excesses and shortages of storage space;
82
v. Increasing level of stock obsolescence;
Notes
S
___________________
vi. Increased investment in dead/slow items; and
___________________ vii. Increased space used by dead/slow items.
___________________ In order that the inventory investment is maintained at a

cost-effective level, a number of measures should be introduced.
___________________
These are financial and operational performance measures.
___________________
PE
___________________ Financial Performance
___________________ Let’s discuss it in the following steps:
___________________ i. Inventory investment/working capital investment;
___________________ ii. Percentage of inventory increase (decrease) versus percentage

___________________
of sales increase (decrease);
iii. Percentage of inventory increase (decrease) versus percentage
of cost of sales increase (decrease);
iv. Stock write-off per period; and
v. Level of capital consumed by dead/slow items.
Operational Performance
)U
Let’s discuss it in the following steps:
i. Customer service levels over time;
ii. Inventory turnover performance (product group, region wise,
rate of sale categories etc.);
iii. Inventory accuracy, actual count/indicated;
iv. Number of customers not supplied from stock;
v. Number of units out of stock/number of days products/segment
wise;
vi. Number of stock outs per year (or other significant period);
vii. Profitability of stock out/product groups, rate of sale categories,
etc.; and
(c
viii. Percentage of demand supplied from stock.

83
Check Your Progress
Notes
S
Fill in the blanks: Activity
___________________
Prepare a report on Inventory
1. Inventory measures reflect, in part, the success in obsolescence.
___________________
structuring systems to ……………. the production rate,
the lead time and the scrap rate. ___________________
___________________
2. There are a number of indicators that suggest to
management that ……………. could be improved. ___________________
PE
___________________
Inventory ___________________
Detailed measures of inventory accuracy and availability are very ___________________

important in order to maximize manufacturing and ___________________
non-manufacturing efficiency and financial results. In addition to
___________________
the measures described above, inventory obsolescence measures
can be very important for items with short shelf lives, due to aging
or technological changes.
Finally, collecting accurate data on which to construct inventory
measures can be challenging. Processes have to be in place to
ensure that inventory is counted accurately and on a timely basis.
)U
In general, supply chain inventories have been declining
significantly in all parts of the world. In 1970, U.S. manufacturers
held more than 50 per cent of aggregate inventory stocks, but this
share has fallen to about 35 per cent in 2000. By sector, the
manufacturing share of durable goods inventories has declined
from 60 per cent in the late 1960s to about 40 per cent by the end
of 2000; for non-durable goods, the manufacturing share has
decreased from 40 per cent to about 25 per cent over the same
period.
This trend is true for all inventory types, be it retail or
manufacturing. Companies today must be fast and nimble enough
to react quickly to changes in customer demand and do it with
little inventory to remain competitive in the market.
(c
The challenge of manufacturers is due to the diversity of their

inventory holdings which cumulatively add up to a very high
capital commitment for the organization. Effectively managing and
minimizing investments in inventory can certainly help the
organization to manage its manufacturing processes and reduce its
costs to stay ahead of competition.
84
Inventory Turnover
Notes
This can be understood as following:
S
___________________
___________________
Inventory Turnover Ratio
___________________ In order to overcome this problem, inventory turnover ratio is

used. This measure allows for better comparison among
___________________
companies. This is calculated as a ratio of company's sales to its
___________________
average inventory investment:
PE
___________________
Inventory turnover = Annual cost of goods sold/Average inventory
___________________ investment
___________________ This is a measure of how many times during a year the inventory
___________________ turns around. It is the ratio of the cost of annual sales to the
average inventory level. The higher the inventory turns, the better
___________________
the firm uses its inventory assets. Another common measure is
days of supply. A firm's days of supply is found by dividing the
average inventory level by the cost of one day's sales.
Because it is a relative measure, companies of different sizes can
be more easily compared. A higher turnover ratio reflects there are
less idle resources in the company and therefore, the company is
)U
using its inventory more efficiently.
This ratio can only be used in this manner to compare companies
that are similar. For example, even in the same industry
depending on the distribution channels, a retailer would have a
much lower inventory turnover ratio than the wholesaler or
distributor.
Inventory Modeling: Under Certainty Environment

In this section, we will consider Fixed-Order Quantity i.e.
inventory models in which demand is assumed to be fixed and
completely predetermined. The heart of inventory analysis resides
in the identification of relevant costs. The basic approach to
determining fixed order sizes – are the Economic Order Quantity
(EOQ) models. The basic EOQ model is concerned primarily with
(c
the cost of ordering and the cost of holding inventory.

A principle on which a Fixed-Order Quantity system operates is
shown in Figure 8.1. The model examines the stock position to
determine when to order inventory. It does this by determining the
economic quantity to be ordered based on a number of decision
parameters which include demand, the cost of ordering and the
cost of holding inventory. This, in turn, determines the reorder 85

point. When the stock reaches the reorder point, a replenishment Notes
S
order is issued to bring the stock within predetermined limits. ___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
Figure 8.1: Fixed Order Quantity System
___________________
However, in order to obtain the economic order quantity or
determine the optimum reorder point, a number of assumptions
are made in all such models. The basic assumptions in simple EOQ
Fixed-Order Quantity models are as follows:
1. The rate of demand for the item is deterministic and is a
constant 'D' unit per annum independent of time.
)U
2. Production rate is infinite, i.e. production is instantaneous.
3. Shortages are not allowed.
4. The entire quantity is delivered as a single package (or
produced in a single run).
The Classical EOQ model is a simple mathematical model. The
formula, for arriving at the economic quantity, uses a number of
notations. These notations may be different in different texts. The
notations that we have used in this text are, therefore, given
below:
'Q' - Lot size
'S' - Set-up cost or Ordering (`/year)
(c
'D' - Annual Demand

'P' - Unit Price (`/unit)
'H' - Holding or Carrying cost per Unit (`/Unit)
'F' - Inventory Carrying Charges Factor
'Q*' - Economic Order quantity (to be determined)
86
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
Figure 8.2: Classical Inventory Model
___________________
The classical EOQ model is shown in Figure 8.2. The 'Y' axis plots
the quantity, and the 'X' axis plots time. Here 'Q' is the order
quantity, 'B' is the reorder point, and 'ab' = 'cd' = 'ef' which reflect
the lead times. The relationships, shown in terms of the 'inventory
level' vs. 'time', reflect the model depicted in the figure.
The objective of the model is to minimize the average annual
)U
variable costs. And it provides a solution to the problem of
determining when an order should be placed and how much should
be ordered.
(c
Figure 8.3: Annual Inventory Cost
The relationships between holding costs, ordering costs and the

total inventory cost are shown in Figure 8.3. From the figure, it is
obvious that based on our assumption that the inventory is
consumed at uniform rate, and since maximum inventory level is
Q, the average inventory will be half the maximum inventory, i.e. 87

'Q/2'. Notes
S
Cycle inventory is the average stock held by the firm. Hence, the ___________________
Average Inventory Holding Cost will be the cost incurred in ___________________
holding the average inventory. This can be written as:
___________________
Holding Cost = HQ/2 = FPQ/2
___________________
The ordering cost will decrease as order size increases. This follows ___________________
PE
as for a given annual demand, the larger the order size, the fewer
___________________
the orders needed. It is commonly assumed that ordering costs are
relatively independent of the size of the order. This can be ___________________
represented by: ___________________
Ordering Cost = DS/Q ___________________
The total annual costs have a fixed and a variable component. The ___________________
purchase cost of the inventory is fixed and the costs associated
with ordering and holding the inventory is variable. The total cost
is a summation of the variable and fixed costs. We will, in this text,
generally calculate total costs using the variable costs. When
calculated in this way, it is called 'TVC' or the total variable cost
(TVC).
)U
The relationship between total cost (TC) and TVC is as follows:
TVC (Q) = TC (Q) + PD ...(1)
This does not change any of the results because, if the price 'P' and
annual demand 'D' were included, the only effect it would have is
to raise the total cost curve. This is shown in Figure 8.3.
TVC when Q units are ordered each time is the sum of the holding
and ordering costs:
TVC(Q) = DS/Q + HQ/2 ....(2)
Inventory Modeling: Under Uncertainty Environment

We will now examine a moderately complex quantity/reorder point
model in which lead time does not vary, but demand does. In this
(c
model, we take into account the possibility of a stock out. The

model establishes buffer stocks that adequately protect service to
customers when demand is uncertain.
88
S
Activity
___________________
Prepare a report on risk of
Fill in the blanks:
carrying additional inventory.
___________________ 1. Inventory …………… measures can be very important
___________________ for items with short shelf lives, due to aging or
technological changes.
___________________
2. Companies today must be …………… and ……………
___________________
PE
enough to react quickly to changes in customer demand
___________________
and do it with little inventory to remain competitive in
___________________ the market.
___________________
___________________ Demand Uncertainty

___________________ The risk of carrying additional inventory depends on the nature of
the demand. Each type of demand carries with it a different type of
risk. And this adds to the cost and the quantum of inventory held
by the organization.
Inventory items can be divided into two main types: Independent
demand, and dependent demand items. In inventory management,
it is important to distinguish between dependent and independent
)U
demand.
Manufacturing requirements are primarily derived from
dependent demand, while retailing requirements basically depend
on independent demand. Dependent demand is by far the most
common type of demand. An item has dependent demand when the
demand for an item is controlled directly, or tied to the production
of something else.
Suppose Ford decided to manufacture 15,000 units of the
automobile for the first year based on a forecast of the independent
demand. Based on this, Ford knew exactly how many steering
wheels are needed and when. This is because the demand for these
items is dependent on the production schedule of 15,000
automobiles for the year. The steering wheels are dependent
(c
demand items because:

z the firm controls their demand through the production
schedule, and
z their demand is tied to the production of automobiles.
Dependent demand, in a manufacturing unit, is based on the
sub-assemblies or components or raw materials that are part of the
BOM for the end items. The demand for these items is indirect or 89
comes from the finished products demand when we explode the Notes
S
BOM (Bill of Material). ___________________
Reorder Point Model ___________________
Figure 8.4 has quantity represented on the 'Y' axis and time on the ___________________
'X' axis. Lead time is constant i.e. L1 = L2. The expected demand is ___________________
variable. This is reflected in the change in the quantities on the 'Y'
___________________
PE
axis.
___________________
___________________
___________________
___________________
___________________
)U
Figure 8.4: Fixed-Time Period
Second, we also know that the lead time 'L' is constant, which is an
assumption for the model. And, the buffer stock is a function of the
variation in demand 'σu' and the protection level specified to
maintain the confidence level, i.e. 'z'.
Let us now look at the basic formulae. The notations that are used
in the model are given below:
µ = Demand during lead time, a random variable
σu = Standard deviation of demand during lead time
µ¯ = Expected demand during lead time

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d¯ = Expected average daily demand

σd = Standard deviation of expected daily demand
D¯ = Expected annual demand

B = Buffer stock
L = Lead Time
90
z = Number of standard deviations needed for a specified
Notes
S
confidence level
___________________
As we know that the buffer stock is a function of the variation in
___________________
demand 'su' and the protection level specified, therefore, the
___________________ expected lead-time demand equals expected demand times lead
___________________ time:
___________________ Ro = μ * B, and 'B' is 'z*σu' for the specified service level
PE
___________________
And μ = d *L,
___________________
Therefore, R* = d * L + z* σu
___________________
The order quantity is simply the simple lost size formula with expected
___________________
annual demand substituted for annual demand:
___________________
Q = Q* = 2 D S/H = EOQ
Generally, average demand is used for this model regardless of the

distribution of the demand function.
Check Your Progress

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Fill in the blanks:
1. The risk of carrying additional inventory depends on the
………… of the demand.
2. Each type of demand carries with it a ………… type of
risk.
Forecasting
Forecasting is the start of any planning activity. Forecasting
systems generally provide three pieces of information:
1. Indications of whether a product market is static or dynamic
(i.e. Growth or decline after seasonal adjustment);
2. The best forecast in the next n periods;
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3. The forecast range within which the actual value is expected to

fall.
Therefore, the main purpose of forecasting is to estimate the
occurrence, timing or magnitude of future events. Forecasting is
not precise because of the interaction between many factors or
environmental forces that lead to the events. The effect of these
interactions is increased uncertainty. This often leads to 91

indecision. Notes
S
Activity
Interactions among the different environmental forces generally ___________________
information on forecasting
follow certain logical rules. This makes it possible to use ___________________
techniques.
mathematical functions to represent the cause-and-effect
___________________
relationship among inputs, resources, forecasts, and the outcome.
___________________
The relationships are captured in a model that reflects how these
___________________
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environmental forces impact the future. There should be no
compromise in the quality of the model. ___________________
The model establishes a link between planning, controlling ___________________
systems and the forecasts necessary for planning, scheduling, and ___________________
controlling the system for an efficient output. Therefore, in
___________________
building a model, it is essential that the model provides
___________________
satisfaction on these two critical questions:
1. Is the model adequate?
2. Is the model stable?
This also means that the model should reflect the objectives of the
management. For example, the type of model that will be adequate
for short-term forecasts may not be adequate for long-term
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forecasts. In order that the model forecasts are stable, it will have
to reflect and compensate for the actual performance.
In Figure 8.5 highlights the systematic development and the
relationship between the modeling and forecasting and highlights
the relationship between the model and the forecast.
Even simple business problems require good models. For example,
your boss calls you. He wants you to make a sales forecast for the
next two years for the major products manufactured and marketed
by your organization. At first glance, this seems to be a very easy
exercise. In a static world, perhaps, you can take last year's sales
figures and add an appropriate internal growth to these figures
and arrive at the projections.
(c
But the world is dynamic. Things change and any projection should
consider the changes that have taken place and the changes that
are expected in the business environment. You know that the
figures you give your boss will be used to determine the resources
of your department. Therefore, you would like the figures to reflect
the real situation on the ground.
92
Notes Past Data &
S
Model
Managerial
Specification
___________________ Judgement
___________________
Model Estimation
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 8.5: Modeling and Forecasting

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Forecasting Methods
Different forecasting methods can be used to develop the forecast.
The appropriate method will depend on the nature of the item
being forecast and the availability of historical data. There are four
common approaches to forecasting which are given below:
z Qualitative: These forecasts are used where there is little or
no historical performance data to determine demand. They are
typically based on an expert's familiarity of products, the
industry and customer preferences.
z Time Series: Time series forecasts rely on historical demand
in order to predict the future demand. There are a variety of
computational methods that can be used which will be
discussed in the next section.
(c
z Causal: Causal forecasting is used when there is a visible

correlation between one or more variables to the demand for
the product. For example, disposable income, lifestyle
indicators, etc. may be used to determine the demand for many
consumer durable items. The method, however, requires a high
level of sophistication in modeling.
93
z Simulation: This method is highly sophisticated and is mainly
Notes
S
used where the organization needs to generate multiple 'what- Activity
if' scenarios. ___________________
Prepare a report on inventory
levels.
The method used should adequately meet the objectives of the ___________________
forecasting model required. More than one method may be used to ___________________
provide the types of outputs desired.
___________________
PE
1. …………….. is the start of any planning activity. ___________________
___________________
2. Forecasting is not …………….. because of the interaction
between many factors or environmental forces that lead ___________________
to the events. ___________________
Efficient Order Quantities

The optimum quantity (lot size) that we have calculated in the
problem above using a tabular approach is called the Economic
Order Quantity (EOQ). The order quantity at which the total cost
is minimum (Q*) can mathematically be expressed as:
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TVC(Q) = DS/Q + HQ/2 …(1)
Differentiating the Equation
dTVC(Q)/dQ = – C R/Q2 + H/2 = 0
Q = Q* (2DS/H) = (2DS/FP) = EOQ …(2)
This equation is known as the EOQ formula. From this formula,

the optimal time between orders can be derived.
*
TQ = D/Q= D/ (2DS/H) = (DH/2S)
The Minimum Total Annual Cost (TC) of holding inventory is given

by the formula:
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TVC(Q) = DS/Q + HQ/2

If Q = Q*, then:
TVC(Q*) = DS/Q* + HQ*/2
= DSQ*/Q*Q* + HQ*/2
= DSQ */(2DS/H) + HQ*/2)
94
= HQ*/2 + HQ*/2
Notes
S
___________________
TVC(Q*) = HQ* ...(3)
___________________ In the above discussion, we considered that lead time is zero.

However, if lead time is constant, the above results can also be
___________________
used without any modification.
___________________
If lead time is say constant ('ab' = 'cd' = 'ef') and equal to 'L', then
___________________
during lead time, the consumption is L*D units. This means the
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___________________ order will have to be released for quantity Q*, the new order will
___________________ arrive exactly after time period 'L' at which time inventory level
will be zero and the system will repeat itself.
___________________
The inventory level at which the order is released is known as
___________________
reorder level. It can be mathematically expressed by the equation:
___________________
Reorder Level (B in Figure 8.2) = RB = LD ...(4)
Where, 'L' is given in years and 'D' is the annual demand.
Let us work out an example to understand the EOQ Model and all
that has been said earlier in this section on fixed order quantity
policies:
A company, ABC Ltd., for one of its class 'A' items, placed 8 orders
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each for a lot of 150 numbers, in a year. Given that the ordering
cost is ` 5,400.00, the inventory holding cost is 40 per cent, and the
cost per unit is ` 40.00. Find out if the company is making a loss in
not using the EOQ Model for order quantity policies.
What are your recommendations for ordering the item in the
future? And what should be the reorder level, if the lead time to
deliver the item is 6 months?
'D' = Annual demand = 8 × 150 = 1200 units
'P' = Unit purchase cost = ` 40.00
'S' = Ordering Cost = ` 5400.00
'F' = Holding Cost = 40%
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Using the Economic Order Equation:
Q* = (2DS/H) = 2DS/FP = EOQ
= (2 × 5400 × 1200)/ (0.40 × 40)
= 900 Units
95
Minimum Total Annual Cost: TVC(Q*) = FPQ*
Notes
S
= 900 × 0.40 × 40
___________________
= ` 14,400.00
___________________
The Total Annual Cost under the present system = TVC(Q) = DS/Q ___________________
+ HQ/2
___________________
= ` (1200 × 5400/150 + 0.40 × 40 × 150/2)
___________________
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= ` (43,800 + 1200) = ` 45,000.00
___________________
The loss to the company = ` 45,000 – ` 14,400 = ` 30,600.00 ___________________
Reorder Level: RB = L × D = (6/12) × 1200 = 600 units ___________________
The company should place orders for economic lot sizes of 900 units ___________________
in each order. It should have a reorder level at 600 units.
___________________
Replenishment Schemes
The replenishment cycle occurs at the retailer/distributor interface
and includes all the processes involved in replenishing the retailer
inventory. It is initiated when a retailer places an order to
replenish inventories to meet future demand. A replenishment
cycle may be triggered at a supermarket that is running out of
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stock of detergent or at a mail order firm that is low on stock of a
particular shirt.
The replenishment cycle is similar to the customer order cycle
except that the retailer is now the customer. The processes
involved in the replenishment cycle are shown in the figure 8.6 and
include:
z Retail order trigger,
z Retail order entry,
z Retail order fulfilment, and
z Retail order receiving.
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96
Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 8.6: Replenishment Cycle
Retail Order Trigger

As the retailer fills customer demand the inventory is depleted and
must be replenished to meet future demand. A key activity that
the retailer performs during the replenishment cycle is to devise
replenishment or ordering policy that triggers an order from the
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previous stage.
Retail Order Entry

This process is similar to customer order entry at the retailer. The
only difference is that the retailer is now customer placing the
order that is conveyed to the distributor. This may be done
electronically or by some other medium. Inventory or production is
then allocated to the retail order.
Retail Order Fulfilment

This process is very similar to customer order fulfilment except
that it takes place at the distributor. A key difference is the size of
each order as customer orders tend to be much smaller than
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replenishment orders.
Retail Order Receiving

Once the replenishment order arrives at a retailer, the retailer
must receive it physically and update all inventory records. This
process involves product flow from the distributor to the retailer as
well as information updates at the retailer and the flow of funds 97

from the retailer to the distributor. Notes
S
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The optimum quantity (lot size) that we have calculated
___________________
in the problem above using a tabular approach is called
the …………….. ___________________
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2. The inventory level at which the order is released is ___________________
known as …………….. level ___________________
___________________
Summary ___________________
Inventory measures reflect, in part, the success in structuring ___________________
systems to optimize the production rate, the lead time and the
scrap rate. Several aggregate performance measures can be used to
judge how well a company is able to control these factors and
utilizing its inventory resources. Detailed measures of inventory
accuracy and availability are very important in order to maximize
manufacturing and non-manufacturing efficiency and financial
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results. Inventory turnover ratio is used for better comparison
among companies. This is calculated as a ratio of company's sales
to its average inventory investment. The heart of inventory
analysis resides in the identification of relevant costs. The basic
approach to determining fixed order sizes – are the Economic
Order Quantity (EOQ) models. The basic EOQ model is concerned
primarily with the cost of ordering and the cost of holding
inventory. Another model is a moderately complex
quantity/reorder point model in which lead time does not vary, but
demand does. Forecasting is the start of any planning activity.
Different forecasting methods can be used to develop the forecast.
The replenishment cycle occurs at the retailer/distributor interface
and includes all the processes involved in replenishing the retailer
inventory. It is initiated when a retailer places an order to
(c
replenish inventories to meet future demand.
Lesson End Activity

Which model do you think is the best: the one which caters to
uncertain demand or the one which caters to certain demand? Give
reasons for your answer.
98
Keywords
Notes
S
Dependent Demand: An item has dependent demand when the
___________________
demand for an item is controlled directly, or tied to the production
___________________ of something else.
___________________
EOQ: Economic Order Quantity
___________________
PE
___________________
1. There are a number of indicators that suggest to management
___________________ that inventory management techniques could be improved.
___________________ What are they?
___________________ 2. Discuss the concept of inventory turnover with example.
___________________ 3. What do you mean by inventory modeling?

4. What do you mean by replenishment cycle? What are the
processes used for this concept?
5. Explain the Economic Order Quantity with the help of
example.
Further Readings
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Books
The Blackwell Encyclopaedia of Management, Cary L. Cooper
David Simchi Levi, Philip Kaminsky, and Edith Simchi Levi,
Designing and Managing the Supply Chain: Concepts, Strategies,
and Case Studies. Irwin McGrawHill, 2000.
Web Readings
www.managementstudyguide.com/inventory-planning.htm
www.scl.gatech.edu/professional-education/on.../course.php?id
wps.pearsoned.co.uk/ema_uk_he_slack_opsman.../index.html
(c
UNIT 9: Designing World Class Warehouse & Material Handling
Unit 9
99
Notes
S
Activity
Designing World Class

___________________
differences between inbound
___________________
shipments and outbound
Warehouse & Material Handling shipments.
___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Storage Systems
\ Order Picking Systems ___________________
\ Shipping ___________________
\ Warehouse Layout ___________________
\ Warehouse Management Systems
Introduction
The primary handling objective in a warehouse is to sort inbound
shipments according to precise customer requirements.
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Merchandise and materials typically arrive at the warehouse in
larger quantities than when they depart. The first handling
activity required is unloading the transportation vehicle. In most
warehouses, unloading is manual. Limited automated and
mechanized methods have been developed that are capable of
adapting to varying product characteristics. Generally, one or two
people unload a shipment. The product is hand-stacked on pallets
or slip sheets to form a unit load for movement efficiency. In some
cases, conveyors are employed to unload vehicles more rapidly.
Larger types of merchandise may be unloaded directly from the car
or truck to be moved into the warehouse. Containerized or
unit-load shipments dramatically reduce unloading time.
Storage Systems
(c
A store or warehouse (these two words are used interchangeably in

this unit) is a static unit in the material and product pipeline,
necessary to match products in a timing sense with consumers, for
storage of products. Many consider warehouses 'a necessary evil'
that add costs to the distribution process. However, in the broader
100 logistical spectrum, warehousing plays a vital role to group

Notes products into assortments desired by customers.
S
___________________
A warehouse is a godown or storage space where a firm stores or
___________________ holds raw materials, semi-finished goods or the finished goods, for
___________________ different periods in time. It helps to create time utility for raw
materials, industrial goods and finished products. The basic nature
___________________
of raw materials, parts, and finished goods flowing through and
___________________ between a vast network of facilities makes warehousing a labour-
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___________________ intensive process. Productivity has been an issue in warehousing.
___________________ The typical warehouse receives merchandise by railroad car or

___________________
truck. The items are moved to a storage area within the warehouse
and piled in stacks. When customer orders are received, products
___________________
are handpicked for placement on wagons and transported to the
___________________ shipping area where the merchandise is assembled and loaded onto
delivery trucks. The description of the operations of a traditional
warehouse also explains the reasons for low labour productivity. It
is low because few, if any, skills are required to perform many of
the manual tasks.
However, this limitation has been largely overcome through new
operational concepts and technology. Technology has had a great
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impact on the quality of service, costs and operations of
warehousing and improved the flexibility of warehousing.
Warehousing has developed into a strategic tool with state-of-the-
art systems capable of providing necessary manufacturing and
retail support.
Technology-based improvements, especially information
technology, make it possible to respond to growing customer
demands in terms of product and shipment profiles. With advanced
information technology, warehouse operators can quickly react to
changes in market conditions. Information technology also
provides the wherewithal to measure performance under a wide
range of operational conditions.
Efficient warehousing permits reduction in material and parts
(c
storage and handling costs while optimizing production, for

manufacturers producing products at multiple locations. Some of
the concepts used for strategic warehousing include the following:
Hub and Wheel Concept: A central warehouse is used to
maintain a basic stock of parts, thereby reducing the need to
maintain inventory at each assembly plant. Using consolidated
shipments, products are purchased and transported to the supply 101

warehouse and then distributed to manufacturing plants as Notes
S
needed. When fully integrated, the warehouse is a vital extension ___________________
of manufacturing.
___________________
JIT Support: Warehousing has become an integral part of JIT
___________________
and stockless production strategies. The JIT concept reduces
work-in-process inventory, but its success is based on the support ___________________
of a highly dependable delivery system. Such logistical support is ___________________
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possible only through the use of strategically located warehouses. ___________________
Market-oriented Warehousing: On the outbound side of ___________________
manufacturing, warehouses also create the possibility of direct
___________________
customer shipment of mixed products. The capability to provide
factory direct mixed product shipments enhanced service capability ___________________
of the marketing organization. As the level of competition in the ___________________

marketplace increases, manufacturers capable of rapidly providing
direct mixed shipments gain a competitive advantage.
Similarly, as the cost to retail stores to transporting small
shipments makes direct ordering prohibitive, manufacturers and
wholesalers have a need to utilize warehouses to provide timely
and economical inventory assortments to retailers. At the
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wholesale level of the channel of distribution, the warehouse is a
support unit for retailing.
Market-oriented warehousing allows a firm to provide the
customer with shorter lead times. This warehousing function
continues to be progressively more important, as companies and
industries utilize customer services as dynamic, value-adding,
competitive tools.
Direct Mixed Shipments: For the customer, direct mixed
shipments have two specific advantages. Firstly, logistical cost is
reduced because full product assortment can be delivered while
also taking advantage of the benefits of consolidated
transportation. Secondly, inventory of slow-moving products can be
reduced because they can be received in small quantities as part of
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consolidated shipments.
Improvement in Time and Place Capability: From a
conceptual perspective, no warehouse should be included in a
logistical system unless it is fully justified on a cost-benefit basis.
The supporting rationale of warehousing is an improvement in the
time and place capability of the overall logistical system both in
102 terms of economic benefits and service. For example, placing a

Notes warehouse in a logistical system to service a specific market
S
___________________ segment may increase cost. These costs must be exceeded by the
benefits of increases in market share, revenue, and gross margin to
___________________
make the decision acceptable.
___________________

PE
___________________ 1. The primary handling objective in a warehouse is to sort
inbound shipments according to ……………….
___________________
___________________ 2. A store or warehouse is a ………………. unit in the

material and product pipeline, necessary to match
___________________
products in a timing sense with consumers, for storage
___________________ of products.
Order Picking Systems

O'Reilly Automotive, Inc. officially started in the auto parts
business in Springfield, Missouri, in November of 1957. In March
of 1975, annual sales volume had risen to $7 million and a modern,
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52,000-square-foot facility at 233 S. Patterson was built for the
O'Reilly/Ozark warehouse operation. By that time, the company
had a total of nine stores, all located in the southwest Missouri
area. In 1993, the company completed an Initial Public Offering of
common stock, and it began trading on the NASDAQ. Today, the
company has 1,775 stores in 26 states. Total sales were $2.28
billion for the year ending 2006.
The underlying spirit and philosophy of O'Reilly Automotive, Inc.
has been one of growth and progress, both for the company and for
its team members. In 2004, O'Reilly Automotive completed a new
development in mechanization of warehousing. They have created
a streamlined and efficient order-flow system that incorporates
proven conveyor and sortation equipment.
They introduced a new process called continuous batch picking
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that allows order pickers to navigate the aisles of warehouses that

are designed nearly similar to the store layouts, and whose
management processes are completely computerized. Product
location and quantity details are displayed on a radio frequency
scanner that guides the picker through the shortest and most
efficient route that will result in the shortest picking time.
103
This process facilitates order picking for many stores in one
Notes
S
stretch, by using carts that contain different container holders for Activity
each store. So to process order forms for six different stores, an ___________________
Prepare a report on blow-
through belt induction system.
employee can expend less motion instead of walking up and down ___________________
the warehouse six times.
___________________
Figure 9.1 shows order flow from the tri-level carton-flow picking
___________________
module used by O'Reilly Automotive. When the orders are
___________________
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completed at each level, they are moved on incline belt conveyors
to the merge level. There they proceed through a three-to-one ___________________
merge and are transported toward the shipping area. The totes ___________________
move on live roller conveyor around a 90-degree curve en route to
___________________
the sorting system. They run in parallel with totes being
recirculated and then pass through another merge before entering ___________________
the sorting system. The high-speed sorter diverts the totes down ___________________
one of the eight shipping lanes where they are staged, palletized,
and loaded for delivery. On average, the distribution centre
processes 40,000 line items a day.
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Figure 9.1: Order Flow in a 3-level Store
The order-fulfilment process begins in the two picking modules,

each of which has three levels. One module, which uses shelving
equipment, is dedicated to the slower moving products. The other
(c
module is designed for the fast-moving items. This carton flow

module uses an Interlake racking system and has an overhead
trash takeaway conveyor to keep the work area free of empty
cartons.
On each level of the modules, orders are picked into totes that rest
on gravity conveyors on either side of a live-roller takeaway unit.
The totes are placed on the takeaway conveyor when picking in the
104 zone is completed. Bar codes applied during the order-picking

Notes process are used to direct the totes as they move through the
S
___________________ distribution centre to the shipping docks.
___________________ A series of incline belt conveyors transport the totes from the
___________________ picking modules up to the merge level. There they connect with
live roller conveyors that have unique Logic feature. This photo-eye
___________________
controlled, zero-pressure conveyors effectively manage the
___________________ accumulation and release of the totes as they move through three-
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___________________ to-one merge tables.
___________________ The single line of powered conveyor then moves the orders toward
___________________
the shipping end of the building makes a 90-degree turn, and then
runs in parallel with a segment of the recirculation loop. These two
___________________
parallel lines then merge into one zero-pressure accumulating line
___________________ as the totes are readied for induction into the high-speed sortation
system.
A blow-through belt induction system uses speed changes to space
totes prior to sorting. Orders are diverted down one of eight
shipping lanes according to store destination. If a lane is full or if
the scanner cannot read the bar code, the tote stays on the main
line for recirculation. The sortation system is engineered to handle
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as many as 50 totes a minute.
At the shipping docks, the completed orders are staged on gravity
lines for stacking onto pallets. The pallets are unitized via stretch
wrap and then loaded on the trucks for delivery to the stores. From
initial picking to staging and loading, the operation is simple,
straightforward and efficient.
Shipping
Shipping consists of checking and loading orders onto
transportation vehicles. As in receiving, shipping is manually
performed in most systems. Shipping with units loads is becoming
increasing popular because considerable time can be saved in
vehicle loading. A unit load consists of grouped products, while a
(c
dead-stack or floor-stack load consists of boxes loaded directly from

the floor. A checking operation is required when merchandise
changes ownership as a result of shipment. Checking generally is
limited to carton counts, but in some situations a piece-by-piece
checks for proper brand, size, and so on, is necessary to ensure that
all items ordered by the customer are being shipped.
Warehouse Layout 105

Notes
Whether you run your own warehouse, use public warehousing or
S
private warehousing, the design of the warehouse should be of ___________________
interest to you. Though the warehousing function is a seemingly ___________________
simple operation, the advantages of warehousing are significant.
___________________
These advantages can be maximized if the design is optimum
keeping in mind the specific functions of the warehouse. ___________________
The basic warehouse design principles, whether the warehouse is a ___________________
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small manual operation or a large automated facility, are based on ___________________
incorporating in the design the four principles described below. ___________________
These are:
___________________
z Product movement,
___________________
z Handling technology,
___________________
z Storage plan, and
z Future expansion.
Product Movement
Physical facility characteristics and product movement are the
main criteria for determining the warehouse design. The factors
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that need to be considered in the design process are:
z Number of stories in the facility,
z Height utilization, and
z Product flow.
The ideal warehouse design is limited to a single story so that the
product does not have to be moved up and down. The use of
elevators or stairs to move product from one floor to the next
requires time and energy. Furthermore, stairs and elevators
normally become bottlenecks in the warehouse operations since
many material handlers will be using the facility at the same time.
The number of stairs or elevators is normally limited due to both
space requirements as well as cost.
(c
Regardless of facility size, the design should maximize the usage of

the available cubic space by allowing for the greatest use of height
on each floor. Through the use of racking or other hardware, it
should be possible to store products up to the building's ceiling.
Maximum effective warehouse height is limited by the safe lifting
106 capabilities of material-handling equipment, such as forklifts, and

Notes fire safety regulations imposed by overhead sprinkler systems.
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 9.2: Typical Product Flow
Warehouse design should also allow for straight product flow

through the facility whether items are stored or not. In general,
this means that product should be received at one end of the
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building, stored in the middle, and then shipped from the other
end. Straight-line product flow minimizes congestion and
confusion.
Handling Technology
The second principle focuses on the effectiveness and efficiency of
material-handling technology. The elements of this principle
concern movement continuity and movement scale economies.
Movement continuity means that it is better for a material handler
or piece of handling equipment to make a longer move than to have
a number of handlers make numerous, individual, short segments
of the same move. Exchanging the product between handlers or
moving it from one piece of equipment to another wastes time and
(c
increases the potential for damage. Thus, as a general rule, fewer

longer movements in the warehouse are preferred.
Movement scale economies imply that all warehouse activities
should move the largest quantities possible. Instead of moving
individual cases, the activities should be designed to move groups
of cases such as pallets and containers. This reduces the number of
activities and the resulting cost.
107
In the area of productivity, which is one of areas of concern in
Notes
S
warehousing, technology has been used to improve configuration of
warehouse systems, handling equipment performance and ___________________
improved storage techniques. This is discussed in the next section. ___________________
___________________
Storage Plan
___________________
According to the third principle, a warehouse design should
consider the storage plan in detail. The integrated storage plan ___________________
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must address the specific characteristics of each product, product ___________________
characteristics, particularly those pertaining to volume, weight
___________________
and storage. A typical storage plan is shown as Figure 9.3.
___________________
Storage space for low
Storage space for low
volume products ___________________
volume products Storage space
for high volume
Products
___________________
Primary
Aisle
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Figure 9.3: A Typical Storage Plan
Store is a very broad word that indicates a wide variety of

materials stored such as chemical, metals, liquids, gases, spare
parts, equipment, or finished goods, ranging from engineering
components to drugs and pharmaceuticals. Each of these items will
require a specific type of storage and their handling and
preservation methods will vary accordingly. There is a high degree
of specialization required to store and handle these products and in
many cases, special storage licenses need to be obtained from the
government, e.g., the storage of petroleum products or explosive
products. It is hence mandatory for stores personnel to understand
thoroughly all of these requirements and implications.
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Product volume is the major concern when defining a warehouse

storage plan. High-volume throughput should be stored in a
location that minimizes the distance it is moved, such as near
primary aisles and in low storage racks. Such a location minimizes
travel distance and the need for extended lifting.
108
Similarly, the plan should include a specific strategy for products
Notes
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depending on weight and storage characteristics. Relatively heavy
___________________
items should be assigned locations low to the ground to minimize
___________________ the effort and risk of heavy lifting. Low-density products which
___________________ require extensive storage volume should be put on open floor space
or high-level racks. On the other hand, smaller items may require
___________________
storage shelves or drawers.
___________________
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___________________
Future Expansion
___________________ A warehouse forms a fundamental element in the infrastructure of

the firm. While planning the facility, sufficient attention has to be
___________________
given for future requirements. In case of expansion, the material
___________________ handling facilities and the storage plan should be expandable in a
___________________ manner that the integrated design of the warehouse maintains its
desired characteristics and there is maximum efficiency of product
flow.
Very often situations, arise where these principles conflict. When
such situations arise, the design principles should be considered as
general guidelines and solutions found should be based on the
specific situation or problem. These situations will become clearer
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as we go through the rest of this unit.
Check Your Progress

Fill in the blanks:
1. A …………….. system uses speed changes to space totes
prior to sorting.
2. Shipping consists of …………….. and …………….. orders
onto transportation vehicles.
Warehouse Management Systems

Strategic Warehousing Logistics planning has become a means to
competitive advantage. It permits the organization to align the
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operations with overall business objectives. Such a network has

various objectives such as speeding the supply of the products and
thereby, speeding the cash flow.
Warehousing enhances the time and place capability of the overall
logistical system. Nonetheless, it has to be fully justified on a
cost-benefit basis. This justification can be quantified by the return
on investment reflected in the direct cost-to-cost trade-off. For
example, if adding a warehouse to a logistical system reduces 109

overall transportation cost by an amount exceeding the fixed and Notes
S
Activity
variable cost of the warehouse, the warehouse is economically ___________________
justified. This means that total costs have been reduced. details on competitive
___________________
advantage.
However, the cost-benefit basis of service is often difficult to
___________________
quantify. At a conceptual level, a service-justified warehouse would
be justified if the net effect would contribute to an increase in ___________________
profitability. But, at an operational level, the problem is how to ___________________
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measure the direct revenue impact.
___________________
From the service point of view, logistics planning in warehousing
___________________
helps to ensure a high level of growth in the revenue for all the
companies involved in the chain. It enhances customer loyalty ___________________
through commitment and competence. It provides options to keep ___________________

costs as low as possible, while maintaining excellent customer
___________________
service. The five basic benefits achieved through warehousing from
a service point of view:
z Spot stock,
z Assortment,
z Mixing,
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z Product support, and
z Market presence.
Spot Stock
Utilizing warehouse facilities for stock spotting takes place when a
selected amount of a firm's product line is placed or "spot stocked"
in a warehouse to fill customer orders during a critical marketing
period in a variety of markets, allows manufacturers with limited
or highly seasonal product lines substantially reduce delivery
times to strategic markets. For example, stock spotting is
commonly used in physical distribution for agricultural products to
farmers during the growing season. At the end of the season, the
remaining inventory is withdrawn to a central warehouse.
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Distribution Assortment
A distribution warehouse is used to stock product combinations in
anticipation of customer orders. It may represent multiple
products from the manufacturer or special assortments of products
as specified by customers. For example, a manufacturer supplying
JIT components would stock products so that it could be offered to
110 the customer as and when required. Distribution warehouses

Notes improve service by having inventory at hand to supply the
S
___________________ principal and also allow larger shipment quantities, which in turn
reduce transportation cost.
___________________
___________________
Customer A
___________________ Break Bulk
Manufacturer Warehouse Customer B
___________________
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___________________ Customer C
___________________
___________________ Figure 9.4: Distribution Assortment Warehouse
___________________ Mixing
___________________ Warehouse mixing is similar to the consolidation process. In
mixing, full truckloads of products are shipped from
manufacturing plants to warehouses. Upon arrival at the mixing
warehouse, the shipments are unloaded and the desired
combination of each product for each customer or market is
selected. In-transit mixing brings economies when plants are
geographically separated, reducing overall transportation charges
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and warehouse requirements. From the service point of view,
warehouses that provide in-transit mixing have the net effect of
reducing overall product storage and customer service is improved
as the inventory is sorted to precise customer specifications.
Production Support
Production support warehousing meets actual requirements of raw
material, part, sub-assemblies and assemblies required for
production in an efficient manner. It provides for safety stocks on
items purchased from outside vendors protecting against long lead
times or significant variations in usage. The different types of
warehousing could be raw materials stores, processed or semi-
finishing materials store, finished goods store, yard store and so
on. The economics is reflected in the ability of providing the most
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economical total-cost solution by supplying or 'feeding' processed

materials, components, and subassemblies into the assembly plant
in an efficient and timely manner.
Market Presence
The major advantage of local warehouses is that local warehouses
can be more responsive to customer needs and offer quicker
delivery than more distant warehouse. As a result, a local 111

warehouse increases the speed of delivery. In many cases, Notes
S
especially for FMCG products, this can result in increased market ___________________
share and potentially increases profitability.
___________________
1. Strategic Warehousing Logistics planning has become a ___________________
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means to ………….. ___________________
2. Warehousing ………….. the time and place capability of ___________________
the overall logistical system.
___________________
___________________
Summary
___________________
Despite today's just-in-time production mentality, with its efforts
to eliminate warehouses and their inventory carrying costs,
effective warehousing continues to play a critical bottom-line role
for companies worldwide. The seven principles of world-class
warehousing include warehouse activity profiling; warehouse
performance measures; warehouse automation and
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computerization; receiving and put away; storage and retrieval
operations; picking and packing; and, humanizing warehouse
operations. Not too long ago, effective warehousing was a relatively
straightforward progression of receiving, storing, and shipping.
But in today's age of e-commerce, supply chain integration,
globalization, and just-in-time methodology, warehousing has
become more complex than at any time in the past – not to
mention more costly. A breakthrough is required to overcome the
confusing array of warehouse technology, buzzwords, and third-
party providers. Holding up efficiency and accuracy as the keys to
success in warehousing, it is the first widely published
methodology for warehouse problem solving across all areas of the
supply chain, providing an organized set of principles that can be
used to streamline all types of warehousing operations. Integration
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of global and e-commerce issues is required along with

customization, information technology, performance analysis,
expansion and contraction planning, and the overall role of the
warehouse in logistics management and the supply chain. Filled
with proven operational solutions, managers should be guided as
they develop a warehouse master plan, one designed to minimize
the effects of supply chain inefficiencies as it improves logistics
112 accuracy and inventory management – and reduces overall

Notes warehousing expense.
S
___________________
___________________ Lesson End Activity

___________________ After going through the unit, chalk out a plan to design your own
___________________ warehouse and material handling system in accordance with world
class standard.
___________________
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___________________
Keywords
___________________
JIT Concept: Just-in-time Concept
___________________
NASDAQ: National Association of Securities Dealers Automated
___________________
Quotations.
___________________
Spot Stock: Utilizing warehouse facilities for stock spotting takes
place when a selected amount of a firm's product line is placed or
"spot stocked".

1. Explain the receiving and put away theory of supply
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management.
2. Write short notes on:
(a) Hub and Wheel Concept
(b) JIT Support
(c) Market-oriented Warehousing
(d) Direct Mixed Shipments
3. Describe the order picking systems designed for world class
warehousing and material handling.
4. What changes are needed in shipping to attain a world class
status?
5. Describe the four basic warehouse designing principles.
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6. Explain the steps in which a warehouse can be managed.

Further Readings 113

Notes
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Books ___________________
W.J. Hopp and M.L. Spearman, Factory Physics: Foundations of ___________________
Manufacturing Management, Irwin, McGraw-Hill, 1996.
___________________
N. Viswanadham, Analysis of Manufacturing Enterprises, Kluwer
___________________
Academic Publishers, 2000.
___________________
PE
Sridhar Tayur, Ram Ganeshan, Michael Magazine (editors),
___________________
Quantitative Models for Supply Chain Management, Kluwer
Academic Publishers, 1999. ___________________
R.B. Handfield and E.L. Nochols, Jr. Introduction to Supply Chain ___________________
Management, Prentice Hall, 1999. ___________________
N. Viswanadham and Y. Narahari, Performance Modeling of ___________________

Automated Manufacturing Systems, Prentice Hall of India, 1998.
Sunil Chopra and Peter Meindel, Supply Chain Management:
Strategy, Planning, and Operation, Prentice Hall of India, 2002.
Jeremy F. Shapiro, Modeling the Supply Chain, Duxbury Thomson
Learning, 2001.
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and Case Studies, Irwin McGrawHill, 2000.
Web Readings
www.amazon.com/World-Class-Warehousing-Material-
Handling.../0071376003
www.distributiongroup.com/world_class_warehousing_toc.php
www.worldtradewt100.com/.../537-worldclass-warehousing-and-
material-handling-1st-edition
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UNIT 10: Case Study
Unit 10
115
Notes
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Case Study
___________________
___________________
___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
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___________________
Case Study: Supply Chain Management at Gujarat Ambuja
Cements ___________________
When leading cement manufacturer Gujarat Ambuja Cements ___________________

commenced operations in 1986, it took 60 days for the company to
convert money paid to suppliers for raw material into money ___________________
received from cement buyers. Nearly two decades later, this ___________________
cash-to-cash (C2C) cycle has been brought down to an
unbelievable 7–8 days, compared to the industry norm of 25–30
days.
Anil Singhvi, executive director and chief financial officer,
Gujarat Ambuja can look back with satisfaction at the entire
process of questioning every aspect of his company’s supply chain
– from the time it took to mine the stone to inventory, logistics
and even the radius within which Gujarat Ambuja cement was
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sold. His company is today not just ‘the most profitable cement
manufacturer in the country’, but also ‘the lowest cost producer of
cement in the world’, as its website proudly states.
And therein lies the rub. The cash-to-cash cycle – which had so far
been perceived to be the domain of the CFO and his wizardry – is
now grabbing the attention of supply chain and logistics heads of
companies.
Cash flows have been gaining greater importance in the overall
analysis of corporate health; thereby making C2C cycles an
important supply-chain performance metric. Companies are
beginning to realise that there is a capital cost side to the supply
chain – replenishing stock more often speeds up supply chains
and increases inventory turns, thereby reducing the capital
required to feed that engine.
An AMR Research report in fact clearly brings out this supply
chain connection. The ‘benchmarking study’ stated that ‘across
industry, companies with better demand forecast accuracy also
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have 15 per cent less inventory, 17 per cent better perfect order
ratings, and 35 per cent shorter cash-to-cash cycle times than
their peers.’
What is a Cash-to-cash Cycle?
Put simply, it is the time between when you spend your money to
when you get money for your products, that is, the length of time
for which inventory must be financed. In terms of a mathematical
Contd…
116 formula, the cash-to-cash cycle is calculated using three drivers of

Notes working capital:
S
1. Receivables outstanding (RO), the number of days from
___________________
product sale to receipt of cash from the customer
___________________ 2. Days in inventory (DI), the time taken to convert raw
___________________
material into sales of finished product
3. Payables outstanding (PO), time taken to provide cash
___________________ payment for purchases from suppliers
___________________ 4. The formula for calculation then is = RO + DI – PO.
PE
___________________ Say, for instance, your company keeps average 30 days’ worth of
stock, it gets paid for its products in 45 days and it pays its
___________________ suppliers within 45 days. This means its cash-to-cash cycle is of
30 days.
___________________
In terms of real businesses, these C2C cycles differ for every
___________________ company, depending on the business model. Those who get paid at
the point of sale and keep manageable inventories have shorter
___________________
cycles. And others who pay their suppliers sooner than they get
paid have longer cash cycles, keeping inventory levels steady.
The ideal scenario is where a company is in such good shape that
it needs no working capital. But in reality, in India, the mean
C2C cycle tends to be 63.5 days, although it differs from sector to
sector.
“Few Indian companies are able to manage with ‘negative
working capital’ i.e. they get the money against sale of the
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products earlier than their paying for the input materials,” says
RV Ramakrishnan, a Chennai-based management consultant.
Tata Motors, for one, works with a ‘negative’ working capital
cycle.
Why should it be reduced?
The following example best illustrates why companies especially
those that aspire to become market leaders cannot afford wastage
of capital, and hence, long cash cycles. Compare the cash cycles of
rivals Dell and Compaq during the 1990s. Dell, as is now known
globally, is a master of the art of demand driven supply chains. Its
business model is based on short cash conversion cycles.
According to a white paper by NMS Communications, in 1999,
Dell’s receivables were 36 days, inventory 6 days and payables 57
days. This resulted in a cash cycle of minus 15 days, implying that
Dell could grow its business with no incremental working capital.
In contrast, Compaq’s cash cycle was 39 days, carrying four times
as much inventory and substantially longer customer payment
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cycles. The actual difference between the two cycles was 54 days.
By 2004, Dell improved this performance further. Its C2C cycle
was down to minus 36 days in mid-2004. Its accounts payable was
up to 71 days, while accounts receivable were down to 31 days.
By better managing its inventory and supply chain, Dell
established a lead that became impossible for Compaq to chase in
a market as price-sensitive as that of personal computers. The
rest, as we all know, is history. While Dell continues its reign over
Contd…
`
UNIT 10: Case Study
the global PC market, Compaq has been merged with HP. What’s 117
more, Dell continues to work at improving these metrics even Notes
S
further.
How can you reduce it? ___________________
At Tata Motors, says PP Kadle, executive director (finance & ___________________

corporate affairs), the negative working capital cycle was a result
of three key initiatives: Inventory control through improved ___________________
supply chain management; improvement in realisation by offering ___________________
better schemes and leveraging banking arbitrage between
vendors, dealers and Tata Motors; and conversion of credit sales ___________________
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to channel financing.
___________________
“But in supply chain management, there is always scope of
improvement,” adds Kadle. ___________________
While individual ways of reducing the cycle time depend on your ___________________
business model, the most obvious parts that remain common are
the three variables that make the C2C equation. So you need to ___________________
work on each.
___________________
Inventory
This is where you need to go looking for value first. Inventory is
actually money lying around in a warehouse and therefore not
available for growing your business further.
Here is what you need to do:
Improve demand forecasting accuracy: Real-time information
on sales will ensure better demand forecasting accuracy, and
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hence, eliminate the need to carry inventory.
Increase production cycle efficiency: Convert raw material
quickly into finished goods by removing inefficiencies caused by a
lack of systems and processes.
Increase supply chain turns: Purchase your raw material more
often in smaller quantities to increase cash flow and reduce the
carrying cost of inventory. However, this may increase the per
unit cost of acquisition, so figure out the trade-off before making
changes.
Reduce safety stock: Improvements in the first three variables
will reduce the need to maintain safety stocks. Aim to eliminate
the need for safety stocks.
Eliminate purchasing errors: A reduction in purchasing errors
will reduce overstocking and minimize stock-outs, which need
expensive expedited purchases.
Eliminate delivery variance: Work with vendors to chalk out a
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process that leaves no room for delivery ahead or behind schedule.

Provide suppliers with forecasts of future needs. Better still; try
out Vendor Managed Inventory (VMI) systems.
Account Payables
This can be done in many simple ways, such as eliminating paper
work; increasing automation in the form of paperless invoices,
electronic data exchanges, electronic funds transfers, etc.;
integrating ERP systems; negotiating payment terms in your
Contd…
118 favour; taking up payment discounts; continuously improving

Notes your purchasing process by removing inefficiencies internally as
S
well as at supplier ends; and reducing errors in processes.
___________________
Account Receivables
___________________ This is really dependent on the industry you operate in and the
___________________
business model you follow. If your supply chain can deliver
exactly what the customer wants within the time the customer
___________________ wants it in, it will not be difficult for you to reduce the days to
receivables.
___________________
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Other ways of reducing account receivables are reduction of
___________________ collection cycle, tighter credit policy, reducing the terms of credit,
shortening the invoicing process, reducing billing errors, and
___________________ reviewing the accounting process periodically.
___________________ The Logistics Way
___________________ Gujarat Ambuja used logistics to drive its C2C cycle down.
Cement being a high-volume-low-value game, “logistics and
___________________ therefore, inventory management, was key to reducing our
working capital cycle,” says Singhvi.
There are many ways to finding your C2C nirvana, but your
supply chain is increasingly becoming the most important one.
Questions
1. Write down the facts and analysis of the case.
2. How has Gujarat Ambuja Cements maintained its cash-to-
cash-cycle?
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3. What lessons have you learnt from this case study related to
Supply Chain Management and how would you apply them in
your company?
Source: http://www.safexpress.com/pdf/OctDec2005.pdf
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UNIT 11: Packaging Design
119
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-III
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120
Notes
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UNIT 11: PACKAGING DESIGN
___________________ UNIT 13: VEHICLE ROUTING PROBLEMS
z Introduction z Introduction
___________________
z Selection of Packaging Materials z Traveling Salesman Problems
___________________ z Time Dependent Variable Problems
z Packaging for Efficient & Effective Transportation:
___________________
Space, Cost and Safety
UNIT 14: TRANSPORTATION PLANNING
___________________
PE
UNIT 12: GREEN SUPPLY CHAIN z Introduction
___________________ z Efficient Networks
z Introduction
___________________ z Routing and Scheduling
z Bio-fuel and CNG
___________________ z Shipment Planning
z Fuel Economics
z Mode and Carrier Selections
z ___________________
Carbon Footprint Modeling
z Transportation Management System Requirements
z Green Purchasing
___________________
UNIT 15: CASE STUDY
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Unit 11
121
Notes
S
Activity
Packaging Design
___________________
essential points to be
___________________
considered while making a
selection of the packaging
___________________
materials.
Objectives
___________________
topics: ___________________
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\ Selection of Packaging Materials ___________________
\ Packaging Cost ___________________
\ Packaging as a Differentiating Factor
___________________
\ Maximum Usage of Packaging Materials
___________________
\ Packaging for Efficient & Effective Transportation: Space, Cost and
Safety ___________________
Introduction
There are various types of materials available for packaging of the
goods. These materials are paper, plastics, wood, cardboard etc.
Selection of the packaging materials should be made keeping in
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view primarily the specifications given by the importer because he
has to plan further for consumer packaging of the goods. Broadly,
the selection of the packaging materials would depend upon the
following factors:
1. Product characteristics,
2. Transportation and storage methods,
3. Climate and culture,
4. Standards and environmental considerations, and
5. Market position.
Selection of Packaging Materials

The type and quality of the packaging is specific to the given
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product. For example, certain products such as garments, shoes,

textiles etc. are sold to the consumers without any packaging. They
are usually displayed without any packaging at the retail stores.
Such goods do not require very expensive packaging. The exporters
have to ensure that the packaging used by them should be such
122 that it prevents the products from getting dirty. These goods are
Notes often packaged in polyethylene bags.
S
___________________ Cardboard boxes are used for the packaging of items such as sets of
___________________ glasses or tableware, decoration with several delicate parts, pairs
___________________
of candle holders, glass vases, delicate statuettes etc., to ensure
that they are not damaged and their appearance is not spoiled
___________________
during handling and display.
___________________
Expensive products and gift items such as jewellery require a high
PE
___________________ standard of packaging. In fact, the more expensive or exclusive the
___________________ product, the more justified high quality and more expensive
packaging is.
___________________
___________________ Packaging Cost

___________________ Packing and transport do not increase the value perception of the
export product (it is true for even the domestic market); they do
increase its cost and consequently the selling price. The exporter
should not use cheap packing materials as it may increase the
chances of damage to the products due to breakage of the boxes.
This damage can be avoided by using better quality packing
materials and the standard size boxes. This will be advantageous
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to the exporter as he would be able to make more profits by cutting
down on the cost of the damaged goods.
The various stages for the economy in packing cost are as follows:
1. Purchase of standard packing materials and boxes. The
exporter should use standard materials and the boxes of
standard dimensions to economies on the packing cost. The
supplier should always be given sufficient time for delivery of
the supplies required for packing.
2. The exporter should always buy the proper quality packing
materials rather than the low-priced packing. The advantage
is that better quality packing reduces damage and not only
this, it helps in increasing the demand for the goods as the
perception about the reliability of the exporter increase’s to
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deliver the goods in safe and sound condition.

3. The exporter should check the requirements of the export
markets before ordering the packages or printing on the boxes.
This should be done by directly asking the importer about the
requirements especially with regard to the environmental
regulations.
123
4. The packing materials should be used as economically as
Notes
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possible i.e., the exporter should plan in such a manner that
maximum number of packages can be taken from a given ___________________
quantity of packaging/packing material. This can be achieved ___________________
by taking the assistance of the packaging professionals. A
___________________
tightly fitting package is always considered the most
economical package. ___________________
___________________
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5. Strict control on the waste of packaging materials can result in
considerable amount of saving in the packing cost. This can be ___________________
achieved by providing proper training to the packing staff. ___________________
Packaging as a Differentiating Factor ___________________
Packaging and package labelling have several objectives: ___________________
___________________
z Physical protection: The objects enclosed in the package may
require protection from, among other things, shock, vibration,
compression, temperature, etc.
z Barrier protection: A barrier from oxygen, water vapour,
dust, etc., is often required. Permeation is a critical factor in
design. Some packages contain desiccants or oxygen absorbers
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to help extend the shelf life. Modified atmospheres or
controlled atmospheres are also maintained in some food
packages. Keeping the contents clean, fresh, and safe for the
intended shelf life is a primary function.
z Containment or agglomeration: Small objects are typically
grouped together in one package for reasons of efficiency. For
example, a single box of 1000 pencils requires less physical
handling than 1000 single pencils. Liquids, powders, and
granules need containment.
z Information transmission: Packages and labels
communicate how to use, transport, recycle, or dispose of the
package or product. With pharmaceuticals, food, medical, and
chemical products, some types of information are required by
governments.
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z Marketing: The packaging and labels can be used by

marketers to encourage potential buyers to purchase the
product. Package design has been an important and constantly
evolving phenomenon for several decades. Marketing
communications and graphic design are applied to the surface
of the package and (in many cases) the point of sale display.
124
z Security: Packaging can play an important role in reducing
Notes
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the security risks of shipment. Packages can be made with
___________________
improved tamper resistance to deter tampering and also can
___________________ have tamper-evident features to help indicate tampering.
___________________ Packages can be engineered to help reduce the risks of package
pilferage: some package constructions are more resistant to
___________________
pilferage and some have pilfer indicating seals. Packages may
___________________ include authentication seals to help indicate that the package
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___________________ and contents are not counterfeit. Packages also can include
anti-theft devices, such as dye-packs, RFID tags, or electronic
___________________
article surveillance tags, that can be activated or detected by
___________________
devices at exit points and require specialized tools to
___________________ deactivate. Using packaging in this way is a means of loss
___________________ prevention.
z Convenience: Packages can have features which add
convenience in distribution, handling, stacking, display, sale,
opening, reclosing, use, and reuse.
z Portion control: Single serving or single dosage packaging
has a precise amount of contents to control usage. Bulk
commodities (such as salt) can be divided into packages that
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are a more suitable size for individual households. It is also
aids the control of inventory: selling sealed one-litre-bottles of
milk, rather than having people bring their own bottles to fill
themselves.
Maximum Usage of Packaging Materials

Depending on the use of packaging materials, the packaging for
export products can be classified into the following categories:
1. Plastic Packaging: Various kinds of plastic materials are
used for packaging of the export products. The most common
plastic materials used for packaging are polyethylene (PE) and
polypropylene (PP). Polyethylene film has two main varieties
of consumer packaging namely, low density polyethylene
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(PE-LD) film and high-density polyethylene (PE-HD).

2. Paper-based Packaging: Paper-based materials are used as
wrapping, as paperboard cartons or corrugated fiberboard
boxes. The various types of paper can be coated with plastics,
waxed or treated with anti-corrosion agents. Paper is either
produced from virgin wood fibres or recycled fibres. The former
is stronger than the latter.
125
3. Paperboard Folding Cartons: Folding cartons made of
Notes
S
different paperboard qualities can be used as retail packaging
for variety of reasons. Folding cartons are economical: they can ___________________
be shaped in almost unlimited number of ways; they can be ___________________
printed very decoratively; properly designed cartons provide
___________________
mechanical protection to products; they protect products
against dust and light, and are easy to handle in retail shops. ___________________
The most important property of such cartons is their stiffness. ___________________
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4. Paperboard Cans: The paperboard can is a form of paper ___________________
based retail packaging, which is quite inexpensive and is used ___________________
to pack different types of products. These cans can be lined
___________________
inside with aluminium foil or plastic films to provide
additional protection against humidity. Such cans are used for ___________________
packaging toys, puzzles, games, tennis balls and other sports ___________________
goods.
5. Combined Plastic and Cardboard Packaging: These
packages are used mainly for retail packaging of pens, small
toys, and gift items lightweight souvenir articles. This type of
packaging has several advantages: the product is visible
through the plastic; the paperboard card can be printed to
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provide information and to add sales appeal; especially small
products are not lost or stolen easily. There are mainly the
following types of packaging that combine paperboard and
plastic materials:
i. Skin Packaging: Skin packaging is a form of packaging
where the product is first placed on a paperboard card
with heat seal coating. It is suitable for products that need
protection against moisture and are not very heavy or
expensive. It is however, not suitable for products that are
sensitive to heat.
ii. Blister Packaging: In this form of packaging, the product
is first placed into a pre-formed plastic blister. Then a
paperboard card is attached to it. Blister packaging can be
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used for a variety of products such as toys, pens, textile

articles and decorations etc. It should not be used for those
products, which are too delicate as there is always some
space for movement inside the blister. This might damage
the delicate product.
126
iii. Plastic Bag with Paperboard Card: In this form of
Notes
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packaging, a paperboard card is attached to the plastic
___________________
bags through a hole in the bag. This adds sales appeal to
___________________ plain plastic bags and is always very cost-effective. The
___________________ paperboard card can be printed on adding information and
attraction. The plastic bags can be made of any materials
___________________
but PP film should be preferred in the interest of better
___________________ product presentation.
PE
___________________ iv. Miscellaneous Packaging: Exporters can make use of
___________________ wood, textiles, straw, leaves or any other locally available
___________________
materials for packaging of the goods. Specially made
wooden boxes can be used to package traditional ceramics,
___________________
wood carvings, various gift items, pieces of jewellery etc. If
___________________ wooden packaging is used as a gift or retail package, it has
to be made with as much care as the product itself. This
means that it should be smooth, clean, and dry, with any
hinges or locks well-made and functioning. It is also
important to pack the product with sufficient cushioning
material into a wooden package, so that the product is not
damaged during transport. Before using wood as
)U
packaging material, one should always check whether
there are any regulations concerning the treatment or
certification of wooden materials.
Check Your Progress

Fill in the blanks:
1. Selection of the packaging materials should be made
keeping in view primarily the specifications given by the
…………….
2. The type and quality of the packaging is specific to the
given …………….
Packaging for Efficient & Effective Transportation:

(c
Space, Cost and Safety

The need for packing arises due to the fact that there are many
stresses and risks involved during the transportation of goods from
the exporter to the importer. These risks can be better understood
if one knows the links involved in the chain of transportation of
goods to their destination. The various steps involved in the 127

transportation of goods are as follows: Notes
S
Activity
1. Stacking and storage of goods in the factory while waiting for ___________________
Prepare a report on risks
involved in different stages in
loading on the truck or freight container. The risk involved at the ___________________
transport chain from
this stage is that if the boxes are weak then they may not exporter's country to the
___________________
importer's country.
endure stacking of more boxes on each other and as a
consequence, there could be possible damage to the boxes on ___________________
the ground. Such possibilities are very strong in the case of ___________________
PE
cardboard boxes. If there is a visible damage to the boxes ___________________
before they leave the exporter's premises, they will certainly
___________________
not endure the vibrations and shocks during transportation
caused by bumps or pot holes on the roads etc. ___________________
2. The boxes are loaded onto the truck and are transported by ___________________
road to the nearest airport/seaport. At this stage, the possible ___________________

risk of damage to the goods may be caused because of
vibrations and shocks arising due to bad road conditions. It
should be ensured that the boxes in the truck are not able to
move inside and there are no empty spaces in the truck,
otherwise bumps in the roads or sudden brakes would cause
serious damage to the goods.
)U
3. The boxes are unloaded and are stored at the airport/seaport
for custom clearance before being loaded on to the
plane/container/ship. At this stage, manual unloading and
handling, breakage or damage due to humidity or damage
causes the possible risk of the damage to the goods by insects
or rodents.
4. The goods are packed into the freight container or loaded on
the plane/ship. The possibility of damage to the goods is again
caused due to poor handling, and stacking of the goods. If the
container is not properly inspected, cleaned and repaired,
there is risk of damage to the goods by insects or rodents. The
risk of damage to the goods is often multiplied if the goods are
sent as loose cargo i.e. not in a freight container.
(c
5. Sailing of the ship to the port of destination: During sailing,

the goods may be damaged due to stormy weather, waves,
heaves, twists and turns.
6. Unloading of cargo at the port of discharge. There are no
special risks involved at this stage.
128
7. Unloading of the containers at the port of discharge. If the
Notes
S
boxes have not been secured properly, some boxes may fall out
___________________
when the doors are opened – risk of damage of products and
___________________ risk of injury to the person opening the cargo. Manual
___________________ handling during unloading holds risks of its own.
___________________ 8. The palletized goods are transferred with a forklift truck to a

warehouse. If the goods are sent to retail shops, they are either
___________________
PE
transferred as pallet loads or as individual packages. There is
___________________ no special risk involved at this stage.
___________________
The main point here is that transport, handling and storage are
___________________ always more stressing and rougher than the packer thinks. This
___________________ should be kept in mind all the time when selecting packing for
goods.
___________________
Although sea transport is considered to be the roughest mode of
transport, one should not forget that risks are also involved in air
transport. Even if airfreight takes less time and is generally not as
rough as the sea freight, there are very rough points, such as the
landing of the aircraft and the handling of the goods on the ground
before they are loaded into the aircraft.
)U
Thus, the exporter should plan for packing of the goods keeping in
view the risks involved in different stages in the transport chain
from exporter's country to the importer's country.
Check Your Progress

Fill in the blanks:
1. The need for packing arises due to the fact that there
are many ……………. and ……………. involved during
the transportation of goods from the exporter to the
importer.
2. The exporter should plan for packing of the goods
keeping in view the risks involved in different stages in
the transport chain from ……………. country to the
(c
……………. country.
Summary
Packaging is an important warehousing and transportation
concern. Right packaging has a bearing on the efficiency and
effectiveness of both. Packaging not only protects and preserves
the Product, but also promotes it. Packaging is a said to be a Silent 129
Sales Person. Packaging can ease movement and storage, when Notes
S
properly designed. From Logistics perspective, its function is to ___________________
organize, protect and identify products and materials.
___________________
Communication is important to ensure that the consignment
reaches the right place at the right time and in good condition. ___________________
Package development involves considerations for sustainability, ___________________
environmental responsibility, and applicable environmental and ___________________
PE
recycling regulations. It may involve a life cycle assessment which ___________________
considers the material and energy inputs and outputs to the
___________________
package, the packaged product (contents), the packaging process,
the logistics system, waste management, etc. It is necessary to ___________________
know the relevant regulatory requirements for point of ___________________
manufacture, sale, and use.
___________________
Lesson End Activity

Discuss in group, how materials are unitized for packaging.
Keywords
)U
Packing: Preparation of product or commodity for proper storage
and/or transportation.
Pallets: Piece of equipment that facilitates mechanical handling of
stacked (palletized) goods for fork-lift trucks.
Containers: A box, bottle, can, etc. which can hold goods.
Packaging: Processes (such as cleaning, drying, and preserving)
and materials (such as glass, metal, paper or paperboard, plastic)
employed to contain, handle, protect, and/ or transport an article.

1. What are the various materials used in packaging for logistics?
Discuss their relative merits and demerits.
(c
2. What are the various aspects of packaging design

considerations? Explain.
3. How does unitization concept enhance overall efficiency of
logistics? Discuss about this in depth.
130
Further Readings
Notes
S
___________________ Books
___________________ Soroka (2002) Fundamentals of Packaging Technology, Institute of
___________________
Packaging Professionals.
___________________ Diana Twede (2005). "The Origins of Paper Based Packaging".

Conference on Historical Analysis & Research in Marketing
___________________
Proceedings 12: 288–300 [289]. Retrieved 2010-03-20.
PE
___________________
Brody, A. L; Marsh, K. S (1997).Encyclopedia of Packaging
___________________
Technology.
___________________
Yam, K. L., "Encyclopedia of Packaging Technology", John Wiley &
___________________ Sons, 2009.
___________________ Soroka, W, "Fundamentals of Packaging Technology", IoPP, 2002.
S., Sterling, "Field Guide to Sustainable Packaging", 2008.
Fundamentals of Logistics Management - M/s Douglas M. Lambert,
James R. Stock and Lisa M. Ellram McGRAW-HILL International
Editions.
Logistics Management – The Supply Chain Imperative - Mr. Vinod
)U
V. Sople, Pearson Education.
Web Readings
en.wikipedia.org/wiki/Packaging_and_labeling
www.packagingoftheworld.com/
www.designinindia.net/everywhere/areas/packaging/
(c
UNIT 12: Green Supply Chain
Unit 12
131
Notes
S
Activity
Green Supply Chain

___________________
consumer demand concept.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Bio-fuel and CNG ___________________
\ Fuel Economics ___________________
\ Carbon Footprint Modeling
___________________
\ Green Purchasing
___________________
\ Green Packaging
___________________
Introduction
There is a growing awareness among the consumers in the
developed markets of the world, in particular, the European
markets to protect their environment from the ill effects of
pollution. They are of the view that they must take care of their
)U
environment so that the future generations can enjoy a decent life.
Bio-fuel and CNG

Consequently, consumers demand environmentally sound products
and hold the manufacturers accountable for their actions and
products. Appreciating this concern of the consumers regarding
environment, even the manufacturers have begun to find ways and
means to satisfy the customers in this regard. As such biofuels and
CNG are fast attaining popularity in the transportation section of
the supply chain. This ensures cost reduction which
simultaneously reduces the price of the end product.
Non-food crops such as cornstalks, switchgrass and municipal solid
waste are the main source of the new second-generation biofuels.
(c
Being eco-friendly, these biofuels emit 60 per cent less greenhouse

gases. Under the Energy Independence and Security Act of 2007
(EISA), advanced biofuel production is expected to rise from two
billion gallons per year in 2012 to 21 billion gallons in 2022. Since
2012, the advanced biofuels industry has employed as many as
29,000 direct people.
132
Another important alternative fuel is CNG which is Natural Gas
Notes
S
(NG) compressed for the purpose of simplified transport and
___________________
storage. CNG has been successfully transported on land by
___________________ road-trailer (trucking) for over thirty years, so bulk CNG transport
___________________ technology is not new. However, the upscaled application of proven
CNG technology to a marine (shipping) transport system is new.
___________________
For storage and transporting, natural gas is compressed into
___________________
PE
special tanks, Gas Containment Tanks (GCTs) normally to a
___________________ pressure of 200 to 250 bar or 2900 to 3600 psi. The NG capacity of
___________________ a GCT, termed in Standard Cubic Feet (SCF) or metres (SCM),
___________________
depends on the volume of the GCT, working pressure, temperature
and composition of the NG. GCTs are mainly cylindrical and vary
___________________
in diameter and length and can be made of steel or lighter-weight
___________________ composite materials – one technology uses coiled small diameter
pipe for marine transportation.
Check Your Progress

Fill in the blanks:
1. Consumers demand environmentally sound products
and hold the manufacturers accountable for their
)U
…………….. and ……………..
2. …………….. crops such as cornstalks, switchgrass and
municipal solid waste are the main source of the new
second-generation biofuels.
Fuel Economics
Due to the escalating diesel prices, optimizing fuel economy
challenges shipping and logistics professionals everywhere. Many
people feel the urgency to deliver fuel savings or manage
escalating fuel costs which is increasing as rapidly as the average
price of diesel. It has been constantly on the rise by nearly 25 per
cent year over year, and experts don’t expect it to decline much
(c
further–at least not anytime soon.

One solution to coping with high diesel prices is up gradation of the
fleet to comply with the Environmental Protection Agency’s
nitrogen oxide (NOx) emissions regulations. All companies
manufacturing, buying, or leasing new trucks must utilize one of
two technologies to comply with the stricter standards. Making the
switch now takes advantage of the fuel economy and cost savings 133
achieved with one of the new emissions-reducing technologies. Notes
S
Activity
While the implementation of Exhaust Gas Recirculation (EGR) or ___________________
Prepare a report on OEMs.
Selective Catalytic Reduction (SCR) is relatively new in the United ___________________
States, both have been in the global marketplace for more than five
___________________
years. While both can reduce NOx emissions by up to 90 per cent,
SCR utilizes Diesel Exhaust Fluid (DEF), a high-quality, urea- ___________________
based solution that enables engines to run more efficiently and ___________________
PE
reliably, providing significant cost and fuel savings over EGR. ___________________
Adding up the Benefits ___________________
Original Equipment Manufacturers (OEMs) and fleets using SCR ___________________
have gained fuel efficiencies ranging from four to 11 per cent. Even ___________________
when accounting for the cost of DEF–which is approximately two
___________________
per cent of fuel cost in the United States on average, depending on
price points and usage–most fleets and OEMs are gaining a fuel
economy net savings of two to nine per cent. With diesel averaging
around $4 a gallon, this savings adds up when multiplied across an
entire fleet.
Although some fleet managers worry about the inconvenience of
)U
having to fill DEF tanks–a necessity to keep SCR engines
running–the widespread availability and distribution of DEF
ensures this task is streamlined into the re-fuelling process.
Check Your Progress

Fill in the blanks:
1. Due to the …………….. diesel prices, optimizing fuel
economy challenges shipping and logistics professionals
are seen everywhere.
2. Original Equipment Manufacturers (OEMs) and fleets
using SCR have gained fuel efficiencies ranging from
…………….. to …………….. per cent.
(c
Carbon Footprint Modeling

To ensure green supply chain, it has become necessary for
companies to keep a track of their initial carbon footprint. This is
the prerequisite for setting up realistic reduction goals. More and
more companies realize that virtual, non-hard fact based reduction
goals because more harm than good. It highlights the actions to
134 carry out in order to better control the environmental impact and
Notes optimise operational costs. 80% of the companies that measured
S
Activity
___________________
their carbon footprint identified immediately applicable
detailed information on carbon improvement initiatives that led to concrete improvements, for
___________________
footprint.
instance to diminish resources consumption and get rid of waste.
___________________

PE
___________________ 1. Non hard fact based reduction goals cause ……………..
___________________ harm than good.
___________________ 2. To ensure green supply chain, it has become necessary

for companies to keep a track of their initial ……………..
___________________
___________________
Green Purchasing
Environmentally Preferable Purchasing (EPP) or Green
Purchasing refers to the procurement of products and services that
have a lesser or reduced effect on human health and the
environment when compared with competing products or services
that serve the same purpose. This comparison may consider raw
)U
materials acquisition, production, manufacturing, packaging,
distribution, reuse, operation, maintenance or disposal of the
product or service.
Figure 12.1: Life-cycle Model for Products and Services
In the past, purchasing was regarded as a business function with

only bottom-line financial considerations. However, for the past
20 years, purchasing professionals have worked to link purchasing
(c
with environmental science and management (as well as other

academic disciplines) by researching (and applying) the impacts
that purchasing has on social, economic and environmental
processes and systems. By understanding and researching
purchasing in this way, purchasing professionals hope to
demonstrate and apply the benefits of integrating social, ethical
and environmental indicators and criteria upstream (where
purchasing decisions are made), which have multiple downstream 135

impacts (including better policy and technological enhancements Notes
S
Activity
as well as identifying pollution and waste prevention opportunities ___________________
Prepare a report on green
and discoveries). purchasing.
___________________
Global experience and examples show how environmentally
___________________
preferable criteria early in the procurement process improve the
organizations’ environmental performance, while addressing ___________________
ethics, social regeneration and economic concerns. Additionally, ___________________
PE
many ‘green’ products work as well or better than traditional ___________________
products and can even save money. Changing to safer cleaning
___________________
products, for example, can reduce incidents of allergic reactions,
asthma, burns, eye damage, major organ damage, and cancer ___________________
connected with the hazardous chemicals used in many traditional ___________________
cleaning products. Similarly, energy-efficient vehicles and
___________________
renewable energy cut greenhouse gas emissions and harmful air
pollutants while lessening our dependence on imported oil. Overall,
the implementation and integration of green purchasing concepts
constitutes a system-wide process reform that collectively
contributes to an organization’s reduction in ecological footprint
(cumulative associated ownership to global ecological damage
stemming from a demand for natural resource to sustain economic
)U
and social balance).
Rather than inheriting financial and environmental risk from their
suppliers. Green purchasing can allow an organization to offset it.
Alternatively, organizations may want to involve their suppliers at
the design stage or develop a network to pre-qualify suppliers that
have responsible environmental management. Assessments and
benchmarking can aid an organization with the process. Green
purchasing can bring important benefits for its practitioners: risk
management, eco-efficiency, stronger supplier relationships, and
improvements in environmental performance, just as a start.
Green Packaging
Exporters can gain a competitive edge if the products and or the
(c
packaging used are environment friendly. In fact, an environment-

friendly image and substance of the product is fast becoming a very
important marketing asset. In sum and substance, it means using
re-usable or recyclable materials for the product, during the
production process and for packaging and packing.
136
The regulations and requirements as regards environment
Notes
S
protection keep on changing. It would be in the interest of the
___________________ exporters to ascertain these requirements of the target markets of
___________________ planning for production and introduction of the product in the
___________________
foreign markets. Therefore, exporters should always ask the
importers about the up-to-date requirements. The main thrust of
___________________
the environmental requirements with relation to packaging is as
___________________ follows:
PE
___________________ z The amount of packing used should not be more than what is
___________________ essential for safe transport and distribution.
___________________ z All packages, materials and accessories should preferably be

recyclable. For instance, adhesive tape made of PVC should not
___________________
be used for corrugated boxes because PVC creates difficulties in
___________________
the recycling process. Instead, adhesive tapes made of PP
material should be preferred. All components of the packing
proper should be made of a single material. Therefore, waxed
paperboard or corrugated board as well as plastic laminates
should be avoided. Labels should be of matching materials:
paper label on corrugated board boxes, or plastic label on
plastic films, etc.
)U
z To make sorting for recycling possible, all materials should be
marked, so that the receiver knows what the material is.
z If the package cannot be recycled, it should be possible to be
burnt safely. Therefore, the packing materials, printing inks,
glues or adhesives, etc. should not contain substances, which
are harmful, such as heavy metals.
The exporter should ask the following questions to satisfy him as
to whether the environmental regulations in relation to packing
and packaging have been followed:
z Are the present sales packaging necessary or can the products

be sold without packaging?
z Is returnable packaging possible?
(c
z Can the size of the packing or the packaging material be

reduced?
z Is the filler material necessary or can it be reduced?
z Is it possible to use materials which can be easily recycled
(paperboard, corrugated fibreboard, paper, PE and PP)?
137
z Is it possible to avoid the use of dangerous synthetics or
Notes
S
plastics?
___________________
z Can water-soluble inks be used?
___________________
z Is it clearly marked what packing material is used?
___________________
If the answers to the above questions are in the affirmative, then
the export boxes are considered compliant with the environmental ___________________
regulations. ___________________
PE
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. …………… refers to the procurement of products and
services that have a lesser or reduced effect on human ___________________
health and the environment when compared with ___________________

competing products or services that serve the same
purpose.
2. All packages, materials and accessories should
preferably be ……………
Summary
)U
Due to the growing concerns towards environment, a new form of
supply chain has evolved, namely, the green supply chain. Biofuels
and CNG are fast attaining popularity in the transportation
section of the supply chain. Escalating diesel prices have led the
need of optimizing fuel economy challenges for shipping and
logistics professionals everywhere. Companies are keeping track of
their initial carbon footprint.
Environmentally Preferable Purchasing (EPP) on Green
purchasing is gaining popularity. Exporters are trying to gain a
competitive edge by using environment friendly packaging.
Lesson End Activity

(c
Correlate Green Supply Chain in context with any industry
Keywords
Green Purchasing: It refers to the procurement of products and
services that have a lesser or reduced effect on human health and
the environment.
138
Green Supply Chain Management: The process of using
Notes
S
environmentally friendly inputs and transforming these inputs
___________________
into outputs that can be reclaimed and re-used at the end of their
___________________ lifecycle thus, creating a sustainable supply chain.
___________________

___________________ 1. Explain the concept of green supply chain.
PE
___________________ 2. What do you mean by green packaging?
___________________ 3. Discuss the life cycle process of green purchasing.
___________________ 4. The main thrust of the environmental requirements with
___________________ relation to packaging is on various factors. What are those
___________________
factors?
5. Explain the following concepts:
(a) Carbon Footprinting Model
(b) Fuel Economics
6. How do bio-fuel and CNG affect the concept of Green marketing
in the environment?
)U
Further Readings
Books
Greening the Supply Chain Sarkis, Joseph (Ed.) 1st Edition, 2006,
XXIV, 407 p. 45 illus.
Green Logistics: Improving the Environmental Sustainability of
Logistics [Paperback].
Prof Alan McKinnon, Dr Sharon Cullinane, Dr Anthony Whiteing
and Professor Michael Browne
Stuart Emmett, Green Supply Chains: An Action Manifesto
Hsiao-Fan Wang and Surendra M. Gupta Green Supply Chain
(c
Management: Product Life Cycle Approach [Hardcover]
Web Readings
www.greensupplychain.com/
logistics.about.com/od/greensupplychain/a/green_intro.htm
www.thegreensupplychain.co.uk/-
UNIT 13: Vehicle Routing Problems
Unit 13
139
Notes
S
Activity
Vehicle Routing Problems

___________________
concept of VRP.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Traveling Salesman Problems ___________________
\ Various issues relating to traveling salesman problem ___________________
\ Time Dependent Variable Problems
___________________
___________________
Introduction
___________________
The Vehicle Routing Problem (VRP) is a combinatorial
optimization and integer programming problem seeking to service
a number of customers with a fleet of vehicles. Proposed by
Dantzig and Ramser in 1959, VRP is an important problem in the
fields of transportation, distribution and logistics. Often the
context is that of delivering goods located at a central depot to
)U
customers who have placed orders for such goods. Implicit is the
goal of minimizing the cost of distributing the goods. Many
methods have been developed for searching for good solutions to
the problem, but for all but the smallest problems, finding global
minimum for the cost function is computationally.
Traveling Salesman Problems (TSP)

The Traveling Salesman Problem is one of the most popular
problems in operational research. Most of the focus of these
researches is on the deterministic and static applications of the
TSP. An upgradation of the present static TSP to the Dynamic
TSP status was introduced in 1988 by Psaraftis. The motivation for
introducing a dynamic TSP was that the classical static TSP is
(c
considered to be the archetypal (static) vehicle routing problem due

to the fact that most other routing problems are extensions and
generalizations of the TSP. Psaraftis defines the DTSP as follows:
G is the complete graph consisting of n nodes. The demands for
service are independently generated at each node of the graph. The
generation process could for example be the Poisson process with
the intensity parameter λ. The demands must be serviced by the
140 salesman who travels at a constant velocity from node i to node j in

Notes the time tij. The service time of each of the demands is denoted t0.
S
___________________ The problem now consists of finding an optimal routing policy for
the salesman to follow. Psaraftis identifies the following issues as
___________________
being interesting and good research issues:
___________________
___________________ Performance Measures

___________________ The basis of performance measures in the communication network
PE
may either be on delay measures or throughput. As far as vehicle
___________________
routing is concerned, these measures mean that the optimal policy
___________________ should be the policy that either maximizes the expected number of
___________________ serviced demands per unit time or the policy that minimizes the
___________________
average expected waiting time for the demands.
___________________ Light Traffic

The vehicle will be able to keep up with the demand if the demand
rate λ is comparatively low and the throughput will be n . λ which
is independent of the policy. However, the waiting time is still
dependent on the policy. The policy of service the (probably sole)
demand as soon as it appears and then wait results in less waiting
time compared to the policy service demands as you go according to
)U
a [ node 1 → node 2 → ... → node n → node 1 → ... ] scheme for low
values of λ.
Heavy Traffic
However, the situation becomes more complicated if the demand
rate takes on higher values. There are cases wherein the demand
rate shoots up to such a height that the vehicle is not able to keep
up with the demands. The performance of the routing policies is
the deciding factor of whether the system can keep up with the
demand or not. There are chances of rejection of demand in heavily
loaded cases.
Repositioning
If the demand rate is low, it is better to reposition the vehicle to a
(c
strategically located node. This is similar to a facility location

problem and Psaraftis has proposed further research on the
combination of dynamic vehicle routing and facility location.
Obviously, a wide variety of different versions of the DTSP exist.
Clarke-wrights Savings Matrix 141

Notes
Clarke and Wright first proposed this classical algorithm in 1964
S
to solve Capacity-constrained Vehicle Routing Problems in which ___________________
the number of vehicles is free. The method starts with vehicle ___________________
routes containing the depot and one other vertex. Two routes are
___________________
merged according to the largest saving that can be generated at
each step, ___________________
Step 1: Compute the savings sij = Cil + Clj – Cij for i, j = 2 . . . . . n, ___________________
PE
and i ≠ j. Create n – 1 vehicle routes (1, i, 1) (i = 2 , . . . , n). ___________________
Step 2: Order the savings in a non-increasing fashion. ___________________
Step 3: Consider two vehicle routes containing arcs (i, 1) and (1, j), ___________________
respectively. If sij > 0, tentatively merge these routes by ___________________

introducing arc (i, j) and by deleting arcs (i, 1) and (1, j), implement
___________________
the merge if the resulting route is feasible. Repeat this step until
no further improvement is possible. Stop.
This procedure can be executed in O (n2 log n) time, but this
complexity can be reduced by using appropriate data structures
(Golden et al., 1977; Nelson et al., 1985; Paessens, 1988). Gaskell
(1967), Yellow (1970) and Paessens (1988) have also proposed a
)U
number of variants of this method. The Clarke and Wright
algorithm implicitly ignores vehicle fixed costs and fleet size.
Vehicle costs f can easily be taken into account by adding this
constant to every c1j (j = 2 , . . . , n). Solutions with a fixed number
of vehicles can be obtained by repeating Step 3 until the required
number of routes has been reached, even if the savings become
negative.
Check Your Progress

Fill in the blanks:
1. ………….. is a combinatorial optimization and integer
programming problem seeking to service a number of
customers with a fleet of vehicles.
(c
2. The basis of performance measures in the

communication network may either be on ………….. or
…………..
142
Time Dependent Variable Problems
Notes
S
Activity
The Time Dependant Vehicle Routing Problem (TDVRP) can be
___________________
Prepare a report on
fluctuations in traffic density.
explained as below. A vehicle fleet of fixed capacities has to serve
___________________ customers of fixed demands from a central depot. Customers must
___________________ be assigned to vehicles and the vehicles routed in order to
___________________
minimize the total time spent on the routes. The travel time
between two customers or between a customer and the depot
___________________
depends on the distance between the points and the time of day.
PE
___________________ Time windows for serving the customers may also be given as well
___________________ as a maximum allowable duration of each route (work day of the
driver). The Time Dependent Traveling Salesman Problem
___________________
(TDTSP) is a special case of the TDVRP in which only one vehicle
___________________
of infinite capacity is available.
___________________
In order to account for urban congestion, the TDVRP extends the
Vehicle Routing Problem (VRP). Similarly, the TDTSP is an
extension of the Traveling Salesman Problem (TSP). The cost or
travel line between two points is considered as known and constant
by the VRP. It is usually assumed by the VRP that the costs or
travel times are a scalar transformation of distances. For real life
applications some composite or modified measure of cost may be
)U
used.
It is assumed that costs are deterministically known and constant
is an approximation of actual conditions. Since speeds are not
constant in a congested urban environment, the travel time
between two points is usually not a function of distance travelled
alone. Fluctuations in traffic density may cause fluctuations in
travel speed that result in variation in travel times. One
component is the travel due to accidents, weather conditions or
other random events. Another component of this variation, which
may cause travel times to increase dramatically during rush hours,
is the temporal variation that results from the hourly, daily or
seasonal cycles in the average traffic volumes.
If the major variation in travel times results from the time-of-day
(c
variation, the travel time between two points may be represented

by the deterministic function of the distance between the two
points and also the time of day the travel takes place. If we ignore
the time of day dependence of travel times we may get a
suboptimal solution, with a different route structure and different
number of vehicles needed than would result from the time
dependent optimal solution. Also, we may obtain a solution that
violates time windows or maximum permissible times for each 143

route. Notes
S
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. It is assumed that costs are deterministically known
___________________
and constant is an ………….. of actual conditions.
___________________
PE
2. ………….. in traffic density may cause fluctuations in
travel speed that result in variation in travel times. ___________________
___________________
Summary ___________________
In the small package shipping industry (as in other industries), ___________________

companies try to differentiate themselves by providing high levels ___________________
of customer service. This can be accomplished in several ways,
including online tracking of packages, ensuring on-time delivery,
and offering residential pickups. Some companies want their
drivers to develop relationships with customers on a route and
have the same drivers visit the same customers at roughly the
same time on each day that the customers need service. These
)U
service requirements, together with traditional constraints on
vehicle capacity and route length, define the Vehicle Routing
Problem (VRP) which is a combinatorial optimization and integer
programming problem seeking to service a number of customers
with a fleet of vehicles. Proposed by Dantzig and Ramser in 1959,
VRP is an important problem in the fields of transportation,
distribution and logistics. Often the context is that of delivering
goods located at a central depot to customers who have placed
orders for such goods. Implicit is the goal of minimizing the cost of
distributing the goods. Many methods have been developed for
searching for good solutions to the problem, but for all but the
smallest problems, finding global minimum for the cost function is
computationally complex.
(c
Lesson End Activity

Design a vehicle routing program for an organisation of your
choice.
144
Keywords
Notes
S
TDVRP: Time Dependant Vehicle Routing Problem
___________________
___________________
TSP: Traveling Salesman Problem
___________________ VRP: Vehicle Routing Problem
___________________ TDTSP: Time Dependent Traveling Salesman Problem
___________________
PE
___________________
___________________ 1. Write a short note on Travelling Salesman Problems.
___________________ 2. Differentiate between light traffic and heavy traffic.
___________________ 3. Explain the Clarke-wrights savings matrix with suitable

___________________
examples.
4. How do time dependent variable problems effect the vehicle
routing design?
Further Readings
Books
)U
W.J. Hopp and M.L. Spearman, Factory Physics: Foundations of
Sridhar Tayur, Ram Ganeshan and Michael Magazine (editors),
R.B. Handfield and E.L. Nochols, Jr., Introduction to Supply Chain
Management, Prentice Hall, 1999.
N. Viswanadham and Y. Narahari, Performance Modeling of
(c

Learning, 2001.
Web Readings 145

Notes
en.wikipedia.org/wiki/Vehicle_routing_problem
S
___________________
www2.isye.gatech.edu/~mwps/presentations/VRP_part1.pdf
___________________
citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1...
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
(c
)U
PE
S
UNIT 14: Transportation Planning
Unit 14
147
Notes
S
Activity
Transportation Planning
___________________
factors affecting speed of
___________________
transportation.
___________________
Objectives
___________________
topics: ___________________
PE
\ Efficient Networks ___________________
\ Routing and Scheduling ___________________
\ Shipment Planning
___________________
\ Mode and Carrier Selections
___________________
\ Transportation Management System Requirements
___________________
Introduction
Transportation is the operational area of the supply chain that
geographically positions inventory. Facility selection establishes a
network structure that creates the framework of transportation
requirements and simultaneously limits alternatives.
)U
Efficient Networks
Transportation requirements can be accomplished in three basic
ways:
z By a private fleet of equipment.
z Contracts with transport specialists.
z Engage the services of carriers on individual shipment basis.
From the supply chain viewpoint, three factors related to
performance are fundamental to the selection of the mode of
transportation: cost, speed, and consistency.
Speed of transportation is the time required to complete a specific
(c
movement. Speed and cost of transportation are related in two

ways:
1. Transport firms capable of providing faster service, typically
charge higher rates; and
148
2. The faster the transportation service, the shorter the time
Notes
S
interval during which inventory is in transit and is
___________________
unavailable.
___________________
Thus, a critical aspect of selecting the most desirable method of
___________________ transportation is to balance speed and cost of service.
___________________ Consistency of transportation refers to variations in time required
___________________ to perform a specific movement over a number of shipments.
PE
Consistency is a reflection of the dependability of transportation. If
___________________
transportation lacks consistency, inventory safety stocks will be
___________________
required to protect against unpredictable service breakdowns. The
___________________ quality of transportation performance is critical to time-sensitive
___________________ operations. Speed and consistency combine to create the quality
aspect of transportation.
___________________
In the design of a logistical system, a delicate balance must be
maintained between transportation cost and quality of service. The
cost of transport is the payment for movement between two
geographical locations and expenses related to administration and
maintaining in-transit inventory. Logistical systems should be
designed to utilize transportation that minimizes total system cost.
)U
Transportation cost, which is one of the major logistical costs, can
be optimized through movement consolidation. As a general rule,
the larger the overall shipment and the longer the distance it is
transported, the lower the transportation cost per unit. In addition,
the cost is also directly related to the product characteristics.
Innovative programmes to consolidate movement by grouping
small shipments through overall supply chain integration can
lower transportation costs significantly.
Transportation creates time and place utility in goods. Logistics
costs are in the range of 12 to 15 per cent of the GDP for a
developing country while it is around 18 to 20 per cent for a
developed country.
The term 'transportation' is derived from the Latin trans ("across")
(c
and portare ("to carry"). In fact, the backbone of the entire supply
chain is the transportation management that makes it possible to
achieve the well-known seven 'R's – the right product in the right
quantity and the right condition, at the right place, at the right
time, for the right customer at the right cost.
149
Check Your Progress Notes
S
Activity
Prepare a report on
transportation functionality.
1. Transportation is the …………… area of the supply ___________________
chain that geographically positions inventory.
___________________
2. …………… of transportation is the time required to ___________________
complete a specific movement.
___________________
PE
Routing and Scheduling ___________________
___________________
Transportation functionality is product movement. Whether the
___________________
product is in the form of materials, components, assemblies,
work-in-process, or finished goods, transportation is necessary to ___________________
move it up and down the value chain. Since transportation utilizes ___________________
temporal, financial, and environmental resources, it is important
that items be moved only when it truly enhances product value.
During the transportation process, the product is inaccessible.
Transportation, therefore, uses temporal resources. Such product,
commonly referred to as in-transit inventory, is becoming a
significant consideration as a variety of supply chain strategies
)U
such as just-in-time and quick-response practices reduce
manufacturing and distribution centre inventories.
Transportation uses financial resources. Driver cost, vehicle
operating cost, and allocation for general and administrative costs
are required if it is a private fleet. External expenditures are
required for commercial or public transportation. In addition,
provision is required for other expenses relating from product loss
or damage.
Transportation uses environmental resources, both directly and
indirectly. In direct terms, it is one of the largest consumers of
energy as it burns most of the world's petroleum. Hydrocarbon
fuels produce carbon dioxide, a greenhouse gas widely thought to
be the chief cause of global climate change, and petroleum-powered
(c
engines, especially inefficient ones, create air pollution, including

nitrous oxides and particulates (soot). Although vehicles in
developed countries have been getting cleaner because of
environmental regulations, this has been offset by an increase in
the number of vehicles and more use of each vehicle.
150
Other environmental impacts of transport systems include traffic
Notes
S
Activity congestion, toxic runoff from roads and parking lots that can
___________________
Prepare a slide presenting pollute water supplies and aquatic ecosystems, and automobile-
shipper's decisions.
___________________ oriented urban sprawl, which can consume natural habitat and
___________________ agricultural lands and noise pollution. These are environmental
expenses attributable to transportation.
___________________
PE
___________________ 1. Transportation functionality is …………… movement.
___________________ 2. During the …………… process, the product is
___________________ inaccessible.
___________________
Shipment Planning
A shipper's decisions include the design of the transportation
network, choice of means of transport, and the assignment of each
customer shipment to a particular means of transport. A shipper's
goal is to mine the total cost of fulfilling a customer order while
achieving the responsiveness promised. A shipper must account for
)U
the following costs when making transportation decisions.
1. Transportation cost: This is the total amount paid to various

carriers for transporting products to customers. It depends on
the prices offered by different carriers and the extent to which
the shipper uses inexpensive and slow, or expensive and fast,
means of transportation. Transportation costs are considered
variable for all shipper decisions as long as the shipper does not
own the carrier.
2. Inventory cost: This is the cost of holding inventory incurred
by the shipper's supply chain network. Inventory costs are
considered fixed for short-term transportation decisions that
assign each customer shipment to a carrier. Inventory costs are
considered variable when a shipper is designing the
(c
transportation network or planning operating policies.

3. Facility cost: This is the cost of various facilities in the
shipper's supply chain network. Facility costs are considered
variable when supply chain managers make strategic design
decisions but are considered fixed for all other transportation
decisions.
151
4. Processing cost: This is the cost of loading/unloading orders
Notes
S
as well as other processing costs associated with Activity
transportation. These are considered variable for all ___________________
Prepare a report on system
transportation decisions. mileage.
___________________
5. Service level cost: This is the cost of not being able to meet ___________________
delivery commitments. In some cases it may clearly be specified
___________________
as part of a contract while in other cases it may be reflected in
___________________
PE
customer satisfaction. This cost should be considered in
strategic, planning, and operational decisions. ___________________
A shipper must make a trade-off between all these costs when ___________________
making transportation decisions. A shipper's decisions are also ___________________

impacted by the responsiveness it seeks to provide its customers ___________________
and the margins generated from different products and customers.
___________________
For example a firm promising delivery within a time window
specified by the customer will require more trucks than a firm
whose customers are willing to accept delivery at any time.
Check Your Progress

Fill in the blanks:
)U
1. A shipper's decisions includes ……………
2. A shipper's goal is to mine the ……………of fulfilling a
customer order while achieving the responsiveness
promised.
Mode and Carrier Selections

Mode of transport is a general term for the different kinds of
transport facilities that are often used to transport people or cargo.
Where more than one mode of transport is used for a journey, or
for transport analysis, the journey can be described as multi-
modal.
Each mode moves cargo in different configurations. The six basic
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transportation modes used in India are:

z Roads,
z Railways,
z Water,
z Pipeline,
152
z Air, and
Notes
S
___________________
z Animal and animal drawn vehicles.
___________________
Truck
___________________
Rail
___________________ Water
___________________
Freight Rate
PE
___________________
___________________
___________________ B C
___________________ Distance
___________________
Figure 14.1: Freight Rate vs. Distance of Different Modes of Transport
Each mode of transport is unique and has different costs. Figure

14.1 shows the cost of freight using three different modes of
transport; road, rail and water. For example, road transportation
is cheaper than railways for shorter distances shown by 'B' in the
figure, however as the distance increases, water transportation
)U
becomes cheaper than rail, shown by 'C' in the figure.
The relative importance of each mode can be measured in terms of
system mileage, traffic volume, revenue, and the nature of traffic
composition. System mileage is generally given in terms of ton
kilometre. The most widely used modes for freight transport on an
international basis are sea (40,000 bn ton km), followed by road
(7,000 bn ton km), railways (6,500 bn ton km), oil pipelines (2,000
bn ton km) and inland navigation.
Factors Affecting Carrier Decisions

A carrier's goal is to make investment decisions and set operation
policies that maximize the return on its assets. A carrier such as
an airline, railroad, or trucking company must account for the
following costs when investing in assets or setting pricing and
(c
operating policies.
1. Vehicle-related cost: This is the cost a carrier incurs for the
purchase or lease of the vehicle used to transport goods. The
vehicle-related cost is incurred whether the vehicle is operating
or not and is considered fixed for short-term operational
decisions by the carrier. When making long-term strategic
decisions or medium-term planning decisions, these costs are 153

variable and the number of vehicles purchased or leased is one Notes
S
of the choices that a carrier makes. The vehicle-related cost is ___________________
proportional to the number of vehicles leased or purchased.
___________________
2. Fixed operating cost: This includes any costs associated with
___________________
terminals, airport gates, and labour that are incurred whether
vehicles are in operation or not. Examples include the fixed cost ___________________
of a trucking terminal facility or airport hub that is incurred ___________________
PE
independent of the number of trucks visiting the terminal or ___________________
flights landing at the hub. If drivers were paid independent of
___________________
their travel schedule, their salary would also be included in this
category. For operational decisions, these costs are fixed. For ___________________
planning and strategic decisions concerning the location and ___________________
size of facilities, these costs are variable. The fixed operating
___________________
cost is generally proportional to the size of operating facilities.
3. Trip-related cost: This cost includes the price of labour and
fuel incurred for each trip independent of the quantity
transported. The trip-related cost depends on the length and
duration of the trip but is independent of the quantity shipped.
This cost is considered variable when making strategic or
)U
planning decisions. The cost is also considered variable when
making operational decisions that impact the length and
duration of a trip.
4. Quantity-related cost: This category includes loading/
unloading costs and a portion of the fuel cost that varies with
the quantity being transported. These costs are generally
variable in all transportation decisions unless labour used for
loading and unloading is fixed.
5. Overhead cost: This category includes the cost of planning
and scheduling a transportation network as well as any
investment in information technology. When a trucking
company invests in routing software that allows a manager to
devise good delivery routes, the investment in the software and
(c
its operation is included in overhead. Airlines include the cost

of groups that schedule and route panes and crew in overhead.
For strategic and planning decisions a carrier should consider all
the costs previously discussed to be variable. For operational
decisions, most of the aforementioned costs become fixed.
154
S
Activity
___________________
Prepare a slide presenting Fill in the blanks:
detailed information on
___________________
physical distribution. 1. Mode of transport is a general term for the different
___________________ kinds of transport facilities that are often used to
transport ………… or …………
___________________
___________________
2. System ………… is generally given in terms of ton
PE
kilometre.
___________________
___________________
Transportation Management System Requirements
___________________
The area of physical distribution concerns movement of a finished
___________________
product to customers. In physical distribution, the customer is the
___________________ final destination of a marketing channel. It is through the physical
distribution process that the time and space of customer service
become an integral part of marketing, linking marketing channels
with its customers.
The typical physical distribution performance cycle involves five
activities: order transmission, order processing, order selection,
order transportation and customer delivery. These activities have
)U
been shown in Figure 14.2.
Figure 14.2: Physical Distribution Cycle Activities
This cycle links the seller and the buyer. We will discuss one
element in this cycle, namely transportation. Transportation
decisions should be based on sound economics. In order to
understand transportation economics, it is necessary to first
(c
understand the transportation environment, which is unique

compared to many commercial enterprises.
The Players: Transportation transactions are influenced by five
parties: the shipper (originating party), the consignee (destination
party or receiver), the carrier, the government, and the public. The
relationship is shown in Figure 14.3. In order to understand the
complexity of the transportation environment, it is necessary to 155

review the role and perspective of each party. Notes
S
___________________
Goods Flow
___________________
Information Flow ___________________
___________________
___________________
PE
___________________
___________________
___________________
Figure 14.3: The Transportation Environment ___________________
The shipper and consignee have the common objective of moving ___________________
goods from origin to destination within a prescribed time at the

lowest cost. Carriers, as the intermediary, want to charge the
highest rate that the shipper (or consignee) will accept and
minimize the labour, fuel, and vehicle costs required to move the
goods. To achieve this objective, the carrier desires flexibility in
pickup and delivery times to allow individual loads to be
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consolidated into economic moves.
The government is the largest investor in infrastructure and
therefore maintains a high interest in transportation's impact on
the economy. The government provides rights-of-way such as
roadways, ports, airports and air traffic control systems.
Government's involvement takes the form of regulation, promotion,
or ownership. As a monopoly owner who maintains absolute
control over markets, services and rates, the government can
regulate carriers by restricting the markets they can service or by
setting the price they can charge. For example, Indian Railways is
a government monopoly.
The final participant, the public, is concerned with transportation
accessibility, expense, and effectiveness, as well as environmental
(c
and safety standards. The public ultimately determines the need

for transportation by demanding goods and services and
determining the value of such services. The development of the
airfreight industry shows that consumers may find cost less
important than speed and service. Very often, trade-offs are
associated with cost, environmental and safety standards.
156
The transportation relationship is complex because of the
Notes
S
interaction between the parties. This leads to frequent conflicts
___________________
between parties with a micro interest shippers, consignees, and
___________________ carriers–as well as parties with a macro interest – government and
___________________ the public. These conflicts lead to duplication, regulation, and
restrictions of transportation services which impact the economics
___________________
of transportation.
___________________
PE
___________________
Check Your Progress
Fill in the blanks:
___________________
___________________ 1. The area of ………… concerns movement of a finished

product to customers.
___________________
2. In physical distribution, the ………… is the final
___________________
destination of a marketing channel
Summary
Transportation planning allows supply managers to efficiently
secure capacity for shipments across multiple modes and locations,
as well as common motor carriers and dedicated or private fleets.
)U
Quick identification of the best transportation management
scenarios to meet the company’s logistics requirements for quality,
cost and speed is mandatory. Key transportation management
benefits include the ability to: (a) Increase control of transportation
spending; (b) Reduce empty miles; (c) Improve on-time
performance; (d) Track and trace visibility across all modes;
(e) Receive instant notification of delays, changes or other events;
(f) Maximize value for motor carriers’ contract commitments; and
(g) Identify trends, anomalies and events that impact your supply
chain.
Lesson End Activity

Imagine yourself to be owner of a cement company. Make your
(c
transportation plan in accordance with what you have studied so

far. Also, include the mode and carrier selections, giving reason for
each.
Keywords 157
Notes
S
In-transit Inventory: During the transportation process, the
___________________
product is inaccessible. Transportation, therefore, uses temporal
resources. Such product commonly referred to as in-transit ___________________
inventory. ___________________
Mode of Transport: It is a general term for the different kinds of ___________________

___________________
PE
Area of Physical Distribution: It concerns movement of a ___________________
finished product to customers.
___________________
___________________
___________________
1. What are the three factors related to performance which are
___________________
fundamental to the selection of the mode of transportation?
2. Describe the different types of resources utilized by the routing
and scheduling decisions.
3. Name and define the costs which a shipper must account for
when making transportation decision.
4. Define mode of transport and name the different modes used in
)U
India.
5. What are the factors affecting carrier decisions? Name the
parties who are influenced by transportation transactions.
Further Readings
Books
(c

158
Notes
S
___________________
___________________
Learning, 2001.
___________________
___________________ Designing and Managing the Supply Chain: Concepts, Strategies,
___________________ and Case Studies, Irwin McGrawHill, 2000.
PE
___________________
Web Readings
___________________
en.wikipedia.org/wiki/Transportation_planning
___________________
www.ite.org/emodules/scriptcontent/orders/ProductDetail.cfm?pc
___________________
www.cyburbia.org/forums/forumdisplay.php?f=19
___________________
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(c
`
UNIT 15: Case Study
Unit 15
159
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Managing Tendupatta Collection Operations
___________________
Madhya Pradesh is the biggest Tendu Leaves (Leaves of
Diospyros melonoxylon) producing State of India. The average ___________________
annual production of Tendu Leaves in Madhya Pradesh is around
25 lakh standard bags, which is nearly 25% of the total Tendu ___________________
Leaves production of the country. One standard bag of Tendu
___________________
Leaves in Madhya Pradesh means 1000 bundles of 50 leaves each.
)U
Figure 1: A Tendu Leaf
The leaves are obtained from Tendu tree (Diospyros melanoxylon

Roxb.) belonging to Family Ebenaceae, which is endemic to Indian
sub-continent. According to Troup (1921) Diospyros melanoxylon
(inclusive of D. tomentosa and D. tupru) is one of the most
characteristic trees of the dry deciduous forests throughout India,
covering the entire Indian peninsula the area of distribution
extends upto Nepal in sub-Himalayan tracts including the Indian
plain, Gangetic plain, Madhya Pradesh, Maharashtra, western
coast upto Malabar and Eastern coast upto Coromandel. The
plant is also met with on the Nilgiris and Serawalli hills in the
south.
(c
Figure 2: Tendu Leaves Field
Diospyros melanoxylon leaf is considered the most suitable

wrapper on account of the ease with which it can be rolled and its
Contd…
160 wide availability. Leaves of many other plants like Butea

Notes monosperma, Shorea robusta etc. also find use as Bidi wrappers
S
in different parts of the country but the texture, flavour and
___________________ workability of diospyros leaves are unmatchable. The wide-scale
use of Diospyros melanoxylon leaves in Bidi industry is mainly
___________________
based on their enormous production, agreeable flavour, flexibility,
___________________ resistance to decay and capacity to retain fires. The broad
morphological characters on which leaves, are selected and
___________________ categorised for Bidi making are size, thickness of leaves, texture,
relative thickness of midrib and lateral veins.
___________________
PE
Bidi rolling is the primary job which is very simple and can be
___________________ done at any place at any time. It is a source of subsidiary
occupation and supplementary income to lakhs of poor rural folk
___________________
Bidi industry provides employment to the rural population during
___________________ off season for collection of bidi leaves. Obviously, bidi industry has
a vital role in rural welfare and in promoting rural economy.
___________________
The procedure for collection and processing of tendu leaves has
___________________ almost been standardised and almost the same procedure is used
everywhere. The tendu plants are pruned in the months of
February and March and the mature leaves are collected after
about 45 days. The leaves are collected in bundles of 50 to 100
leaves, which are dried in sunlight for about a week. The dried
leaves are sprinkled with water to soften them and then filled
tightly in jute bags and exposed to direct sunlight for two days.
The bags, thus packed and cured can be stored till their use in
Bidi manufacture. Great care is needed while plucking, curing
and storage of tendu leaves. It is a sensitive product and with the
)U
slightest mistakes or oversight during any of these processes their
quality deteriorates rendering them unfit for making Bidis.
Figure 3: Dried Tendu Leaf
The State Government enacted an Act in 1964 and took over the
trade in Tendu Leaves. In order to give more benefits to forest
dwellers in collection and trade of Tendu Leaves, the Madhya
Pradesh State Minor Forest Produce (Trading & Development)
Co-operative Federation Limited was formed in 1984. In 1988, the
State Government decided to involve co-operative societies in the
trade of Tendu Leaves. For this, a three tier Co-operative
(c
structure was designed. M.P. State Minor Forest Produce

Federation was placed at the apex level of this structure. At the
primary level, Primary Forest Produce Co-operative Societies
were constituted. At the secondary level, District Forest Produce
Co-operative Unions were formed.
Collection of Tendu Leaves is done by the Primary Co-operative
Societies of actual pluckers of Tendu Leaves. There are over 15,000
collection centres in the State. The collection work is seasonal. It
Contd…
`
UNIT 15: Case Study
lasts for about 6 weeks. Depending on the geographical location of 161

Districts, the season may commence any time from the middle of Notes
S
April to second week of May. The collection stops ten to fifteen days
before the onset of the monsoon, so that leaves can be cured, ___________________
bagged and safely transported to godowns.
___________________
Table 1: Data of Tendu Leaves Trade
___________________
Collection Quantity
Collection Quantity Sale Net
Year Collection Rate per disposed Expenditure
Wages Stored Price receipt ___________________
S.B off
1989 43.61 150 65.42 43.58 43.58 405.15 114.70 290.45

___________________
PE
1990 61.15 250 152.88 60.57 60.57 248.47 209.12 39.35
1991 46.16 250 115.40 45.79 45.79 298.07 180.00 118.07 ___________________
1992 45.06 250 112.65 44.64 44.64 285.99 201.47 84.52
___________________
1993 41.31 300 123.93 40.98 40.98 252.77 198.29 54.48
1994 42.38 300 127.14 42.08 42.08 299.40 210.95 88.45 ___________________
1995 39.56 300 118.68 39.36 39.36 289.39 197.80 91.59
1996 44.60 350 156.10 44.43 44.43 338.85 269.38 69.47

___________________
1997 40.14 350 140.49 39.95 39.95 338.69 244.05 94.64
___________________
1998 45.47 400 181.84 45.23 45.23 407.66 280.39 127.27
1999 49.37 400 194.20 49.12 49.12 402.20 283.87 118.33
2000 29.59 400 114.78 29.49 29.49 176.31 160.08 16.23
2001 21.28 400 83.09 21.22 21.22 111.05 136.07 -
2002 22.74 400 89.04 22.65 22.65 165.77 143.83 21.94
2003 22.25 400 87.56 22.21 22.21 152.95 140.71 12.24
2004 25.77 400 101.61 25.72 25.72 167.71 145.86 21.85
2005 16.83 400 66.37 16.82 16.82 131.41 106.90 24.51

)U
2006 17.97 400 71.88 17.97 17.97 151.33 100.56 50.77
2007 24.21 450 108.95 24.21 24.21 373.64 136.89 236.75
2008 18.25 550 100.35 18.25 18.25 211.26 136.57 74.69
2009 20.49 550 112.67 20.49 20.49 265.49 149.86 115.63
2010* 21.25 650 138.11 21.25 21.21 332.62 179.71 152.91
2011* 17.06 650 110.80 17.06 17.05 309.96 162.02 147.94
Note: Figures for 2010 and 2011 season are to be finalised
1. Quantity: In lakh Standard Bags (1 Standard Bag=50,000

leaves);
2. Amount: In ` Crores.
Table 2: Collection Rates in Different Seasons
Collection Rate
Season Area
(` per S.B.)
5 D.U.- Shivpuri,Bhopal,Chhatarpur,
1999, 2000 300/-
Tikamgarh & N. Sagar
& 2001
All other D.U. 400/-
4 D.U.- Bhopal,Chhatarpur,
300/-
(c
2002 Tikamgarh & N. Sagar

3 D.U.- Chhatarpur, Tikamgarh &
2003,2004, 300/-
N. Sagar
2005
2006 All D.U. 400/-
2007 All D.U. 450/-
2008,2009 All D.U. 550/-
2010,2011 All D.U. 650/-
From 2000 season, figures are for the new state of M.P.
Contd…
162
SWOT Analysis of Tendupatta
Notes
S
Strengths
___________________
1. High demand. Over half of the tobacco consumption in India
___________________ is through bidi made from tendu leaves.
2. Collection and marketing through cooperatives.
___________________
3. Trades have been evolved and established in the past few
___________________ decades following rigorous trial and errors.
___________________ 4. Local community is capable of undertaking silviculture
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management of the species, which is quite simple.
___________________
Weaknesses
___________________ 1. On an average, the collectors get ` 60 per day which is below
___________________ the minimum wage rate.
2. Bush cutting/pruning not done properly resulting in loss of
___________________
production (quantity as well as quality).
___________________ 3. Price fixation and other management decision related to
collection and trade are decided by the government and there
is hardly any involvement of the beneficiaries in the decision
making process.
4. Procedural delays reduce impact of various welfare measures
of the government for tendu leave pluckers.
Opportunities
1. Some state governments have developed a policy of benefit
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sharing from the net profit from tendu trade with the
collectors.
2. Welfare measures such as insurance for collectors have been
introduced in some states.
3. Collectors can be involved in bidi rolling as rural micro
enterprise.
Threats
1. Considered as “sunset” industry
2. Uncertain future due to growing awareness about harmful
effects of smoking
3. If FD support in tendu leave procurement is withdrawn, it
might again lead to collectors’ exploitation.
Issues
Collection Malpractices: Setting up of fire before collection,
improper siviculture techniques of bush cutting, tending and
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cleaning reduces quality and productivity

Collection Regulation: The collection targets, duration of
collection, are prefixed by the forest departments since it is a
nationalized product as a result the total collections by the
collectors are not procured by the Forest Corporations/
Federations. This also sometimes encourages gray market for the
tendu leave procurement, which goes unrecorded in official
figures.
Contd…
`
UNIT 15: Case Study
163
Post Harvesting Treatment: Lack of proper post harvesting
treatment like cleaning, grading and drying of tendu leaves Notes
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results in huge wastage of the total collection. Therefore, more
orientation and training is required for this. ___________________
Storing: Huge warehouse infrastructure was created to store ___________________

tendu leaves by forest department in Madhya Pradesh and some
other states so that the prices could be controlled in favour of the ___________________
collectors. Now these storage facilities are no longer used for this ___________________
purpose and the leaves are sold on spot after procurement so that
immediate benefit to be given to the collectors. Now while, it ___________________
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provided quicker money to the collectors it also reduces the share
of profit. The traders are however, now using these warehouses to ___________________
store the same leaves in some instances. ___________________
Processing: The processing of tendu leaves into bidi has extreme
unhealthy environment of work due to handling of tobacco by ___________________
women and children. Simple safety measure like masks and ___________________
gloves are also not available to the processors. There are virtually
no other alternative uses or product diversification of tendu ___________________
leaves.
Pricing and Trading: Some states like Orissa lack proper policy
on tender and auction of tendu leaves.
Taxation: High sales tax and excise duty and non-uniform policy
across state with double tax imposition or interstate
transportation is applied in case of tendu leaves.
Transportation: The collectors bear high transportation cost
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from the place of collection to the place of procurement.
Policy and Governance: Benefit sharing arrangements like
Madhya Pradesh is lacking in other states also the cooperative
model of tendu leave collection is lacking for other states, which
give less opportunity to collectors in terms of benefit sharing and
their role in the operation of the cooperatives.
Questions
1. Write down the facts of the case.
2. What are the issues faced by the tendupatta industry?
3. After going through the SWOT analysis, how do you think
should the tendupatta industry handle its supply chain?
Source:http://mfpfederation.org/website/content/tendupatta.html,http://pubs.iied.org/pdfs
/G02281.pdf
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UNIT 16: Supply Chain Information Systems
165
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-IV
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166
Notes
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UNIT 16: SUPPLY CHAIN INFORMATION
___________________ UNIT 18: MANUFACTURING SUPPLY CHAIN
SYSTEMS DESIGN STRATEGY
z ___________________
Introduction z Introduction
z ___________________
Levels of Functionality z VMI: Vendors Managed Inventory
z Hub & Spoke Model
z Integration Requirements
___________________
z Computer-aided Supply Chain Management

___________________ UNIT 19: RETAIL SUPPLY CHAIN DESIGN
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z Supply Chain Information System Architecture
___________________ z Introduction
z Organizing to Improve Retail Supply Chain
___________________
UNIT 17: SCOR MODELING Performance
z ___________________
Introduction z The Demand Driven Supply Chain
z Pillars of SCOR: Plan, Source, Make, Deliver and

___________________ z Product Tracking along Retail Supply Chains
Return
___________________
UNIT 20: CASE STUDY
z Introduction to SCOR 11
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Unit 16
167
Notes
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Activity
Supply Chain Information

___________________
information concept.
___________________
Systems ___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Functionality Requirements
\ Integration Requirements ___________________
\ Computer-aided Supply Chain Management ___________________

\ Supply Chain Information System Architecture ___________________
Introduction
Information is one of the greatest facilitators in supply chain
management. Supply Chain information is a critical component of
a firm's ability to respond rapidly to the end consumer demand in
today's highly competitive marketplace. Timely and accurate
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information is also critical for three reasons:
z Information on order status, product availability, delivery
schedule, and invoices is perceived by customers as a
necessary element of total customer service;
z Information can reduce inventory by minimizing demand
uncertainty; and
z Information increases flexibility with regard to how, when,
and where resources may be utilized for strategic advantage.
Levels of Functionality
Information integrates supply chain activities by building on four
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levels of functionality:
z Transaction,
z Management control,
z Decision analysis, and
z Strategic planning systems.
168
The schematic arrangement, shown as Figure 16.1, identifies the
Notes
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level and identifies major decision areas associated at each level.
___________________
___________________ Strategic Planning
D ev elopm e nt of C apabilitie s
___________________ Sc ann ing for O pportun ities
C us tom er Serv ic e A nalys is
D ecision Analysis
___________________
Vehicle R ou tin g and Sc hedu ling
Inv ento ry Le vels & M a nage m ent M a na ge m ent Ce ntral
___________________ N etw o rk /fac ility Lo ca tion pla nning
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C us tom er S erv ic e M ea su rem ent
Prod uctivity M ea surem ent
___________________ Q uality M ea surem ent
Ex ception R e porting
___________________ Transaction System s
O rd er Entry
___________________ Inv ento ry A s signm e nt
O rd er Selec tion
Sh ipp ing
___________________ Pricing & in voicing
C us tom er R esp ons e/S e rvice
___________________
Figure 16.1: Information Functionality
Transaction
Transaction activities include order entry, inventory assignment,
order selection, shipping, pricing, invoicing, and customer inquiry.
The customer order performance cycle order starts with an entry
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transaction on the receipt customer order. This initiates the next
transaction i.e. assign inventory to the order. A third transaction is
then generated to direct the material handlers to select the order.
This is followed by a transaction directing the movement, loading,
and delivery of the order. The final transaction prints or transmits
the invoice for payment. Thus, the customer order performance
cycle is completed through a series of information system
transactions. The process also enables order status information to
be available to customers as and when they desire such
information.
The transaction system is characterized by formalized rules,
inter-functional communications, a large volume of transactions,
and an operational day-to-day focus. Because of the large number
of system users, heavy communication demands, high transaction
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volume, and significant software complexity transaction system

costs can be relatively high. In the transactions system, the major
emphasis is on information system efficiency. However, as the
processes are highly structured, the system costs are relatively
well-defined and benefits or returns can be easily computed.
Management Control 169

Notes
Management control is characterized by an evaluative, tactical,
S
intermediate-term focus that evaluates past performance and ___________________
identifies alternatives. Information on common performance ___________________
measures includes financial, customer service, productivity, and
___________________
quality indicators. For example, some measures could be:
transportation and warehousing cost per kilogram (cost measure), ___________________
inventory turnover (asset measure), order fill rate (customer ___________________
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service measure), cases per labour hour (productivity measure),
___________________
and customer perception (quality measure). While some
___________________
management control measures, such as cost, are very well-defined,
other measures such as customer service are less specific. ___________________
The Supply Chain Information System (SCIS) should be proactive ___________________

and capable of predicting future issues that need management ___________________
attention. It should have the capability for measurement of
competitive capability and addition of potential improvement
areas. This is accomplished through exception reporting as
information is being processed. Information provided through
exception reporting is often useful to identify potential customer or
order problems, inventory shortages on the basis of forecasted
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requirements and anticipated receipts, or a firm's ability to
leverage price, etc.
Decision Analysis
This focuses on decision applications to identify, evaluate, and
compare logistics strategic and tactical alternatives for managerial
decisions. There are a number of analytical tools that are
commonly available in most supply chain application packages.
Some of the common ones include inventory planning and
management, forecasting, vendor scheduling, vehicle routing, and
cost-benefit analysis of operational trade-offs and arrangements.
Similar to the management control, decision analysis is
characterized by a tactical, evaluative focus. However, unlike
management control, decision analysis focuses on evaluating
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future tactical alternatives.

Decision analysis SCIS emphasis shifts more to effectiveness
(identifying profitable versus unprofitable accounts) rather than
efficiency (faster processing or increased transaction volume while
utilizing fewer staff resources). To do so effectively, the SCIS needs
170 to be relatively unstructured and flexible to allow consideration of

Notes a wide range of options.
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___________________
Newer SCIS applications show great potential in providing
___________________ competitive advantage: using these applications enterprises are
___________________ re-engineering their supply chain procedures to reduce the number
of cycles and sequential activities.
___________________
___________________ Strategic Planning Systems
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___________________ As is apparent from the title, the focus is on information that
supports the ability of the organization to develop and refine
___________________
supply chain strategy. These decisions are less structured than the
___________________
other areas discussed above, but have a long-term focus. Examples
___________________ of strategic planning decisions include restructuring networks,
___________________ exploiting firm capabilities and market opportunities, strategic
alliances, and major customer service improvements, etc. The SCIS
strategic planning level information must reflect lower-level data
collection and convert this into a wide range of business planning
and decision-making information. This information can then be
used in models that assist in evaluating the probabilities and
payoffs of various strategies. Strategic planning ability to assess
customer/product profitability, segment contribution, or alliance
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synergies can have a major impact on enterprise profitability and
competitiveness.
Traditionally, information flow was used to improve transaction
system efficiency. While this has offered returns in terms of speed
and lower operating costs, expected benefits in terms of cost
reductions are diminishing as competitors develop their
competencies. With increasing competitiveness, the area in SCIS
applications that has the maximum potential for providing major
savings is shifting focus on the management control, decision
analysis, and strategic planning components.
Check Your Progress

Fill in the blanks:
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1. …………… is one of the greatest facilitators in supply

chain management.
2. The customer order performance cycle order starts with
an …………… transaction on the receipt customer order.
Integration Requirements 171

Notes
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Integration requirements coordinate the facility, equipment, Activity
___________________
labour, and inventory resources necessary to accomplish the Prepare a report on
integration requirements.
logistics mission. For example, the integration requirement ___________________
component schedules shipments of finished product from ___________________
manufacturing plants to distribution centres and retailers. The
___________________
shipment quantity is calculated as the difference between
customer requirements and inventory level. Logistics integration ___________________
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requirements are often implemented using Distribution ___________________
Requirements Planning (DRP) as an inventory management and ___________________
process control tool. Future requirements are based on forecasts,
___________________
customer orders, and promotions. Forecasts are based on sales and
marketing input in conjunction with historical activity levels. ___________________
Customer orders include current orders, future committed orders, ___________________
and contracts. Promotional activity is particularly important when
planning logistics integrated requirements, since it often
represents a large percentage of total volume and has a large
impact on capacity. Current inventory status is product available
to ship. Specifically, for each planning period (e.g., weekly or
monthly), the sum of forecast plus future customer orders plus
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promotional volume represents period demand. It is not easy to
determine the percentage of the forecasted volume that is
accounted for by the known customer orders, so some judgment
must be made. Typically, period demand is actually a combination
of the three, since current forecasts may incorporate some future
orders and promotional volume. When determining period demand,
it is important that the overlap between forecast, future customer
orders, and promotions be considered. Period logistics integrated
requirements then equal period demand less inventory-on-hand
less planned receipts. Using this form, each period would ideally
end with zero inventory available so that planned receipts would
exactly equal period demand. While perfect coordination of demand
and supply is ideal from an inventory management perspective, it
may not be the best strategy for the firm.
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Logistics requirements must be integrated with both capacity

constraints (up-stream) and manufacturing requirements
(downstream) to obtain optimal system performance. Poorly
integrated logistics and manufacturing components typically result
in finished goods inventory at the end of the production line that is
not visible when logistics requirements are determined.
172
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___________________ 1. …………… requirements coordinate the facility,
___________________ equipment, labour, and inventory resources necessary to
accomplish the logistics mission.
___________________
2. The shipment quantity is calculated as the ……………
___________________
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between customer requirements and inventory level.
___________________
___________________
Computer-aided Supply Chain Management
___________________
The evolution of Supply Chain Information Systems (SCISs)
___________________ started with manual processing of information and from there,
___________________ moved on to stand-alone computer systems. The next step was
information systems at the firm level and interfirm integrated
systems. Simultaneously, the speed of information transfer evolved
such that integrated systems can provide computational speed that
matches operational decision-making. These options use a
combination of hardware and software offering specifically
designed to manage, control and measure supply chain activities.
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Hardware includes the processor, input/output devices and storage
media, which can be configured in a number of ways. A continuous
range of possibilities is available, starting from stand-alone
personal computers, to microcomputers, to mini-computers, to
networks and mainframes. The use of Local Area Networks
(LANs), Wide Area Networks (WANs), and client/server
architecture offers the benefits of decentralization, responsiveness,
flexibility, and redundancy while providing data integration
throughout the enterprise. What the choice of IT architecture
might be, the decision should reflect the desired managerial
structure and the system should also have the ability to be
extended for changes expected to take place in the foreseeable
future.
The hardware aspect of communication and networking includes
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cables, fibres, satellite technology and VSAT technology to access

satellites. This is a rapidly expanding field, where the
infrastructure is becoming available and affordable for many
players, through services offered by independent providers and by
public sector companies in the field of communications.
173
Considering the multiple roles required of IT, distributed systems
Notes
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and client-server architecture are preferable options for supply Activity
chain operations. Communication and networking technologies can ___________________
be integrated to allow centralized recording of transactions and evolution stages of Supply
___________________
Chain Information Systems.
data and also a mix of decentralized decisions, such as individual
___________________
branches placing orders at warehouses, and centralized decisions,
such as allocation decisions by plants to multiple warehouses. An ___________________
Internet-based Global Supply Chain is shown in Figure 16.2. ___________________
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___________________
S u ppliers ___________________
Shared
Database
Sa les
___________________
Inb ound
Log istics
___________________
M a rketing
___________________
W a re -
Prod uction
O utbou nd hou ses
process
Log istics
Figure 16.2: Internet-based Global Supply Chain
The design and implementation of advanced supply chain solutions

is unthinkable without IT. To this is the added advantage of a
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computerized system that reports and statistics can be generated
that allows the monitoring of supply chain performance. System-
wide metrics of supply chain performance can be measured
through an integrated information system. In addition, other
impacts of IT on supply chain are that it has:
z enabled the move from centralized to decentralized
management without any loss of information at any level;
z improved speed/timely delivery, reliability, cost saving,
security, etc.
z resulted in the empowerment of individuals and teams with
the work environment progressively moving from functional
organizational arrangement to a team arrangement; and
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z enabled high-level connectivity, information sharing and

integration not only within a company and/or among
companies, within a nation and/or among nations, but globally.
Information technology is increasing in both speed and capacity
while there is a decline in the cost of transactions. Some specific
technologies have demonstrated widespread supply chain
applications and are discussed here include:
174
z Electronic Data Interchange (EDI),
Notes
S
___________________
z Intranet,
___________________ z Bar coding and Scanning,
___________________ z RFID,
___________________ z Satellite Communications, and

___________________ z Expert Systems.
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___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The evolution of ………….. started with manual
___________________
processing of information and from there, moved on to
___________________ stand-alone computer systems
2. ………….. includes the processor, input/output devices
and storage media, which can be configured in a number
of ways.
Supply Chain Information System Architecture

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Information technology is at the centre of virtually every aspect of
business, especially in today's dynamic, uncertain, and highly
competitive environment. It has a vital and critical role in an
effective and efficient supply chain. Information systems can be
divided into intra-firm information systems, and interfirm
information systems. In this section, we will consider supply chain
issues as a whole. An information systems supply chain model can
be seen in Figure 16.3.
Intrafirm Supply Chain

Business Information Intrafirm Information
Environment Systems Information Systems
Functional
DSS Systems Forecasting Software
Integration Extranet
Expert Systems
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EDI E-Commerce
Time & Quality Based WMS/TMS
Internet
Competition Intranet
Supply Chain
ERP
Increasing Computing Intrafirm Applications Applications
Intrafirm Applications (JIT, Crossdocking) (QR, ECR, VMI< AR,
Power
(MRP/DRP) Technology)
Figure 16.3: Information System Supply Chain Model

The solid arrows suggest an evolution or progression from one 175
stage to the next, while the dotted arrows suggest that it is Notes
S
Activity
possible to bypass stages. For example, it is possible to focus on ___________________
Prepare a report on various
building a supply chain information system, directly responding to information drivers for an
___________________
enterprise.
the business environment. However, it is generally recommended
___________________
to first develop an information system within the firm (an intra-
firm system), then expand the capabilities of the information ___________________
system by connecting to suppliers or customers (an interfirm ___________________
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system), and then add capabilities to connect to the supplier's
___________________
supplier and customer's customer (a supply chain information
system). ___________________
___________________
The nature of the information provided by the SCIS is determined
by what benefits are expected from the different activities of the ___________________
information system. The basic drivers have been identified in ___________________
Figure 16.4. In addition, continuity of business relationship is also
among the drivers for inter-firm IS use.
Drivers for Types of Interfirm

Interfirm is use in SCM is use in SCM
R e du ctio n o f co sts
Vo lu m e of tran saction s
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Tra nsa ction p roce ssin g
S p ee ding u p in form a tio n tra nsfe r
Elim in atio n o f h u m a n erro rs
U n pre dictab le volatile a nd Su pp ly cha in p la nn in g

lo g istically d em a nd in g en viron m en t a nd collab o ration
Pro je ct-orie nta tion of th e bu sine ss

O rd er trackin g an d
d elivery coo rd in ation
In -tra nsit d elivery con solid ation
Figure 16.4: Supply Chain Information System–Types and Drivers
There are two types of activities of a SCIS:

z Planning and coordination activities; and
z Operating activities.
(c
Inventory deployment and inventory management are the

interfaces between planning/coordination and operations.
Planning/Coordination
Supply chain system planning/coordination components form the
information system backbone for manufacturers and
merchandisers and reflect activities necessary to produce and
176 deploy inventory. These components define core activities that

Notes guide enterprise resource allocation and performance from
S
___________________ procurement to product delivery. The architecture includes
material planning activities both within the enterprise and
___________________
between distribution channel members.
___________________
The specific components of the planning/coordination function are:
___________________
z Strategic Planning,
___________________
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z Demand Planning, and
___________________
___________________ z Supply Planning.
___________________ These components are shown in the first three rows of Figure 16.5,
and each component of the planning/coordination activity is
___________________
further subdivided into its tasks. Also shown in the figure are the
___________________ operational components and their tasks.
S trateg ic Plan nin g Strategic S upply Ch ain Design Strategic S ourcing
D em a nd P lanning Fo rec a stin g & Life cy cle P lan nin g P ro m otion P lan nin g C o nsen s us D em a nd Plan ning
S upply P la nnin g C u sto m er S u pplier

C ollab oration C ollab oration
P rocurem en t P urcha s e O rder P roc e ss in g R e ce ip t C on firm atio n Invoice Ve rificatio n

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M a nu fac tu rin g P rodu ction P lan ning & D e taile d S che du ling M an ufac turin g E x e cu tio n
Inb ou nd O utbo un d W a reh ou sing &

W areh ou sing C ro s s D o c king P h ys ic a l In ve ntory
P ro ce s sing P ro ce s sing S torag e
O rde r F u lfillm en t S a les O rd er P roc e ss in g Lo gis tic s C o ord ina tion B illing
Trans p ortatio n Tra ns po rta tion P lan nin g Trans p ortation E xec u tio n Freig ht C o sting
P ro cure m en t M a nufac turing Tra ns po rta tio n S u pply

Visibility Fu lfillm e nt Visibility
Visibility Visibility Visibility C h ain A nalytics
Figure 16.5: Supply Chain Information System
Strategic Planning: Primary information drivers for many

enterprises are their strategic objectives. Marketing's strategic
objectives define target markets, products, marketing mix plans,
and the role of supply chain value-added activities such as service
levels or capabilities. Supply chain goals and performance targets
include service availability, capability, and the quality elements
which the firm must develop into a plan and communicate in a
(c
manner detailed enough to be operationalized.

Demand Planning: Demand planning supports required
historical sales data or point of sales data (POS) for creating base
statistical forecast using enhanced forecasting techniques, casual
forecasting using timely events like advertising, as well as
non-sales-related events such as competitors' activities, market
intelligence, and upward/downward economic trends, etc. One of 177

the main issues inhibiting increased supply chain performance Notes
S
today is the lack of visibility into downstream demand. This lack of ___________________
demand and inventory visibility leads to lost sales and high
___________________
inventory levels for both retailers and manufacturers.
___________________
Most companies forecast future demand based on historical
customer orders or shipment levels and patterns. However, actual ___________________
consumer demand may be very different from the order stream. ___________________
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The further a company is "upstream" in the supply chain, the more ___________________
distorted is the order stream relative to consumer demand as
___________________
described by the so-called bullwhip effect. This distortion of the
demand picture imposes high supply chain costs in the form of ___________________
suboptimal customer service levels, high inventories and low ___________________
returns on asset.
___________________
In consensus demand planning, each member of the supply chain
in the cycle observes the demand patterns of its customers and in
turn produces as set of demands on its suppliers. Enterprises can
focus on enhancing customer value by enabling business
collaboration across business partners in their networks.
Demand planning should be designed to:
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z enable exchange of required planning information with
business partners;
z restrict user access to authorized data and activities;
z support consensus planning process; and
z support exception-based management.
Supply Planning: Supply planning is characterized as a process
that involves activities related to material flow and processing as
well as the flow of information and materials in both directions of
this chain. All constraints can be considered during planning. The
Supply planning scenario comprises the following main
components:
(c
z Safety Stock Planning,

z Supply Network Planning,
z Distribution Planning, and
z Transportation Planning and Vehicle Scheduling.
Supply chain requirements must be integrated with both upstream
constraints and downstream requirements to obtain optimal
178 system performance. Poorly integrated supply chain and

Notes manufacturing components typically result in finished goods
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___________________ inventory at the end of the production line that is not visible when
the supply chain requirements are determined. Collaboration can
___________________
add information from all partners to reach feasible plans while
___________________
optimizing the planning process.
___________________
While each planning/coordination component can operate
___________________ independently, best practice enterprises use collaborative or
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___________________ consensus planning, which avoid problems of excess manufacturing
and inventory as well as decreased operating efficiencies. Today,
___________________
many enterprises are increasing coordination and integration to
___________________
reduce forecast inconsistency. This is implemented through the use
___________________ of common databases and with more frequent information
___________________ exchange. Integration is a major source of improved effectiveness
offering a large competitive advantage.
Operations
Operations information reflects the activities necessary to receive,
process, ship, and invoice customer orders. To attain operational
excellence, the organization must simplify, standardize, and
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automate business processes to achieve a high level of customer
service – while reducing operating costs. Operations can facilitate
the firm to free up resources and run the business more flexibly
regardless of changes in the market and in demand.
The information activities required to achieve these objectives are

discussed as the following operational components:
z Order management and processing,

z Distribution operations,
z Transportation and shipping, and
z Procurement.
Order Management and Processing: Order management and
(c
processing, in conjunction with customer service representatives,

forms the primary interface between the customer and the
enterprise SCIS. Order management is the entry point for
customer orders and inquiries. It enters and maintains order
information, edits for appropriate values, and offers information on
inventory availability and order processing allocates delivery dates 179

and available inventory to customer orders. Notes
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While assigning an inventory to a customer, three aspects are ___________________
taken into consideration, namely; processing system of ___________________
pending/back orders, speed of response, and balancing customer ___________________

requirements and the firm's resource constraints. ___________________
Order management and processing is a complex process that ___________________
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involves an entire enterprise – from sales and service to finance,
___________________
operations, and the supply chain management. Some of the
___________________
activities involved are given below:
___________________
1. Entering order;
___________________
2. Credit checking;
___________________
3. Checking inventory availability;
4. Acknowledging the order;
5. Editing and modification of the order;
6. Order pricing;
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7. Order status enquiry;
8. Price and discount extensions;
9. Promotion checking;
10. Allocating priority based on the back order status;
11. Raising invoice;
12. Preparing transportation and shipping documents;
13. Reserving inventory/safety stock and their release;
14. Reassigning order source;
15. Verifying shipment; and
16. Return processing.

(c
Good order management and processing applications generate an

order solution that satisfies both customer requirements and
enterprise resource constraints. This enables improved order
accuracy and shorter cycle times – resulting in increased revenue,
a reduction in lost sales, and enhanced customer satisfaction. If
180 order management and processing processes are inefficient or

Notes ineffective, the risk is unhappy customers and lost revenues.
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___________________
Distribution Operations: The customer order, with its allocated
___________________ inventory and corresponding order selection material, links order
___________________ processing with distribution centre physical operations.
___________________ Distribution operations are often termed inventory control or
___________________
warehousing systems. They incorporate SCIS functions to guide
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distribution centre physical activities including product receipt,
___________________
material movement, and storage and order selection. The major
___________________
functions of distribution operations are:
___________________
z Locating storage and warehousing;
___________________
z Planning inventory and lot control;
___________________
z Labour scheduling;
z Marshalling of goods on customer order;
z Receiving, stock storage and retrieval;
z Tracking of storage locations; and
z Measuring performance.
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Distribution operations have the responsibility to direct all
activities within distribution centres. Very often, a combination of
batch and real-time assignments are used. Information is required
to improve operations by combining delivery and warehouse
information with data from customers, suppliers, and logistics
service providers based on which it can plan operating
requirements and also measures performance. Access to accurate,
up-to-date information improves visibility and reduces errors.
In real-time environments, information-directed technologies such
as bar coding, radio frequency communication, and automated
handling equipment operate interactively with LIS to reduce the
elapsed time between decision and action.
Transportation and Shipping: Transportation and shipping is a
(c
central element in the logistics chain. The functionality allows the

control and monitoring of the entire shipment processes. The
activities of transportation and shipping include:
z Carrier selection;
z Dispatch scheduling and dispatching;
z Document preparation;
181
z Freight payment;
Notes
S
z Routing and consolidation of shipment;
___________________
z Vehicle loading;
___________________
z Fleet management; ___________________
z Tracking of shipment; and ___________________
z Performance measurement. ___________________
PE
Information is used both for goods receipt and goods issue so that ___________________
all goods movements are represented in the system. Incoming ___________________
shipments are made on the goods receipt side following the goods
___________________
purchase order and shipping notification; outgoing shipments are
made on the sales side following the sales order and delivery ___________________
creation. ___________________
Procurement: Information flow on procurement starts even before

the buyer creates a draft purchase order and a purchase order is
transmitted to the vendor. However, for the supply chain, the
procurement starts with purchase order preparation. Using this as
a starting point, the functions that are relevant are:
Purchase order entry, processing and placement;
)U
z
z Purchase order status;

z Receipt schedule; and
z Measurement of vendors' performance.
Procurement systems integration allows coordination of material
receipt, facility capacity, and transportation back-haul. State-of-
the-art procurement SCIS provides plans, directs activities, and
measures performance, coordinating inbound and outbound
activity movement.
Inventory Deployment and Management

Inventory deployment and management forms the interface
between planning coordination and operations. Its role is decide on
(c
"where, when, and how much." These are based on the customer
service objectives established by management. Service objectives
define target fill rates for customers and products. The
combination of service objectives, demand characteristics,
replenishment characteristics, and operating policies determines
the "where, when, and how" for the system.
182
Besides initiating basic inventory decisions, the information
Notes
S
generated must also measure inventory performance by monitoring
___________________ inventory levels, turns, and productivity. This is assisted by
___________________ effective knowledge on demand characteristics and forecast
modelling.
___________________
___________________
In "make to order" materials systems, there is minimal need for
inventory deployment and management. In other products,
___________________
inventory deployment and management systems are necessary for
PE
___________________ the firm to significantly reduce the level of inventory assets
___________________ required to meet specific service objectives.
___________________ Integrated decision systems, when used, have some major

advantages. Networked inventory management takes away the
___________________
amplification of demand and supply between organizations in the
___________________ supply chain and reduces the uncertainty of inventory levels in the
stock points. Safety stocks can be decreased without affecting
customer service levels.
The integrated decision system can be a Base Stock Control (BSC)
system, MRP/DRP system, or Line Requirement Planning (LRP)
system. The applicability of the different options of IT systems is
shown in Figure 16.6.
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Figure 16.6: Inventory Decision Systems
A BSC system for networked inventory management triggers on

customer demand. Because the variability in customer demand is
less than in upstream ordering, the inventory levels can be
(c
decreased. An MRP/DRP system exploits the dependent nature of

demand, the coordination of operations and the opportunities of
time-phased inventory levels, resulting in uncertainty reductions
and hence lower inventories. An LRP system for networked
inventory management contributes to a higher transparency of the
supply chain. This results in more robust planning as compared to
MRP/DRP and further reduction of inventory levels.
183
S
1. Information technology is at the centre of ………………. ___________________

every aspect of business, especially in today's dynamic,
___________________
uncertain, and highly competitive environment.
___________________
2. Primary ………………. for many enterprises are their
___________________
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strategic objectives.
___________________
Summary ___________________
___________________
A key aspect of supply chain management is the ability to make
strategic decisions quickly based on accurate data, and this ___________________
requires an efficient and effective information system. Information ___________________
is vital for a supply chain to function. Without information relayed
at right time to the right place, there are no purchase orders, no
shipment managers and no payments and the supply chain shuts
down. Supply chain management is based on the exchange of
substantial quantities of information among the buyer, supplier
and carrier to increase the efficiency and effectiveness of supply
chain.
)U
Information systems are essential to managing a supply chain. The
supply chain information systems rely on either EDI (Electronic
Data Interchange) or the Internet to transmit information within
the supply chain. A valuable initial element in managing a supply
chain is developing supply chain information systems. The concept
of supply chain management is built on functional integration,
which is supported and often catalysed by information technology.
One of the components of the implementation of supply chain
management is information sharing through two-way
communication between partners within a supply chain. The
activities of information generation, storage, and utilization in
individual firms in a supply chain are essential to implement
supply chain management. Member of a supply chain need
(c
real-time visibility of performance data across the entire supply

chain.
Lesson End Activity

Design a supply chain information system for an organisation of
your choice.
184
Keywords
Notes
S
SCIS: Supply Chain Information System
___________________
___________________
DRP: Distribution Requirements Planning
___________________ LAN: Local Area Networks
___________________ WAN: Wide Area Networks
___________________ EDI: Electronic Data Interchange
PE
___________________ RFID: Radio-Frequency Identification
___________________ POS: Point of Sales
___________________ BSC: Base Stock Control
___________________
LRP: Line Requirement Planning
___________________
MRP/DRP system: Manufacturing/Distribution system

1. Name the three reasons for which timely and accurate
information is critical.
)U
(a) Transaction
(b) Management control
(c) Decision analysis
(d) Strategic planning systems.
3. What are the key integration requirements in supply chain
information systems?
4. Explain the concept of computer aided supply chain
management.
5. State the impact of IT on supply chain.
6. Describe, in brief, the two types of activities of a SCIS.
(c
7. What are the specific components of the planning/coordination

function?
8. Name the informational activities required to achieve the
objectives of operational components.
9. Write in brief about inventory deployment and management.
Further Readings 185

Notes
S
Books ___________________
___________________
___________________
___________________
PE
___________________
R.B. Handfield and E.L. Nochols, Jr., Introduction to Supply Chain ___________________

Learning, 2001.
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Web Readings
www.smeal.psu.edu/scis
www.ryerson.ca/.../McLaren%20et%20al.%20SCM%20IS%20Capab
ilities%20Model%20%5BISeBM%5D.pdf
ieeexplore.ieee.org/iel5/4125524/4125525/04125618.pdf?arnumber
(c
(c
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S
UNIT 17: SCOR Modeling
Unit 17
187
Notes
S
Activity
SCOR Modeling
___________________
information on SCOR.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Pillars of SCOR: Plan, Source, Make, Deliver and Return ___________________
\ Introduction to SCOR 11 ___________________
\ Use of SCOR for Evaluating Suppliers, Performance and Internal
Supply Chain Performance ___________________
___________________
Introduction ___________________
The Supply Chain Operations Reference SCOR model is the global

standard model for supply chain management and the world’s most
widely accepted framework for evaluating and comparing supply
chain activities and their performance. SCOR is organized around
the five primary management processes of Plan, Source, Make,
Deliver, and Return. It can be used to describe supply chains that
)U
are very simple or very complex using a common set of definitions
and enabling a common understanding.
Pillars of SCOR: Plan, Source, Make, Deliver and

Return
The SCOR model, whose conceptual framework and linkages are
shown in Figure 17.1, is a process reference model that expands to
analyse processes involving cross-functional activities. It looks at
five distinct management processes that constitute the basic
elements of a value chain:
Plan: Processes that balance aggregate demand and supply to
develop a course of action which best meets sourcing, production
(c
and delivery requirements.

Source: Processes that procure goods and services to meet planned
or actual demand.
Make: Processes that transform product to a finished state to meet
planned or actual demand.
188
Deliver: Processes that provide finished goods and services to
Notes
S
meet planned or actual demand, typically including order
___________________
management, transportation management, and distribution
___________________ management.
___________________ Return: Processes associated with returning or receiving returned
___________________ products for any reason. These processes extend into post-delivery
customer support.
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
Figure 17.1: SCOR Model
Check Your Progress

Fill in the blanks:
1. ……………. is organized around the five primary
management processes of Plan, Source, Make, Deliver,
and Return.
2. SCOR can be used to describe ……………. that are very
simple or very complex using a common set of
definitions and enabling a common understanding.
(c
Introduction to SCOR 11
One of the early attempts to develop such a model specifically for
the supply chain was taken up by the Swedish firm IKEA. It
developed a performance model called "the product management
model". This model consists of measures within five different 189

areas: Notes
S
Activity
1. Product range; ___________________
Prepare a report on SCOR
model.
2. Cost; ___________________
___________________
3. Quality;
___________________
4. Availability; and
___________________
PE
5. Service.
___________________
These areas of measurement were identified by consumers during
___________________
the buying process, who were asked to assess whether the products
offered value for money or not, and whether the product was ___________________
available in stock. As the model did not develop a standard ___________________
cause-and-effect relationship, it was based on each manager
___________________
developing his/her own idea of what created business success based
on the customer information on these measures.
IKEA's desire to make explicit the priorities of the supply chain is
illustrated in the product management model. It viewed
performance to be interrelated; the different dimensions of
performance were considered part of a greater whole, which is
)U
fundamental in systems thinking. Though the model was not
intended to make explicit the relationships between the different
dimensions of performance, its scope of measurement activities
encompassed several organizations.
Since the IKEA model, a lot of water has passed under the bridge.
The Supply Chain Operations Reference (SCOR) model has been
developed by the Supply-Chain Council as the cross-industry
standard for supply-chain management. The SCOR model is based
on a benchmarking process and used to measure the performance
of an existing supply chain and its related processes. It covers
customer interactions starting from order entry through paid
invoice. It also covers product transactions and market
interactions from helping understand demand to fulfilling
individual orders.
(c
Use of SCOR for Evaluating Suppliers’ Performance and

Internal Supply Chain Performance
The model uses a four-level pyramid: Process-Type Level,
Configuration Level, Process Element Level, and Implementation
Level – that defines the steps a company needs to take to measure
190 and improve supply chain performance. Table 17.1 gives the
Notes configuration toolkit for determining the process type.
S
___________________
Table 17.1: The SCOR Model Configuration Toolkit
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
The process involves comparing practices and procedures to those
___________________
of the 'best' to identify ways in which an organization (or
___________________ organizations) can make improvements. This is accomplished
through benchmarking.
The SCOR Model endorses twelve performance metrics. The level 2
and 3 are keys to these twelve levels 1 metrics. Metrics can include
a wide variety of performance measures. A list of the commonly
used metrics is given below:
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z Delivery (in-full, on-time, in-specification),
z Order fulfilment,
z Fill rate (for make-to-stock),
z Lead time or supply-chain response time,
z Production flexibility,
z Total cost,
z Realized margin,
z Warranty costs, and
z Returns processing costs and more.
At level 3, different suppliers under consideration are added and
compared on the criteria laid out in level 2. Benchmarking is an
(c
effective means of determining the supply chain's performance

relative to those of other organizations. A data bank of
benchmarking studies is provided with the SCOR model to make
relevant comparisons. A company is not likely to meet best practice
norms in all metrics, but the metrics it should focus on, should
reflect its customer needs and market realities.
191
The model draws attention to process gaps rather pointing to
Notes
S
specific departments' performance. This is meant to help the
company communicate without ambiguity and help measure, ___________________
manage and refine processes. Based on a data bank on different ___________________
industries, it helps the organization quantify operational
___________________
performance and set improvement targets using best practices in
similar companies. Organizations have to devise means to relate ___________________
departmental performance metrics to the SCOR model. ___________________
PE
___________________
___________________
___________________
___________________
___________________
Figure 17.2: Integrated SCOR Model
The challenge in SCM is to integrate the functional performance

measures into overall measures that will reflect the performance of
the entire supply chain. The performance measures must show not
)U
only how well you are providing for your customers (service
metrics) and how you are handling your business (speed,
asset/inventory, and financial metrics), but also for the supply
chain as a whole. Measurement is also an ideal way to
communicate requirements to other members of the supply chain
and to promote continuous improvement and change.
Many organizations are willing to receive information from other
supply chain members, but are reluctant to share their information
with other members. The issue of the organization's willingness to
share information with other supply chain members is something
that needs management attention and a solution to make the SCM
initiative successful. Working together, organizations can better
satisfy the customer's requirements for quality, cost, product and
(c
service.
By providing a complete set of supply chain metrics, industry best
practices and enabling systems' functionality, the SCOR model
allows firms to conduct a thorough fact-based analysis of all
aspects of the supply chain.
192
S
___________________ 1. One of the early attempts to develop such a model
___________________ specifically for the supply chain was taken up by the
Swedish firm …………….
___________________
2. The ……………. is based on a benchmarking process and
___________________
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used to measure the performance of an existing supply
___________________
chain and its related processes.
___________________
___________________ Summary
___________________ The Supply Chain Operations Reference model (SCOR) is a
___________________ management tool used to address, improve, and communicate
supply chain management decisions within a company and with
suppliers and customers of a company. The model describes the
business processes required to satisfy a customer’s demands. It
also helps to explain the processes along the entire supply chain
and provides a basis for how to improve those processes.
The SCOR model was developed by the supply chain council with
)U
the assistance of 70 of the world’s leading manufacturing
companies. It has been described as the “most promising model for
supply chain strategic decision making.” The model integrates
business concepts of process re-engineering, benchmarking, and
measurement into its framework. This framework focuses on five
areas of the supply chain: plan, source, make, deliver, and return.
These areas repeat again and again along the supply chain. The
supply chain council says this process spans from “the supplier’s
supplier to the customer’s customer.”
The SCOR process can go into many levels of process detail to help
a company analyse its supply chain. It gives companies an idea of
how advanced its supply chain is. The process helps companies
understand how the five steps repeat over and over again between
suppliers, the company, and customers. Each step is a link in the
(c
supply chain that is critical in getting a product successfully along

each level. The SCOR model has proven to benefit companies that
use it to identify supply chain problems. The model enables full
leverage of capital investment, creation of a supply chain road
map, alignment of business functions, and an average of two to six
times return on investment.

Notes
S
Choose the correct option:
___________________
Not only does SCOR act as a management tool for addressing and
___________________
improving supply chain management decisions with in a company,
but it also describes the business processes essential for: ___________________
A. Satisfying a customer’s demand. ___________________
___________________
PE
B. Organizing better transport efforts.
___________________
C. Maintaining proper stock in warehouses for retail-oriented
businesses. ___________________
D. Properly utilizing the Human Resource staff. ___________________
___________________
Keywords ___________________
SCOR: Supply Chain Operations Reference

SCM: Supply Chain Management

1. Define SCOR and explain the five pillars of SCOR.
)U
2. How can SCOR be used for evaluating suppliers’ performance
and internal supply chain performance?
Further Readings
Books
(c

194
Notes
S
___________________
___________________
Learning, 2001.
___________________
___________________ Designing and Managing the Supply Chain: Concepts, Strategies,
PE
___________________
Web Readings
___________________
en.wikipedia.org/wiki/Supply-chain_operations_reference
___________________
supply-chain.org/scor
___________________
supply-chain.org/scor-overview -
___________________
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(c
UNIT 18: Manufacturing Supply Chain Design Strategy
Unit 18
195
Notes
S
Activity
Manufacturing Supply Chain

___________________
detailed information on VMI.
___________________
Design Strategy ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ VMI: Vendors Managed Inventory
\ Hub & Spoke Model ___________________
___________________
Introduction ___________________
The demand for fans is forecasted based on taking the average of

sales for the last three years and extrapolating it into the following
year. This forecasting method assumes history will repeat itself
within manageable limits. “The objective of strategic capacity
planning is to provide an approach for determining the overall
capacity level of capital intensive resources–facilities, equipment,
)U
and overall labour force size – that best supports the company’s
long range competitive strategy.” There are several ways to
improve this current method of operation.
VMI: Vendors Managed Inventory

An outcome of JIT is Vendor Managed Inventory (VMI). As the
number of suppliers is reduced, it puts the firm in a position of
greater dependence on its suppliers. More frequent deliveries mean
higher inbound transportation costs; to reduce these costs,
suppliers have found it economical to distribute product from
warehouses or production facilities located in close proximity to the
buyer. It is therefore extremely important that deliveries always
be on time, delivered to the right location, in the right quantities,
(c
and be of quality, since existing inventories will be lower.

Under VMI, the supplier assumes responsibility for monitoring
sales and inventory. He has access to the distributor's inventory
data and uses this information to trigger replenishment orders and
generating purchase orders. In effect, suppliers take over the task
of stock replenishments. VMI makes it less likely that a business
196 will unintentionally become out of stock of a good and reduces

Notes inventory in the supply chain.
S
___________________
Therefore, VMI is a Just-in-Time technique in which inventory
___________________ replacement decisions are centralized with upstream
___________________ manufacturers or distributors. Acronyms for VMI include:
___________________ z Continuous Replenishment Programs (CRP),
___________________ z Supplier Assisted Inventory Management (SAIM),
PE
___________________ z Supplier Assisted Inventory Replenishment (SAIR), and
___________________ z Efficient Consumer Response (ECR).
___________________ VMI may also be considered as an extension of Distribution
___________________ Replenishments Planning (DRP). Vendor Managed Inventory can
be defined as a means of optimizing supply chain performance in
___________________
which the supplier takes full responsibility for maintaining an
agreed inventory of the material, usually at the buyer's
consumption location.
A simple model of VMI is shown in Figure 18.1. The model is based
on the assumption that the customer has entered into a
collaborative or partnership agreement with a distributor under
)U
which the latter agrees to stock a specified range of items and meet
specified service levels. In return, the customer undertakes to buy
the specified items solely from the distributor and no longer keeps
the item in stock. There must, therefore, be a high level of trust
between the customer and the distributor.
(c
Figure 18.1: VMI Model

197
There are five steps shown in the model as described below:
Notes
S
Step 1: The customer sends information on items sold to the
___________________
distributor.
___________________
Step 2: The distributor processes the information.
___________________
Step 3: The distributor collects detail of all customer order.
___________________
Step 4: The manufacturers replenish the distributor's stock.
___________________
PE
Step 5: The distributor invoices the customer who remits payment.
___________________
The benefits of the system to the firm include reduced ___________________
administrative costs owing to the elimination of the need to
___________________
monitor inventory levels, paper to computer entries and reduced
re-ordering costs, less working capital requirements owing to ___________________
reduced inventory levels and obsolescence and enhanced stock-turn ___________________
with improved cash flow, and reduced lead times with enhanced
sales and a reduction of list sales through stock-outs.
Some challenges and limitations include unwillingness to share
data, limited benefits in fashion and seasonal products, a high
investment by the customer and supplier, greater dependence on
the supplier, and the practicalities of the processes and procedures
)U
that underpin VMI may not be transferable from one customer to
another.
Check Your Progress

Fill in the blanks:
1. Forecasting method assumes history will ………… itself
within manageable limits.
2. ………… is a Just-in-Time technique in which inventory
replacement decisions are centralized with upstream
manufacturers or distributors.
Hub & Spoke Model

(c
Efficient warehousing permits reduction in material and parts

storage and handling costs while optimizing production, for
manufacturers producing products at multiple locations. One of the
concepts used for strategic warehousing is the Hub and Spoke
Concept. A central warehouse is used to maintain a basic stock of
parts, thereby reducing the need to maintain inventory at each
assembly plant. Using consolidated shipments, products are
198 purchased and transported to the supply warehouse and then

Notes distributed to manufacturing plants as needed. When fully
S
Activity
___________________
Prepare a report on features integrated, the warehouse is a vital extension of manufacturing.
of efficient warehousing.
___________________ Hub and Spoke arrangement can also be called a part of cross-
___________________ docking. Cross-docking is a practice in logistics of unloading
materials from an incoming truck or rail car and loading these
___________________
materials in outbound trucks or railway wagons, with little or no
___________________ storage in between.
PE
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Efficient warehousing permits ………… in material and
___________________
parts storage and handling costs while optimizing
___________________ production, for manufacturers producing products at
multiple locations.
2. A ………… warehouse is used to maintain a basic stock
of parts, thereby reducing the need to maintain
inventory at each assembly plant.
Summary
)U
Today more than ever, manufacturers are looking for ways to
achieve lean manufacturing goals. Vendor Managed Inventory
programs offer the promise of reduced order costs, lower cost of
carry, and reduced strain on overworked purchasing departments.
While all of these are definite benefits, a world-class VMI program
goes further to provide continuous process improvements that
benefit all aspects of a manufacturer’s operations.
Many companies have successfully implemented hub and spoke
distribution to achieve a competitive logistics advantage. They
have found that this method of distribution reduces transportation
costs, improves cycle times, and reduces inventory. These
companies are now realizing that significant cost savings can
result from improving their distribution processes.
(c
A hub and spoke network is a centralized, integrated logistics

system designed to keep costs down. Hub and spoke distribution
centres receive products from many different origins, consolidate
the products, and send them directly to destinations.

Notes
S
Discuss in group the pros and cons of Vendor Management
___________________
Inventory.
___________________
Keywords ___________________
___________________
JIT: Just-in-Time
___________________
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VMI: Vendor Managed Inventory
___________________
CRP: Continuous Replenishment Programs
___________________
SAIM: Supplier Assisted Inventory Management
___________________
SAIR: Supplier Assisted Inventory Replenishment
___________________
ECR: Efficient Consumer Response
___________________
DRP: Distribution Replenishments Planning

1. Write short note on Vendor Management Inventory.
2. What do you know about the Hub and Spoke Model?
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Further Readings
Books
(c

200
Notes
S
Learning, 2001.
___________________
David Simchi Levi, Philip Kaminski, and Edith Simchi Levi,
___________________
___________________
Web Readings
___________________
PE
www.tandfonline.com/doi/abs/10.1080/09537280701495021
___________________
student.bus.olemiss.edu/.../SupplyChain/Supply%20chain%20desig
___________________
n%20and%20analysis.pdf
___________________
www.busn.uco.edu/gwillis/ISOM%204343/Simchi.../Chap011toPres
___________________ ent.pptx
___________________
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(c
UNIT 19: Retail Supply Chain Design
Unit 19
201
Notes
S
Activity
Retail Supply Chain Design

___________________
‘Supply Chain Management
as ___________________
an evolution from logistics
management’.
___________________
Objectives
___________________
topics: ___________________
PE
\ Organising to Improve Retail Supply Chain Performance ___________________
\ Collaboration with Supply Chain Partners ___________________
\ The Demand Driven Supply Chain
___________________
\ Product Tracking along Retail Supply Chains
___________________
___________________
Introduction
Supply Chain Management is an evolution from logistics
management. The supply chain or distribution logistics
encompasses all those activities and exchanges involved in
extracting, processing, manufacturing and distributing goods and
services from raw materials through to the end consumer.
)U
Organizing to Improve Retail Supply Chain
Performance
A retail definition of Supply Chain Management is the
management of resources to supply the product and service needs
of the end consumer, encompassing the supply chain of any
physical products and the exchange process involved.
Retail Logistics
In retailing, customer expectations of retail service delivery are
very high. No amount of service enhancement or added incentives
will be a substitute for an empty shelf. Modern retailers are using
sophisticated and complex infrastructure so as to meet the
(c
customer's ultimate measure of a service – availability of goods or

services. But all this involves cost. So the retailers have to provide
retail services in an efficient manner and achieve production gains
through using retail logistics. Retail logistics is the organized
process of managing the flow of merchandise from the source of
supply to the customer – from the producer/wholesaler/
intermediary through to the warehouse, transport to the retail
202 units until the merchandise is sold and delivered to the customer.
Notes The following figure gives the components of retail logistics.
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
Figure 19.1: Functions Involved in Retail Logistics System
Retailing is defined as a set of business activities that adds value

to the product and services sold to the final consumers for their
personal, family or household use. Retail management is a set of
marketing activities designed to provide satisfaction to the end
consumer and profitably maintain the customer base by continuous
)U
quality improvements across all areas concerned with selling goods
and services.
Collaboration with Supply Chain Partners

The formation of strategic alliances between retailers and their
suppliers is becoming ubiquitous in many industries. Suppliers
have far better knowledge of their lead times and production
capacities than do retailers. Thus, as margins get tighter and
customer satisfaction becomes even more important, it makes
sense to create cooperative efforts between suppliers and retailers
in order to leverage the knowledge of both parties.
The most important requirement for an effective Retailer Supplier
Partnership (RSP), especially one toward the VMI end of the
partnership spectrum, is advanced information systems on both
(c
the supplier and the retailer sides of the supply chain. Electronic
Data Interchange (EDI) or internet-based private exchanges-to
relay POS information to the supplier and delivery information to
the retailer-are essential to cut down on data transfer time and
entry mistakes. Bar coding and scanning are essential to maintain
data accuracy. And inventory, production control, and planning
systems must be online, accurate, and integrated to take 203

advantage of the additional information available. Notes
S
As in all initiatives that can radically change the way a company ___________________
operates, top management commitment is required for the project ___________________
to succeed. This is especially true because information that has
___________________
been kept confidential up to this point will now have to be shared
with suppliers and customers, and cost allocation issues will have ___________________
to be considered at a very high level. It is also true because such a ___________________
PE
partnership may shift power within the organization from one ___________________
group to another. For instance, when implementing a VMI
___________________
partnership, the day-to-day contacts with retailers shift from sales
and marketing personnel to logistics personnel. This implies that ___________________
incentives for compensation of the sales force have to be modified ___________________
because the retailer's inventory levels are driven by supply chain
___________________
needs, not by pricing and discount strategies. This change in power
may require significant involvement of top management.
Finally, RSP requires the partners to develop a certain level of
trust without which the alliance is going to fail. In VMI, for
example, suppliers need to demonstrate that they can manage the
entire supply chain; i.e., they can manage not only their own
)U
inventory but also that of the retailer. Similarly, in quick response,
confidential information is provided to the supplier, which typically
serves many competing retailers. In addition, strategic partnering
in many cases results in significant reduction in inventory at the
retailer outlet. The supplier needs to make sure that the additional
available space is not used to benefit the supplier's competitors.
Furthermore, the top management at the supplier must
understand that the immediate effect of decreased inventory at the
retailer will be a one-time loss in sales revenue.
Check Your Progress

Fill in the blanks:
1. Supply Chain Management is an evolution from
…………….. management.
(c
2. In retailing, customer expectations of retail service

delivery are very ……………..
204
The Demand Driven Supply Chain
Notes
S
Activity Demand Driven Supply (DDS) is supply management with a
___________________
Prepare a report on DDS.
heightened focus on customer demand. Unlike the conventional
___________________ push-driven model where factory capacity and asset utilization are
___________________ given importance to by the manufacturers to plan their operations,
___________________
the demand driven supply model operates on a pull-based
customer-centric approach and allows demand to drive supply
___________________
chain planning and execution.
PE
___________________
Pull-based Supply Chain Management (SCM) is also known as the
___________________ modern approach to SCM. It is known as demand supply network.
___________________ In this approach, the actual consumption pulls distribution, which
___________________
in turn pulls production, in turn pulling material supply.
___________________ Global experience with various companies shows that the

Pull-based SCM is better than the Push-based SCM. Experience
shows a 20–50% improvement in overall working capital, capacity
utilization, cost of goods and customer service with the 'Pull-based'
approach when compared to the 'Push-based' approach, in addition
to a 50–100% improvement in time to market and a 3–15%
increase in market share.
)U
The 'pull view' is a direct outcome of the 'Forrester Effect'. This
effect takes place due to demand uncertainty caused by forecasting
errors at the different stages of the supply chain. If the activities
are initiated by a customer order, demand is completely known.
Therefore, there is no need to forecast demand and no demand
uncertainty. For example, if Tata Steel collects orders that are
similar enough to enable it to produce steel sections in large
quantities, the manufacturing cycle is reacting to customer
demand. Then, it is following a pull process.
Internal supply chains are based on derived demand, i.e. they are
based on the decomposition of the bill of materials. In other words,
there is no demand uncertainty related to forecasting for most
items in the internal supply chain. Therefore, internal supply
chains generally follow a pull process.
(c
Pull processes are referred to as 'reactive processes' because they

react to customer demand. Push processes are referred to as
'speculative processes' because they respond to forecasted rather
than actual demand.
Therefore, a supply chain that has fewer stages and more pull
processes is easier to manage and coordinate. As the number of
pull processes increase, its impact on improved supply chain 205

performance becomes significant. Notes
S
___________________
Customer Order Cycle
PULL ___________________
PROCESS Customer Order Cycle
Customer
___________________
Customer Retailer ___________________
Replenishment and
Order
Manufacturing Cycle
Arrives
___________________
PE
Manufacturer
Procurement
Manufacturing, PULL Procurement Cycle Supplier ___________________
Replenishment Cycle PROCESS
___________________
___________________
Figure 19.2: Push/Pull Processes for a Retail Network ___________________
In Figure 19.2 shows graphically the push/pull system in a retail ___________________

network. It can be clearly seen from the figure that in the pull
processes, customer demand is known with certainty at the time of
execution i.e. it is executed after the customer order arrives.
Whereas for a push process, demand is not known and must be
forecast as the customer order is yet to arrive.
A push/pull view of the supply chain is very useful when
)U
considering strategic decisions relating to supply chain design.
This view forces a more global consideration of supply chain
process as they relate to a customer order. For instance, if one can
screen the processes and identify processes whose responsibility
can be passed onto a different stage of the supply chain, it is
possible to transfer activities in a manner that allows many push
processes to become pull processes. In other words, the push/pull
boundary can be moved through introspection and proper design.
The push/pull boundary in a supply chain is the interface that
separates push processes from pull processes.
In real-world supply chains, there are actually two decoupling
points. The first is to attempt that strategic inventory is held in as
generic a form as possible. This point ideally should lie as far
(c
downstream in the supply chain and as close to the final

marketplace as possible. The second decoupling point is the
'information' decoupling point. The idea here is that this should lie
as far as possible upstream in the supply chain – it is in effect the
furthest point to which information on real final demand
penetrates.
206
By managing these two decoupling points, i.e. by moving the
Notes
S
information point as far upstream as possible, or by moving the
___________________
inventory held in generic form as far downstream as possible, or by
___________________ using a combination of both methods, organizations can create a
___________________ competitive advantage that will be difficult to match.

PE
___________________
1. ………… is supply management with a heightened focus
___________________ on customer demand.
___________________ 2. ………… Supply Chain Management (SCM) is also
___________________ known as the modern approach to SCM.
___________________
Product Tracking along Retail Supply Chains
The product/material flow in a supply chain is concerned with the
procurement, movement and storage of materials and finished
products. For a large manufacturer, these operations may consist
of thousands of components, raw materials and parts and their
movements, which ultimately culminate in the delivery of products
)U
to an industrial user, retailer, wholesaler, dealer, or other
customer. For a large retailer, supply chain operations may
commence with the procurement of products from the
manufacturer and may terminate with consumer pickup or
delivery of the product.
For better understanding, it is useful to divide product/service
flows into three areas: procurement, manufacturing support, and
physical distribution.
Procurement
Procurement is concerned with purchasing and arranging inbound
movement of materials, parts, and/or finished inventory from
suppliers to manufacturing or assembly plants, warehouses, or
(c
retail stores. Whereas physical distribution is concerned with

outbound product shipments, it is inbound movement to the buyer
of the product.
Inbound logistics or the process of acquisition of materials is
typically called purchasing. Materials are involved in the process of
adding value through manufacturing. Purchasing is concerned
with availability of the desired material assortments where and 207

when needed. Notes
S
Activity
Procurement involves five activities: sourcing, order placement and ___________________
Prepare a slide presenting a
value, a supply chain
expediting, supplier relationship, transportation (inbound and ___________________
generates.
outbound logistics) and receiving. These activities are shown in
___________________
Figure 19.3.
___________________
___________________
PE
Order placement
Sourcing
and expediting
___________________
Supplier ___________________
___________________
Receiving Transportation
___________________
___________________
Figure 19.3: Procurement Activities
On the operational side, inventory turns is a key performance

measure that be watched very closely. Let us take an example.
There are two companies, 'A' and 'B', who have identical sales and
profit margins over a one-year period.
)U
'A' buys one crore worth of parts at the beginning of the year. It
sells the finished products by year's end at a 10 per cent profit,
which generates ` 1.1 crore in total revenues.
'B' uses a more aggressive inventory management strategy. It buys
parts four times during the year, spending only ` 25 lakh at a time,
and reordering just before running out of components. Essentially,
the company reinvests the same ` 25 lakh to replace sold
inventory. By year's end, 'B' generates the same ` 1.1 crore.
However, since 'B' is only investing ` 25 lakh at a time, it is
spending ` 75 lakh less on inventory than 'A'. Considering an
interest rate of 15 per cent, 'B' pays an interest of ` 5 lakh for
inventory, while 'A' pays ` 20 lakh. If 'A' makes a profit of ` 10
lakh, the 'B' has made a profit of ` 25 lakh. 'B' has also reduced his
(c
capital risk for the year compared to 'A'.

This example shows that simply by increasing inventory turnover,
the company generates more profit and more free cash flow. The
procurement system has the ability to control inventory turnover
as it initiates orders.
208
In retailing and wholesaling, buying is the most widely used term
Notes
S
for procurement. It is also called outbound logistics. Products
___________________
(inventory that is available for consumer purchase) are ready for
___________________ consumption. A unique characteristic of outbound logistics is that
___________________ the customer base it services is typically more than the number of
suppliers a firm uses.
___________________
In its physical distribution operations, each firm is only one of
___________________
PE
many participants in an overall supply chain. Materials and parts
___________________ are often purchased directly from either the original manufacturer
___________________ or a specialized industrial wholesaler. The utilization of direct
___________________
channels is an important factor in the design of a supply chain
system for procurement.
___________________
It is more complex than inbound logistics, since customer order
___________________
processing handles orders in response to customers' requirements;
random ordering must be accommodated by the physical
distribution system. The ability to determine when and where
products are purchased serves to substantially reduce operational
variance compared to purchasing where operational variances are
much lower.
)U
Physical Distribution
The area of physical distribution concerns movement of a finished
product to customers. In physical distribution, the customer is the
final destination of a marketing channel. It is through the physical
distribution process that the time and space of customer service
become an integral part of marketing, linking marketing channels
with its customers.
This links marketing and the supply chain, the interface between
these two functions is critical. Very often, there is a potential for
conflict in this relationship.
In a typical organization, marketing tries to accommodate
customer requirements, while manufacturing requires long stable
production runs to control costs. Inventory is used to reconcile the
(c
difference in perspectives of marketing and manufacturing. This

compels supplies to use forward deployment throughout the system
on the basis of forecasted sales. This is often the reason for the
confrontation with marketing as there is always the possibility
that inventories are moved to the wrong markets and at the wrong
time.
209
The key to understand physical distribution dynamics is to realize
Notes
S
that customers initiate the process by placing an order. Although
similar or even identical requirements may be involved, the degree ___________________
of managerial control and risk related to performance failure ___________________
varies substantially between physical distribution and
___________________
procurement.
___________________
Typical physical distribution involves five activities: order
___________________
PE
transmission, order processing, order selection, order
transportation and customer delivery. These activities have been ___________________
shown in Figure 19.4. ___________________
___________________
Order Order Customer
processing transmission order ___________________
___________________
Order Order Customer
selection transportation delivery
Figure 19.4: Physical Distribution Cycle Activities
Analysis, of how customers order products, is necessary to

minimize operational variance and simplify transactions. This
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requires improving forecast accuracy. There should be proper
coordination between customers and order management to reduce
uncertainties. And finally, the physical distribution system should
be designed to be as flexible as possible.
Manufacturing Support
The area of manufacturing support concentrates on managing an
orderly and economic flow of materials and work-in-process
inventory between the different stages of manufacturing. This
constitutes movement and storage of product, materials,
semi-finished parts and materials between the firm's facilities.
Manufacturing support is treated as a distinct operating area. This
is because manufacturing support represents the most complex
internal support operations and has one significant difference
(c
when compared with physical distribution. Unlike physical

distribution, which attempts to service the desires of customers
and therefore must accommodate the uncertainty of consumer and
industrial demand, manufacturing support involves supply and
movement requirements that are under the control of the
manufacturing enterprise.
210
Supply chain capabilities are stretched by the requirements of
Notes
S
quick manufacturing switchover and shorter production runs. This
___________________
requires numerous handlings and transfers of materials and
___________________ economies of scale have often to be discarded. As the number of
___________________ plants with specific production activities of the firm increase, the
manufacturing support system gets to become more complex.
___________________
Integrating Material/Product Flows: Within a typical
___________________
PE
enterprise, the three areas, physical distribution, manufacturing
___________________ support, and procurement overlap to provide integrated
___________________ management of materials, semi-finished components, and products
___________________
moving between locations, supply sources, and customers of the
enterprise. Viewing each as an integral part of the overall
___________________
value-adding process creates an opportunity to capitalize on the
___________________ unique attributes of each while facilitating the overall process.
Supply chain can also be viewed as an integral part of the value
chain. Michael Porter, from Harvard University, first articulated
the value chain concept in the 1980s. The value chain reflects the
addition of value of activities in a firm. It is comprised of both the
primary and support activities. Two of the primary activities of the
value chain – inward and outward logistics – are included in the
)U
activities of the supply chain. The supply chain, therefore, is a
subset of the value chain.
The value a supply chain generates is the difference between what
the final product is worth to the customer and the effort the supply
chain expends in filling the customer's request. Therefore, the
profitability of the supply chain is based on the flows between and
among stages in a supply chain, unlike the traditional measure of
organizational success in terms of the profits at an individual
stage. The final price of the goods should be such that it covers all
of the costs involved, with a profit share for each participant in the
chain. Figure 19.5 shows the supply chain as a network and also as
a part of the value chain.
(c
211
Notes
S
Firm Infrastructure
Support Human Resource Management
Activities Technology Development ___________________
Procurement
S3 C3
S2 C2
S3 C3 ___________________
S3 Inbound Outbound Marketing Customer C3
S2 Suppliers Logistics Operations Logistics and Sales Service Customers C2
S3 C3 ___________________
S3 C3
S2 C2
S3
Value Chain Primary Activities Supply Chain C3 ___________________
___________________
PE
Materials/Supply Management Physical Distribution/Channel Management
___________________
Extended Value Chain/Total Supply Chain/Total Logistics Management

___________________
___________________
Figure 19.5: Supply Chain is Part of the Value Chain ___________________
___________________
Check Your Progress
Fill in the blanks:
1. The product/material flow in a supply chain is concerned
with the procurement, movement and storage of
materials and …………… products.
2. The value a supply chain generates is the ……………
)U
between what the final product is worth to the customer
and the effort the supply chain expends in filling the
customer's request.
Summary
The present state of the Indian Retail industry is marked by fierce
competition due entry of global majors and several new entrants.
The rapid growth of the Indian retail industry and low penetration
levels of organized retail are attracting a large number of players
and massive investment. The relative share of each player will
depend on the price of its offering to the discerning Indian
customer. Retail companies are now turning to their supply chain
and distribution strategies as a way to differentiate their products
(c
and cut costs. Logistical expertise should be used not only to

survive, but also to sustain real competitive advantage.
Retail supply chains are complex and composed of multiple
interacting supply chains for various categories and formats. They
need to be highly effective as well as defect free. This demands
careful design of supply chain processes that are both robust and
212 scalable. Lean Supply Chains are focused on supplying products at

Notes the least possible cost, thus demanding lean distribution
S
___________________ strategies. Lean six sigma is a powerful tool for achieving this
objective. A well designed and meticulously implemented lean six
___________________
sigma project can yield significant benefits.
___________________
___________________
Lesson End Activity
___________________
PE
Out of the push and pull based supply chain management, which
___________________ do you think is more beneficial and why?
___________________
___________________ Keywords
___________________ Retail Logistics: It is the organized process of managing the flow
___________________ of merchandise from the source of supply to the customer – from
the producer/wholesaler/intermediary through to the warehouse,
transport to the retail units until the merchandise is sold and
delivered to the customer.
RSP: Retailer Supplier Partnership
POS: Point of Sale
)U
EDI: Electronic Data Interchange

1. Define retail logistics. What are the different components of
retail logistics?
2. How are strategic alliances between retailers and their
suppliers formed?
3. Differentiate between push and pull based supply chain
management.
4. In to how many areas are the product/services flows divided?
Elaborate each one of them.
5. Describe the process of integrating material/product flows.
(c
Further Readings
Books
213
Notes
S
___________________
Quantitative Models for Supply Chain Management, Kluwer ___________________
PE
___________________
___________________
___________________
___________________
Learning, 2001.
Web Readings
)U
www.springer.com/business+%26.../book/978-0-387-78902-6
www.fortna.com/pdfs/128.pdf
www.llamasoft.com/wp-content/uploads/.../DS-LLamasoft-for-
Retail-US.pdf
(c
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PE
S
`
UNIT 20: Case Study
Unit 20
215
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Vehicle Routing at Baroda Union
___________________
Baroda Dairy is a prestigious popular co-operative organization of
farmers of Vadodara District, providing good quality milk to the ___________________
people of Sayaji Nagari since last 52 years. Baroda Dairy is a one
___________________
of the leading dairies in India having turnover of ` 4000 million
(2008–09) and has a 1300 member milk cooperative societies ___________________
(2008–09), 800 milk centres for distribution and sales of milk, 500
retailers for sales of milk products and 1300 dedicated employees.
The mission is to help farmers of the district to grow and improve
life style of rural people.
Introduction
Baroda District lies in the centre of Gujarat, a state of Western
India, well-known for co-operative dairying. Baroda District
co-operative Milk Producers’ union Ltd. is the full name of Baroda
)U
dairy. As the name suggests, it is a co-operative union. The
company is engaged in the production of milk, flavoured milk,
butter and ghee, butter milk. The company also produces a wide
variety of ice-cream, shrikhand, and many sweets through Sugam
unit, a subsidiary of Baroda dairy.
The plant is situated in Makarpura area, in the centre of the city.
The plants of Baroda dairy are fully equipped with latest
technology and modern facilities. Baroda dairy always work for
welfare of society.
Objective
The Milk Union was established on 24th December 1957 with a
view to relieve the milk producers by the private milk venders
and to give proper remuneration to them and to supply good milk
to the citizens of Baroda City.
Foundation of Dairy
With the view to relieve the milk producer from the exploitation
(c
by the private vendors, and to give a remunerative price for their

milk and to supply good quality of milk to the citizen of Baroda
city, the milk union was established on 24th December, 1957.
The milk union got guidance and help in all respect from the
Neighbouring milk union of "Amul" especially from the Founder
Chairman of "Amul", Shri T.K. Patel and then the general
manager, Dr. V. Kurien who supported and guided the Baroda
Contd…
216 Milk Union. This union has strong leadership of Shri Maganbhai
Notes Patel, Founder Chairman and Shri Jashvantlal Shah, Deputy
S
Minister in the then state of Bombay. Under their dynamic
___________________ leadership the foundation stone of this union was laid.
___________________ First six milk co-operative societies became founder members of
this union from where the milk was brought for distribution, but,
___________________ in the absence of adequate facilities for chilling and
pasteurization it was thought best to postpone the rural milk
___________________
collection. In turn, pasteurized hygienic milk from Amul Milk
___________________ Union was brought for distribution to the consumers of the
PE
Baroda city.
___________________
The foundation stone of 50,000 LPD Dairy Plant was laid on 24th
___________________ August 1962, by Shri T.K. Patel, the Doyen of the Co-operative
Dairy Movement in Gujarat. In the year 1963–64 milk
___________________ distribution through 21 Distribution centres were started in an
organized way.
___________________
In the year 1964–65, the union started its milk procurement from
___________________ 120 milk co-operative societies. The dairy plant commissioned on
25th April, 1965, was inaugurated by Shri Morarjibhai Desai, the
then Finance Minister, and Government of India. Under the milk
distribution system, pasteurized milk in the bottles was supplied
to the city consumers. The bottling plant was set by UNICEF in
collaboration with CARE to supply the reconstitutes milk to
school children on matching contribution basis.
Current Expansion
The dairy has started manufacturing bottled mineral water.
)U
Water from the river Narmada will be used for manufacturing
mineral water, which will be marketed in bottles and pouches. A
12 km pipeline has been laid to pump water from the Narmada.
The dairy has already got 90% subsidy from the Centre for the
project. The project name is “NARMADA NEER”.
Future Expansions
Baroda Dairy, run by Baroda District Milk Cooperative Union, is
all set to venture into manufacturing of tomato ketchup. The
dairy has decided to take up a green field project for setting up a
tomato ketchup manufacturing facility in central Gujarat. The
dairy also plans to market the product at a later stage.
Baroda dairy is currently giving final touches to the project
report. According to top officials of the dairy, the proposed plant
will come up in the Bodeli area. Around ` 7–8 crore would be
required to set up the new unit, for which the dairy has already
acquired land. Bodeli is an ideal location for such a plant as its
surrounding area such a Chhota Udaipur, Pavijetpur and
(c
Sankeda grow tomatoes on a large scale. Tomatoes will be

procured from these areas, according to the dairy officials.
Baroda Dairy is also going to introduce Idli-Dhosa centre after the
success of Pizza. As per the latest news given in the local news
paper dated 8th June, 2010, Baroda Dairy has increased its
turnover with ` 62 crores. And also with the expenditure of ` 20
crores, the Dairy will launch a new plant with the capacity of
7 lakh litres.
Contd…
`
UNIT 20: Case Study
217
Present Products Mix
Notes
S
Baroda Dairy is a unique place processing several products from
the basic raw-material i.e. Milk. These products are as under and ___________________
are immensely popular in and around city of Baroda.
___________________
z Milk
z Butter Milk (Chhash) ___________________
z Curd ___________________
z Flavoured Milk ___________________
PE
z Butter
___________________
z Cheese
___________________
z Paneer
z Ghee ___________________
z Rajwadi Kadhi ___________________

z Thickshake ___________________
z Dry Sweets
z Ice-cream
z Pizza
z Shrikhand
Vision and Mission
Baroda Dairy is a Co-operative society and it is not just a profit
)U
making unit but to serve the better worth to society. The main
mission of the Baroda dairy is to assure and safeguard the
interest of the both nominal consumer of milk in city area and
supplier of rural areas. For this the Baroda Dairy deals according
to provide BEST QUALITY product at REASONALBE PRICE to
their customers.
Quality Policy
Baroda Dairy firmly believes to provide Milk and Milk products of
quality to give total consumer satisfaction. In order to achieve this
objective, Baroda Dairy has implemented Quality and Food safety
Management Systems since May 2000. The dairy is certified for
ISO 9001:2000 and HACCP by SAI Global, which is a wholly
owned subsidiary of Standards Australia International Ltd.
The implemented systems emphasize on ensuring and
maintaining quality and food safety at all stage of procurement,
production, packaging, storage and distribution of Milk and Milk
Products.
(c
Both the Quality and Food Safety Management Systems are

audited every six months by SAI Global to ensure the continuity
and adequacy. The product quality and safety is ensured at every
stage of operation and does not merely relay on final product
testing. There is a system in place to identify and assess the risk
at every stage of product manufacturing, packaging storage and
distribution. Appropriate control measures are implemented at
Contd…
218 the identified stage to eliminate the possible cause of risk. This
Notes ensures the quality and food safety at every stage.
S
A high level of plant and personnel hygiene and housekeeping is
___________________
maintained to avoid any cross contamination. The housekeeping
___________________ audits are conducted periodically and employees are motivated to
participate in good Housekeeping Competitions.
___________________
The dairy develops and maintains lawn and trees on open land
___________________ within the premises. Baroda Dairy now, looks forward to
implement ISO-14001:1996 Environmental management System
___________________ with the objective to prevent pollution and protect environment
PE
through proper Management and control of its activities, products
___________________
and services.
___________________ Achievements
___________________ z Achievement of holding ISO 9002 HACCP 9000 certificate.
___________________ z National Productivity Award for the best Productivity.

z Jamnalal Bajaj Award in 1994–1995.
___________________
z Award for good housekeeping at state level.
z Baroda Dairy was second achieving the award in
Horticulture.
z Received International recognition ISO 14001 Certificate for
the maintenance of Natural Environment.
z Received second Prize for minimum accidents among drugs
pharmaceuticals food and dairy Industry.
)U
Inventory Management System
In Baroda dairy, the store department uses the FIFO method,
i.e. First In First Out method of inventory management.
Purchase Procedure
Baroda Dairy’s main raw material is milk. The purchase
department has only to pick up just 10% of other raw material.
The purchase procedure is as under:
1. First of all respective department heads find out their need
and get it approved by the managing director.
2. Then they contact the stores department.
3. After this they send an indent to the purchase department.
4. The purchase department then asks for quotation from the
suppliers.
5. After the quotations are received supplier will then be
selected.
(c
6. The least cost giving suppler will then be selected.

7. Then take the approval and give the authority to the supplier
who gets the quotation passed.
8. Then just let the finance department make the payment to
the supplier after the delivery of goods.
Contd…
`
UNIT 20: Case Study
219
Types of Stores
Notes
S
z Cold Stores: The cold stores are use for storing milk, chhas,
flavoured milk, dahi etc. and many other products. ___________________
z General Store 1: In this general store, the veterinary
___________________
products, medicines, transportation instrument, buckets,
flavours for milk and shrikhand are stored here. ___________________
z General Store 2
___________________
Dispatch and Logistics
___________________
PE
All activities carried out under the supervision and order General
Manager of Marketing head i.e. order of milk and milk products ___________________
are dispatched as per the order of customers and retailer and all
records of dispatch are kept in dispatch register and computer. ___________________
In dispatch department the work is divided in three shifts. ___________________

1. Morning ___________________
2. Afternoon
___________________
3. Evening
Sources of Mode of Transportation
There are trucks, tempos, insulated vans, three wheeler tempos
are used to deliver the milk and the milk products in all the three
shifts.
Baroda Union has been working with same procurement routes
that had evolved historically for the last couple of years.
)U
Procurement managers of Baroda Union are exploring the
possibility of redesigning routes so as to reduce transportation
costs. Unless they could come up with a more scientific way of
designing these routes, transportation costs in milk procurement
accounted for 17% of the total cost. The main objective of the
union was to minimize total costs so that members (farmers)
would get the highest payment per litre of milk.
Questions
1. Identify the key challenges faced by Baroda Union. How
important is in-bound logistics for Baroda Union?
2. Will the problem of designing optimal vehicle schedules be
affected by the nature of ownership? Comment.
Source: http://www.slideshare.net/killer08/project-report-on-baroda-dairy
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PE
S
UNIT 21: Supply Chain Design for Logistics Service Providers
221
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-V
)U
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222
Notes
S
UNIT 21: SUPPLY CHAIN DESIGN FOR
___________________ UNIT 23: INTERNATIONAL BUSINESS STRATEGY
LOGISTICS SERVICE PROVIDERS z Introduction
z ___________________
Introduction z Global Competition
z Concept of 3PL
___________________ z New Market/Country Selection and Criteria
z Organising 3PL to Improve 3PL Supply Chain
___________________ z International Distribution Channels
Performance
___________________
PE
UNIT 24: INTERNATIONAL MARKETING AND
UNIT 22: SUPPLY CHAIN ORGANISATION
___________________ LOGISTICS
DESIGN z Introduction
___________________
z Introduction z Entry Restrictions
___________________
z Organisation Alignment z Regional and Country-specific Logistics Conditions
___________________
z Recent Design Models
UNIT 25: CASE STUDY
z
___________________
Organisation Skills and Experience Requirements
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Unit 21
223
Notes
S
Activity
Supply Chain Design for Logistics

___________________
nPLs.
___________________
Service Providers ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Evolution of n(PL) concept
\ Concept of 3PL ___________________
\ Organising 3PL to Improve 3PL Supply Chain Performance ___________________

\ Integration of 3PL and 4PL ___________________
Introduction
The service sector has developed in the last few years. A new breed
of specialists has changed the way in which organizations operate.
Local agents involved as clearing and forwarding agents,
distribution agents, stockists, wholesalers, etc., are giving way to
)U
branded Third Party Logistics Companies (3PL). By partnering
with existing logistics companies in specific marketplaces and
creating strategic alliances with knowledge-based partners, 3PLs
and 4PLs, organizations do not have to build a costly global
presence in each marketplace they serve.
These companies also manage the transportation and storage
infrastructure. Today, there are at least ten companies with a
national presence and providing such services to industry, though
insufficient access to high quality infrastructure and the resultant
capital investments requirement are still deterrents to this sector.
Concept of 3PL
(c
Beginning in the mid-1990s, multinational companies began to

turn to qualified single-source logistics providers, working across
geographic boundaries, to provide an integrated, regional approach
to logistics. 3PLs have led the way in logistics outsourcing.
Drawing on its core business, whether it be forwarding, trucking or
warehousing, they moved into providing other services for
224 customers. It presented a way for a commodity-service logistics

Notes provider to move into higher margin, bundled services.
S
___________________
Successful 3PLs and 4PLs serving multinationals began
___________________ purchasing or taking equity interests in existing logistics
___________________ companies in key global economic regions to extend their reach and
build a more seamless supply chain. This partnership approach to
___________________
global logistics, using a regional and more culturally sensitive
___________________ economic model, creates increased short-term market visibility and
PE
___________________ immediate cost and service benefits for all trading partners within
the global supply chain.
___________________

___________________ 1. Beginning in the mid-………, multinational companies
began to turn to qualified single-source logistics
providers, working across geographic boundaries, to
provide an integrated, regional approach to logistics.
2. ………….. have led the way in logistics outsourcing.
Organising 3PL to Improve 3PL Supply Chain

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Performance
The decision to utilize third-party or contract logistics companies
has been fostered in part by the interest in reducing asset
investment to improve asset productivity. Another rationale is the
focus of the company on its core competencies as a strategy to
operate more effectively and efficiently. A company may see its
core competency, for example, in production and marketing. A
company will, therefore, be more effective if it focuses upon its two
core competencies.
Companies, anxious to reduce costs, want what 3PLs have to offer.
Since no single logistics provider is truly capable of handling all
aspects of the global logistics management process, the key to any
(c
successful international 3PL lies in establishing a regionally based

3PL partner relationship that can function as an integrated global
logistics network that can be tailored to the multinational
company's needs. The 3PL must be able to integrate critical
databases across customer levels while addressing the strategic,
tactical and operating philosophy of the multinational company
throughout the global supply chain.
225
The potential market opportunity for outsourced logistics service
Notes
S
providers, whether domestic, international and/or global is huge. Activity
There is a current trend toward the involvement of 4PL providers, ___________________
Prepare a report on improving
to help manage a number of 3PLs that may be involved with a asset productivity.
___________________
company's operations. This is the result of the rapidly advancing
___________________
information age: Multinational companies increasingly require
logistics services that are much more complex and specific. ___________________
___________________
PE
As countries, regions and multinational companies become more
successful, their supply-chain expectations and demands become ___________________
more standardized, regardless of the market. This requires higher ___________________
levels of international service, using proven supply-chain models.
___________________
It also means increased emphasis on information technologies and
integrated logistics services between trading partners to ensure a ___________________
more seamless and cost-effective supply chain process for the ___________________
customer.
Integration of 3PL and 4PL

A 4PL is an integrator that assembles the resources, capabilities,
and technology of its own organization and other organizations to
design, build and run comprehensive supply chain solutions. Aside
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from managing a number of 3PL operations, a 4PL is looked to for
the provision of competencies relating to knowledge availability,
information technology, and skills in forming and sustaining
successful supply chain relationships.
Using a 4PL, fourth party logistics service provider, is different
than the traditional 3PL. The 4PL is a BPO provider. This lead
logistics provider will bring value and a re-engineered approach to
the customer's need. A 4PL is neutral and will manage the logistics
process, regardless of what carriers, forwarders or warehouses are
used. The 4PL can and will even manage 3PLs that a customer
uses.
This new international logistics service provider helps develop
solutions tailored to meet the unique and special needs of each
(c
customer, without regard to a parent company's service offerings

and operations. The firm understands the key to success with
process, people and technology. A good 4PL has a better
understanding of the complexity of the customer's requirements.
226
Check Your Progress
Notes
S
Fill in the blanks:
___________________
1. The decision to utilize third-party or contract logistics
___________________
companies has been fostered in part by the interest in
___________________
reducing asset investment to improve …………..
___________________ productivity.
___________________ 2. The 3PL must be able to integrate ………….. databases
PE
___________________ across ………….. levels while addressing the strategic,
tactical and operating philosophy of the multinational
___________________
company throughout the global supply chain.
___________________
___________________
Summary
___________________
Logistics service providers have been keen on contributing to
innovations in their client’s supply chain for some time now and
they have been expanding service offerings for example through
the creation of 4PL offerings. The 4PL model essentially elevates
the 3PL to a coordinator of the flow of goods, not just an operator
in the physical movement of goods. This is seen by 3PLs as a
method for not only increasing revenues but also, more
)U
importantly, as a method to contribute to offering higher value
added activities in the supply chain than the warehousing and
transport services traditionally offered. The market for these
traditional services may still be growing, it is however,
increasingly crowded with service providers increasingly offering
cut-throat rates, an indicator of commoditization of the service.
The 3PL model is also asset-intensive which in a price sensitive
market further challenges return on investments and financial
performance. The 4PL model is far less asset intensive as it
focused more on coordination, rather than just operating assets in
service of the customer. Despite the availability of examples such
as General Motors and Vector Logistics, the market for expanded
services there are far fewer companies successfully operating.
These services can upgrade the position of the 3PL in the supply
(c
chain beyond a supplier of commodity services, into a supplier of

key services, such as coordination and management of the overall
flow of goods in the supply chain, instead of merely operating the
physical movement at selected links in the chain.

Notes
S
Out of the two 3PL and 4PL logistics, which is better? Give reasons
___________________
to support your answer.
___________________
Keywords ___________________
___________________
3PL: Third Party Logistics
___________________
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4PL: Fourth Party Logistics
___________________
Questions for Discussion ___________________
___________________
1. What are the factors that led to the evolution of the PL
concept? ___________________
2. How can 3PL concept improve the supply chain performance? ___________________
3. In what ways the integration of 3PL and 4PL is beneficial to

supply chain management?
Further Readings
Books
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Learning, 2001.
228
Notes
S
___________________
___________________
Web Readings
___________________
www.managementstudyguide.com/logistics-service-providers-
___________________
scm.htm
___________________
PE
en.wikipedia.org/wiki/Supply_chain
___________________
www.barloworldscs.com/home/.../logistics-service-providers.aspx
___________________
___________________
___________________
___________________
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UNIT 22: Supply Chain Organisation Design
Unit 22
229
Notes
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Activity
Supply Chain Organisation

___________________
conventional operations
___________________
organisations.
Design ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Organisation Alignment
\ Organisation Design Alternatives ___________________
\ Recent Design Models ___________________

\ Organisation Skills and Experience Requirements Job Outlook ___________________
Introduction
In this global economy, an optimally designed supply chain
Organisation is the need of the hour as this will ensure better
business performance and add value to the overall customer
experience.
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Organisation Alignment
Effective Organisation design can be structured in accordance with
the following issues:
z Decision relating to identifying the core competencies of the
firm and thus completing those activities internally
z Time when an activity can be outsourced along with its
associated risks
z Decentralization of any activity/process
z Positioning of all the functions needed to perform an activity/
process in one place
(c
z Identifying the various non-value adding functions that can be

removed resulting in a lean Organisation hence better
managed
z Linking of roles/ownership associated with each function
thereby assigning the responsibility and doing away with all
the non-value adding roles
230
z Identification of the bottlenecks in proper flow of information,
Notes
S
goods etc. from one function to another and their respective
___________________
solutions
___________________
z Identification of critical roles and responsibility required to
___________________ maintain an efficient supply chain and equipping them with
___________________ appropriate wherewithal to discharge their duties effectively
___________________ z Strictly defining the reporting structure across the entire
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supply chain
___________________
___________________ z Restructuring the supply chain with a view to building support

throughout the firm, eliminating unnecessary delays, reducing
___________________
costs, simplifying complexities
___________________
z Developing the capability in order to acquire the critical roles
___________________ internally over a period of time.
Organisation Design Alternatives

While designing the appropriate organisation for the supply chain
processes and strategy, one has to identify the various issues and
challenges associated with it. Conventional operations
Organisations are functionally oriented. That is, key supply chain
)U
activities and associated groups report directly to their relevant
functional managers. A typical functionally based organisation
may have logistics (receiving and shipping) and manufacturing
reporting to an operations vice president, and separate
procurement and customer order-management groups. In the
1970s, this type of organisational structure was typical of many
companies, and it is still quite common today.
Many companies began to transition to organisational structures
that grouped many core supply chain functions less than one
department in the 1980s and 1990s. Many of these companies still
had the position of vice president of operations, but the
responsibilities expanded from a purely functional orientation.
These managers now had responsibility for management of the
supply base and fulfilment of customer orders in addition to
(c
manufacturing and physical logistics. We call this the Transitional

Supply Chain Organisation (see Figure 22.1).
231
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
Figure 22.1: Transitional Supply Chain Organisation
The term “supply chain” came into vogue in mid to late 1990s and
it was then that we began to see Organisations with positions
called “supply chain manager” or “vice president of supply chain.”
This period, of course, also marked the beginning of the now
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widespread philosophy of the supply chain as an end-to-end
process.
Check Your Progress

Fill in the blanks:
1. In this global economy, an ………….. designed supply
chain organisation is the need of the hour as this will
ensure better business performance and add value to
the overall customer experience.
2. ………….. operations organisations are functionally
oriented.
(c
Recent Design Models

Supply chain management as a separate function or entity within
Organisations has been established with the help of two primary
models. In both models, a supply chain management group is
responsible for achieving cross-functional operational objectives,
such as inventory days of supply, order-fulfilment lead time, or
232 customer on-time delivery. The difference between the models lies
Notes in resource management. The first model (shown in Figure 22.2),
S
___________________ which we call the partially integrated organisation doesn’t give full
control to the supply chain manager over the resources responsible
___________________
for executing the supply chain strategy.
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 22.2: Partially Integrated Supply Chain Organisation
In the Integrated Organisation model (see Figure 22.3), he or she

does have full control over these resources.
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(c
Figure 22.3: Integrated Supply Chain Organisation
The transitional and integrated models may look very similar but
the difference is much more than a few shifts in box position on the
Organisation chart or renaming of the various functions. The
concept of a discrete supply chain Organisation as depicted in the
integrated model is relatively new.
233
S
Activity
Prepare a report on SCM as
an entity within organisations.
1. Supply chain management as a separate function or ___________________
entity within Organisations has been established with
___________________
the help of ………….. primary models.
___________________
2. In both models, a supply chain management group is
___________________
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responsible for achieving ………….. operational
objectives, such as inventory days of supply, order- ___________________
fulfilment lead time, or customer on-time delivery ___________________
___________________
Organisation Skills and Experience Requirements ___________________
Supply chain managers attempt to integrate and optimize all the ___________________
steps required to produce the right amount of the right product
and deliver it to the end user at the right time. In other words,
Supply Chain Management (SCM) is involved in every aspect of
getting products to customers, from raw materials to consumption.
As one insider defines it, "Supply chain management is interested
in everything that happens to a product from cradle to grave."
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Requirements
Even at the entry level, SCM recruiters are not looking for
generalists. Most firms and organisations have a select group of
SCM programs from which they recruit. But a school program may
not be the only criterion; internship can also lead to this job.
Because the market is soft now, firms are demanding industry and
functional experience even for entry-level positions. Firms are
mainly on the lookout for supply chain coursework or dedicated
supply chain programs.
Certifications are not necessary, but they do help in a slack
market. Common certificates are Certified Purchasing Manager
(CPM) and CPIM (Certification in Production and Inventory
Management). Majority of all purchasing professionals hold a CPM
(c
certification and nearly 10 per cent hold a CPIM certificate.

Undoubtedly, proficiency in Enterprise Resource Planning (ERP)
software package such as SAP, Oracle, or will be an added
advantage. One of the main prerequisites of a supply chain job is
detail orientation. It is extremely necessary when communicating
with prospective employers, either in informal conversations or
234 during the interview process. Finally, because of the

Notes cross-functional nature of the field, communication and people
S
Activity
___________________
skills are paramount.
applications of SCM.
___________________
Job Outlook
___________________
Supply chain management jobs have a healthy outlook. However,
___________________ in the case of mid-career job seekers, most companies look for
___________________ candidates with coursework in supply chain management or prior
PE
industry and functional experience. Due to these prerequisites the
___________________
number of qualified candidates in the field is limited. However,
___________________ more and more companies are reorganizing around supply chain
___________________ management (as opposed to logistics or materials) and so supply
___________________
chain manager roles are becoming more prevalent. Clearly,
proficiency in an Enterprise Resource Planning (ERP) software
___________________
package such as SAP, Oracle, or i2 greatly enhances your
marketability.
SCM has been affected by the 2008–2009 recession just like other
industries. The most effected is the shipping sector. Global
shipping often reflects the world's overall economic status: Time
Magazine dubbed it "The Most Important Economic Indicator
You've Never Heard Of." The Baltic Dry Index, which tracks the
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cost of shipping raw materials, dropped from an all-time high of
11,793 in May 2007 to below 800, a 22-year low at the end of 2008.
Although shipping has been greatly affected, the supply chain
industry as a whole is doing well and many experts believe there
will be an upswing soon.
Check Your Progress

Fill in the blanks:
1. Supply Chain Management (SCM) is involved in every
aspect of getting products to customers, from …………..
materials to …………..
2. Supply chain management is interested in everything
that happens to a product from ………….. to grave.
(c
Summary
Too often, organisations evolve over time, driven more by random
situations than alignment with strategy. Change, when made, is
often piecemeal and creates unanticipated consequences.
Organisational design is iterative and occurring all the time. 235

However, it often happens without much thought or holistic Notes
S
design. But the desired outcome can be improved by the strategic ___________________
alignment of structure, work processes and culture. Design process
___________________
is a mix of dialogue and scenario planning. It establishes a shared
understanding of mission and strategy. It also evaluates ___________________
alternatives and likely impact of change on the Organisation. By ___________________

synchronizing its supply chain with its Organisational design, an
___________________
PE
enterprise can create a competitive tool to quickly respond to
___________________
changing customer needs and demand cycles.
___________________
Lesson End Activity ___________________
Among the various organisation design models discussed in this ___________________
unit, which do you think is the best and why? ___________________
Keywords
CPM: Certified Purchasing Manager
CPIM: Certification in Production and Inventory Management
ERP: Enterprise Resource Planning
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1. State the issues in accordance to which an effective
organisation design can be structured.
(a) Transitional Supply Chain Organisation
(b) Partially Integrated Organisation
(c) Integrated Supply Chain Organisation
3. State the skills and experience required in professionals to gain
entry in supply chain management.
(c
Further Readings
Books
236
Notes
S
___________________
___________________
___________________ Academic Publishers, 1999.
___________________ R.B. Handfield and E.L. Nochols, Jr., Introduction to Supply Chain
___________________ Management, Prentice Hall, 1999.
PE
___________________ N. Viswanadham and Y. Narahari, Performance Modeling of
___________________ Automated Manufacturing Systems, Prentice Hall of India, 1998.
___________________ Sunil Chopra and Peter Meindel, Supply Chain Management:

___________________
___________________
Learning, 2001.
Web Readings
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www.gsb.stanford.edu/sites/.../PRTM_The_New_Supply_Chain_Or
g.pdf
www.concargo.com/contact-concargo-management-organisation-
design-governance.php
scm.ncsu.edu/scm-articles/article/the-role-of-organizational-design
(c
UNIT 23: International Business Strategy
Unit 23
237
Notes
S
Activity
International Business Strategy

___________________
variation in transportation
___________________
costs.
___________________
Objectives
___________________
topics: ___________________
PE
\ International Business Strategy ___________________
\ New Market/Country Selection and Criteria ___________________
\ International Distribution Channels
___________________
___________________
Introduction
___________________
Today's globalization is built around falling transportation and
telecommunication costs. The fact that low transportation costs
have been reinforced by low communication costs means that
developing countries do not have to merely send their raw
materials to the industrialized nations and get finished products in
return. It also means that developing countries can become major
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producers as well. People can offer and trade services globally.
Companies can locate different parts of their manufacturing,
research and development, financing, and marketing units in
different countries and still tie them all up together.
Global Competition
Global competition has four prominent characteristics:
z Companies competing globally seek to create standardized and

yet customized marketing;
z Product life cycles are shortening for certain high-tech products
such as computers and peripherals, photography items, and
audio-visual equipment. Sometimes, the PLC lasts less than
(c
one year. Global companies can extend the PLC by expanding

geographically;
z More companies are utilizing outsourcing and offshore
manufacturing; and
z Marketing and manufacturing activities and strategies tend to
converge and be better coordinated in firms operating globally.
238
As companies service global markets, logistics networks tend to
Notes
S
become more expansive and complex, lead times increase and
___________________
inventory levels rise. The world has experienced a long-term
___________________ divergence in the levels of per capita incomes among countries over
___________________ the past two centuries. The international policy agenda reproduces
the traditional asymmetries in the world economy and creates new
___________________
ones. It is particularly visible in trade in services and trade in hard
___________________ currency, in the form of currency substitution. The uncertainty of
PE
___________________ globalization is shown by concerns about global imbalances and
institutions, protectionism coupled with nationalism, the
___________________
emergence of new power centres and miscellaneous geo-political
___________________
and even biological hazards.
___________________
To successfully operate in a time-based competitive environment,
___________________ firms have to emphasize managing logistics as a system,
shortening lead times when possible, and move towards the use of
worldwide sourcing and manufacturing facilities that are focused
to produce limited product lines for geographically specific areas.
The most important step in designing and implementing global
logistics strategies is to learn what the service needs of customers
are, dispersed throughout the world, and how to meet these needs.
)U
This is a prerequisite to developing effective operations in the
global marketplace.
To win, more and more companies are trying to become
increasingly customer, rather than internally, focused. They key is
to do so in a way that balances customer requirements with
company requirements for profitability. The first thing companies
realize on the way to becoming more customer-focused is the
reality that you can't plan the customer. This makes
responsiveness a core requirement for companies to thrive in
today's globalized markets.
Global companies are growing more rapidly than transnational
and multi-domestic companies. Global structures provide volumes
sufficient to absorb the significant cost outlays essential for global
(c
business. These companies are more likely to strategically source

materials and components worldwide, select global locations for
key supply depots and distribution.
Global companies design their operating strategy objectives around
four components: technology, marketing, manufacturing, and
logistics. For the four areas to function synchronously, logistics is
the key. The logistics system serves as the global infrastructure
upon which the other systems operate. Different approaches to 239

globalization require different degrees of supply chain integration Notes
S
as well as different supply chain structures, resulting in different ___________________
strategies.
___________________
A number of factors and relationships in this regard are shown in
___________________
Figure 23.1. The important processes that make global strategies
effective are: ___________________
___________________
PE
z Strategic Fit;
___________________
z Risk management viewed from the perspective of operating
knowledge of the global environment and minimization of ___________________
foreign exchange risks. It also includes understanding the ___________________

inherent risks in context of differences in language and culture;
___________________
z Knowledge and Technology management; ___________________
z Development of organizational capability in terms of ability
operating flexibility to respond to changes, dealing with
differences in financial accounting systems, decision support
tools that incorporate global variables;
z Channel management/outsourcing decisions; which means
developing the capability and infrastructure to manage these
)U
activities on a global basis, and the different cultures,
languages and business environments; and
z Information management needs reflect the ability of the system
to standardize and manage data to integrate supply chain
operations on a global basis.
(c
Figure 23.1: Factors Influencing Global Logistics
The major challenges of the logistics system are to manage

complexity, size, and decrease lead times and inventory levels.
Perhaps the most important requirement is to understand the
service needs of customers in locations dispersed throughout the
world. As consumers have greater access to more goods and
240 services, a firm's competitive position depends on understanding

Notes changes in consumer demand and the speed of response.
S
Activity
___________________
Prepare a report on global
operations. Check Your Progress
___________________
Fill in the blanks:
___________________
1. Low transportation costs have been reinforced by
___________________
…………….. communication costs means that developing
___________________ countries do not have to merely send their raw materials
PE
___________________ to the industrialized nations and get finished products
in return.
___________________
___________________ 2. Companies competing globally seek to create

standardized and yet …………….. marketing.
___________________
___________________
New Market/Country Selection and Criteria
There are many forces driving firms to enter the international
arena. These forces serve as both motivators and facilitators.
Enterprises are motivated to expand global operations to grow and
survive. Global operations are also facilitated through developing
technologies and capabilities. The five forces driving global
)U
operations are economic growth, supply chain perspective,
regionalization, technology, and deregulation.
Economic Growth
Since World War II, firms in many industrialized economies have
enjoyed annual double-digit percentage increases in revenue and
profit. This growth trend resulted from a combination of improved
market penetration, and increased market size resulting from high
birth-rates. Since the population of major industrial countries has
stabilized or even declined, most of these traditional strategies no
longer support sustained revenue and earnings growth.
The decline in economic growth in industrialized countries
occurred at about the same time manufacturing and logistics
productivity began to increase as a result of new technology
(c
deployment. The result was excess capacity. Given this

environment, the most direct means for an enterprise to increase
revenue and profit is through global expansion into other
developed regions and into developing nations. Such expansion
requires the integration of global manufacturing with marketing
capabilities and the initiation of logistics support for new business
locations. Thus, the search for growth and profit is a fundamental 241
force driving enterprises to serve global markets. Notes
S
___________________
Supply Chain Perspectives
___________________
The second force driving global logistics is widespread adoption of
a total supply chain perspective by manufacturers and large-scale ___________________
distributors. Historically, managers have focused on reducing ___________________

procurement cost and manufacturing expense within their own
___________________
PE
enterprise. Expenses incurred by other channel members typically
___________________
were not viewed as important when making logistics or product
sourcing decisions. ___________________
Firms traditionally sought logistical control by performing as many ___________________
essential activities as possible internally. Internal performance ___________________

typically resulted in private warehouses, transportation, and
___________________
information processing.
While such privatization maximized control, it also increased the
assets required to support logistics operations. Commitment of
assets to logistics is not critical from the viewpoint of profitability.
However, in terms of "return on assets" (ROA), it is desirable to
reduce the capital deployed to support any business activity.
)U
Logistics managers found that they could reduce capital deployed
by outsourcing the performance of a wide range of logistics
activities. As a result, the use of service specialists became
common practice during the 1980s.
This experience with outsourcing proved critical in terms of
financial global expansion. While attempting to develop
cost-effective operations to support global expansion, firms
capitalized on their earlier learning experience. They were willing
to develop alliances with global suppliers that could provide
expertise and quality logistics service at a reasonable cost for
activities such as international freight consolidating and
forwarding, international transportation, documentation, and
facility operations.
(c
Regionalization
As indicated above, the need to develop new markets to sustain
growth was a primary force that encouraged firms to seek
customers outside their "home" country. The typical initial choices
of expansion-minded firms were countries in nearby geographic
regions. To promote regional trade and protect trading partners
242 from outside competition, countries began to formalize

Notes partnerships through treaties. Examples of such agreements are
S
___________________ the European Community (EC 92) and the North American Free
Trade Agreement (NAFTA). The Dean Foods sidebar illustrates
___________________
such a regional strategy. Ohmae's triad view suggests that the
___________________
world is evolving into three major trading regions: Europe, North
___________________ America, and the Pacific Rim. While each region does not restrict
___________________ trade with other regions, the agreement strongly promotes and
PE
facilitates intraregional trade.
___________________
Such regionalization is resulting in an industrialized triad with
___________________
each part having relatively equal population and economic
___________________
strength. Intra-regional trading is facilitated by reducing tariffs,
___________________ minimizing customs requirements, developing common shipping
___________________ documentation, and supporting common transportation and
handling systems. The ultimate goal is to treat intraregional
movements as if they had the same country origin and destination.
Technology
Communication and information technology represents a fourth
force stimulating international operations. Mass market
communications exposed international consumers to foreign
)U
products, thus stimulating a convergence of global needs and
preferences. “Whatever their nationality, consumers in the triad
increasingly are exposed to similar motivations seek the same kind
of life-style, and desire similar products. They all desire the best
products available, at the lowest price possible”. The demand for
blue jeans in Asian and Eastern European countries, and athletic
shoes throughout the world, has increased as a result of
widespread media exposure. Cable News Network (CNN), USA
Today, and other satellite communications promote a variety of
products and stimulate demand on a global basis.
A second expansion force resulting from technological development
is an increased capability to exchange information facilitated by
widespread availability of computers and communication
(c
networks. Historically, international commercial documentation

such as orders, delivery requirements, and customs forms were
typically hard-copy paper that required extensive time to transfer
and often contained many errors. Prior to advanced communication
technologies, the performance cycle from order commitment to
order receipt was nine months to replenish Adidas shoes in the
United States from the Orient. The total performance cycle has
been reduced to three months through the use of enhanced 243

information technology that speeds order requirements Notes
S
communication, production scheduling, shipment scheduling, and ___________________
customs clearance.
___________________
As the world becomes more real-time oriented, demand for world-
___________________
class products and services will increase. Although politicians
regularly stress the importance of "home-grown" products, the ___________________
average consumer neither knows nor cares where the product is ___________________
PE
actually produced as long as it offers the best perceived value. For ___________________
example, while the Honda Accord is typically viewed as a foreign
___________________
automobile by United States consumers, it has one of the highest
percentages of domestic content of any car assembled or sold in ___________________
that country. Honda has been among the top five selling ___________________
automobiles in the United States over the past five years. The
___________________
preferences of well-travelled and knowledgeable citizens are
influencing governments to rethink import restrictions and the
consequences of political border barriers.
Deregulation
Deregulation of a number of key industries is a fifth driving force
toward a borderless world. The two primary deregulated industries
)U
are finance and transportation.
Financial Deregulation
Global finance and foreign exchange are facilitated through a
number of changes in regulations and procedures. Government, in
the form of institutions such as the United States Export-Import
Bank, and multi-government-sponsored credit institutions, such as
the International Monetary Market, serve to extend and guarantee
long-term export and import credits above and beyond individual
bank capabilities. This not only increases the availability of funds,
but reduces individual bank risk and increases trade potential.
The International Monetary Market (IMM) also provides the
mechanism to exchange currencies and trade futures at market
(c
rates. Although the IMM originated in 1972, its impact increased

significantly in 1987 with the establishment of a global electronic
automated transaction system. Global financial information
standards are a key factor in the international trade increase.
Another factor is the elimination of the gold standard as support
for individual currencies. The United States dropped the gold
244 standard in the early 1970s, which allowed other major currencies
Notes to float against the dollar through the IMM agreement. Fixed
S
___________________ monetary rates had previously restricted trade by setting
artificially high levels for major currencies of industrialized
___________________
nations. High exchange rates made international trade expensive
___________________
because of the artificially high cost of goods. Floating rates
___________________ facilitate free currency movement and tend to synchronize global
___________________ booms and recessions. In addition, interest rates, capital markets,
PE
and the overall investment climate are more interlinked and
___________________
interdependent given global monetary systems.
___________________
The free flow of currency exchange is particularly evident in
___________________
contemporary financial markets. The United States dollar, for
___________________ example, facilitates the global flow of goods while being only
___________________ minimally affected by differences in individual country wage rates.
In fact, these markets support an annual volume of foreign
currency exchange in equity and capital transactions that is 300
times larger than the annual goods exchange between triad
members. The difference in magnitude between currency and
goods exchange explains why directional shifts in goods exchange
have only a minor impact on exchange rates.
)U
Transportation Deregulation
The United States initiative to deregulate transportation during
the early 1980s has gradually spread throughout the globe. Despite
the fact that overall global deregulation has advanced at a slower
rate than in the United States, three global changes concerning
intermodal ownership and operation, privatization, and cabotage
and bilateral agreements have occurred. The global trade impact of
each is discussed.
Historically, there have been regulatory restrictions concerning
international transportation ownership and operating rights.
Carriers have traditionally been limited to operating within a
single transportation mode with few joint pricing and operating
agreements. Specifically, steamship lines could not own or manage
(c
land-based operations such as motor or rail carriers. Without joint

ownership, operations, and pricing agreements, international
shipping was complicated as a result of the number of parties
involved. International shipments typically required multiple
carriers to perform and manage the freight flow. In addition,
carrier operations were typically limited. For example, foreign-
owned carriers could not operate in many nations located between
domestic origins and destinations. There were also limitations for 245
carriers when they made pickups or deliveries in foreign countries. Notes
S
Specifically, government rather than market forces determined the ___________________
extent of services foreign-owned carriers could perform. Although
___________________
some ownership and operating restrictions remain, marketing and
alliance arrangements among countries have substantially ___________________
improved transportation flexibility. Similar restrictions were ___________________

removed in most other industrialized nations. An example of the
___________________
PE
increased flexibility is United Parcel Service's (UPS) current
___________________
capability to serve over 190 countries in a seamless manner via
ownership, joint marketing, and operating agreements. Internally, ___________________
UPS may provide service by carrying a package with a combination ___________________
of rail, motor, air, and water transportation. Such agreements
___________________
facilitate international shipment efficiency and trade, as well as
increase the possibility of one-stop logistics services. ___________________
A second transportation stimulant to globalization has been

increased carrier privatization. Historically, many international
carriers were owned and operated by “home country” governments
to promote trade and provide strategic reserves in case of war.
In an effort to improve service, many governments have privatized
)U
major carriers, while others are considering it. For example, the
United Kingdom and Canada are in the process of privatizing air,
motor, and rail carriers. The European Community is completing
other large-scale privatization and infrastructure projects to meet
increased business demands resulting from EC 92 initiatives.
Forced to operate in the competitive marketplace, privatized
carriers must improve service and be more consistent and
competitively priced. The result is facilitated international trade.
Changes in cabotage and bilateral service agreements are the third
regulatory factor influencing international trade. Cabotage laws
require passengers or goods moving between two domestic ports to
utilize only domestic carriers. For example, water shipments from
Los Angeles to New York must use a United States carrier. The
same cabotage laws restrict a Canadian driver from transporting a
(c
back-haul load to Detroit once a shipment originating in Canada is

unloaded in Texas. Cabotage laws protect domestic transportation
industries, even though they reduce overall transportation
equipment utilization.
The European Community is relaxing cabotage restrictions to
increase trade efficiency. It is projected that reduced cabotage
246 restrictions will save United States corporations 10 to 15 per cent

Notes in intra-European shipping costs. European Transport Ministers
S
___________________ have reached agreement to open Europe as a single transport
market by 1998. Several prominent United States trucking
___________________
companies, such as Yellow Freight and Carolina Freight, have
___________________
opened offices and entered into operating agreements with
___________________ European carriers. Although NATA does not allow motor carrier
___________________ cabotage, American trucking firms will be able to carry
PE
international cargo into Mexican Border States by the end of 1995
___________________
and throughout Mexico by the end of 1999. Mexican trucking firms
___________________ will be allowed reciprocal treatment in the United States on the
___________________ same timetable.
___________________ Bilateral service agreements require that a balanced number of
___________________ carriers registered in each country be authorized to operate
between origin and destination points. Such agreements serve to
limit the total number of international carriers that serve key
specific gateways. In addition, bilateral agreements may result in
duplicate service and excess capacity in low-volume gateways. The
consensus is that traditional bilateral agreements are shifting
toward multilateral arrangements with separate considerations for
passenger and freight transport. This inter-governmental
)U
arrangement and cooperation will yield improved transport service
while simultaneously reducing transportation rates. The net result
should favour international trade.
Check Your Progress

Fill in the blanks:
1. Global operations are facilitated through ……………
technologies and capabilities.
2. The five forces driving global operations are ……………,
supply chain perspective, regionalization, technology,
and ……………
International Distribution Channels

(c
Distribution channel differences such as infrastructure

standardization and trade agreements are a third barrier
confronting logistics managers. Infrastructure standardization
refers to differences in transportation and material-handling
equipment, warehouse and port facilities, and communication
systems. While there have been recent efforts to improve
standardization with respect to containerization, there are still 247

major differences in global transportation equipment such as Notes
S
Activity
vehicle dimensions, capacity, weight, and rail gauge. It is not even ___________________
necessary to go beyond United States boundaries to find information on infrastructure
___________________
differences in permissible transportation equipment length and standardization.
weight restrictions on a state-by-state basis. ___________________
When infrastructure is not standardised, it is necessary for ___________________
products to be unloaded and reloaded into different vehicles or ___________________
PE
containers as they cross national boundaries, resulting in ___________________
increased cost and time. Infrastructure problems are common
___________________
within the United States when ocean carriers require ocean
containers to be unloaded prior to domestic shipment. ___________________
Trade restriction barriers can influence channel decisions, such as ___________________
the rules that restrict the volume of imports or increase duties once ___________________
a specified volume has been reached. There are, for example, trade
agreements for all tuna imports from American Samoa into the
United States. The agreement levies a 15 per cent tariff when total
annual imports exceed a specified level. When the specified level is
reached, tuna importers build inventories in bonded warehouses for
shipment release following the beginning of the next year. The use
)U
of bonded warehouses on the United States mainland means that
the tariffs are not assessed until the product is shipped to local
warehouses. While the tactic of using bonded warehouses reduces
tariff expense, it increases logistics complexity and cost, since it
requires inventory build up and temporary warehousing. Not only is
this a problem when individual enterprises use this tactic, but it is
further compounded since competitors also vie to get their product
imported under the same import restrictions while minimizing their
duty and storage expense. This example illustrates how trade
agreements that limit quantities or require special conditions
increase international logistics complexity.
Check Your Progress

Fill in the blanks:
(c
1. Distribution channel differences such as infrastructure

standardization and trade agreements are a …………….
barrier confronting logistics managers.
2. ……………. refers to differences in transportation and
material-handling equipment, warehouse and port
facilities, and communication systems.
248
Summary
Notes
S
As companies service global markets, logistics networks tend to
___________________
become more expansive and complex, lead times increase and
___________________ inventory levels rise. Global companies are growing more rapidly
___________________ than transnational and multi-domestic companies. Global
___________________
structures provide volumes sufficient to absorb the significant cost
outlays essential for global business. The major challenges of the
___________________
logistics system are to manage complexity, size, and decrease lead
PE
___________________ times and inventory levels. There are many forces driving firms to
___________________ enter the international arena. These forces serve as both
motivators and facilitators. Enterprises are motivated to expand
___________________
global operations to grow and survive.
___________________
The decline in economic growth in industrialized countries
___________________
occurred at about the same time manufacturing and logistics
productivity began to increase as a result of new technology
deployment. Communication and information technology
represents a fourth force stimulating international operations.
Deregulation of a number of key industries is a fifth driving force
toward a borderless world. The two primary deregulated industries
are finance and transportation. Distribution channel differences
)U
such as infrastructure standardization and trade agreements are a
third barrier confronting logistics managers. Trade restriction
barriers can influence channel decisions, such as the rules that
restrict the volume of imports or increase duties once a specified
volume has been reached.
Lesson End Activity

“Bilateral agreements may result in duplicate service and excess
capacity in low-volume gateways”. Do you agree? Comment.
Keywords
PLC: Product Life Cycles
(c
NAFTA: North American Free Trade Agreement

IMM: International Monetary Market
NATA: National Air Transportation Association
GATT: General Agreement on Tariffs and Trade
FTA: Free Trade Agreement
Questions for Discussion 249

Notes
S
1. State the four characteristics of global competition.
___________________
2. What are the important processes that make global strategies
___________________
effective?
___________________
3. Describe the five forces driving global operations.
___________________
4. Write a short note on International Distribution Channels.
___________________
PE
Further Readings ___________________
___________________
Books ___________________
___________________
)U
Learning, 2001.
Web Readings
(c
en.wikipedia.org/wiki/International_business_strategy
www.strategy-business.com/
www.slideshare.net/bctia/strategies-for-international-business
(c
)U
PE
S
UNIT 24: International Marketing and Logistics
Unit 24
251
Notes
S
Activity
International Marketing and

___________________
different global logistics
___________________
barriers.
Logistics ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Concept of International Marketing and Logistics
\ Regional and Country-specific Logistics Conditions ___________________
\ Consideration in Reconfiguring European Logistics ___________________
___________________
Introduction
Exporting and importing are two sides of the same coin; both
supply customers with products manufactured outside the country.
Exports now account for over 15% of global GNP and are growing
at an annual compound rate in excess of 10%. Export marketing
requires knowledge of the target market, a marketing mix
)U
decision, planning, organisation and control and information
systems. Exporting is often an incremental process, from
unsolicited order filling to deliberate export planning. No doubt
few firms will export unless profit and growth opportunities are
expected. Theories of trade stress the basis as "comparative
advantage", but in practice this is of little use. The most significant
factors affecting trade are "firm" not "product" characteristics.
McGuiness and Little (1981) found two firm characteristics
"restrained from exporting" and "high technology" as opposed to
product characteristics had an overwhelming influence on the
decision.
Whilst exporting and importing are, this is not the way
governments look at it when making policy. Simply, policy can be
(c
construed as two-faced. Often, every effort is made to improve and

encourage exports whilst every effort is made to curb imports. The
combination of policy measures can have an offsetting effect.
Government, however, seeks to support export activities in three
ways: by applying lower rates of tax to earnings from exporting or
refunds; outright subsidies or assistance like information giving.
252 Many African countries have incentives like export retention

Notes schemes and revolving schemes to aid potential exporters.
S
___________________
___________________ Entry Restrictions

___________________ Perceived and real market and competitive barriers include entry
___________________ restrictions, information availability, pricing, and competition.
Entry restrictions limit market access by placing legal or physical
___________________
PE
barriers on importing. An example of a physical barrier is the
___________________ European practice of local presence, which requires that
___________________ market-based manufacturing or distribution facilities be
___________________
established prior to market access. An example of a legal entry
barrier is the Japanese practice of allowing local retailers to "vote"
___________________
on acceptance of new retailers, particularly foreign ones, into the
___________________ market.
Poor information availability is another global logistics barrier. In
addition to limited information availability regarding market size,
demographics, and competition, little coordinated information is
available defining import and documentation requirements.
Typical requirements differ by government and even by specific
case. Most governments require that documentation be completed
)U
and processed prior to shipment. In many cases, if the
documentation is not flawless, the shipment is delayed or
impounded. While correct documentation is important for all
shipments, it is critical for international transportation.
Pricing and the related topic of tariffs are other marketing-related
barriers. International pricing is strongly influenced by exchange
rates. The situation confronted by United States distributors of
German automotive parts illustrates how exchange rates affect
logistical requirements. The common practice is to delay ordering
replenishment parts until as late as possible to reduce risk and
investment. However, when the German mark rises compared to
the United States dollar, as it did in the early 1990s, a more cost-
effective strategy may be to stock up on parts and take advantage
(c
of the favourable exchange rate.

Tariffs represent another traditional barrier. Tariffs were
originally designed to protect domestic industries by increasing
prices on imported goods. Tariffs complicate international trade in
two ways. Firstly, tariffs are an additional cost element that must
be considered when evaluating foreign sources of supply. Secondly,
tariffs are political, subject to quick change as government policy 253

alters. Notes
S
Tariffs serve as a barrier to logistics planning since trade flow ___________________
direction and volume can change overnight. While the NAFTA and ___________________
EC 92 eliminate many tariffs within North America and Europe,
___________________
substantial tariffs remain between regions.
___________________
GATT (General Agreement on Tariffs and Trade) is a multilateral
___________________
PE
trade mechanism for improving trade relations among signatory
trading partners. It is designed to increase trade consistency, ___________________
improve trade relations, and reduce bilateral agreements. A ___________________
fundamental GATT principle requires that tariff reductions
___________________
negotiated between any two members be extended to all members.
Since GATT was founded in 1948, there have been eight "rounds" ___________________
of negotiations resulting in an increase in tariff consistency. ___________________

However, despite this effort, tariff differentials still exist and
remain effective barriers for international logistics.
While most international firms have experience in highly
competitive environments, different rules concerning competitive
governance also serve as global logistics barriers. For example, the
United States government fosters private enterprise, and, as such,
)U
it maintains an arm's-length relationship with business and
prohibits price collusion. However, these economic policies are not
a global standard. Global competitors, such as United States-based
Boeing, must contend with firms such as Airbus Industries that
have a home field advantage in Europe because of the French
government's majority, ownership. The competitive barrier is a
combination of a lack of awareness regarding global rules and the
necessity to conform to the norms of particular geographic regions.
Check Your Progress

Fill in the blanks:
1. The most significant factors affecting trade are
"…………." not "…………." characteristics
(c
2. …………. information availability is another global

logistics barrier.
Regional and Country-specific Logistics Conditions

This section reviews the current status of each major global region,
including a summary of current and proposed trade acts. It also
254 discusses the logistics implications of each trade act and the
Notes strategies reported by enterprises to accommodate and take
S
Activity
___________________ advantage of regional changes.
Prepare a report on EFTA.
___________________
North America
___________________
North America took the first step toward economic integration
___________________ when the Canada-United States Free Trade Agreement (FTA) was
___________________ implemented on January 1, 1989. This act has produced promising
PE
trends in trade, investment, and commercial cooperation.
___________________
Both countries have realized significant expansion of exports. The
___________________ most important provision of the agreement is the elimination of all
___________________ tariffs on goods traded between the United States and Canada by
___________________
1998, particularly since Canadian tariffs were among the highest
in the industrialized world.
___________________
The FTA greatly expands the potential for United States and
Canadian businesses to sell their products to each other's federal
government, especially for smaller contract awards. The FTA also
reinforces relatively liberal service industry and investment
regulations between the two countries: potentially, over 150 service
industries across many sectors are affected by the agreement
regulations. Finally, both nations must make publicly available all
)U
proposed laws and regulations that relate to any service trade
issue, in order to allow participation by affected parties in the
regulatory process.
The second step in economic integration, the North American Free
Trade Agreement (NAFTA), was concluded in August 1992
between the United States, Canada, and Mexico. The NAFTA
agreement, which took effect January 1, 1994, eliminates all tariffs
among the three countries over a fifteen-year period and creates a
free trade zone that extends from the Yukon to the Yucatan.
The goals of both agreements, particularly NAFTA, are to enhance
North American competitiveness relative to Europe and Asia by
(1) improving the climate for cross-border investment and trade,
and (2) reducing administrative costs and delays associated with
(c
trade. The drive to accomplish these goals is generating new

transportation routes and strategic alternatives and is forging
many new partnerships to facilitate cargo movement.
The NAFTA impact on logistics integration efforts will be different
in Canada than in Mexico. In the past, United States
manufacturers established local operations in Canada primarily to
maintain a marketing presence. However, logistics support of 255

manufacturing operations was constrained because of four Notes
S
conditions: Canada's manufacturing base is centred almost entirely ___________________
in Ontario and Quebec, Canadian manufacturing labour costs are
___________________
generally higher than those in the United States, the Canadian
warehousing industry lags behind United States efficiency and ___________________
technology, and East-West transportation movement across ___________________

Canada's vast hinterland markets is expensive. For these reasons,
___________________
PE
NAFTA stimulated trade and transportation in Canada are
___________________
projected to develop in a North-South direction. It is anticipated
that this North-South development will allow more markets to be ___________________
effectively serviced by fewer distribution facilities, which will ___________________
provide increased scale economies.
___________________
Although the logic of North-South movement increases access to
___________________
populous markets on both side of the Canada-United States
border, most Canadian restructuring has been targeted toward
manufacturing efficiencies rather than improved logistics
operations. While sufficient time has not transpired since the
NAFTA agreement to make generalizations regarding enterprise
logistics strategy, initial research indicates that some changes
have occurred in strategies of production and distribution service
)U
areas. Increased competition resulting from NAFTA will pressure
Canadian firms to innovate and adopt best United States logistics
practice and should steadily improve United States-Canadian
integration.
Several Canadian carriers have anticipated an increasingly
competitive market and have made strategic efforts to shift away
from traditional East-West movements to a more North-South
orientation. The Canadian National Railway has integrated its
three United States subsidiaries to create a significant marketing
and operational presence in the Midwest and eastern United
States. It has also created strategic alliances with Burlington
Northern and Norfolk Southern railroads. Canadian Pacific Ltd.'s
CP Rail System has also expanded by purchasing several United
(c
States railroads. Canadian Pacific is now the seventh largest

North American railroad, operating from coast to coast in Canada
and offering a major United States presence. Contract agreements
between several United States and Canadian carriers have also
been established to provide wider geographic motor carrier service
throughout Canada. The small package segment will become more
256 competitive with expanded Canadian coverage by United Parcel

Notes Service and Roadway Package System.
S
___________________
Currently, United States companies are establishing Mexican
___________________ operations to take advantage of low-cost labour and to gain access
___________________ to a major consumer market in which half of the population will be
under the age of twenty. Although most manufacturing in Mexico
___________________
is located near the United States-Mexico border, most of the
___________________ buying power is concentrated in the central portion of the country.
PE
___________________ Therefore, the majority of retail growth as well as distribution and
warehousing development will occur in this central region. Current
___________________
Mexican transportation infrastructure is incapable of supporting
___________________
major cross trade between the United States and Central Mexico.
___________________
For the foreseeable future, these restrictions will force most
___________________ Canadian and United States enterprises that set up
manufacturing plants in Mexico to accommodate a particular
supply-chain management design. Specifically, parts vendors are
and will be primarily located in the United States, with
maquiladora assembly plants located along the United States-
Mexico border. Final distribution will be handled through facilities
in the south-western and mid-western United States. A
)U
maquiladora is a facility that manufactures, assembles, or
produces raw materials and components that have been
temporarily imported to Mexico. Products are then shipped back to
the originating country or to a third country for final assembly and
distribution. No duties are charged by the Mexican government on
the imported inventory and equipment moving into the
maquiladoras. Duties are paid only on the value added in Mexico
when the finished goods are re-exported to the country of origin.
United States motor carriers are now permitted to transport
international cargo into Mexican Border States and will be
permitted to carry shipments throughout Mexico by 1999. Mexican
motor carriers will receive reciprocal treatment. The pact also
phases out barriers to bus service and cross-border investment in
transportation companies and expands opportunities for United
(c
States railroads in Mexico.

There has been a tremendous amount of carrier preparation with
respect to increased trade between the United States and Mexico.
Improved rail services include (1) an increased number of stack
trains between the mid-western United States and Mexico,
(2) nonstop integrated rail-barge connections, and (3) either rail or
motor shipment options to the Mexican border from the United 257
States. Trucking improvements include (1) door-to-door service Notes
S
movement on a single freight bill, (2) expedited and more frequent ___________________
less-than-truckload service, (3) improved tracing, and (4) wider
___________________
geographic service. Streamlined brokerage services and procedures
are now available through several specialized service providers. ___________________
Major distribution facilities are being constructed in Mexico. ___________________
With the passage of the FTA and the approval of NAFTA, North ___________________
PE
American governments have established the entire continent as a ___________________
relevant logistics landscape. While it is clear that the logistics
___________________
infrastructure could not support such continental operations in the
past, the necessary partnerships are developing through alliances. ___________________
With the expanded possibilities resulting from free trade ___________________
agreements, North American logistics managers must particularly
___________________
refine their strategies regarding material sources, manufacturing
locations, distribution sites, and service providers.
Europe
European economic integration discussions began shortly after
World War II and eventually culminated with the formation of the
European Economic Community (EEC) in 1957. The original
)U
members (Belgium, France, Germany, Italy, Luxembourg, and the
Netherlands) were joined by Denmark, Ireland, and the United
Kingdom (1973); Greece (1981); and Portugal and Spain (1985).
The EEC established a plan to eliminate intercountry tariffs,
create common external tariffs, and guide economic policy
regarding tax structures, exchange rates and controls, immigration
among member countries, and agricultural support programmes.
A second trade association, the European Free Trade Association
(EFTA), was formed in 1960 and included Liechtenstein,
Switzerland, Sweden, Finland, Norway, Iceland, and Austria.
EFTA signed trade pacts with Czechoslovakia, Poland, Hungary,
Turkey, and Israel in 1991 and 1992. The European Community,
or EC (formerly the EEC), eliminated trade barriers with EFTA in
(c
late 1991.
In 1985, the EC Commission outlined the necessary steps to
achieve a single common market allowing free movement of labour,
capital, and goods by the end of 1992. This process was termed EC
92 (European Community Integration by 1992). Formal
implementation efforts have been in process since 1987.
258
Another aspect of European integration is monetary union. The
Notes
S
Maastricht Treaty, which requires legislative approval by all
___________________
twelve EC states, mandated a central European bank and currency
___________________ by 1999. The treaty met with some resistance in several EC
___________________ countries in 1992. Although single-market integration will not fail
without monetary union, it is considered a critical business and
___________________
political signal to the rest of the world.
___________________
PE
EC administrative reforms are already providing benefits to
___________________ European transportation and trade. Shipment spot checks within
___________________ nations have replaced systematic customs formalities, thus
___________________
speeding traffic flows and preventing long border delays.
Transportation and trade are also facilitated by development of a
___________________
Single Administrative Document (SAD). The SAD eliminates
___________________ duplicate customs documents for goods shipped between countries
and replaces approximately twelve forms for each participating
country. The SAD also facilitates EDI transmission and statistical
information collection at border crossings. The SAD itself was
eliminated in 1993 since border checks occur only to monitor
criminal activities and to report value and origin of cargo at the
point of destination. Except for trade with countries outside the
)U
EC, all customs documentation has vanished. EC efforts to
standardize customs procedures and clearance through
introduction of EDI are also in progress.
EC 92 significantly affects enterprises that view their European
operations as international. For large multinational companies,
the creation of a single market permits production and distribution
system rationalization, or streamlining, as barriers to cross-
national shipments are eliminated. EC 92 improvements in intra-
European distribution, warehousing, and infrastructure can save
companies millions of dollars. Many firms are consolidating
extensive European facility networks to become pan-European
both strategically and operationally.
A report of the Council of Logistics Management has summarized
(c
the perceptions and strategies of enterprises as they reconfigure

European logistics systems. The key findings of the study are
summarized in five major categories: business and logistics
environment in Europe today, European logistics strategy
responses, critical management issues, achieving and sustaining
logistics excellence, and European logistics: future challenges.
259
A specific consideration in reconfiguring European logistics is
Notes
S
transportation strategy, which is significantly influenced by
demographics and geography. The European population density is ___________________
three times that of the United States, making business centres ___________________
more easily serviced by motor carriage. Over-the-road hauling
___________________
provides 70 per cent of all EC freight movements and is projected
to increase by 60 per cent before the year 2000. ___________________
___________________
PE
As remaining cabotage restrictions are eliminated, national
carriers that service the entire region will be allowed to pick up ___________________
and back haul cargo throughout the EC. Reduced cabotage ___________________
restrictions are a key requirement for resolving European road
___________________
congestion and environmental issues. However, new entrants face
stiff opposition from many of the small "family-size" trucking ___________________
companies that constitute a significant proportion of European ___________________

operators. European road infrastructure is also a considerable
problem. A recent EC Commission proposal suggested a $450
billion plan for comprehensive European transportation
improvements over the next decade.
Rail offers a viable solution to numerous European transportation
problems, although it faces several formidable hurdles. National
)U
protectionist politics have contributed to the financial, technical,
and physical barriers of European rail integration.
Check Your Progress

Fill in the blanks:
1. …………. offers a viable solution to numerous
transportation problems, although it faces several
formidable hurdles.
2. A second trade association, the European Free Trade
Association (EFTA), was formed in ………….
Summary
(c
The development of international trade is driven by international

logistics and management and the provision of the global supply
chain. The ultimate objective of global supply chain management is
to link the market place, distribution network, manufacturing/
processing/assembly process, and procurement activity in such a
way that customers are serviced at a higher level yet lower cost.
260 Overall this has introduced a new breed of management in a

Notes computer literate environment operating in a global infrastructure.
S
___________________
This unit dealt with the role of international logistics in managing
___________________ the global supply chain. The global business climate and factors
___________________ that influence international logistics and supply chain
management were discussed. The generic strategies for global
___________________
supply chain management were described as prototypical strategic
___________________ designs. Finally, the coordinating role of international logistics in
PE
___________________ global supply chain management was explored, and suggestions for
enhancing the success of global supply chains through
___________________
collaboration were discussed.
___________________
___________________
Lesson End Activity
___________________
You have learnt about the logistics condition of Europe and North
America in this unit. Choose another continent and find out all
about its logistics conditions.
Keywords
EEC: European Economic Community
)U
EFTA: European Free Trade Association
EC: European Community
SAD: Single Administrative Document

1. What are different logistics barrier?
2. Explain different regional and country-specific logistics
conditions.
3. What are entry restrictions?
4. Write a specific consideration in reconfiguring European
logistics.
(c
Further Readings
Books
261
Notes
S
___________________
Quantitative Models for Supply Chain Management, Kluwer ___________________
PE
___________________
___________________
___________________
___________________
Learning, 2001.
Web Readings
)U
alumni.pondiuni.edu.in/dde/downloads/ibiv_ilm.pdf
www.samk.fi/.../international_business_and_marketing_logistics
www.linkedin.com/company/international-marketing-&-logistics
(c
(c
)U
PE
S
`
UNIT 25: Case Study
Unit 25
263
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Sport Obermeyer Limited
___________________
Aspen, Colorado
___________________
Wally Obermeyer deftly balanced his office keys and a large
printout of forecasting data as he wheeled his mountain bike ___________________
through the front entrance of Sport Obermeyer's headquarters in
Aspen, Colorado. It was a crisp November morning in 1992; Wally ___________________
paused for just a moment to savour the fresh air and beauty of the
surrounding mountains before closing the door behind him.
Wally had arrived at work early to start one of the most critical
tasks Sport Obermeyer, a fashion skiwear manufacturer, faced
each year–committing to specific production quantities for each
ski wear item the company would offer in the coming year's line.
The task required carefully blending analysis, experience,
intuition, and sheer speculation: this morning Sport Obermeyer
)U
would start to make firm commitments for producing its 1993–
1994 line of fashion skiwear with scant information about how the
market would react to the line. In fact, no clear indications had
yet emerged about how end-consumers were responding to the
company's current 1992–1993 line. Despite the attraction of
waiting for market information, Wally knew that further
procrastination would delay delivery to retailers and that late
delivery would reduce the exposure consumers would have to
Obermeyer products.
As usual, Obermeyer's new line offered strong designs, but the
ultimate success of the line was highly dependent on how well the
company was able to predict market response to different styles
and colours. Feedback from retailers on the 1993–1994 line
wouldn't begin to surface until the Las Vegas trade show next
March, long after many of Obermeyer's products had entered
production.
Wally mused: How appropriate that our fate is always
determined in Las Vegas. Like most fashion apparel
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manufacturers, we face a "fashion gamble" each year. Every fall

we start manufacturing well in advance of the selling season,
knowing full well that market trends may change in the
meantime. Good gamblers calculate the odds before putting their
money down. Similarly, whether we win or lose the fashion
gamble on a particular ski parka depends on how accurately we
predict each parka's salability.”
Contd…
264
Inaccurate forecasts of retailer demand had become a growing
Notes problem at Obermeyer: in recent years greater product variety
S
and more intense competition had made accurate predictions
___________________
increasingly difficult. Two scenarios resulted–both painful. On
___________________ one hand, at the end of each season, the company was saddled
with excess merchandise for those styles and colours that
___________________ retailers had not purchased; styles with the worst selling records
were sold at deep discounts, often well below their manufactured
___________________ cost. On the other hand, the company frequently ran out of its
___________________ most popular items; although popular products were clearly
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desirable, considerable income was lost each year because of the
___________________ company's inability to predict which products would become best-
sellers.
___________________
Wally sat down at his desk and reflected on the results of the
___________________ day-long "Buying Committee" meeting he had organized the
previous day. This year Wally had changed the company's usual
___________________ practice of having the committee, which comprised six key
Obermeyer managers, make production commitments based on
___________________
the group's consensus. Instead, hoping to gather more complete
information, he had asked each member independently to forecast
retailer demand for each Obermeyer product. Now it was up to
him to make use of the forecasts generated by the individuals in
the group. He winced as he noted the discrepancies across
different committee members' forecasts. How could he best use
the results of yesterday's efforts to make appropriate production
commitments for the coming year's line?
A second issue Wally faced was how to allocate production
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between factories in Hong Kong and China. Last year, almost a
third of Obermeyer's parkas had been made in China, all by
independent subcontractors in Shenzhuen. This year, the
company planned to produce half of its parkas in China,
continuing production by subcontractors and starting production
in a new plant in Lo Village, Guangdong. Labour costs in China
were extremely low, yet Wally had some concerns about the
quality and reliability of Chinese operations. He also knew that
plants in China typically required larger minimum order
quantities than those in Hong Kong and were subject to stringent
quota restrictions by the U.S. government. How should he
incorporate all of these differences into a well-founded decision
about where to source each product?
Tsuen Wan, New Territories, Hong Kong
Raymond Tse, managing director, Obersport Limited, was
anxiously awaiting Sport Obermeyer's orders for the 1993–1994
line. Once the orders arrived, he would have to translate them
quickly into requirements for specific components and then place
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appropriate component orders with vendors. Any delay would

cause problems: increased pressure on his relationships with
vendors, overtime at his or his subcontractors' factories, or even
late delivery to Sport Obermeyer.
Obersport Ltd. was a joint venture established in 1985 by Klaus
Obermeyer and Raymond Tse to coordinate production of Sport
Obermeyer products in the Far East. Obersport was responsible
for fabric and component sourcing for Sport Obermeyer's
Contd…
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UNIT 25: Case Study
production. Materials sourced were cut and sewn either in 265

Raymond Tse's own "Alpine" factories or in independent Notes
S
subcontractors located in Hong Kong, Macau, and China.
Raymond was owner and president of Alpine Ltd., which included ___________________
skiwear manufacturing plants in Hong Kong as well as a recently
established facility in China. Sport Obermeyer's orders ___________________
represented about 80% of Alpine's annual production volume.
___________________
Lo Village, Guangdong, China
Raymond Tse and his cousin, Shiu Chuen Tse, gazed with pride ___________________
and delight at the recently completed factory complex. Located ___________________
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amongst a wide expanse of rice paddies at the perimeter of Lo
Village, the facility would eventually provide jobs, housing, and ___________________
recreational facilities for more than 300 workers. This facility was
Alpine's first direct investment in manufacturing capacity in ___________________
China.
___________________
Shiu Chuen had lived in Lo village all of his life–the Tse family had
resided there for generations. Raymond's parents, former ___________________
landowners in the village, had moved to Hong Kong before
___________________
Raymond was born, returning to the village for several years when
Raymond was a young boy during the Japanese occupation of Hong
Kong in World War II. In 1991, Raymond Tse had visited Lo
Village for the first time in over 40 years. The villagers were
delighted to see him. In addition to their personal joy at seeing
Raymond, they hoped to convince him to bring some of his wealth
and managerial talent to Lo Village. After discussions with people
in the community, Raymond decided to build the factory, so far
investing over US$1 million in the facility. Working with Alpine's
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Hong Kong management, Shiu Chuen had hired 200 workers for
the factory's first full year of operation. The workers had come from
the local community as well as distant towns in neighbouring
provinces; most had now arrived and were in training in the plant.
Shiu Chuen hoped he had planned appropriately for the orders
Alpine's customers would assign to the plant this year; planning
had been challenging since demand, worker skill levels, and
productivity levels were all difficult to predict.
Sport Obermeyer, Ltd.
Sport Obermeyer's origins traced to 1947, when Klaus Obermeyer
emigrated from Germany to the United States and started
teaching at the Aspen Ski School. On frigid, snowy days Klaus
found many of his students cold and miserable due to the
impractical clothing they wore–garments both less protective and
less stylish than the clothing skiers wore in his native Germany.
During summer months, Klaus began to travel to Germany to find
durable, high-performance ski clothing and equipment for his
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students. An engineer by training, Klaus also designed and

introduced a variety of skiwear and ski equipment products; for
example, he was credited with making the first goose-down vest
out of an old down comforter in the 1950s. In the early 1980s, he
popularized the "ski brake," a simple device replacing
cumbersome "run-away straps"; the brake kept skis that had
fallen off skiers from plunging down the slopes. Over the years,
Sport Obermeyer developed into a preeminent competitor in the
Contd…
266 U.S. skiwear market: estimated sales in 1992 were $32.8 million.
Notes The company held a commanding 45% share of the children's
S
skiwear market and 11% share of the adult skiwear market.
___________________ Columbia Sportswear was a lower-price, high-volume-per-style
competitor whose sales had increased rapidly during the previous
___________________
three years. By 1992 Columbia had captured about 23% of the
___________________ adult ski-jacket market.
Obermeyer offered a broad line of fashion ski apparel, including
___________________ parkas, vests, ski suits, shells, ski pants, sweaters, turtlenecks,
___________________ and accessories. Parkas were considered the most critical design
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component of a collection; the other garments were fashioned to
___________________ match the parkas' style and colour.
Obermeyer products were offered in five different "genders":
___________________
men's, women's, boys', girls', and pre-schoolers'. The company
___________________ segmented each "gender" market according to price, type of skier,
and how "fashion-forward" the market was. For example, the
___________________ company divided its adult male customers into four types, dubbed
Fred, Rex, Biege, and Klausie. A "Fred" was the most
___________________
conservative of the four types; Freds had a tendency to buy basic
styles and colours and were likely to wear the same outfit over
multiple seasons. "High-tech" Rex was an affluent, image-
conscious skier who liked to sport the latest technologies in
fabrics, features, and ski equipment. In contrast, "Biege" was a
hard-core mountaineering-type skier who placed technical
performance above all else and shunned any non-functional
design elements. A "Klausie" was a flamboyant, high-profile skier
or snowboarder who wore the latest styles, often in bright colours
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such as neon pink or lime green.
Within each "gender," numerous styles were offered, each in
several colours and a range of sizes. Obermeyer offered during the
preceding 16-year period, as well as the average number of styles,
colours per style, and sizes per style-colour combination offered.
Obermeyer competed by offering an excellent price/value
relationship, where value was defined as both functionality and
style, and targeted the middle to high end of the skiwear market.
Unlike some of its competitors who made outerwear for both
skiing and for casual "street wear," Obermeyer sold the vast
majority (over 85%) of its products to customers for use while
skiing. Functionality was critical to the serious skier–products
had to be warm and water-proof, yet not constrain the skier's
ability to move his or her arms and legs freely.
Management believed that the effective implementation of its
product strategy relied on several logistics-related activities,
including delivering matching collections of products to retailers
at the same time (to allow consumers to view and purchase
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coordinated items at the same time), and delivering products to

retail stores early in the selling season (to maximize the number
of "square footage days" products were available at retail).
Management Approach
Throughout the company's history, Klaus Obermeyer had been
actively involved in company management. Klaus believed that a
company should run "free of tension." Klaus's personal philosophy
Contd…
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UNIT 25: Case Study
was at the core of his management style; in both his personal life 267
and his professional life he sought to "achieve harmony." He Notes
S
observed:
“We're blending with the forces of the market rather than opposing ___________________
them. This leads to conflict resolution. If you oppose a force, you get
___________________
conflict escalation. It is not money, it is not possessions, and it is
not market share. It is to be at peace with your surroundings.” ___________________
In accordance with his philosophy, Klaus believed that the
skiwear industry should be left to people who were "comfortable ___________________
with an uncertain bottom line." Klaus's management style ___________________
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emphasized trust in people and providing value to customers. He
believed many aspects of the business fell into the artistic realm; ___________________
in making decisions, one should be guided by one's judgment and
intuition. In his joint venture with Raymond Tse, Klaus relied on ___________________
his trust of Raymond and had always left production and
___________________
investment decisions to Raymond.
Although Klaus was the "heart and soul" of the company, other ___________________
members of the family had played key roles in the company's
___________________
growth as well. Klaus's wife, Nome, a successful designer, was
actively involved in developing new products for the company. In
Klaus's judgment, Nome had a "feel" for fashion–Klaus had relied
heavily on her judgment in assessing the relative popularity of
various designs.
In recent years, Klaus's son Wally had become actively involved in
managing the company's internal operations. After completing
high school, Wally combined working part-time for the company
with ski-patrolling on Aspen Mountain for six years before
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entering college in 1980. After graduating from the Harvard
Business School in 1986, Wally initially focused his efforts on
developing a hydro-electric power-generating plant in Colorado.
By 1989, when the power plant was established and required less
day-to-day involvement, Wally joined Sport Obermeyer full time
as vice president.
As is often the case, the company founder and his MBA son had
different management approaches; Wally relied more heavily on
formal data gathering and analytical techniques, whereas Klaus
took a more intuitive style that was heavily informed by his
extensive industry experience.
The Order Cycle
Sport Obermeyer sold its products primarily through specialty
ski-retail stores, located either in urban areas or near ski resorts.
Obermeyer also served a few large department stores (including
Nordstrom) and direct mail retailers (including REI). In the U.S.,
most retail sales of skiwear occurred between September and
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January, with peak sales occurring in December and January.

Most retailers requested full delivery of their orders prior to the
start of the retail season; Sport Obermeyer attempted to deliver
coordinated collections of its merchandise into retail stores by
early September.
Nearly two years of planning and production activity took place
prior to the actual sale of products to consumers.
Contd…
268
The Design Process
Notes The design process for the 1993–1994 line began in February
S
___________________ 1992, when Obermeyer's design team and senior management
attended the annual international outdoors wear show in Munich,
___________________ Germany, to view current European offerings. "Europe is more
fashion-forward than the U.S.," Klaus noted.
___________________
"Current European styles are often good indicators of future
___________________ American fashions." In addition, each year, a major trade show for
ski equipment and apparel was held in Las Vegas. The March
___________________ 1992 Las Vegas show had provided additional input to the design
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process for the 1993-1994 line. By May 1992, the design concepts
___________________
were finalized; sketches were sent to Obersport for prototype
___________________ production in July.
Prototypes were usually made from leftover fabric from the
___________________ previous year since the prototype garments were used only
___________________
internally by Obermeyer management for decision-making
purposes. Obermeyer refined the designs based on the prototypes
___________________ and finalized designs by September 1992.
Sample Production
As soon as designs were finalized, Obersport began production of
sample garments–small quantities of each style-colour
combination for the sales force to show to retailers. In contrast to
prototypes, samples were made with the actual fabric to be used
for final production; dyeing and printing subcontractors were
willing to process small material batches for sample-making
purposes.
)U
Sales representatives started to show samples to retailers during
the week-long Las Vegas show, typically held in March, and then
took them to retail sites throughout the rest of the spring.
Raw Material Sourcing and Production
Concurrent with sample production, Obersport determined fabric
and component requirements for Obermeyer's initial production
order (typically about half of Obermeyer's annual production) based
on Obermeyer's bills of material. It was important that Obersport
place dyeing/printing instructions and component orders quickly
since some suppliers' lead times were as long as 90 days.
Cutting and sewing of Obermeyer's first production order would
begin in February 1993.
Retailer Ordering Process
During the Las Vegas trade show, most retailers placed their
orders; Obermeyer usually received orders representing 80% of its
annual volume by the week following the Las Vegas show. With
this information in hand, Obermeyer could forecast its total
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demand with great accuracy. After completing its forecast,

Obermeyer placed its second and final production order. The
remainder of retailers' regular (non-replenishment) orders were
received in April and May. As noted below, retailers also placed
replenishment orders for popular items during the peak retail
sales season.
Contd…
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UNIT 25: Case Study
269
Shipment to Obermeyer Warehouse
Notes
S
During June and July, Obermeyer garments were transported by
ship from Obersport's Hong Kong warehouse to Seattle, from ___________________
which they were trucked to Obermeyer's Denver distribution
center. (Total shipment time was approximately six weeks.) Most ___________________
goods produced in August were air shipped to Denver to ensure
timely delivery to retailers. In addition, for goods manufactured ___________________
in China, air freighting was often essential due to strict quota ___________________
restrictions in certain product categories. The U.S. government
limited the number of units that could be imported from China ___________________
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into the United States. Government officials at the U.S. port of
entry reviewed imports; products violating quota restrictions were ___________________
sent back to the country of origin. Since quota restrictions were
___________________
imposed on the total amount of a product category all companies
imported from China, individual companies often rushed to get ___________________
their products into the country before other firms had "used up"
the available quota. ___________________
Shipment to Retail; Retail Replenishment Orders ___________________
Toward the end of August, Obermeyer shipped orders to retailers
via small-package carriers such as UPS. Retail sales built
gradually during September, October, and November, peaking in
December and January. By December or January, retailers who
identified items of which they expected to sell more than they
currently had in stock often requested replenishment of those
items from Obermeyer. This demand was filled if Obermeyer had
the item in stock.
)U
By February Obermeyer started to offer replenishment items to
retailers at a discount. Similarly, retailers started marking down
prices on remaining stock in an attempt to clear their shelves by
the end of the season. As the season progressed, retailers offered
deeper discounts; items remaining at the end of the season were
held over to the following year and sold at a loss. Obermeyer used
a variety of methods to liquidate inventory at year-end, including
selling large shipping containers of garments well below
manufacturing cost to markets in South America and engaging in
barter trade (for example, trading parkas in lieu of money for
products or services used by the company, such as hotel rooms or
air flights).
The Supply Chain
Obermeyer sourced most of its outerwear products through

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Obersport. In recent years, Wally had worked with Obersport to

"pre-position" (purchase prior to the season and hold in inventory)
greige fabric (fabric that has been woven or knitted but not yet
dyed or printed) as part of a wider effort to cope with
manufacturing lead times. To pre-position the fabric, Obermeyer
would contract with fabric suppliers to manufacture a specified
amount of fabric of a given type each month; Obermeyer would
later specify how it wanted the fabric to be dyed and/or printed.
Contd…
270 Obermeyer had to take possession of all fabric it contracted for,

Notes whether or not it was actually needed. Different types of fabrics
S
were purchased for use as shell (outer) fabric and lining fabric.
___________________ Approximately 10 types of shell fabrics were required each year.
___________________ Obersport purchased shell fabric from vendors in the United
States, Japan, Korea, Germany, Austria, Taiwan, and
___________________ Switzerland.
___________________ Lining fabric was sourced primarily from Korea and Taiwan.
Each greige fabric would later be dyed and/or printed as
___________________
necessary; each shell fabric was typically offered in 8 to 12 colours
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___________________ and prints. Prior to the start of the season, Obersport would work
with its subcontractors to prepare a small batch for each colour
___________________ that was required in a given fabric. The preparation of each such
"lab-dip" took two weeks; the procedure at times had to be
___________________ repeated if the quality of the lab-dip was not found to be
___________________
satisfactory by Obermeyer managers or designers. In addition,
Obersport worked with its printing subcontractors to develop
___________________ "screens" which would be used to print patterns on fabric. This
procedure took six weeks.
Most other tasks were performed only after the production
quantities planned by Sport Obermeyer were known. Immediately
after receiving production instructions from Sport Obermeyer,
Obersport asked subcontractors to dye or print fabric. A typical
adult's parka, for example, required 2.25 to 2.5 yards of 60" width
shell fabric. The consumption of fabric was slightly less for kids'
or pre-schoolers’ parkas. Dyeing subcontractors required a lead
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time of 45-60 days and a minimum order quantity of 1,000 yards.
Printing subcontractors required a minimum of 3,000 yards;
printing lead times were also 45-60 days.
Obermeyer products used insulation materials and a variety of
other components in addition to shell and lining fabric. Each
parka, for example, needed around 2 yards of insulation material.
Insulation materials (with the exception of goose-down insulation,
which was purchased in China and Korea) were purchased from
DuPont, whose licensees in Hong Kong, Taiwan, Korea and China
could provide them within two weeks. At the beginning of each
year, Obersport gave DuPont an estimate of its annual
requirement for each type of insulation.
Obersport also had to ensure the availability of a variety of other
components such as D-rings, buckles, snaps, buttons, zippers,
pull-strings with attached castings, and various labels and tags.
Buckles, D-rings, pull-strings and buttons were procured locally
in Hong Kong and had a 15- to 30-day lead time. Many snaps
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were purchased from German vendors; since snap lead times were
long; Obersport kept an inventory of snaps and dyed them locally
as needed. Labels and tags had short lead times and were
relatively inexpensive; Obersport generally carried excess stock of
these materials.
Most zippers were purchased from YKK, a large Japanese zipper
manufacturer. Obersport used a wide variety of zipper types each
Contd…
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UNIT 25: Case Study
year. Zippers varied by length, tape colour, and slider shape as 271
well as the gauge, colour, and material of the zipper teeth. Notes
S
Approximately 60% of Obersport's zipper requirements were
sourced from YKK's Hong Kong factory, where standard zippers ___________________
were manufactured. The lead time for these zippers was 60 days.
The remainder were non-standard zippers, which were sourced ___________________
from Japan with at least 90-day lead times–sometimes longer.
___________________
YKK required a minimum order quantity of 500 yards if the
dyeing colour was a standard colour from its catalogue; if not, the ___________________
minimum order quantity was 1,000 yards.
___________________
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All production materials were received by Obersport; materials
for any given style were then collected and dispatched to the ___________________
factory where the particular style was to be cut and sewn.
Obermeyer products were produced in a number of different ___________________
factories in Hong Kong and China.
___________________
Cut and Sew
A typical Obermeyer product required many cutting and sewing ___________________
steps. The allocation of operations to workers differed from one ___________________
factory to another depending on the workers' level of skill and the
degree of worker cross-training. Workers in Hong Kong worked
about 50% faster than their Chinese counterparts. In addition to
being more highly skilled, Hong Kong workers were typically
trained in a broader range of tasks. Thus, a parka line in Hong
Kong that required 10 workers to complete all operations might
require 40 workers in China. Longer production lines in China led
to greater imbalance in these lines; hence, a Hong Kong sewer's
actual output during a given period of time was nearly twice that
)U
of a Chinese worker.
Workers were paid on a piece-rate basis in both China and Hong
Kong: the piece rate was calculated to be consistent with
competitive wage rates in the respective communities. Wages in
China were much lower than in Hong Kong; an average sewer in
a Guangdong sewing factory earned US$0.16 per hour compared
with US$3.84 per hour in the Alpine factory in Hong Kong.
Workers in Hong Kong were also able to ramp up production
faster than the Chinese workers. This ability, coupled with
shorter production lines, enabled the Hong Kong factory to
produce smaller order quantities efficiently. For parkas, the
minimum production quantity for a style was 1,200 units in
China and 600 units in Hong Kong.
Obermeyer produced about 200,000 parkas each year. The
maximum capacity available to the company for cutting and sewing
was 30,000 units a month; this included the production capacity at
all factories available to make Sport Obermeyer products.
(c
Obersport was responsible for monitoring production and quality

at all subcontractor factories. Workers from Obersport inspected
randomly selected pieces from each subcontractor's production
before the units were shipped to the United States.
Production Planning
Wally's immediate concern was to determine an appropriate
production commitment for the first half of Obermeyer's projected
demand for the 1993–1994 seasons. He had estimated that
Contd…
272 Obermeyer earned 24% of wholesale price (pre-tax) on each parka

Notes it sold, and that units left unsold at the end of the season were
S
sold at a loss that averaged 8% of wholesale price. Thus, for
___________________ example, on a parka style such as the Rococo, which had a
wholesale selling price of $112.50, Obermeyer's expected profit on
___________________
each parka sold was approximately 24%($112.50) = $27, and its
___________________ expected loss on each parka left unsold was approximately
8%($112.50) = $9.
___________________
A Sample Problem
___________________ To build his intuition about how to make production decisions, he
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decided to look at a smaller version of the company's problem. He
___________________ looked at the Buying Committee's forecasts for the sample of 10
___________________ women's parkas. Since these 10 styles represented about 10% of
Obermeyer's total demand, to make this smaller version
___________________ representative of the larger problem, he assumed he had cutting
and sewing capacity of 3,000 units per month (10% of actual
___________________ capacity) during the seven month production period. Using these
___________________
assumptions, Wally needed to commit 10,000 units for the first
phase of production. The remaining 10,000 units could be deferred
until after the Las Vegas show.
Wally studied the Buying Committee's forecasts, wondering how
he could estimate the risk associated with early production of
each style. Was there some way he could use the differences
among each member's forecast as a measure of demand
uncertainty? An examination of demand from previous years
indicated that forecast accuracy was the highest for those styles
the Buying Committee had the highest level of agreement.
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(Technically, he found that the standard deviation of demand for
a style was approximately twice the standard deviation of the
Buying Committee's forecasts for that style.) With this in mind,
he constructed a forecast distribution for each style as a normal
random variable with the mean equal to the average of the
Buying Committee member's forecasts and standard deviation
twice that of the Buying Committee's forecasts.
Where to Produce
To complete the planning decision, Wally would also need to
decide which styles to make in Hong Kong and which would be
better to produce in China. This year, Obermeyer expected to
produce about half of all its products in China. Longer term,
Wally wondered whether producing in China would constrain
Obermeyer's ability to manage production and inventory risks.
Would China's larger minimum order sizes limit the company's
ability to increase the range of products it offered or to manage
inventory risk? Was Obermeyer's trend toward increased
(c
production in China too risky given the uncertainty in China's

trade relationship with the United States?
Questions
1. Write down the facts and analysis of the case.
2. Discuss the management style of Obermeyer and what lessons
have you learnt form it?
Source: http://opsmanagement.wikispaces.com/file/view/Sport.pdf
Glossary
Glossary
273
Notes
S
___________________
3PL: Third Party Logistics ___________________
4PL: Fourth Party Logistics ___________________
A Request for Proposal (RFP): It is a document that an organization ___________________
posts to elicit bids from potential vendors for a product or service.
___________________
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Analytic Hierarchy Process (AHP): It is a structured technique for
organizing and analyzing complex decisions. ___________________
Analytic Network Process (ANP): It is a process that allows one to ___________________

include all the factors and criteria, tangible and intangible that have ___________________
bearing on making a best decision.
___________________
Area of Physical Distribution: It concerns movement of a finished
product to customers. ___________________
Beer Game: The game involves a simple production/distribution system

for a single brand of beer. There are three players in the game including a
retailer, a wholesaler, and a marketing director at the brewery. Each
player's goal is to maximize profit.
BSC: Base Stock Control

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Bullw hip Effect: It occurs when the demand order variabilities in the
supply chain are amplified as they moved up the supply chain.
Containers: A box, bottle, can, etc. which can hold goods.
CPIM: Certification in Production and Inventory Management
CPM: Certified Purchasing Manager
CRP: Continuous Replenishment Programs

Data Envelopment Analysis (DEA): It is a nonparametric method
in operations research and economics for the estimation of production
frontiers.
Days of Payable Outstanding (DPO): An indicator of how long a
company is taking to pay its trade creditors.
Days Sales Outstanding or DSO: A measure of the average number of

days that a company takes to collect revenue after a sale has been made.
(c
Dependent Demand: An item has dependent demand when the demand

for an item is controlled directly, or tied to the production of something
else.
DRP: Distribution Replenishments Planning
DRP: Distribution Requirements Planning
EC: European Community

274
ECR: Efficient Consumer Response
Notes
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EDI: Electronic Data Interchange
___________________
EEC: European Economic Community
___________________
EFTA: European Free Trade Association
___________________
EOQ: Economic Order Quantity
___________________
___________________ ERP: Enterprise Resource Planning
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___________________ FTA: Free Trade Agreement
___________________ GATT: General Agreement on Tariffs and Trade
___________________ Goal Programming: It is a branch of multiobjective optimization,

which in turn is a branch of multi-criteria decision analysis (MCDA)
___________________
Green Purchasing: It refers to the procurement of products and services
___________________ that have a lesser or reduced effect on human health and the
environment.
Green Supply Chain Management: The process of using

environmentally friendly inputs and transforming these inputs into
outputs that can be reclaimed and re-used at the end of their lifecycle
thus, creating a sustainable supply chain.
IMM: International Monetary Market

)U
In-transit Inventory: During the transportation process, the product is
inaccessible. Transportation, therefore, uses temporal resources. Such
product, commonly referred to as in-transit inventory.
Inventory Turnover or Inventory Turn: It refers to the frequency of

inventory cycles or turns over per year.
JIT Concept: Just in time concept
JIT: Just in Time
LAN: Local Area Networks
Logistics Channel: the portion of the logistics network that adds value
by making the product available in a manner the customer wants it.
LRP: Line Requirement Planning
Mode of Transport: It is a general term for the different kinds of

(c
MRP/DRP system: Manufacturing/ Distribution system
NAFTA: North American Free Trade Agreement
NASDAQ: National Association of Securities Dealers Automated

Quotations.
NATA: National Air Transportation Association

Glossary
275
Neo-classical Location Theory: It identifies competition as the general
regulator of economic behaviour, which includes a rational pattern to Notes
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determine the location of facilities. ___________________
Network Optimization: It refers to the processes and utilities that help ___________________
a network administrator keep a network operating at peak efficiency.
___________________
Networking Sourcing Strategy: In networking, bought in content of
___________________
the final product is based on the skills and specialized knowledge of
different tiers of subcontractors. ___________________
PE
Packaging: Processes (such as cleaning, drying, preserving) and ___________________
materials (such as glass, metal, paper or paperboard, plastic) employed to
___________________
contain, handle, protect, and/ or transport an article.
___________________
Packing: Preparation of product or commodity for proper storage
and/or transportation. ___________________
Pallets: Piece of equipment that facilitates mechanical handling of ___________________

stacked (palletized) goods for fork-lift trucks.
PLC: Product Life Cycles
POS: Point of Sale
Retail Logistics: It is the organized process of managing the flow of

merchandise from the source of supply to the customer – from the
)U
producer/wholesaler/intermediary through to the warehouse, transport to
the retail units until the merchandise is sold and delivered to the
customer.
RFID: Radio-Frequency Identification
RSP: Retailer Supplier Partnership
SAD: Single Administrative Document
SAIM: Supplier Assisted Inventory Management
SAIR: Supplier Assisted Inventory Replenishment
SCIS: Supply Chain Information System
SCM: Supply Chain Management
SCOR: Supply Chain Operations Reference
Spot Stock: Utilizing warehouse facilities for stock spotting takes place
(c
when a selected amount of a firm's product line is placed or "spot

stocked".
Supply Chain Management: Management of material and

information flow in a supply chain to provide the highest degree of
customer satisfaction at the lowest possible cost.
TDTSP: Time Dependent Traveling Salesman Problem

276
TDVRP: Time Dependant Vehicle Routing Problem
Notes
S
Transportation Problem: It is a modification of the simplex method
___________________
that takes advantage of certain characteristics of the CTP and related
___________________ problems.
___________________ TSP: Traveling Salesman Problem
___________________ Value Engineering (VE): It is a systematic method to improve the
"value" of goods or products and services by using an examination of
___________________
PE
function.
___________________
Value: It as defined, is the ratio of function to cost.
___________________
VMI: Vendor Managed Inventory
___________________
VRP: Vehicle Routing Problem
___________________
WAN: Wide Area Networks
___________________
)U
(c

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Supply Chain Modeling & Design

Dr S R Das Dr Sanjay Mittal Prof V K Nangia

SLM Development Team

Mr Kapil Mehra Mr A N Sinha

Course Code: MBSL-821D

Course Name: Supply Chain Modeling & Design

Version: July 2013

© MPower Applied Learning Enterprise

Unit 1 Introduction to Supply Chain Modeling & Design ....................................................... 3

Unit 6 Distortion in Supply Chain .......................................................................................... 57

Unit 11 Packaging Design ....................................................................................................... 121

Unit 16 Supply Chain Information Systems........................................................................... 167

Unit 22 Supply Chain Organisation Design ........................................................................... 229

Unit 23 International Business Strategy................................................................................ 237

Unit 24 International Marketing and Logistics ..................................................................... 251

Unit 25 Case Study .................................................................................................................. 263

z Concept of Supply Chain Management

z Supply Chain Network z Goal Programming (GP)

___________________ UNIT 4: SUPPLY CHAIN PERFORMANCE

Modeling & Design ___________________

\ Definition of Supply Chain Management ___________________

flows are used by the various supply chain partners to coordinate

___________________ Traditional procurement, physical distribution management and

potential benefits and importance of strategic and cooperative

materials, and components they used in manufacturing their ___________________

supply chain participants. This encompassed the distribution ___________________

___________________ What are the differences between a function and a business

z It is only concerned with what has to be done.

organizational component responsible. Examples are aggregate 7

reflected by the materials function. The concepts and the ___________________

Check Your Progress ___________________

Fill in the blanks: ___________________

1. Supply Chain Management is involved with integrating ___________________

Concept of Supply Chain Management

SELLER BUYER (a)

SUPPLIER SELLER BUYER (b)

Figure 1.1: (a) Traditional Supplier-Buyer Relationship,

Figure 1.1 shows a traditional seller-buyer relationship (a) and a

8 chain shown in Figure 1.2. An extended supply chain consists of a

___________________ Figure 1.2: A Simplified View of Kalyani Breweries Supply Chain

both customers and suppliers, with respect to these flows.

requirements, the overall structure and its essential interfaces and 9

and home products. ___________________

supply chain may also contain a wholesaler or distributor, the ___________________

of these flows is a key to supply chain success. The conceptual

The basic objective of Supply Chain Management is to maximize

Check Your Progress

immediate supplier and customers of the immediate

Supply Chain Network 11

behavioural, and physical dimensions of channel activity influence

Network Modeling Using Spreadsheet: Capacitated Plant

12 production developed. In that model, bauxite ore is converted to

___________________ ∑ ∑ Qsap − M s = 0 (s = 1, 2, …, 11), …(1)

___________________ Variable Qsap is the amount of product p to be produced at smelter

topmost node, is the total production at the smelters, and must

In practice, manipulations like these just performed for

14 computationally in conjunction with large-scale systems

Finally, observe that the network in Figure 1.4 contains only a

___________________ What is a basic solution?