LESSON 1

OVERVIEW OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT

A. OVERVIEW OF LOGISTICS

Nature and Concept

The term ‘Logistics’ stems from the Greek word ‘Logistics’ meaning ‘the science of
computing and calculating’. Since ancient times, logistics has been performed but earlier, it
was used first within the facet of military science. The engineering-related logistics, as
practiced by the military, attracted attention among business that produced industrial products
that had to be maintained with repair parts over the life cycle of the product. For example,
heavy machinery manufacturers, such as Komatsu, have developed world-renowned logistics
systems for delivering spare parts to repair and maintain their vehicles. In fact, engineers
developed a separate professional organization called the society of logistics Engineers
(SOLE), which has had active participation from both military and commercial enterprise.
Hence, from a military point of view, logistics refers to a supportive system which reflects
the practical art of moving armies and materials engaged in combats enemy to achieve the
desired results. The logistics officer was responsible for encamping and quartering the troops
as well as for stocking supply depots.
The term logistics has become much more widely recognized by the general public in the last
20 years. Television, radio and print advertising have lauded the importance of logistics.
Transportation firms, such as UPS, DHL, and FedEx, frequently refer to their organizations
as logistics companies and stress the importance of their services to overall logistics success.
The Persian Gulf War of the 1990s probably contributed to increased recognition of logistics
because of CNN news commentators frequent mention of the logistics challenges associated
with 7,000-mile long ’supply pipeline’ to support the war effort in the Persian Gulf countries.
Logistics management is the most widely accepted term and encompasses logistics not only
in the private business sector but also in the public/government and nonprofit sectors. In
addition, services organizations such as banks, hospitals, restaurants, and hotels have logistics
challenges and issues, and logistics management is an appropriate term in these industries.

Features of Logistics Management

It ensures a smooth flow of all types of goods such as raw materials, work in process and
finished goods.
1. It ensures the delivery of quality product.
2. It offers the best customer service at the least cost.
3. It deal with movement and storage of goods in appropriate quantity.
4. It enhances productivity and profitability.

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Evolution of the Logistics Concept
In a broader sense, logistics is seen to have developed as a society transported from the stage
of human self-sufficiency to the era of exchange which was needed in the socio economic
system. This exchange system has given birth to the concept of trading largely due of division
of labor, industrialization and urbanization of the population. Logistics now goes on all over
the world, 24 hours of every day, seven days a week during 52 weeks a year in every nation,
regardless of their political philosophies. With the transformation of the business function
itself on globally, there has been transformation in the concept of logistics, which has been
systematically divided into 4 phases, namely:

• Independent Business Function Era (till 1950s)

During the early phase of the industrial growth, emphasis was on the problems of production,
mainly due to characteristics of economy of abundance. Companies were under tremendous
pressure to increase production capacity due to high demand created by war time shortages,
followed by very limited number of players. In this stage, logistical function were limited
only to warehousing and transportation of raw material and finished goods the objective of
this stage was to maximize the profit by a corresponding maximization of sales volume by
means of aggressive selling and preaching kills of the sales forces. This stage was the
phenomenon till the 1950s.
• Limited Internally Integrated Business Function Era (1960-70)
With the beginning of the 1960s, corporate enterprise started experiencing difficulties n the
marketplace while converting their products into cash, mainly due to three reasons:
i. A large number of new players entering in the market resulted into
competitive environment
ii. The recession of 1958
iii. The demand for most of consumer and infrastructural goods became
saturated and resulted into a profit squeeze.
Prior to the period of 1960, activities such as procurement, inventory or raw materials, work
in process and finished goods, storage and warehousing, traffic and transportation were
performed in a fragmented manner and caused poor performance and high costs. But in this
era of functional management during the period of 1960s and 1970s two limited internally
integrated business functions- materials management and physical distribution management.
The concept of materials management refers to planning, implementation and control of
activities responsible for the flow of materials into an organization. In other words, materials
management involves function like order placement, procurement of raw materials,
components and working process their inventory levels inbound transportation storage. On
the other hand physical distribution management deals with planning, implementation and
control of activities referring to the flow of finished goods from the last point of production to
the ultimate users it included functions like out bound transportation, protective packaging,
distribution, warehousing, order processing, inventory level of finished goods and customer
service.

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The major objective behind the above steps was to control the costs involved in the above
two functions which were supposed to be next to the costs of raw material
The objective of this era was to control costs and output was the survival of the firm in the
competitive market due to their price based competitive market due to their price based
competitive capability.

• Fully Internally Integrated Business Function Era (1980)

With the beginning of 1980, business situations became more critical as both external and
internal forces continued to generate change in the business functions mainly due to the
following reasons:
i. Inflation continued at an unprecedented ate and resulted into significantly higher
interest rate.
ii. Production productivity was almost at a peak and it was very difficult to further cream
the fat in the production functions.
iii. There was a gradual change in the economic system of most to the countries,
especially with regard to multinational operations.
Many managers were of opinion that material management manufacturing management and
physical distribution functions should be integrated and the term logistics became the
common way to describe the whole activity of storage and movement. This in the early 1980
there had been a shift in the positioning of physical distribution and material management
functions to an integrated logistics management which combined distribution, manufacturing
and material management functions in order to have synchronized system which would
ensure a smooth flow of all kinds of goods.
Integrated logistics refers to a set activities concerned with the flow of all material,
information and control system. In an integrated logistics system there is an interface between
traditional activities of physical distribution and material management along with other
functions of marketing and manufacturing such as production planning and scheduling, sales
forecasting, inventory, management and customer services.
The major objective behind the development of an integrated logistics management system
was cost reductions, which reflects maximization of profitability sales volume by means of a
high degree of coordination between various managerial function.
• Externally Integrated Business Function Era (1990s)
With the beginning of the 1990s, the overall business scenario became more critical, mainly
due to the following sea changing the environmental factors:
i. Liberalization of almost all the economies of the world for movement of goods from
one country to another resulted into world class competition in the market.
ii. Rapid innovation in the field of science and technology, particularly information
technology, has completely changed the corporate mindset from safety stock
mechanism real time response mechanism by means of rapid communication and
exchange of data.

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 iii. New inventory management techniques like MR, DRP and JIT became popular
instruments to efficiently plan and deploy inventory items throughout the complex
and multilevel networks, preventing stock out situation without enough safety stock,
resulting into further curtailment of logistics costs in general and inventory costs in
particular.
iv. Due to increase in the quantum of competition firms need to have a long term
unbeatable core competency or competitive advantage
v. Emergence of third party logistical service provider changed the entire concept of the
transport industry form mere transporters to logistics services solution, providers,
contributing significantly in the success of logistics system
Hence, due to the above mentioned reasons, the organizations structure emerging following
the logistics activities in the 1990 follow the pattern of external integration which has given
impetus to the concept of supply chain management.
The major objective of this era is the core competency by means of further streamlining the
logistics system with other supply chain members so as to achieve a higher level of
specialization and to reduce financial risks. The output of this era is the maximization of
customer value and harmonious long run relationship between all supply chain members.

Logistical Mission and Strategic Issues

The logistical system of firm refers to an integrated effort towards generating the highest
value of customer satisfaction at the least cost while delivering the highest value to its
shareholders. Hence, the major missions of logistics are as follow:
a. To make available the right quantity of right quality products at the right time and
right place in the right physical condition in the right quantity to the right customer.

b. To offer the best possible customer service for core competency firms need to keep
their customer motivated towards trade. For this purpose, firms have to offer their best
services to their customers in terms of three broad categories of service components,
namely:

i. Strategic Components-- These components reflect the vision of the top

management of the company towards relationships with their customers in terms
of their ability to ensure best return against the investment made.
ii. Logistical Components-- These component deal with basic services required for
delivery of goods including availability of goods, fixed replenishment cycle time,
zero defect delivery, prompt reverse logistics system, point to point information
and reliability their services.
iii. Non-Logistical Components-- These service components basically refer of value
added services offered to customers in terms of financial and technical support for
infrastructural development, credit facility etc.

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 iv. To Minimize Total Logistical Costs– Normally, logistical cost range from 15 to
45 percent for the price of the product next to the costs of raw materials for most
of the goods. There is enough scope for curtailment of these costs by means of
having better coordination and integration of various logistical and non-logistical
functions of an enterprise along with high level of productivity.

Logistical Competitive Advantage

The generic meaning of the term competitive advantage involves the firm ability to
differentiate itself with others, in the eyes of the customer in terms of its various activities
and ensuring economies of scale in operations. In other words, it generates the highest level
of customer satisfaction and maximizes productivity and profitability by operating at a lower
cost. Michael E Porter, professor of Howard Business School, who rolled the coin of
competitive advantage in circulation through his research and writing and gave a new
direction towards the mindset of the corporate strategists and mangers in achieving success in
the market place.
Porter has divided total business activities of a firm into two sets of value chain activities,
namely primary and secondary activities.
Primary activities include in-bound logistics, operations, and out-bound logistics, marketing
and sales and services whereas secondary activities involve infrastructure, human resource
management, technology development and procurement. To gain a competitive advantage
over other players, efforts should be made by the firm to deliver value to its customer
performing value chain activities in a more efficient way than its competitors. Logistics
management has tremendous potential to contribute in gaining a competitive advantage
because it is a primary activity in the value chain facilitating in the performance of others.
Competitive advantage can be created and achieved by logistics managers in two ways
namely cost advantage and value advantage. Logistics ensure a high level of cost advantage
termsof low inventory level, resulting in lower inventory cost, no stock outs no lost sales cost,
intact delivery, maximum capacity, utilization, high working capital turnover as well as
integrated total logistics system, resulting into a synergistic effect. It also contributes in high
value advantage by means of high quality products, their regular availability, quick response,
best customer service and consistency in the performance of the logistical system. High cost
and value advantage ensure superior customer value, revealing a competitive advantage.
William c. Copacino has identified the following five ways to significantly gain a competitive
advantage by the use of logistics management:
i. Low cost: Low cost is important in logistics intensive industries where there is little
differentiation among commodity products.
ii. Superior customer service: The most notable measures for customer service include
short order lead times and in stock availability.
iii. Value added services: This involves providing services that enhance customers’
ability to compete ad includes activities like pricing and ticketing of merchandise,
making drop shipments direct to stores, arranging for quick replenishment and
providing raining to the customer.

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 iv. Flexibility- A logistics system can create and advantage by being flexible enough to
customize its services and cost offerings in order to meet the needs of either distinct
customer segments.
v. Regeneration –A genuine value and competitive advantage can be provided by a
logistics system with the capability to reinvent itself. This means it has the capability
to innovate or develop new ways to serve a market.

Strategic Logistics Planning Process

Step 1-Corporate Vision – A well-defined corporate vision gives future direction to the
firm. Strategic logistics planning process starts with the definition of the corporate vision
towards objectives behind the extent of use of logistics, the key inputs of logistics planning
process, identification of potential, alternative. The key elements of corporate vision towards
logistics strategic plan include – recognition of service requirement for different market
segment, anticipation of key external environmental forces along with their impact and
definition of the mission and objectives for the logistical function in terms of strategic
direction and requirement for logistics.
Step 2-Logistics Strategies Analysis- After proper definition of corporate vision then go to
next step involved in the strategic logistics planning process is logistics strategies analysis.
The key function of this step includes development of various strategies alternatives and
review and final confirmation of detailed logistics plan. This step depicts the essential
components of logistics strategy, also reflecting the extent of its use for competitive
advantage in terms of superior customer service and productivity, structural framework with
regard to channel design and logistical network, functional aspects, infrastructural facilities.
Step 3- Logistics Planning - The logistic plan is a blue print of the total logistics system in
term of:
o Functional goals to achieve pre-determined long run logistical objectives and
corporate missions,
o Programmes and procedures for new logistics projects,
o Operational activities along with their coordination,
o Time for framework, authority and responsibility and
o Continuous evaluation and measurement of performance for further improvement of
total logistics system.
Step 4- Managing Change -The final step in the strategic logistics planning process deals
with managing change by developing a cohesive environment in the organization so as to
ensure an efficient way of conducting business. the key element for managing change
effectively are: clear out definition of the mission and objectives of the logistics activities,
communication of the logistical mission and objectives to subordinates along with its
contribution capabilities, coordination mechanism between logistics function and their related
functions and organization of training programme to meet the requirement of the new
logistical system to ensure its success.

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Operational Objectives
While achieving logistics missions of the enterprise, logistics mangers are required to define
operational objectives in more specific terms.
i. Right Response-- The first operational objective of logistics management refers to a
firm’s ability to meet the service requirement of its customers by means of quick
response with positive attitude. Real time communication of information regarding
requirements and availability of logistics service is the core of the right response.
ii. Right Quality-- The second logistics operational objective is to ensure delivery of
only right quality products. It include consistency in the quality of the product and
their zero defect delivery.
iii. Right Quantity-- The objective of right quality deals with the maintenance of a
minimum possible level of inventory required for a desired level of customer service.
Any decrease in the raw material means inventory levels for the same level of service
results in a decrease in the inventory cost, which consequently achieves the logistics
mission of minimum total logistics cost. The growing importance of logistics
management has witnessed the innovation of modern inventory management
techniques such as zero inventory just in time, MRP system.
iv. Right Value-- Operational objective of the logistics management system is right
value addition due to its major contribution in creating time and place utilities. A
product remain in the stock, its value will decrease and cost increase. Logistics
prevent this occurrence. Hence logistics add value by creating time and place utilities.
The real value addition made by logistics is in terms of quality, quick response, better
service and consistency and reliability of the total logistics system, which generate
superior customer value.
v. Right Costs Trade-offs-- This objective of logistics is to bring a right costs trade-off
between the cost involved in a logistics system and getting achievement in terms of
overall business performance. This logistic objective ensures a proper balance
between total logistics cost and a desired level of customer service performance.
Logistics system brings cost trade-off between various elements of logistics cost,
warehousing, transportation, material handling, protective packaging.
vi. Right Information-- Right information is the core logistics operational objective. In
order to achieve a logistics mission of the best possible customer service, information
regarding the requirement of goods is the primary aspects. Point to point information
is one of the important elements of customer services

Components of Logistics Management

There are three components: Generic component refers to the logistics mission of customer
service, primary component are actors in the smooth functioning of the total logistics system
and supportive component that facilitate smooth functioning of generic and primary
components
1. Generic component-- It include customer service bring about an interface of logistics
with marketing that determines; customer services requirement for products or
competitive advantage , corporate vision towards service goals, service expectation of

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 customers and their response, development of customer service standard, logistics
cost service trade off and infrastructural requirement.
2. Primary component-- It include
a. Network Design-- Number, size and location of facility network required to
perform logistics operation, relationship among location facilities, and their cost
and customer service capabilities.
b. Transportation-- Requirement, availability and regularity of the transport
service, modes of transport, transport cost, fleet management, transit insurance,
time, speed and intact delivery and point to point information about movement
status.
c. Inventory Management-- Stocking policies for raw materials, work. In process
and finished goods, zero inventory, just in time, push or pull inventory strategies,
inventory cost.
d. Order Processing– Order receiving and recording, speedy order processing and
transmission, order inventory interface procedures, ordering and back order
system, warehouse picking and packing and order processing cost.
3. Supportive Components-- It include:
a. Storage and Warehousing– Warehousing location and configuration,
infrastructural facilities, operational mechanism, space determination, goods
placement, up to date recording of goods stock position, proper loading and
unloading system and warehousing cost.
b. Protective Packaging-- Goods protected from loss and damage, design of
packaging required for handling and storage, reuse of packages and many more
activities.
c. Information-- Information requirement for logistics system, sources of data and
their reliability, DBMS for processing, analysis and storage.

Functions of Logistics Management

1. Procurement Function-- This function ensure a smooth flow of raw material, parts
and components of specified quality and quantity form quality certified suppliers to
the production centers. This logistical function is required to complete the
procurement process. After procurement and arrival of input materials, there is
subsequent requirement of other logistical functions such as handling, storage and
movement to shop floors for final use I the manufacturing process. These functions
are generally attributed as in bound logistics or traditionally material management
function of the total logistics function. Traditionally, companies procured input
materials from a large number of supplies in bulk quantity. But modern logistics
approach has changed procurement management which advocates procurement of
quality specified goods from very limited always in small quantities in a continuous
basis. This approach further facilitates low inventory level, resulting into huge saving
in logistics costs. This function of logistics is more imperative in those industrial
sectors where a large number of components and raw materials are procured such as
automobiles industry like Maruti Udyog.
2. Production Function-- The production function of logistics deals with efficient and
effective management of work in process inventory and its flow between the different

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 stages of manufacturing. Hence this logistical function ensures timely availability of
semi processed materials and components inventory to support the production
schedule. The primary task of production function of logistics is to establish and
maintain and orderly, smooth and economic flow of materials facilitating total
production system, avoiding idle time for any manufacturing facility due to non-
availability of any input items. This function of logistics is significantly different from
procurement and physical distribution function. This function is limited to movement
within and enterprise, whereas other deal with external facilitators such as suppliers
and customers. Hence, the production function of logistics is largely controllable in
nature, while the performed of other function are largely conditioned to the extent of
behavior and support of them. This function is important in all industrial sectors and
generally more crucial in those industrial units where the product cycle time is high
and needs a lot of processing.
3. Physical Distribution Function– Physical distribution function refers to the
movement of finished goods from the last point of production to customer. The
physical distribution function of logistics ensures zero defect service and eliminates
stock out situation by making the product available regularly with the minimum
inventory level. It offer cost efficient value added customer service This particular
function of logistics of logistics is more crucial in those industries units where the
number of product or product mix is quite large. For example, FMCG and electronic
goods.

Integrated Logistics System

In order to sustain in the competitive market place and retail market dominantly managers
were of the opinion that it is the need of the hour to develop an integrated logistics system
which will be an interface of the procurement function, production function and physical
function of total logistics management system with an intention to achieve following
objectives.
I. To ensure better customer service by appropriate value addition for superior
customer values
II. To ensure higher productivity and further curtailment of logistics cost by means of
synergy between different business functions and particularly all three logistical
function
III. To avoid a repetition of similar types of logistical function by different department
at different levels and the development of a profession integrated approach.
IV. To properly monitor the performance of existing logistics system so that a
continuous improvement in the system can be made possible in time.
In an integrated logistics system, there is a high degree of coordination brought in between
the traditional activities of procurement or material management and the physical distribution
management, along with marketing and production management. Integrated logistics system
refers to set of activities concerned with storage and flow of all materials, information and
control system it a cost-efficient manner. It becomes clear that an integrated logistic system
in an interface of procurement function, production function and physical distribution
function of the total logistics function in order to achieve a basis of logistic mission of the
best possible customer service at the least possible costs. Furthermore, in an integrated

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logistics system, the flow of goods is in forward direction to ensure availability of goods at
the point of use in time as per specifications for greater market dominance .whereas the flow
of information is in both directions for activations and improvement of the total system. The
nature of backward information flow such as quality feedback, customer order, procurement
quality, specifications and timing, production and dispatch planning facilitate coordination
function. However, the forward information flow, such as availability of goods, order
processing and status trading and legal documents, quality assurance report operating and
warranty manuals, etc. deals with the operational function of logistics system.

Total Cost Analysis and Trade-off

The total cost refers to the sum total of the cost involved in various component of logistics
function namely:
o Inventory cost,
o transportation cost,
o storage cost,
o warehousing cost,
o material handling cost,
o protective packaging cost,
o order processing cost, information cost,
o customer service cost, and
o Production lot quantity cost.
Thus, the total cost analysis is as its name implies the analysis of a logistics system design
taking into consideration all the costs of the integrated system. In this approach efforts are
made to minimize the total cost of logistics rather than minimization of the cost of individual
component. Various components of logistics have a conflicting behavior and relationships
with each other items of costs. Similarly any cut in the warehousing cost may lead to a
substantial increase in the transportation cost due to shipment of a small quantity or decrease
in the sales volume due to a reduction in the level of customer service. Therefore, it is
essential to consider the total of all logistics costs. Reduction in cost of one component of
logistics leads to an increase in the cost of others. Thus, effective management and real cost
saving can be accomplished by having an attempt to improve the efficiency of the total cost
of the total cost of integrated logistics system and not the separate cost of individual
components.

Growing Importance of Logistics Management

Logistics in the Economy:
A Macro Perspective
1. Logistics cost as a percentage of GDP have declined from 16 percent in 1980, to
under 10 percent in 1999.
2. Early to mid- 1970s closer to 20 percent.
3. This reflects a serious improvement in the efficiency of logistics system.

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 4. The Federal Reserve measure of inventory to sales ratios from 1991 to 1999 in that
year companies are getting better at managing inventory.
5. Companies have been supporting larger amount of sales with decreasing amounts of
inventory.
6. The frequent trade-off in logistics management is between transportation and
inventory cost.
At the macro level, India spends nearly 13 percent of its GDP on logistics, as compared to an
average of 10 percent in developing economies. Transportation and inventory costs constitute
over 50 percent of the value added in India. Worldwide, the logistics costs have decreased
from 12.2 percent in 1992 to 11.7 percent as a result of better supply chain management.
There is definitely scope for improvement in India for reducing costs through a better supply
chain design, inventory management and operations.
With globalization and shortened product life cycle, the Indian industry is focusing to re-
engineer their supply chain and logistics activities to achieve the competitive edge. Indian
companies are increasingly integration their supply chains and outsourcing their Logistics
and Supply Chain Management requirements.
This has created the need for a range of logistics and transportation solutions for the industry,
ranging from solutions for multimodal transport, freight forwarding, material handling,
warehousing, shipping, air cargo, packaging, inventory management and more importantly, in
integrating logistics and supply chain etc. to name a few.

Logistics in the Firm:

The Micro Dimension
1. Logistics interface with operations/manufacturing.-
2. length of production run-
i. Seasonal demand-- the acceptance of seasonal inventory to balance to lead
production times.
ii. Supply –side interface– stocking adequate supplies to ensure uninterrupted
production now a logistics function.
iii. Protective packaging-- principal purpose is to protect the product from damage.
At the micro level, after decades of continuous development, leading companies across
industries now closely match one another in most of aspects of production, manufacturing,
sales and marketing. With a lot of work already done in these areas, only a gigantic
innovation can bring about significant change.
Logistics and supply chain management is an area in which leading corporate enterprise,
especially, automobile, FMCG, steel and other allied industrial sectors have been working
since the last six to seven years, reaching high dividends. Across industries, firms are now
facing the need to fulfill the never-ending ‘value for money’ demand from the end user and
the ever increasing ‘threat’ of product supplies from low-cost, small-sized players.
The requirement of appropriate logistics system to any enterprise may begin with the concept
of an integrated total movement and storage approach for coining a synergistic approach

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between different inter-dependent logistical functions which deals not only with ample
opportunity for costs saving but also accelerate productivity and profitability by means of
making just-in-time supplies and deliveries with minimum inventory.

Logistics Interface with Marketing

The Marketing Mix- Four Ps:
1. Price--
An organization sells on a delivered –price basis (price includes transportation charges) and if
its price schedule matches the transportation shipping requirements on a weight basis, the
shipper should be able to get lower rates per pound with larger purchases and thus save
money for the shipper and customer. So when an organization calculates how the weight of
that number of units compares with the weight requirements for a transportation rate.
Matching schedules- quantity discounts should be tied to carrier quantity discounts.
Volume relationships- volumes sold will affect inventory requirement.
2. Product--
Consumer packaging- generally, since the size, shape, weight and other physical
characteristics of the product impact on its storage, transportation and handling, the logistics
managers should be included in any decisions regarding these product trait.
3. Promotion--
Push versus pull- the most important factor is that the logistics division is aware of any
changes in demand pattern so that it can plan for any consequences.
Pull strategies tend to be more erratic.
Push strategies tend to more predictable.
Channel competition- the more popular a product, the easier it is to persuade channel
members to promote your product.
4. Place--
Wholesalers-- generally, since wholesalers are combining purchases for multiple retailers, the
shipment sizes tend to be large and the number of transactions that have to be processed are
fewer, with the result that logistics costs are smaller.
Retailers-- with the exception of very large retailers who act more like wholesalers, smaller
sales are the norm. These costs are more for transportation and order processing.
Logistics Interface with Other Areas--
While manufacturing and marketing are probably the two most important internal, functional
interfaces for logistics in a product-oriented organization, there are other important interfaces.
The finance area has given significant impact during the last decade. The impact that logistics
can have upon return on assets (ROA) or return on investment (ROI) is very significant.

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ROA is defined as follows:
ROA= Revenue-expenses/Assets
or
ROA= Gross Profit/Assets
Logistic can impact ROA in two ways.
First, inventory is both an asset on the balance sheet and an expense on the income
statement.
Second, transportation and warehousing costs also significantly influence increased. If these
assets are reduced or eliminated, ROA will increases.

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 B. SUPPLY CHAIN MANAGEMENT

Nature and Concept

Supply chain management can be traced to the 1980s, it is safe to say that not until the 1990s
did supply chain management capture the attention of senior-level management in numerous
organization. They recognized the power and potential impact of SCM to make organization
more globally competitive and to increase market share with consequent improvement in
shareholder value.

Features of Supply Chain Management:

A. Single Entity-- A group consisting of representatives from purchase, manufacturing,
distribution and sales could be the entity for finalizing the marketing plan, the
dispatch plan, the production plan and the production plan and the procurement plan.
This has an impact on reducing administration delays and improving empathy across
the supply chain.
B. Inventory Perspective-- The appropriate inventory to protect oneself against
uncertain process yields, working with lower and lower inventories will perforce
highlight the top problem areas where efforts for improving process yields need to be
focused. This results in a learner and cleaner system, which is more responsive in the
long run. Some key measures are: reducing lead times, reducing uncertainties and
improving quality.
C. Strategic Decision Making-- Being concerned with just sourcing trucks from the
market, one could consider long-term contracts with transporters, or investing in their
infrastructure to suit one’s purpose. This facilitates smoother and more reliable
transport logistics in the long run.
D. System Approach-- The supply chain from vendor to customer is viewed as a single
integrated system rather than many subsystems interfacing with each other.
Traditionally the efforts would have been aimed at developing better interfaces
between, marketing and production, or sourcing and conversion. This would have
facilitated smooth operational functioning, issue like outsourcing, which significantly
cut across both sourcing and conversion, would not have been considered. The
integrated concept of the supply chain would enable this.
E. Doing the Best One Can-- In the various activities of the supply chain, it is important
to focus on doing what one can do best. This has implications on outsourcing or even
in sourcing and building effective partnerships. The more extensive the logistics
requirements or the more uncertainty due to logistics supply, in sourcing would be a
right direction. General norm in this business in today’s times is outsourcing.
F. Supply Chain Relationships-- The supply chain concept emphasizes more of
harmonious relationships among all the members such as vendors, channel
participants, and all third- party logistics service providers. The contributions of
supply chain members are significant for the performance of the organizations.

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 G. Flexible Approach- Supply chain are designed for flexibility in all the processes of
company’s supply chain system, starting from manufacturing to warehousing, which
plays a very important part in improving the customer service. Since, business
conditions are certain to change, the supply chain configuration should be flexible
one.

Value Chain
In the value chain of SCM, which starts with vendors and ends with consumers, via the
shipper (in-bound transporters), producer (manufacturer), out-bound transporter, distribution
warehouses, transportation from there to customers and finally to the end user (consumer),
the flow of goods and value are in forward direction for greater market dominance and the
flow of cash is in a backward direction to the total business system alive, whereas the flow of
information is in both directions for activation and improvement of the total supply chain
system.
• Value Flow-Value is delivered through the defined business activity of the firm in the
form of goods and services. The flow of value is always in a forward direction in the
supply chain process as each supply participant add some value in the supply chain
process as each supply chain participant add some value I the goods or source
received by him from his proceeding member before making delivery to the next
party. The value may be in the form of quality, costs, quick response, availability and
consistency of the logistical system.
• Goods Flow- The second item of flow in the value chain of SCM is good or
inventory, which is the heart of the total system. The flow of goods are always in a
forward direction, ensuring better customer service, superior value, greater market
dominance and higher market share. Smooth flow of goods from vendors to
consumers prevent stock out situation for any item of inventory systematic and
sophisticated supply chain approach deals with better customer service with lower
inventory level and flexibility to meet unforeseen requirements.
• Cash Flow- Flow of cash in the value chain of SCM has commercial significance,
which flows in a backward direction (against the value and goods flow) to keep the
total business system alive and activated. Cash flow basically deals with the money
paid for goods and services received by a supply chain member.
• Information Flow- Information flow is as significant in the supply chain as blood is
for human life. The flow of information in the value chain of SCM is in both
directions for activation and improvement of the total supply chain system. The nature
of backward information flow facilitates coordination activities consisting of quality
feedback, consumer order and specification, procurement quantity with specification
and timing, strategic capacity, production and dispatch planning. etc. however, the
forward information flow refers to operational activities consisting of availability of
goods, order processing and management, order status, invoice, transportation and
shipping advices, quality assurance, warranty card, operating manual, etc. any delay
in the information flow cost to the company ranges from higher transportation cost to
lost sales and cooperate image.

15
Function and Contributions:
Minimizing the Number of Stages-The number of stages that the goods and services flow
through add to the complexity of SCM. Unification of tasks and reducing the number of
stages ease the coordination of decisions.
Improving Flexibility- Reducing set up or changeover times in various processes and the use
of flexible manufacturing and assembly techniques improve the flexibility of response.
Improving Process Quality- A prerequisite to effective SCM in the light of reducing
inventories and wastage is to do things right the first time. This is ideal for improving the
process quality. The techniques for doing so include statistical process control root cause
analysis of poor quality and improvement of process capability.
Minimizing Variety- Variety is one of the major causes for inventory in the downstream part
of supply chains. One response is to modularize product designs so that variety is offered in a
controlled way and some economies of scale can be exploited.
Focusing on a Group- This is a well-known idea from classical economics and inventory
theory, where special attention is paid to items that account for a large part of the value, or
which are critical, and/or customers who are significant, and/or territories that are important.
Planning for Multiple Supply Chains- Doing better SCM would often require different
supply chains for different customer segments based on response requirements. The tendency
to club supply chains in the interest of efficiency can be counter-productive for effectiveness.
Modifying Performance Measures- These measures need to from being single-actor
focused in the supply chain. A transporter like the railways would focus more on the time
taken for delivering a wagon/rake to a customer from the time the indent is placed, rather
than wagon utilization/turnaround.
Competing on Service- The big opportunity in SCM for a long-term competitive advantage
is on the service aspects of value delivery to the customer. Product quality and features can
only be short-term advantages.

Supply Chain Effectiveness and Indian Infrastructure

Supply chain is a process which interfaces and interacts within the entire company and with
external organization like, vendors, customers, carriers, etc.
For the successful performance of supply chain activities to meet the requirement of the
above key issues, it is essential to have adequate infrastructure in terms of internal as well as
external facilities. Hence, an appraisal of the Indian infrastructural facilities is essential. S.K.
Acharya (1999) managing director of Indian container leasing company has quite rightly
identified the Indian infrastructural bottlenecks and challenges ahead are as follows:
When we look at the infrastructure available with us, we wonder how we are going to
progress in this millennium. We have the second largest railway network in the world but it is
getting clogged day by day. We have roads connecting the country from one part to other but
their width and surface are of serious concern.

16
In the development of supply chain management, we are still at the bottom of the ladder- we
are still at the stage of trucking and distribution. There are not many companies we can
remember who are in thirty-party logistic management business in India.
There have been efforts by the government to create road infrastructures which will make us
at par with developed world. But the kind of funds that we require to set up 10,000 km of
super highway poses a very serious challenge. Our transportation and distribution
management business process has a long gap to be bridged to take us to the twenty-first
century.
When things start changing, it is very, very fast. New dynamics step inside the existing
processes and realignments starts taking place. The automobile revolution has already started
in India-competition has set in. there is a tremendous challenge before the supply chain
managers in the industry because here the opportunity exists best in saving wastage and
adding value in the total process. The key to tomorrow’s success lies here-I see a tremendous
role for the supply chain manger as a catalyst to the change ahead of us.
a. Despite the limitation of infrastructure, there is a lot to be done in the supply chain
management. We need to ensure that in a country of resources constraint like India
each resource is utilized to its highest capacity. All the partners who are involved in
movement of raw materials or finished products need to be made a part of the same
planning process which will determine deployment of resources within supply chain
as also ensure the highest productivity in the same.
b. Despite being in an economic down turn, we still expect growth rate to be in the
vicinity of 6 percent. Grow 1.5 times and that of cargo transportation grow 1.3 times
of GDP. This means that in 7-8 year time, passenger transportation will double and
freight transportation will double in 10 year time. We need to spend US $10 million to
create the road infrastructure to help us get into the twenty first century. There is a
substantial growth in domestic intermodal transportation, which is energy efficient as
also environment friendly. We have about 8,000 km of coastline. We have the Indian
railway with the right of way to construct additional railway lines through its main
Kolkata-Delhi-Mumbai-Chennai network and it is extremely important.

Outsourcing and 3PLs

Outsourcing is one of the important features of the supply chain management. Companies
were and are still using the services of third parties, be it a transporter for shipment of goods
from a production plant to warehouses/distributors or a consultant for improvement of
productivity. Even in manufacturing, third-parties (contract manufacturers) are used by most
of FMCG companies. In logistics and supply chain management too, firms have been
outsourcing the activities of transportation, warehousing, clearing, and forwarding to
different operators. The business worlds quickly studied and separated value-adding activities
and non- value adding activities. This action facilitated them to redefine their mindset and
concentrate on only the former and leaving the latter to other firms who have the expertise it
doing that at a more economical of scale, i.e.-seeking the services of external agencies that
could handle non-value adding services. This is the genesis of ‘third-party logistics’ service
providers. The business activity of farming out identified non-core activities to external
agencies came to be known as ‘out sourcing’.

17
In India, are offering a suite of services that includes logistics planning, developing
customized logistics solutions, implementing solutions, warehousing management, shipment
consolidation, carrier selection, rate negotiation, fleet management, logistics information
systems, reverse logistics, order fulfillment and processing, inventory management, multi-
model transportation, value added services etc.
Outsourcing and 3PL provide several advantages for the long-run strategies core competency
to the firms which are as follows.
• Cost Reduction- 3PL providers offer benefits of economies of scale and lesser cost of
services. They are able to do this because of pooling in idle time of resources that
translates into reducing operating costs and interest costs.
• Maximum Revenues- By outsourcing the logistics functions, companies are able to
concentrate on their core areas and can utilize both financial and non-financial
resource where it can maximize returns. The 3PL providers take care of routine work
that frees human resources and time spent on routine functioning.
• Cost Control- Controlling costs is distinct from reducing costs. It is quite visible
efforts by almost all the companies at the shop floor and at stores that are driven
towards controlling cost. So, while individual ,these ‘kaizen ’or cost control measures
may not transform into tangible results but collectively, all the companies stand to
gain in the long run.
• Working Models- Outsourcing for companies in India has different meanings. From
an organizational structure point of view, three distinct models may be visualized.
First and the most widely used model in India every today is of internal purchase,
sales and dispatch departments that handle all the commercial and sourcing function
for the company. This has been the traditional way of working with its own hierarchy
and control. The second model is that of a separate logistics department that handles
all the logistics activities of transport, inventory, warehouse management and
coordinating with suppliers and its client- which may be the company itself.
The third option is of outsourcing the entire logistics function to a third-party that
specializes in logistics management.
• Roadblocks- ETIG’s meetings with more than 60 manufacturing companies and
logistics players, consultants revealed a few factors hindering the faster growth of
3PL some of them are:

a) Volume of Transactions- volume of transactions is not big enough to set up an

independent department or outsource the function. Hence, we find Indian
companies still using the first two types of models.
b) Cost Control- Indian companies believe that outsourcing and use of 3PLs for
any function other than manufacturing will not benefit the bottom line.
c) Not good enough- Most companies, when contracted for 3PL services, were
not clear on how the external agency could do a better job than its own people.
d) Mindset- Indian companies resist change until it is forced upon them. As was
observed in ERP and computerization in PSUs like banks, people fear change.

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Bullwhip Effect and Supply Chain
The ‘bullwhip effect’ phenomenon first identified by Seungjin Wang (1995) which refers to
the variation in reaction down the length of a whip offer it is cracked, resulting in an
expensive manufacturing problems. He explains that the bullwhip effect happens in
manufacturing when information about consumer demand for any product becomes
increasingly distorted as it moves upstream in the manufacturing process. The bullwhip effect
distorts demand information within the supply chain, with different stages having a very
different estimate of what demand look like.
Procter & Gamble (P&G) first noticed the phenomenon with the US when the company
examined order patterns for its diaper brand-‘pampers’. Sales of the diaper brand at retail
stores were fluctuating, but the variability was not excessive. This was because the frequency
of purchase at a single retail store is more or less constant or at least predictable, since the
same families shop at a particular neighborhood retail store and babies change diapers at
known intervals. For distributors, orders, the degree of variability was much more. The
demand order variability amplified at the higher levels of the supply chain.

The bullwhip effect in various components of logistics and supply chain are as follow:
• Manufacturing Cost-- The bullwhip effect increases the manufacturing cost in the
supply chain mainly due to a variation or gap in the real quantity demanded and
quantity for which order placed by the customer. This result in increased variability,
either in building excess capacity or in holding excess inventory, both of which
increase the manufacturing cost per unit produced.
• Inventory Cost and Replenishment Lead Time-- These are mainly due to the fact
that the firm has to maintain a higher level inventory than the required one, also
having impact on dispatch schedule for finished goods by the firms as well as by
supplier firms for components/raw materials to be supplied to the firms because
available capacity and inventory level might not meet the order quantity, resulting
into higher replenishment lead time.
• Transportation Cost– Within the supply chain, transportation cost increases due to
bullwhip effect, which is mainly due to significant fluctuation in the transportation
requirement over a period of time. This has the impact of raising transportation cost
due to requirement of maintenance of surplus transportation capacity to meet high
demand period requirements. At the same time, the bullwhip effect also increases
labor cost associated with shipping, receiving, loading and unloading of shipment in
the supply chain.
• Product Availability-- The bullwhip effect decreases product availability. Due to a
lack of trade-off between the actual demand and order quantity, firms will always face
problems of stock out at some selling point, whereas over stock at other, resulting into
both loss of sales and increase in the cost of the product. In this way, the bullwhip
effect hurts the nature of relationships across the supply chain. In case of stock out,
the retailers have the tendency to blame the earlier stage of supply chain for poor
performance, whereas in the case of overstocking at a retailer the firm blames on them
as it puts pressure to clear the stock because of the fact that the firm might be facing
stock out at some places.
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Supply Chain Relationships
Today, companies establish strategic relationships with various organizations such as
suppliers, marketing intermediaries, consumers, transporters, etc. in order to have overall
competitive advantage in terms of technology, costs, marketing and long-run performance of
the business. It is happening mainly due to following facts:
• As the world market is emerging as a global village with greater diversity in its
environment, it is not possible for companies to respond quickly to changing customer
wants due to limitation of resources and risks involved in adaptation of changes.
• In the era of rapid innovations in the field of science and technology, it is generally
beyond the capabilities of a single organization to meet the skill and resource
requirements for the complexity of technology
• Information revolution makes establishing organizational relationships more flexible
in terms of time, costs and effectiveness so as to keep relationships alive and active by
improving communication system
• Expansion of market due to liberalization and globalization of almost all the
economies of world further excel the need of gaining access to markets. Effective
coverage and reliable knowledge of the market are the major problems faced by most
of the companies nowadays, unless they have strategic relationships with their
marketing intermediaries such as wholesalers and retailers
• Emergence of third party logistics service providing organizations whose professional
high degree of core specialization have changed the overall performance of logistics
service
Hence to sustain itself in the highly global competitive environment, effective
coverage, reliable market knowledge and real time response are the greatest
challenges faced by the corporate world. that is why , the success of companies not
only depends on how well they have integrated their functions for optimum utilization
of resources so as to have strategic advantage but largely on their ability to establish
strategic relationship for comparative advantages with outside organizations or
individuals such as vendors, channels partners, third-party logistics service providers
like transporters, banks, field warehousing, firms etc. they contribute significantly in
the success of the company in terms of technology, costs, consumer satisfaction and
long-term performance of the business.

Conflict Resolutions Strategies for Harmonious Relationship

The transactional view of conflict is negative and destructive in nature; believed to be
avoided. Whereas, the modern approach welcomes a conflict in the constructive sense
because it always lead to crises, which is the genesis of innovations. Whether it is
constructive or destructive should be proactively and strategically resolved at the earliest in
order to maximize its advantage and minimize disadvantages. Resolution of conflict is
strategically significant in order to develop and maintain harmonious relationships between
channels members. According to Jagdish N. Seth, ‘harmonious relationship require similar
goals for channel members regarding the various aspect of the relationship as well as process

20
convergence, that is, how to achieve effectiveness and efficiency in the process of delivering
service outputs required by end-users’
Goal (the what Aspect)
Divergent Convergent

Convergent Misunderstood Relationships Harmonious

Process (the Relationship
How Aspect)
Divergent Acrimonious Relationship Mismanaged
Relationship

Criteria for Harmonious Relationship Marketing

Thus in order to make relationships harmonious, convergence is essential in terms of

individual goals of all supply chain members with a collaborative process. This process refers
to constructive management of following aspects:
1. Clear definition and distribution of role, resource and power within relationships.
2. Frequent and effective communication of information.
3. Proper grievance handling system
4. Proactive strategy for resolution of conflicts.
In other words, a strategic collaborative approach of all supply chain members is required for
redefining the common goal in order to achieve their individual goals and maintenance of an
appropriate harmonious relationship for a long run b means of resolving conflicts amicably.
To resolve conflicts, strategic approach adopted by members largely depend upon the cause
for emergence of conflicts, their own relative strength and limitations and phase through
which the relationship is passing. Generally, to occupy long-run harmonious relationships
between supply chain members, most relationships eventually pass through four stages of
development, namely , awareness, exploration, expansion and commitment. That is why
different strategic moves may be adopted by them based on two factors- two dichotomy
matrix as shown:

Significance of Individual Goals

LOW HIGH
Compromising by sacrifice Integrating by
Nature of Long Run Negotiation
Relationship
Maintenance
Withdrawing by Avoidance Forcing by Domination
Transactional

Strategies for Conflict Resolution

21
Withdrawing by Avoidance- When individual goals have a low importance and the nature
of relationship maintenance is transactional, generally, both parties have attitude to avoid
issues of conflict in order to do the best in the interest of the common goal, i.e., they may
wish to withdraw themselves form a conflict and have a growth in relationships. Normally,
this strategy is adopted and quite appreciable in the case when parties are new and passing
through awareness or exploration stage of relationships.
Forcing by Domination- This strategy refers to the characteristics of high importance of
individual goals and transactional nature of relationship maintenance, i.e. one supply chain
member is trying to achieve its own goal at any costs without having any consideration for
maintenance of a relationship. This strategic situation arises when one party has a very
commendable and dominating position in relationship over the other. For example, a well-
established Maruti dealer markets the accessories of a new company.
Compromising by Sacrifice- This strategy involves long-run maintenance of a relationship
even at the costs of individual goals by members, i.e. supply chain members give the highest
value to a long run relationship and the least to their individual goals in order to resolve
conflicts. This strategy is suggested and applied to resolve conflicts when a relationship is
passing through the expansion stage, both possess attitude of giving rather than expecting to
the relationships.
Integrating by Negotiation – The last strategy puts emphasis on reaching an agreement
between channel members by integration by highly important individual goals and long-run
maintenance of a harmonious relationship will be kept alive in positive sense after giving due
consideration to their individual goals. This strategy is most suitable to resolve conflicts when
relationship became mature and have trust and respect for each other, i.e. the relationship is in
its final stage of commitment.

Towards Harmonious Relationships

It is quite obvious that for a significant contribution of supply chain management, it is
essential to have harmonious relationships with other supply chain partners, because they
facilitate the supply chain system of the firm in the achievement of overall objectives of
logistical competitive advantage. Therefore while achieving the objective depends on how
well the relationship is managed. All supply chain participants require careful consideration
and analysis of the following 7Ms.
Mutual Strategic Alliance
Strategic alliance is a long-term contractual symbiotic relationship between a company and
its all supply chain member for the achievement of common as well as individual specific
objectives and goals. In other words a strategic alliance offer a natural linkage between the
company’s internal environment with external supply chain environment as well as the
interactive process so that all the strategic alliance, partners acquire from each other
technologies, products, skills and knowledge to operate with greater efficiency and
effectiveness. In the prevailing global competitive environment, companies need to have
competitive advantages in terms of technology costs marketing, quick response and long-run
22
performance of the business. But, no company is self-sufficient, mainly due to the following
reasons:
o It is not possible for companies to respond quickly to changing customer wants
because of limitation of resources and risk involved in adaption of changes
o It is general beyond the capability of a single organization to meet the skills and
resource requirements for the complexity of technology
o Due to expansion of markets as a result of globalization and liberalization, it is
necessary to gain an access to the market effective coverage and reliable knowledge
of the market are major problems faced by most of the companies.
In order to overcome the above limitations and problems, companies are required to
establish strategic alliances with various organizations for the achievement of
competitive advantage in the market place, i.e. nature of such relationships should be
long term and strategically aimed at cost-efficient, value added mutual benefits.
Mutual strategic alliances facilitate reduction in wastage and redundant activities
which led to economies of scale and productivity.

Mutual Cooperation and Coordination

Cooperation refers to locating and suggesting potential opportunity to attain a strategic
alignment in the prospective relationships. In other words, it helps to indicate the degree to
which every supply chain members shall be flexible in the pursuit of mutual-satisfying
transaction terms for the maximum benefits of all.
Whereas, coordination deals with how well each of the necessary function will be allocated
among all supply chain members, i.e. coordination refers to a systematic approach for doing
different jobs by different supply chain members with harmony and mutual understanding to
achieve synergy and prevent conflict.
Mutual cooperation and coordination among supply chain members facilitate:
o Clear definition and distribution of role, resources and power within relationships
o Frequent and effective communication of information
o Eagerness to locate a new opportunity and then exploit economies of scale
o Shared minimum risks due to synergistic efforts
o Pro-active resolution of conflicts.
Like, vendors supply raw material as per specification and timing desired by the produce,
producers specialize in production and national promotion, channel members, specialize in
merchandizing, physical distribution and local promotion for making final sales, whereas
transportation contribute significantly by making goods available at the right time in the right
physical condition. Therefore, a high degree of cooperation and coordination is inevitable
among these partners on various issue such as strategic and functional planning, specific role
to play etc.
Mutual Trust and Commitment
The establishment of harmonious relationship among the supply chain members can be
possible on the basis of mutual trust and commitment. Trust refers to a system of norms
establishing each party’s expectations about the other’s performance. In other words, the
23
presence of trust implies that each party within a relationship believes that is counterpart’s
commitment is credible and will be honored. Whereas, commitment highlights an
understanding between all supply chain members that there will be an emergence of
continuous relationship. Commitment reflects loyalty, shared values, objectives and
expectations, willingness to overlook like partner’s temporary short falls, trust and future
orientation.
Once mutual trust and commitment prevails, supply chain partners are likely to work
diligently at preserving their relationship investment by cooperating with one another.
Trust and commitment yield greater efficiency, productivity and effectiveness within supply
chain relationships, i.e. how well the relationships are depend on how much they are
concerned for others.
Mutual Excellence
Mutual excellence refers to the emergence of an implicit behavior and internal capabilities of
all supply chain members to exploit future opportunities efficiently and effectively by means
of optimum utilization of all pooled resources while achieving common and individual goals.
In other words, it recognizes the greater value of relationships by establishing positive and
firm motives and intentions by all the members so that relationships objectives can be
achieved in a cost-efficient and strategically-effective manner. Mutual excellence highlights
the following characteristics with recognize greater value to supply chain relationships:
o A passion for work, i.e. a willingness to get on with things
o A willingness to listen to the customer and zeal for providing unparalleled
quality/service
o Encouragement of political risk taking and innovation coupled with tolerance of
reasonable number of mistakes as a part of the innovative process;
o All members are viewed as the root source of quality and productivity gains; and
o The relationship, philosophy and values are clearly communicated among all the
members.
Thus, mutual excellence brings devotion, determination and dedication of heart, mind and
soul of all the members towards harmonious relationships so that a long-term unique core
competency can be developed.
Mutual Information Sharing
In the era of environmental dynamics, the success of a supply chain system is largely
conditioned to the company’s ability of a real-time response of proper information processing
and their speedier communication to other supply chain members for accurate and timely
implementation of courses of actions.
Quarterly/monthly planning is now replaced by weekly/daily planning due to quick
information sharing among supply chain members, facilitating decision making to fulfill the
requirement of real-time delivery, time to market and effective use of resources.
In the value chain of supply chain management, the flow of information is in both direction
for activation and improvement of total system. The two sets of information that flow in
different directions are:
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 o The backward flow of information refers to coordination activities consisting of order,
procurement quantity, specifications, timing, etc. facilitating strategic, capacity,
logistics, manufacturing and procurement planning and
o The forward flows of information deals with operating activities consisting of goods
availability, order status, invoices, shipping advises etc. involving order, distribution,
inventory, transportation and shipping management.
Mutual information sharing makes relationships flexible in terms of time, costs and
effectiveness and keeps the harmonious relationships alive, active and conflict free by
improving the communication system.
Mutual Involvement by Investment
In order to ensure further growth and more service from trade to sustain in the marketplace,
companies have to offer the best services at the least cost and improve the productivity and
profitability by means of optimum utilization of resources, avoiding idle time for any of
them. So, quite obviously, companies expect value added service from their supply chain
partners. For instance , they expect more from their channel members in terms of investment,
showroom/Godown space, skilled sales forces, mobility, state of the art service facilities, etc.
and zero-defect, in-time, small lot supplies, fixed replenishment cycle time, etc. from
vendors.
Mutual investment brings a high level of belongingness due to financial involvement. Mutual
investment may be made in the following ways:
i. Investment should be allowed for other supply chain members in the company and
ii. The company should also invest in supply chain member firms, directly or indirectly,
by way of providing financial assistance in infrastructural developments.
Mutual investment further strengthens supply chain relationships by means of a deep-dense
of belongingness and involvement.
Mutual Transfer of Technology and Skills
In the modern era of rapid information in the field of science and technology, it is generally
beyond the capabilities of a single organization to meet the skills and resources requirements
for the complexity of technology, irrespective of the size of the firms. Generally, with respect
to the company, other supply chain members have limited size of business and resources,
coupled with professional skill such as interactive skills, executive skills, etc. At the same
time, small companies with specialized competitive strength are able to achieve an
impressive power with larger firms because they have high levels of competence in
specialized technology areas, and are able to substantially compress the development time.
Furthermore, in order to cut down their won costs, companies have to undertake the
responsibility to sharpen the professional skills of other supply chain members with regard to
finance, technology, marketing, competitive strategy and planning, leadership and people
management.
Hence, mutual transfer of technology and skills provides strategic advantages and the
opportunity to enhance the product value, which ultimately motivates the supply chain
members to establish long-term harmonious relations among them.

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 LESSON – 2

TRANSPORTATION

Introduction
The climax of ‘transport industry’ is not a mere movement of persons and goods from one
place to another but the real excitement incorporates the overall growth and development of
civilization in general and economy in particular. The essential prerequisite for the rapid
growth and development of any progressive economy is existence of an adequate
infrastructure which generally incorporates energy, transport and communications.
Infrastructural facilities in general and transport facility In particular, which ultimately
provide bigger opportunities for rapid industrialization of the country. There are a lot of
transport benefits to any economy, mainly divided in two categories, namely economic and
non-economic:
Economic Benefits:
o Transportation makes products available to the final condemns, i.e. it serves not only
existing demand, but also simulates new demands by extending the variety of goods
that can be made available anywhere and everywhere.
o It facilitates production by moving different means of production i.e. raw materials,
machines, tools, men, etc. to place of production where these are best suited.
Transport also encourages regional specialization for competitive advantage.
o It is also considered as a key agency for the promotion of planned development i.e.,
regional economic disparities can be removed by way of transport.
o Transport provides ample opportunity for acceleration of employment and income,
which in turn, create demand for consumer goods.
Non-Economic Benefits of transport may be judged by its great contribution towards social,
political as well as cultural integration of mass population of any country with different
modes, language, caste, creed and tradition. Transportation brings people of different regions
at a common platform with the common social make-up of the community.

Position of Transportation in Logistics and Supply Chain Management

Transportation is the main artery of logistics and supply chain management. It refers to the
movement of goods from one location to another. In other words, raw materials can be
transported from suppliers to production facilities and finished goods from thee to the
consumers. Transportation plays a significantly role in supply chain process because products
are rarely produced and consumed in the same location.
Normally, the share of transportation costs is about 40 percent of the total logistical costs.
Being an integral part of total logistics and supply chain system in India, railways and
roadways carry about entire domestic freight cargo, whereas seaways and airways for
international freight cargo.

26
Due to the prevailing global competitive environmental scenario, corporate enterprises are
continuously under pressure to cut down logistical costs and improve customer service
capabilities. They need:
o Reduction in transit time for minimization of inventory cost
o Less damage, en-route handling and pilferages for minimum insurance charges
o Curtailment of protective packaging costs
o Point to point information regarding the status of the shipment
.
The enterprises includes committed timely delivery, express cargo management, multi model
transportation, warehousing, inventory management, protective packaging, money collection
and management, container truckload, door to door delivery, coastal shipping, clearing and
forwarding in the case of interchange, total insurance and risk management, value-added
service, material handling and emergency services.
Liberalization, privatization and globalization have further increased the market scope, where
the world market is shrinking into a global village. In this situation, movement of goods and
products has become more imperative as also wider. Furthermore, raw materials of one
country are processed in the other country and sold out in Third World countries at an
economy of scale and competitive advantage in the logistics and supply chain perspective.
Transportation has a significant link with various stages of global supply chain.
Hence, in internet marketing and associated home delivery of products, transportation costs
have become even more significant in retailing. Now, transportation plays a very significant
role in the success of e-commerce supply chain.
Thus, the success of any logistical system and coordination and efficient supply chain
performance, transportation plays a very strategic role because:
o It ensures speedier and timely physical movement of goods from point of inception to
point of consumption.
o It create core competency by preventing stock out and customer annoyance
o It provides protective storage during transit
o It ensure cost-effective better customer service
o It fulfils specific service requirements of the corporate enterprise for improvement of
logistical capabilities and harmonious supply chain relationships.
Elements of Transportation Cost
Following are the various elements of transportation cost:
Tariff of Transport Mode- This element of transportation refers to freight charge of various
modes of transport to be paid for movement of goods from one location to another. Tariff of
airways is highest, followed by roadways, railways, seaways and pipelines. Normally freight
charges increase with the decrease in transit time, i.e. higher transit time, lower the freight
cost. Tariff of transport mode largely depends upon a large number of factors, such as nature
of the product, distance to be covered, volume to be shipped, density of the product, etc.
Transit Time Cost- This cost of transportation deals with the cost of inventory in transit.
From total logistics costs point of view, this element of transport cost is very significant, if

27
the transit time of a particular mode of transport is longer, it means that the product of the
company remains in transit for a longer period of time, so, the involvement of working
capital is for a longer period of time, resulting into higher transit time cost.
Obsolescence and Deterioration Cost –These elements of transport cost involve costs
caused due to deterioration and obsolescence in the physical attributes of the product during
transit. These are certain categories of Products which are perishable and delicate in nature,
whose physical attributes deteriorate over a period of time, gradually resulting into
devaluation of the product. For instance, fish is transported from Andhra Pradesh to most of
the country, any delay in transit forces the marketers to sell them at a less-than desired price.
Protective Packaging Cost– For specific products and modes of transport, there is
requirement of specific protective packaging. Hence, such a cost comes under total transport
cost. For instance, if a product is shipped by railways, more sophisticated protective
packaging is required to protect goods from breakages and pilferages. Whereas, in the case of
roadways, less protective packaging is relatively required due to safe shipment and proper
handling of goods, resulting into less breakages and pilferages. Hence, shippers need to take
into consideration the protective packaging requirements along with costs incurred in it.
Transit insurance cost– Transit insurance cost, another element of transport costs, is the cost
of insurance paid to insurance company to cover various types of risks. At the advent of
containerization, this cost has been minimized due to lesser chances of damages of goods
during transit.
Miscellaneous cost– Apart from the above elements of transport costs, there are other
miscellaneous costs, such as local tax, octroi, toll taxes etc. especially when goods are
shipped through roadways.

Modes
The Basic Modes of Transport:
• Airways – When goods are transported by air, the mode of transport is called airways.
This mode of transport is the newest and least preferred mode, especially for domestic
purpose. One of the significant advantages of the air transportation lies in the speed. It
needs only a few hours for a shipment from one place to reach another. In contrast to
the days required with other modes. That is why it is a most preferred mode of
transport for perishable goods like flower or for emergency services. The growth of
this mode is gradually increasing. However, the freight of this mode is highest in
comparison with other modes.
• Seaways- Seaways is the oldest mode of transport when goods are transport through
the water medium by a ship, it is called a seaways transportation. Due to globalization
of the world market, seaways have a large potential for foreign trade. Throughout the
world, this mode has acquired a very high position due to its advantages like being the
cheaper, having a larger capacity and flexibility, however the greatest drawback of it
lies in terms of slow speed.
• Roadways – The roadways have expanded rapidly since the last three decades. Most
of the logistical operation of corporate enterprise largely depend on this mode of

28
 transport. It is mainly due to its moderate contribution in between two extremes of
airways and seaways, as far as speed and cost are concern. The reliability and
economy of this mode is gradually increasing due to continuous improvement in the
quality of motor vehicles and the condition of roads. These factors facilitate in the
achievement of logistical objectives like lower transit time, lower total logistical cost
and improve customer services. That is why over the years it has attracted the
corporate world significantly and eaten the business of railways.
• Railways– Historically, railways had accounted for the largest percentage of freight
cargo in most of the countries. The major advantage of railways is to efficiently
transport large quantities of goods over long distance. Given the high fixed cost and
low variable cost of operation, the tariff of railways is low, which encourages large
shipments over a longer distance. That is why the bulk shipment of products like
fertilizer, cement, food grains, petroleum products etc. are normally through railways
from the production plant to the bulk/central warehouse.
• Pipelines– This mode of transport is a very significant one but with a very restricted
scope. Pipeline is used primarily for the shipment of liquid and gas like crude
petroleum, and refined and natural gas. The basic nature of this mode of transport is
unique in comparison to all other modes. It includes a significant initial fixed cost in
setting up the pipeline and related infrastructure, lowest variable cost, 80 to 90 percent
optimization of pipeline capacity utilization, 24-hour operation, not being labour
intensive. However, pipelines are not flexible and this scope is limited with respect to
commodities.

Multi-modal Transport
After realizing every mode of transportation have strength and weakness that put emerging
challenges and limited their strength, various modes of transport have started cooperating
with each other to pool their resources and facilities so as to have a win-win situation to all
while meeting service expectation of their customer. The beginning of the state-of-art
transport technology has given the impetus to the concept of multi-modal transportation,
emphasizing the coordination of two or more modes to transport rather than in competition
with each other.
Multi modal defines transport as the carriage of goods by at least two different modes of
transport on the basis of a multi modal transport contract from a place in one country at
which the goods are taken in charge by a multi-modal transport operator to a place designated
for delivery situated in a different country.
In multi-modal transport, and old concept, is a term used to describe the linking of transport
responsibilities, documentation and liability in movement of goods (by land, sea and air)
using the existing infrastructure? This linking results in improved transport efficiency and
provides the user with a single point of responsibility and greater cost transparency. The aim
of Multi-Modal in supply chain management is to make the movement of goods from seller
to buyer more efficient way through faster transit at reduced costs.
Multi-modalism transport brings benefits by enabling exports to be placed in the market place
of the world at a reduced cost and so ‘be more competitive’. Likewise, costs associated with

29
imports will be reduced, thus, leading to reduced foreign exchange outflow and cheaper
imported goods.
Multimodalism is all about coordination:
o Coordination of the different modes of transport
o Coordination of documentation
o Coordination of the commercial and physical aspects of the commercial transaction
between the buyer and the seller.
Thus, multi-modal/inter-modal transportation is the use of more than one mode of transport
for the movement of shipment from the origin to its destination. Inter-modal systems are
joint, point-to-point through transportation services involving two or more modes on a
regular basis. In this system, inter-modal operators use multiple modes of transport to take the
advantage of the inherent economies of each and thus, provide integrated service at the
lowest total cost.
There are Various Types of Multi-Modal Transportation:
Piggyback
Piggyback is the best known and most widely used inter-modal transportation system, which
is an outcome of the coordination between railways and roadways. It is also called as ‘trailor-
on-flat-car’ or ‘container-in-flat-car’. This system include picking up goods in a trailor or
container by trucks/vehicle, delivering it to rail, now removed the truck/vehicle trailor and
loading it on a flat car of rail for al long distance by rail, and at the destination point,
detaching the trailor from rail, reattaching it to a truck which makes the final delivery.
Fishy back
The inter-modal transportation system is achieved by coordination of road and water modes
of transport.it function in the same fashion as piggyback Combines roadways and railways. In
other words, in fishyback service, the good containing boxes are loaded on the trailor which
will be further loaded on a ship. Again, at destination, it will be unloaded from the ship and
reloaded on truck train for final delivery. This coordinated transportation system is used
widely in the case of export/import freight cargo.
Trans-ship
Trans-ship refers to a inter-modal transportation system which is the coordination efforts of
railways and waterways for the bulk movement of freight cargo. Again, it functions in same
pattern.
Air truck
As the name itself says, this inter-modal transportation system is the outcome of the
coordination between airways and roadways. That, it is refers to exchange of goods
container/boxes between air and road carriers. It is also referred to as birdyback.
Containerization
Inter-modal transportation refers to the movement of a shipment from origin to destination
utilizing two or more different modes transportation. Hence, general inter-modal systems are

30
structured around the use of container. A container is a special designed metal box (case or
tank) that resembles a trailor without wheels.
The concept of containerization is very simple. Goods of any kind are packed into a container
at any location and placed on wheels and moved by truck or rail to reach the destination. In
the case of overseas shipment, containers are moved to the marine terminal by truck or rail,
where large gantry cranes. The container from the vehicle and load on the ship with slots
assigned to hold container for shipment. At destination, the process is reversed and the
container is off-loaded for final delivery to customer.
Features
The major features of containerization are:
o Having permanent character with adequate strength to be used repeatedly for
packaging and transport.
o Specially designed to protect goods from breakages and pilferages during
transportation by different modes
o Equipped with fittings provisions for easy handling from one mode of transport to
another.
Major Advantage
Containerization contributes significantly in the achievement of logistical objectives of cost
reduction by means of:
o Speedier transportation
o Lower inventory cost due to reduction of transit time
o Lower insurance charges due to less chances of damages, pilferages and deterioration
in physical attributes during transit
o Minimum handling cost due to elimination of en-route handling
o No protective packaging requirement
o Less documentation
Selection of Transportation Mode
For the selection of the appropriate transportation mode to move goods from one place to
another, it is always necessary to have a comprehensive approach incorporating various
factors. A logistics manager is required to take in consideration the following factors while
selecting a transportation mode:
i. The strength and weakness of the company in terms of marketing, financial, and
production resources
ii. The prevailing market characteristics including the competitive scenario, geographical
and territorial structure.
iii. Braved equity of company’s products in the eyes of customer to bear with a stock-out
situation
iv. Product features and suitability to various modes of transportation such as weight,
size, shape, etc.
v. Quantity to be transported each time.
vi. Distance to be covered

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 vii. Total transportation cost of various modes of transportation.
viii. Carrier performance in terms of speed, availability, flexibility, frequency, reliability,
safety, versatibility, claim settlement procedure, and logistical service capabilities.

Indian Transport Infrastructure Bottleneck

India has entered in a deregulated environment. Customer expectation are increasing so fast
that the ‘just In time’ transportation system, which is not a very common phenomenon in
India, will become the norm rather than the expectation (CII,1997).if we see and compare the
current logistical infrastructure of our country, then we find that it is far behind other
countries in this aspect.
Railway
Length of railway tracks:
The route length of railways has increased form 53,000km in 1950-51 to only 62,000 km in
1996-67. The network has remained frozen since the early seventies.
o Compared to other countries, the density of rail network in India is extremely
inadequate.
Country Rail(miles)/100sq miles
Belgium 44
Germany 20
India 2.8
o The railway mileage also lags behind in teams of per lakh population
Country railway mileage per lakh population
Canada 465
USA 224
India 9.5
Freight movement by rail
o The share of rail in percentage of the total freight movement has come down over the
years, although it is the cheapest mode of inland transport.
Year rail share (%)
1961 74.6
1981 49.6
199335.7
o Comparison with other geographically large countries:
Country rail share (%)
USA 63
China 87
Average speeds
Passenger train speed 50km/hour
Freight train speed 26km/hour
o To increase the speed of trains, the electrification of railway network is of paramount
importance but merely 18 per cent of the total route has been electrified.

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Multiplicity of Gauges
Gauge lines, which comprise more than 42 per cent of the total railway lines have to be
converted into broad gauge at the earliest.
Wagons
o There is an overall shortage of wagons in the system as the orders for manufacturing
have aged behind the requirement. Though railway is trying to get private investment
through ’own your wagon’ scheme, the availability.
o The movement of cargo by railways is not secured because of:
No guaranteed transit time
Absence of freight tracking systems
4-5% sick wagons
Pilferage on specific routes
Roadways
Present Scenario of Roads
o The total length of surfaced roads in India is around 5,50,000 km. still is required to
be expanded at a phenomenal rate as freight on road is growing at the rate of 8 per
cent p.a.
o The road network is inadequate in the context of our area and population.

Country Surfaced Road (km) Surfaced Road (km)

Per 100 sq.km Per Lakh Population

Spain 27.6 404

Sri Lanka 58.4 324
India 18.9 114
o The length of national highways is required to be extended urgently, as more than 50
per cent of the total freight is being moved by national highways.
Roads km
National highways 6%
State highways 23%
Others 71%
o Out of the total length of national and state highways, only 2 per cent of their length is
four- lane which is required to be increased drastically.
Cost of Transportation
o Inadequate road network has led to higher transportation cost, which have also
severely eroded international competitiveness of the Indian economy. Commercial
vehicles are able to run for only 200-250 km on an average per day, as compared to
500-600km per day in other countries.
o Heavy delay occurs at octroi points and sales-tax check points during road transit.
o The existing road structure restricts the vehicles from carrying higher pay load and
thus economy of scale is not achieved.

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Inadequate Maintenance of Roads
o The fuel wastage due to bad roads is estimated to be around Rs 500 Crores annually.
o In addition, there are many times bigger losses on account of extra wear and tear of
tyres spare-parts and other components.

Inland Container Depots

o With the increase in containerization of cargo all over the world, the inland container
depots(ICDs) have assumed an important role in the logistics chain.
o A lot still needs to be done to upgrade the existing facilities at ICDs.
o The waiting time of containers before containers before loading them on block trains
at ICD is high.
o For imports: the container take on average 15-18 days before they leave the gateway
ports. The surprising thing are that the same goods coming from the UK to India takes
only 24 days.
o Container delays at Indian ports cost approximately US$ 70 million a year, putting us
at cost disadvantage.
o With the passing of multi-modal Transport of Goods Act 1993 to promote inter-modal
transport, development of ICDs have become of paramount importance to facilitate
‘Door-to-Door’ delivery concept. Private sector participation in this sector is very
much required. The government should take the lead in developing ICDs either by
joint venture or other acceptable mode of participation.
o Electrification of ICDs and customs with the user should be initiated on a priority
basis.

Ports
Ports are an important link of logistics chain for international trade. Some of the salient
features of Indian ports and then services are being highlighted form the trader’s point of
view:
o Ports in India are operating at more than 100 per cent utilization but are extremely
less productive as compared to other ports in Asia.
Average ship turn around (ASTA) at Kandla 6-9 days
Average ship turn output (ASBO) at Kandla 2,000-2,500/day
Average pre-berthing delay at Kandla 10-15 days
o In Singapore, for a container ship
Average ship turnaround (ASTA) 6-8 hrs
o The traders in India have to incur ship detention cost ranging from US$ 15000 to
US$20000 per day, making them cost inefficient.
o Poor interdepartmental communications, especially between customs and port
authorities. The connectivity between government agencies and port users is dismal.
o The handling charges at port are high Indian ports charge US$400-450 per box while
the same is around US$200-350 at foreign ports, putting exporters at a cost
disadvantage.
o Insufficient warehouses and unproductive use of the existing warehouses.

34
 o Special warehouses like temperature- controlled warehouses, cold storage, liquid
cargo warehouses are short in number.

Customs
o Non-standardization of documents within the customs office at various ports.
o Single-window clearance for cargo, including payment of port charges and custom
duties should be provided at the port.
o Absence of EDI in customs. In Singapore, the customs officials have agreed on using
common electronic Data Interchange. Approvals there take only 15 minutes and are
available 24 hrs. a day.

Technology Up gradation
o Average loading unloading rate of Indian port is much lower as compared to other
countries as it is labor intensive. Therefore, cargo handling should be mechanized to a
greater extent.
o Losing on economies of scale because large vessels do not berth on the Indian port
due to inadequate mechanization at ports.
After realizing the growing significance of appropriated logistical infrastructure to compete
globally, the government of India has already taken steps to regulate and facilitate efficient
cargo management services and Multi-modal logistics.
Initiatives have been taken in the form of multi-modal logistics: (MTO) in 1992, followed by
Multi-modal Transportation of Goods (MMMTG) Act, 1993. Furthermore, most recently, the
government has set up National Highways Authority of India to link all major ports on lines
of the National Highways Authority of India basis. Expressways provide high speed and safe
movement of industrial and agriculture product along with people across the length and
breadth of the country. The average daily productivity of a truck, which is nearby 2000 tons
km on a congested two-lane road, would improve to 3000 tons km on an expressway.
Thus, a close look at the current logistics network highlights that there are quite a large
number of issues which still need proper resolution for development of an integrated logistics
network.
i. While customs formalities have been streamlined, a lot more rationalization needs to
be done to ease the movement of both international and coastal cargo.
ii. While octroi has been removed from several States, there are still a few States where
octroi continues to block the free movement of traffic.
iii. Infrastructural inadequacies in terms of both road and rail bottlenecks.
iv. Non-availability of experienced players.
v. Lack of inter-modal handling equipment and interchanging facilities,
vi. Lack of modern warehousing facilities.

Transportation Decision (Pricing and Rate)

In the supply chain, for the transportation goods from one place to another, there are two
main players namely; shipper and carrier.

35
The shipper is the party that requires the transportation of goods from one point to another
point in the supply chain,
The carrier is that party who moves the products of the shipper.
For instance, when Modi Xerox uses Blue Dart to transport its photocopier from factory at
Rampur, U.P., to national warehouses, Delhi, Modi Xerox is the shipper and Blue Dart at the
carrier.
While making transportation-related decision a variety of factors are required to be taken
into consideration which further vary from the perspective of shipper and carrier. For a
comprehensive discussion on transportation decision, following four aspects need to be
highlighted.
a) Economic factors
b) Shipper’s factors
c) Carrier factors
d) Alternative pricing strategies.
Economic Factors
There are several economic factors which influence transport rates. The specific economic
factors are:
Distance- Distance is one of the most basic economy factors which determine the total
transportation cost. It contributes directly to variable cost, including labor, fuel and
maintenance. The transport variable cost is always directly proportionate to distance. In other
words, it can be said that the transportation cost increase with the increase in the distance.
Volume- The second economic factor is load volume, which influences the transportation
cost. Transport cost per unit of weight decrease with the increase in the load volume. It is
mainly due to fixed administrative and other costs like delivery and picking cost.
Density- The density factor of economic implies that weight and space aspects, which have
great significant because transportation cost is normally quoted in terms of Rupees per tons.
Generally, an individual vehicle has more constrain/aware of space than weight, especially
when the product allow relatively fixed transportation costs to be spread across additional
weight. Transportation cost per unit of weight decreases with the increase in the product
density.
Stow ability- The Stow ability factor refers to product dimension and now they affect vehicle
(railer, trailer, or container) space utilization. Products of odd sizes and shapes along with
excessive weight or length, typically waste spaces because, they cannot be stowed well. For
instance, while steel blocks and rods have the same density, rods are more difficult to stow
because of their length and shape than blocks. Transportation costs are generally more in the
case of odd shaped products whose Stow ability is more difficult.
Handling- Specific handling facilities are required for loading and unloading to vehicle. If,
more sophisticated and specific handling Equipment’s are required for this purpose, the
transportation costs go up obviously.

36
Liability-- Transportation costs are also affected by the quantum of risk covered by the
carrier during the transit of goods from the origin to destination, mode of claim settlement in
the case of any damage, and the quality of protective packaging of goods by the shipper.
Market Factors-- The last but not least economic factors which affects transportation cost is
market factors such as availability of transport, emergency of freight movement, and
possibility of getting return journey load, drivers of transporters. During the period of high
demand for shipment, if vehicles are not readily and easily available, automatically,
transportation rates are quite high, these all affect economies. Similarly transportation rates
are always high for emergency and value-added services required by the shipper.
Shipper Factors
While making transportation related decision, a shipper’s objectives emphasizes on
minimization of total logistics costs in terms of transportation, inventory, information, and
facility costs as well as maximization of customer responsiveness capability of the firm
ensuring best logistical services. Hence, following aspects of costs required to be taken into
account by the shipper:
o Transportation cost paid to carrier for the shipment of goods go to customers
o The cost of holding inventory incurred by the shipper’s supply chain network
o Facility cost in the shipper’s supply chain network for the smooth coordinate
functioning and transmission of information and other facilities associated with
transportation
o Customer service mission of the shipper to meet delivery commitment and
competitive advantage.

Carrier’s Factors
While making transportation-related decisions, carrier are required to make investment
decision for the development of transportation infrastructure and then operating decisions to
maximize their own return against the investment made. Hence a carrier must take into
account the following costs:
o Cost for procurement of vehicles
o Fixe operational costs like salaries of drivers, attendants, vehicles insurance
registration and road taxes
o Trip-related costs such as cost of fuel, labor, road permit, toll tax etc.
o Value added service costs such as tracking of shipment, point to point
information, door to door delivery, express cargo facilities, bar coding , EDI, cash
management etc.
Alternative Pricing Strategies
While selecting rates to change, shippers and carriers can adopt one or a combination of two
out of the following alternative pricing strategies. The major objective behind adoption of
alternative strategies is to bring about a trade-off between the cost of service rendered by the
carrier and the value of the service to the shipper.

37
Cost of the Services Strategy-- This is the simplest pricing strategy for transportation
service. In this strategy, a ‘build up’ approach is adopted where transport service provider
determines a rate based on the cost of providing the service plus a profit margin to get a pre-
determined return. For instance, if the cost of transportation service to be provided is Rs.
5,000 and the profit markup is 10 Percent, the carrier would charge the Rs. 5,500. This
strategic approach is widely used in the case of a highly-competitive environment because it
provides a base or minimum transportation charge.
Value of the Service Strategy--This strategy approach refers to fixation of transportation
charge on the basis of value of the service required by the shipper. Currently, logistics
manager of the enterprise are not expecting mere movement of goods from origin to
destination from their carrier but they need value-added services in terms of total logistics
solution. Hence in this approach, transportation charges are fixed on the basis of the
perceived shipper value rather than the cost of actually providing the service. This approach
is most suitable in the case of transportation of high-value goods and shorter and fixed
replenishment cycle time assured by the firm.
Combination Strategy-- As the name itself depicts, this alternative strategy is a combination
of earlier discussed two approaches. This strategy refers to establishment of the transport
price at some intermediate level between the cost of service minimum and the value of
service maximum. Practically, this strategy alternative is widely used by the carriers.
However, logistics manager must be aware of minimum and maximum rates so that they can
negotiate with the carriers appropriately.
Transportation Network (Routing and Scheduling)
In most of the cases, transportation cost is generally a major component of total logistical cost
ranging between one third and two-third. That is why it is a major concern to logistics
manager to improve its efficiency through the maximization of transportation resources and
system.
The reduction of transportation cost and improvement of customer service depend upon the
quality of routing and scheduling of transportation vehicle which comes under the preview of
the design of a transportation network. In other words, the design of a transportation network
affects the performance of a supply chain by establishing the infrastructure within which
operational transportation decisions regarding scheduling and routing are made.
The design of transportation network varies from industry to industry, company to company
and product to product due to diversity in the requirements of industry, company as well as
the product.
Direct Shipment Network
In this transportation network design, all shipments come directly from different plants of the
supplier to stockists or customer in fig below; in this design option, the routing of each
shipment is specified and clearly defined and the logistics and supply chain managers have to
be decide the quantity to be shipped and mode of transport preferred so as to bring a trade-off
between transportation and inventory cost.
One of the major advantages of this transportation network design is to elimination
warehousing infrastructural facilities and it implies reduce warehousing cost. The operation
38
of this network design is very simple as well as necessitating high degree of coordination due
to the direct interface between shipment supplies and customers. On the other hand, the major
setback of direct shipment network design is the high cost when the quantity to be shipped is
not equal to the load capacity of the vehicle. It is also not suitable to ensure better customer
service, in the case of replenishment lot sizes.

Destination
Supplier Point

Plant 1 Customer A

Plant 2 Customer B
s

Plant 3
Customer C

Plant 4
Customer D

DIRECT SHIPMENT NETWORK

For instance, this system is widely used by MUL in India whose most of the component,
suppliers are within the 50 km radius of the manufacturing plant at Gurgaon, supporting the
JIT manufacturing system.

Direct Shipping with Milk Runs

In a milk-run transportation network design, a truck/vehicle collects goods or type of goods
from various plants of the shipper/supplier and delivers them to a customer or collects goods
from one plant and delivers them many of customer in fig below; manger has to decide on the
routing of each milk run so as to meet the requirement of the customer service.
This network design overcomes the problem of first design relating to small replenishment lot
sizes as they are accumulated to fill the load capacity of the vehicle/truck, resulting into lower
transportation costs and better customer responsive service, also reducing warehousing
infrastructural facilities. But the major limitations also eliminate warehousing infrastructural
facilities. But the major limitation of this design is in its scope, i.e. this design is only suitable
in the case of cluster of customer/plants.

39
DIRECT SHIPPING WITH MILK RUN

Supplier Destination point

Plant 1 Customer A

Customer B
Plant 2

Plant 3 Customer C

Plant 4 Customer D

Plant 1 Customer A

Plant 2
Customer B

Plant 3
Customer C

Plant 4 Customer D

40
Direct Shipment via Distribution Centre
In other words, first goods from various plants of the supplier are consolidated at a central
distribution Centre/warehouse and then delivered to individual customer as shown in fig
below. For instance, Mahindra & Mahindra LTD. ships its tractor from Mumbai and Nasik
plants to various stock-yards all over the country by railways normally and from the stock-
yards to dealers directly by road to achieve economies of scale in transportation cost.

The main advantage of this design is to lower plant-to-warehouse transportation cost by bulk
transportation and consolidation as well as ensure better customer service by lowering
inventory requirement at customer’s end resulting into better return to them. On the other
hand, it also results into higher logistical costs due to increased inventory cost and
warehousing infrastructure and facility costs to the company.

Supplier Destination Point

Plant 1 Customer A

Distribution
Plant 2 Customer B
Point

Plant 3 Customer C

Shipping via Distribution Centre using Milk Runs

As the name suggests that, this transportation network design is to extension of direct
shipping with milk runs, where there is inclusion of a distribution Centre in between supplier
and customer as shown in fig below.

This design ensure lower plant-to-warehouse as well as warehouse-to-customer

transportation costs for small lots suiting small customer, whereas there are increases
inventory and warehousing costs along with complexity of coordination.

41
 Supplier Destination point

Plant 1 Customer Apop

Customer B
Plant 2 Distribution Centre

Plant 3 Customer C

Customer D

42
 LESSON – 3

WAREHOUSING AND DISTRIBUTION CENTRES

Concept of Warehousing
Warehouses are the Godowns for keeping and storing of goods and providing other related
services in order to keep traders or manufactures to preserve the goods in a scientific and
systematic manner and in efficient and effective way, so as to maintain their original value,
quality and usefulness. The good may be raw materials, parts, components, in-processes,
finished goods, maintenance, repairing and operating suppliers, or any other items used or
sold of a firm. Traditionally, a warehouse was viewed as a storage facility necessary to
accomplish basic marketing process. That is, the warehouse served as a static unit in the
material and product pipeline, necessary to match products in a timing sense with consumer.
Changing requirement of the retail environment where they became business partners against
mere traders has further broadened the concept and function of a warehouse. Nowadays, due
to the availability of more alluring trade opportunities, channel members expect more return
not only on investment made by them but also on space provided by them as well as their
push efforts. The need of the hour is superior logistical customer services in terms of regular
availability of products, zero-defect delivery, information sharing, and consistency and
reliability of services. These logistical service providers work in a cost-efficient manner. That
is, making available goods at the right time, at the right place, in the right quantity, in the
right physical form at the right cost.
Storage
Storage are the godowns for keeping and storing of raw materials, components, semi-finished
goods, tool, maintenance, repairing and operating equipment and supplies relate to the
production function. The primary use of storage occurs in relation to – and usually in advance
of various production processes. It is unusual for finished goods in condition to be delivered
to customers of a firm to be stored for any length of time. This may occur, however, in
situations where the firms has, for one reason or another, produced or purchased and
extremely large amount of a particular product at one time and must store some portion of
this amount for later sale of use.
Storage warehouses may be located at any point in a logistics system, but usually have some
type of strong location relationship to production facilities. That is, these storage location
relationship to production facilities. Operations of storage are all closely related to problems
of demand supply coordination. Storage are most frequently used by companies for various
reasons such as seasonal demand and supply pattern to level out production activities,
maturing, ripening, or aging products such as tobacco, cheese and wine industries, stockpiling
of strategic materials, suppliers resulting from speculative purchasing decision, etc.
Distribution Centre
The distribution Centers is a new idea at the advent of logistics and supply chain
management, referring to dynamic, full-service warehouse primarily related to the market. It
emphasizes the movement of goods rather than their storage and other customer-oriented
43
logistical services such as sales, market intelligence, traffic, credit and other merchandizing
services as manufacturer. In other words, the emphasis of distribution Centers is fast
movement of goods and logistical services such as making available goods as per the
requirement of retailers, documentation, assortments, information sharing, intact delivery of
goods, credit facility, etc. that is why, the distribution Centers are usually called distribution
warehouses which must be situated near to the markets. Distribution Centers are
distinguished from conventional private warehousing operations in that they are major
centralized warehousing operation that:
o Serve regional markets.
o Process and regroup products into customized orders.
o Maintain a full line of products for customer distribution.
o Consolidate large shipments from different production points.
o Frequently employ a computer and various material handling equipments and may be
highly automated rather than labor intensive.
o Are large and single-storied rather than multi-storied.

The Role of the Warehouse in the Logistics System

o The warehouse is where the supply chain holds or stores goods.
o Functions of warehousing include:
a) Transportation consolidation
b) Product mixing
c) Docking
d) Service
e) Protection against contingencies
f) Part of firms’ logistics system that stores products at and between point of
origin and point of consumption.

Benefits of Warehousing Management

o Provide a place to store and protect inventory.
o Reduce transportation costs.
o Improve customer service levels.
o Most activity in a warehouse is material handling.

Objectives of Efficient Warehouse Operation

o Provide timely customer service.
o Keep track of item so they can be found readily and correctly.

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Warehousing Activities
o Receive Goods- Accepts goods from outside transportation, this implies that attached
responsibility, check the quantities, check for damage and fill out damage reports if
necessary.
o Dispatch Goods to Storage- Goods are sorted and put away
o Hold Goods- Goods are kept in storage and under proper protection until needed.
o Pick Goods- Items required from stock must be selected form storage and brought to
a marshalling area.
o Marshal Shipment- Goods making up a single order are bought together and checked
for omissions or errors, order records are updated.
o Dispatch Shipment- orders are packaged, shipping documents are prepared, and
goods loaded on the vehicle.
o Operate an Information System- A record must be maintained for each item in
stock showing the quantity received, quantity issued, and location in the warehouse.
Cost of Operating a Warehouse
o Capital Cost- Costs of space and material handling equipment.
o Operating Cost- Cost of labor, measure of labor productivity is the number of units
that an operator can move in a day.
Types of Warehouse
There are two broad bases on which we can divide warehouses, namely:
I. On the basis of ownership.
II. On the basis of services.
On the Basis of Ownership
o Private Warehouse -- Private warehouses comprises warehousing facilities operated
by and owned or leased by a company handling its own goods. They are used by firms
whose warehousing needs are stable enough, such as retail, chain stores firms or
Multibrand-Multiproduct, FMCG companies, to make long term commitments to
fixed facilities. Generally, private warehouses assure greater design flexibility with
respect to storage and material handling needs, greater and efficient control of
warehouses, operational functionality, rapid information flow and lower costs. Private
warehousing operation comes under the logistical function of an enterprise.
The major benefits of private warehousing include control, flexibility, costs, and other
intangible benefits. Since the firm has full decision-making authority and integration of it
with firm’s capability to meet unforeseen or unique needs due to flexibility in the operational
procedure of the warehouses. As developments of private warehouses are long-term
commitment and investment so, facility costs do not have a markup in the case of public
warehouse. Finally, private warehouses contribute significantly in the company-
dealer/retailer relationship, market responsiveness, corporate emerge etc.
o Public Warehouses - Public warehouses are those warehouses which are owned and
operated by organizations like government, cooperatives, or a company in the private
sector. The space of public warehouses can be used by any other company or
organization or individual public on certain terms and conditions of payment. Despite
45
 of having higher operating costs, the major benefit of public warehouses are
flexibility in terms of ease in changing the location, size and number of facilities, no
fixed costs, economies of scale and capability to offer value-added service. Firms
using the services of public warehouses came under the preview of supply chain
process at the advent of supply chain management outsourcing is the key to get
access.
That is why, more and more firms are now interested in public warehousing to get value-
added services due to their professional expertise.
On the basis of Services
o Bonded Warehouses – It is licensed an authorized by the custom authorities for
storing of goods till import duty due on it is paid-owned either by the government or
private parties.
o Field Warehouses- These warehouses are managed by a public warehousing agency
in the premises of a factory or company which needs the facility for borrowing from
bank against the certification of goods in storage or in process by an independent
professional warehouseman.
o Cold Storage- It is another type of warehouses which provides facility to preserve the
perishability of goods against payment of a storage charge for the space utilized by
different parties.
o Distribution Warehouses- These warehouses are generally located nearer to the
market owned or leased by the manufactures to stock their final products for
immediate supply to the market. These distribution warehouses are also called
distribution Centers.
o Buffer Storage Warehouses- These warehouses are built at strategic locations with
adequate transport and communication facilities and the goods are stored in huge
quantities and further transmitted to distribution warehouses.
o Export and Import Warehouses- These warehouses are located near the ports from
where international trade is undertaken. They provide transit storage facilities for
goods awaiting onward movements.

Functions of Warehouses
The function of warehousing can be properly discussed in two heads namely
1. Economic functions
2. Operational functions
Economic Function – This category of functions is directly related to the logistical costs, i.e.
trade-off between various elements of logistical costs. for instance, Generally , the addition of
one more distribution warehouse results into an increase in the warehousing and inventory
costs but there may be a decrease in the overall logistics cost due to reduction in the
transportation costs and increase in the customer service level, resulting into an increase in
the volume of sales.
The economic function of warehousing is as follows:

46
 o Consolidation-- In this function, a warehouse receives and consolidates
material/goods from different production plants and then dispatches the same to a
particular customer on a single transportation shipment, such warehouses are also
called consolidation warehouses, as shown in below.
The primary benefit of consolidation is that it combines the logistical flow of several small
shipments to a specific market area. Hence it may be used by a single firm, or a number of
firms or even delivery of goods to several in-route customers at an economy of scale for
small quantities.

Customer M
Plant
X YZ
A Product
X XYZ

X
Plant Product Consolidation
X Warehouse
Y
B
XYZ
Customer N
Product
Plant Z X Y Z

B
o Break-Bulk – This function refers to the transshipment of goods from the production
plant in bulk quantity by low rate volume shipment to the distribution warehouse and
then reshipment in small quantities to different customers as shown in the below fig.

Customer X

BUS

BUS Customer Y
Plant Truck Break-Bulk
warehouse
BUS
Customer Z

47
The major benefit of this function is that the cost of transportation is quite low due to major
distances that are covered by low rate transportation modes. For instance, in industries
dealing with cement, fertilizer, coal etc., the railway is used for bulk transportation from the
plant to the distribution warehouses and roadways from distribution warehouses to customer.
o Stockpiling– The next economic function of warehousing is the seasonal storage of
goods to select businesses. For instance, agricultural products are produced at a
specific time but consumed throughout the year or woolen garments are manufactured
in summer and stocked to meet the demand of winter. Both the situations require
stockpiling function of warehouses to support marketing efforts. The major benefit is
that it ensures regular and smooth availability of products/goods without being
affected by seasonal factors and price gambling.
o Value-added Services– Certain value-added service are also provided by the
warehouses, such as packaging and labeling. In some cases, basic products are
produced and shipped to warehouses and finally distributed to different customers in
different packages and labels.
The two major benefits are:
o Minimum risk because final packaging is not completed till the order for specific
packages and label is received.
o The required level of total inventory reduced by way of keeping basic product without
packaging and labeling.

Operation Function
o Receiving of goods.
o Up-to-date recording of goods showing stock position.
o Storing of goods at and appropriate place and in the minimum area.
o Protecting and preserving the physically loading and unloading.
o Order receiving, processing and filling.
o Marshalling of goods in terms of assortment of various goods to be dispatched to a
customer.
o Dispatching of goods.
o Preparation of documents preparing to transaction, records and advices.
o Marketing intelligence and act as an intermediary between company and customer.
o Other legal function related to trade.

Warehousing Strategy
In logistical system design, a warehouse should be established if it can render either service
or cost advantage. The appropriate number and geographic sites of warehouses are
determined by customer and manufacturing locations and product requirements. Warehouses
represent one part of a firm’s overall effort to gain time and place utility. From a policy
viewpoint, a warehouse should be established in a logistical system only when the sales and
marketing impact is increased or the total cost is reduced.

48
The formulation of any warehousing strategy largely depends on the overall corporate
objectives with regard to growth of the company expected to be achieved in future in general
and logistical objectives in particular especially with regard to:

o Availability of goods to the Customer.

o Degree of Customer service to be offered.
o Minimum total Distribution costs.

After properly defining the corporate and logistical objectives it is essential to take into
consideration the prevailing environmental scenario with reference to:
o Demand pattern.
o Buying behavior of Customers.
o Reaction of Customers during stock-out situation.
o Warehousing Strategies of Competitors.

After careful perusal and analysis of environmental scenario, strategists need to analyze the
firm’s resources in term of:
o Financial and other resources condition
o Brand equity; and
o Warehousing facilities required for the products

All the above steps enable the strategists to have a comprehensive analysis of the total
situation which facilitates them to develop two alternative situations, whether to have private
or public warehouses. Again, further decisions are require for:
o Centralized or Decentralized Warehouses
o Location of the Warehouses
o The cost of the Warehousing.

A comprehensive study of private and public warehouses has already been made which
enables strategists to decide about the ownership of the warehouses.
Bowersox and Closs have suggested five qualitative decision factors to be considered by
strategists while deciding on the choice of particular private warehouse it include that
presence synergies, industry synergies, operating flexibility, location flexibility, and scale
economies should have to achieve the marketing and logistical objectives. Normally,
strategists have two options, namely:
1. Decentralized warehousing.
2. Centralized warehousing.

Centralized warehouse are usually built around the production site and have one or few
dispatch point. This type of warehouses suit those industrial sectors/units which have strong
brand loyalty, limited market, industrial products and high unit price, needing Centralized

49
inventory control. Whereas, decentralized warehousing suits specially retail chain stores,
FMCG sectors where customer responsiveness is the key to be successful in the market place.
The relative strengths and weaknesses of centralized and decentralized warehouses:

Centralized Warehouse Strengths Decentralized Warehouse Strengths

1. Need not carry large inventory as
compared to a decentralized one.
2. No stock-out situation due to
storing of goods at one/few
locations.
3. Demand variations in different
market segment can be met at a
short notice.
4. Centralized control of inventory.
5. Bulk transportation will be
cheaper.
6. Less warehousing cost.
Weakness
1. Transport cost is maximum unless
in bulk quantity.
2. Distant markets demand cannot be
met in short notice otherwise, costly
mode of transport will be adopted.
3. Loss of customer service advantage.
4. Poor market coverage and control
1. Market coverage will be maximum
resulting into increased sales.
2. Maximization of customer services
creates a high level of loyalty and
goodwill.
3. Transportation cost will be moderate
due to bulk transportation of goods from
plant to warehouse.
4. Better control over market intermediate
Weakness
1. Huge inventory investment.
2. Huge warehousing development cost.
3. Stock-out situation.
4. Shortage of goods at one warehouse
replenished from another warehouse
requires additional transportation costs.

Factor for Selection of Number and Location of Warehouses

Whether centralized or decentralized warehouses, strategists are required to take into
consideration the following factors for the selection of the number and location of the
warehouses:
o Number of geographical locations of the market targeted by the firm. If the market for
the products of the company is quite limited and clustered, then the number of
warehouses should be quite limited and their location should be near to those markets.
Furthermore, if the location of these markets is closer to the production plant of the
company, then it is always better to serve from the in-plant warehouse. In this case of
wide and diversified markets, the company has to have decentralized warehouses.
o The second factor which determine the number and location of warehouses is the
corresponding location and facilities of the production Centers i.e., how many
production plants, the company have and their distances from the target/potential
markets. If the company has multiple production plants and they are near the different
target markets, then it is suggested to operate from the in-plant warehouses. Facilities
of production Centers deal with goods produced by the company In terms of single,

50
 multiple, or all products. If all the products are produced by all the production Centre,
then there is no need to have warehouses and these production Centers, should also be
used ad distribution Centers. Single or multiple manufacturing production Centers too
far from the market need warehousing facilities for consolidation, breaking bulk, and
value-added logistical customer service.

I. Transportation infrastructure facilities also determine the number and location

of warehouses. These include quality and availability of vehicle, quantity to be
transported, transit time, etc. if availability of good quality vehicles followed
by fulfillment of their load capacity are not major problems at the same time,
transit time is a reasonable one. In these cases, the firm can operate from
centralized warehouses otherwise the firm has to have decentralized
warehouses.
II. Nature and quality of goods to be stored is another factor affecting
warehousing strategy. For instance, highly-seasonal goods need to be stored in
bulk quantity for a specific time period. In such a situation, decentralized
public warehouses should be hired by the company.
III. In the case of strong brand loyalty among customer who can wait for the
product during a stock-out situation, the firm can have a centralized and
limited number of public warehouses so that there will not requirement of
finance for warehouse infrastructure and capital requirement will be very less.
IV. Another factor which also affects warehousing location and number decision
is the possibility of change in the use of the warehouse facility at a later stage,
if so desired. In other words, is there any scope for lease or sale of land and
buildings?
Elements of Warehousing Costs
There are basically three Types of Warehousing Costs, namely:
1) Warehousing Infrastructural Development Costs, which includes:
o Costs of procurement of storage space.
o Handling and transfer cost
o Administrative cost.
o Costs incurred in direct and indirect physical facilities.

2) Working capital costs include the cost of working capital involved in goods stored in
warehouse as inventory.

3) Miscellaneous costs include:

o Tax to be paid.
o Insurance paid for covering risks.
o The risk of product obsolescence or deterioration.
Warehouse Design
The Designing of the warehouse is one of the critical aspects to achieve logistical objectives
in terms of cost and service level. Prior to designing a warehouse infrastructure, the following
factors are required to be taken into consideration.

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 1. Products to be distributed thorough the proposed warehouse in terms of quantity and
character of goods. The design of a warehouse is directly related to the characteristics
of the product mix in terms of their annual/monthly turnover, consistency in demand,
shape, size, weight, average size of the order to be processed through the warehouse
each time. Material-handling equipment required, as well as facilities required to
preserve the physical attributes of the products intact.
2. Estimation of the future expansion requirements of warehouse operation. As the
development of warehouse is an infrastructural facility, a futuristic approach is
required.
3. Identification and selection of the material-handling system is another factor which
determine the warehouse design, because the handling of goods at a warehouse are
generally in bulk quantity requiring handling equipment followed by lowering
warehousing cost and improving efficiency. Hence, selection of material handling
system is one of the initial thing while designing warehouse layout.
While designing the layout of a warehouse, following three steps are followed:
a. Purpose of the Facility – The warehouse design process starts with the determination
of the purpose for which the warehousing facility is to be used. A well-defined
purpose ensures the achievement of all logistical objectives of the firm pertaining to
warehouse facilities. It includes the sizes of the building, the number of storage levels,
the ceiling height, length and width ratio, flexibility of these dimensions for material
handling a storage purposes, floor load capacity, etc.
The purpose definition of the above aspects is an important consideration in the
smooth flow through operational of warehouse for receiving for receiving, storing and
shipping of goods.
b. Layout of the Facility – The layout of a warehouse is determined on the basis of two
major aspects, namely:
o Required material-handling system and physical facilities, and
o Required floor plan to facilitate smooth material flow.
In layout planning, it is required to identify the various physical facilities needed in terms of
s, material receiving and shipping doors, fire doors, supporting pillars, lighting facilities, etc.,
along with requirements of material handling equipment and facilities such as elevators,
cranes, fort lifts, trucks, etc. the material flow requirement affecting the layout of the
warehouse include receiving, storage, order selection, packaging and shipping areas within
the warehouse.
c. Space Requirement and Aisle Layout – Warehouse space requirement consist of the
space required for storage as well as other warehousing activities. Storage space
layout considerations generally include pallet placement and aisle width.
• Pallet Placement – The space layout for storage of material is largely dependent
upon the size of the pallet needed and their positioning or placement. In general,
standardized pallets are used whose sizes are40 by 48 inches. The basic method of
positioning pallet is a mechanized warehouse is a ninety-degree/square placement.
• Aisle Width - Generally, the requirement of aisle width vary with the size of
material handling, equipment and quantity of material moored. In the case of
standardized size of material (due to standard size of package unit), the

52
 dimensions of pallet or container along with the size of the forklift equipment
determine aisle dimensions. Normally, aisle widths are designed in such a way
that they can allow two-way traffic. The exact width is determined by:
o The length of motive equipment with pallet;
o The turning of the loaded motive equipment; and
o The width of the loaded equipment
However, the recent development of forklift trucks with size-loading attachments and stacker
cranes guided by trucks has reduced aisle-width requirements.
d. Space Needed for Other Warehousing Activities
Apart from storage space requirements, there is the additional requirement of space to
facilitate other warehousing activities such as:
o Areas for vehicles waiting to be unloaded or loaded and employee parking.
o Receiving and loading facilities for each mode of transport serving the facility.
o Staging, or temporary storage areas, for both incoming and outgoing merchandize.
o Office space, including an area for whatever computer facilities may be involved.
o Employee washrooms, lunchrooms, and the like.
o Pallet storage and repair facilities.
o An area to store damaged merchandize that is awaiting inspection by the carrier’s
claim representative.
o An area to salvage or repair damaged merchandize.
o An area for repacking, labeling. Price marking, and so on.
o A room for accumulating and baling waste and scrap.
o An area for equipment storage and maintenance. For example, battery powered lift
trucks must be plugged into battery chargers overnight.
o Specialized storage areas for hazardous items, high- value items, warehouse
supplies, or time needed other specialized handling(such as freezer)
o A returned or recycled goods processing area.
Operational Mechanism of Warehouse
The operational mechanism of warehouse incorporates a variety of functions ranging from
receiving of goods, their storage, marshalling, shipping, motivation of workforce and their
safety, etc. various elements of total warehouse operation system are:
o Receiving and stocking system
o Hiring and Training Personnel
o Developing a working procedure system
o Developing security system
o Billing and inventory management system
o Local delivery system
o Safety and maintenance system
Receiving and Stocking System
An ideal warehousing operation starts with system for procurement of gods for the
production plant and their stocking at the warehouse. Hence, this sub-system of the total
warehousing operating system includes:

53
 • Total product-mix to be handled by the warehouse and their quantity of inventory.
• Anticipation of demand pattern and safety stock policy.
• Scheduling of arrival of in-bound products.
• Time required for unloading products and their placement in the storage area.
Normally, it depends on quantity and characteristics of the products.
• Slot assignment for different products. There are two common slot assignment
methods, namely; fixed and variable slot. A fixed slot assignment refers to a rigid and
permanent assignment of storage area for the positioning of each single product. It is
not change until or unless there is some sort of extraordinary situation in terms of
considerable increase or decrease in the inventory level. One of the major advantages
of fixed replenishment is easy to locate the product.
On the other hand in the variable dynamic slot assignment system, the assignment-a slot for
product positioning in the storage area is always variable and changes at the arrival of each
shipment. The major objective behind the use of the method is to utilize the space of
warehouse more efficiently but product location is generally difficult to find. However, with
the extensive use of computers in the warehouse functionally, there is no more a problem.
One can easily identify the location of the product in the computer-added warehousing
system.
Hiring and Training Personnel
The successful operation of any warehouse is largely conditioned to the availability of
qualified and trained personnel. Since a variety of functions are performed at the warehouse
level such as administration, supervision, selection, equipment operations, material handling,
maintenance, etc., to ensure desired results of the total warehousing system, highly qualified
and professionally equipped human resource is required. At the same time, their continuous
training and development is essential to keep them up to date. This process includes:
• Identification and definition of the job requirement describing that role in the total
system and their hiring.
• Acquainting hired personnel with the job profile.
• Locating the training need
• Regrouping of personnel for various operations as per training needs
• Providing hands-on-training to different groups under near typical working
conditions.
Developing a Working Procedure System
This aspect of the warehousing operations deals with the fulfillment of the operations
functions of the warehouse for the attainment of logistical objectives, which includes
• Movement of material handling system within the storage area and
• Older picking and selection system. Normally, there are two methods used, namely;
individual selection and area selection. Individual selection means that one selector
will be responsible for the complete sorting and picking of the order of one customer,
irrespective of area. Whereas, area selection deals with the allocation of a certain
portion of the total storage space to each selector, irrespective of the customer. Major
advantages of the area selection over individual selection are specialization, time

54
 saving due to less movement of selectors and less chances of errors in the marshalling
of the total order of the customer. Other procedural aspects include :
o Maintaining proper inventory recording system
o Order processing system
o In voicing and documentation system
o Follow up of the loading procedures such as right assortment, item checking,
adequate protective packaging, etc.
o Full pallet load stability.
o System for sharing information regarding the status of the order and shipment
schedules.

Developing Security System

This subsystem of the total warehouse operating system, ensuring the protection of goods
from pilferage and deterioration includes:
• Protection goods from theft, which is very common factor in the warehouse operation
• Security provisions for proper maintenance of the warehouse and special provisions
for any unwanted situation;
• Developing of a standard procedure for checking at the time of entry and exit of the
employee;
• Procedure for the entry of guests, customers, etc.;
• Facilities for preserving the physical attributes of the goods;
• Prevention of careless handling of goods at the warehouse; and
• Proper utilization of material handling equipment, ensuring no damage to the package
of the goods during loading and unloading.

Billing and Inventory Management System

This aspect of warehousing operation directly facilitates the achievements of logistical
objectives. At the age of computer and information technology solution to logistics and
supply chain management, firms largely use computers for efficient functioning and
operation includes:
• Preparation of invoices and dispatch challans;
• Preparation of shipping documents;
• Procedure for proper and up-to-date inventory management system;
• Prevention of stock-our situation; and
• Prevention of under/over stocking.

Local Delivery System

Generally, distribution warehouses make the delivery of goods to customers by private
trucks. So, efforts to this sub-system is to ensure best computer service at least delivery cost.
This procedure includes;

55
 • Schedule for the movement of trucks for the delivery of goods to the customers as per
their order specification;
• Routing of trucks in case of multi-customer delivery schedule to fill the load capacity
of the trucks; and
• Trade-off between total distribution cost and distance covered by vehicles.

Safety and Maintenance System

Prevention of accident is one of the most severe challenges faced by many warehouses
operating system deals with;
• Development and deployment of a well-balanced safety programme in order to
prevent accidents.
• Proper and continuous examination and maintenance of all material handling
equipment and safety instruments.
• Floor cleaning system on a regular basis and instantly in the case of breakage of
product package/product drainage on the floor.
• Installation of fire-fighting systems and proper lighting.

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 LESSON – 4

INVENTORY

Concept
Inventory constitutes one of the most important elements of any supply chain and
management. The term inventory can be used to mean several different things such as:
i. The stock on hand of materials at a given time
ii. An itemized list of all physical assets
iii. (As a verb) to determine the quality of items in hand
(For financial and accounting records) the value of the stock of goods owned by an
organization at a particular time
In logistics and supply chain perspective, inventory is an idle material resource of an
enterprise awaiting future sales, use, or transformation. In other words, it refers to stocking of
raw materials, in-process, finished, packaging, tools and equipment’s, spares and other in
order to meet an expected demand or distribution in future.
Types
There are several ways in which inventories are classified, namely:
Nature of Materials
o Production Inventories: Raw materials, parts and components which are consumed
in the production process of goods, came under the category of production material
inventories.
o MRO Inventories: Maintenance, repair and operating supplies which are used in the
production process but do not become a part of the products, called MRO items, and
their stocking is called MRO inventories. Items like lubricating oil, old clothes,
machine spare parts, etc., are not a part of the product produced but they required for
the smooth functioning of the production process and so their stock is maintained.
o In-Process Inventories: These goods are partially completed/finished goods that are
still in the production operation, i.e. semi-finished products found at various stages in
the production process are called in-process inventories.
o Finished- Goods Inventories: These inventory items are final products, available for
sale and distribution, i.e. completed products ready for shipping.

Uses of Materials
o Transaction Inventory: These types of inventory items are basically needed for
transaction, e.g. transaction of finished saleable products or raw material.
o Speculative Inventory: The stocking of materials as a measure of speculation so as
to get more prices of goods in future.
o Precautionary Inventory: The stocking of certain materials/items to prevent the
breakdown of the production process and/or to meet any unexpected demand.

57
Functions of Inventory in Logistics and Supply Chain Management
While converting raw material into finished products and their shipments to customers, most
products move from various processes though a complex network of supply chain, such as
from secondary to primary vendors, from manufacturers to various Distribution Centres, from
Distribution Centre to customers who ultimately deliver to end users. In other words, supply
chain concept represents the flow of raw materials through the conversion processes in order
to become a finished product at the ultimate consumer’s point of use. Inventories usually
exist throughout the network in various forms and for various reasons. At any manufacturing
point, inventories may exist in the form of raw material, work in process, and finished goods.
They also exist at the gathering and distribution warehouses and in transit, or the pipeline.
Inventories on each of the path, link the fixed facilities. All these inventories are related in the
sense that:
The Downstream (toward the customer) location creates the demand on the upstream
inventories: Demand combined with the factors causing need for inventories, largely
determines the level of inventory required at any one point. It is difficult to have a perfect
trade-off between demand and supply, which results into an inventory. There are certain
reasons behind a gap between demand and supply, namely; time, discontinuity, uncertainty
and economy. The time factor refers to the time required in the production and distribution of
goods for the final use by the consumers. The discontinuity factor deals with different
degrees of risks associated with various departments’ operations in an independent and
economical manner. For instance, the quantum of inventory risk is highest in the case of
manufactures as the inventory commitment starts with raw materials and components and
with finished goods, including work-in-process. The wholesalers’/distributers’ inventory risk
is higher as they stock goods in bulk quantities and then sell them in small quantities to
retailers. The inventory risk of retailers can be viewed as wide but not deep as fundamentally,
for them, it is a matter of buying and selling. The uncertainty factor behind an inventory is
normal due to unforeseen events such as equipment breakdown, strikes, act of god, or error in
demand forecasting. To overcome such situations, firms need to have some preventive stock
of goods. On the other hand, the economic factor behind the inventory allows a firm to take
advantage of cost-reducing alternatives such as quantity discounts.
Another way to explain the process inventory sources is introduced by functional
classification of inventory. Based on its utility, inventory can be placed in one or more of the
following categories:
• Working stock
• Safety stock
• Anticipation stock
• Pipeline stock
• Decoupling stock
• Psychic stock
Working Stock
Working stock is also known as cycle or lot size stock. In general, it is an average amount of
inventory in stock that results from lot sizes to get the benefits of minimum ordering and
holding costs, quantity discounts and favorable freight rates.

58
Safety Stock
The safety stock or buffer stock function of an inventory is to meet short-range variations in
either demand or replenishment, i.e. safety stock inventory is held in stock to protest against
the uncertainties of demand and supply.
Anticipation Stock
The anticipation or seasonal or stabilization stock refers to holding a high level of inventory
to meet the peak seasonal demand, err artic requirements or inconsistency in the production
capacity, e.g., production and holding of woolen garments in advance to meet the demand
during winter.
Pipeline Stock
The pipeline stock is also known as transit stock or work-in-process inventory. Generally, a
geographical gap exists in the point of production and point of consumption of goods. Hence,
goods in transit from manufacturer to be delivered to a customer are called pipeline stock.
Furthermore, raw materials and components being processed, waiting to be processed or
being moved to become finished goods also come under the functions of pipeline inventory
functions.
Decoupling Stock
Decoupling stock is inventory accumulated between the various Departments activities
(manufacturer, wholesalers, retailers, etc.) or stages to reduce the requirement for completely
synchronized operations. In other words, inventory brings about a smooth interface between
material, production and distribution system of an enterprise.
Psychic Stock
Psychic stock refers to window display of an inventory in order to stimulate demand and act
as a silent salesman. This function of inventory generates an impulse-buying tendency,
fulfilling the need of promotion function.
After a perusal of the contribution of the inventory, one can also say that inventory is
essential for the smooth functioning of any organization mainly due to geographical
specialization, periodic variation and for balancing demand and supply. But a vital question
is: how much? If a company holds too much inventory, It may be capable enough to meet
unforeseen demand and generate additional sales volume due to advantages of impulse
buying tendency, but at the same time, it leads to undue.
o Carrying/holding charges in the form of taxes, insurance, storage facility,
obsolescence and depreciation and
o Involvement of working capital which ultimately affects the overall profitability of
the firm.
If a company holds too little inventory, there will be alternate needs such as:
o Too-frequent ordering.
o Loss of quantity discounts.
o Higher transportation charges.
o Likely shortage in future.

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Elements of Inventory Cost
The objective behind proper inventory management is to ensure the availability of materials
at the right time, in the right place, at the right cost. The various elements of inventory costs
are:
I. Procurement Cost
II. Carrying Cost
III. Stock-Out Cost

I. Inventory Procurement Cost

This element includes:
o Cost of order processing from the indenting stage to accounts and finally to
purchase. It involves use of stationary and services, cost of staff and the executive
time spent on order processing.
o Cost of the transmission of an order from the purchase department to the supplier,
including the cost of postage and follow-up messages over the telephone, fax, etc.
At the advent of I.T (information technology) enabled SCM (supply chain
management), various tools like EDI, Bar Coding System, Internet, etc. there has
been a significant reduction and control on the cost of transmission.
o The cost of transportation, including freight, octroi, transit insurance, protective
packaging etc. again, due to the extensive use of containers and strategic alliances
with third party logistics service providers and fleet management system, firms are
putting forward their best efforts to curtail the transportation costs.
o Cost of invoice pricing, including checking, approval, book entries and payment
procedures.
o Cost of goods, receiving, handling, inspecting, and entry in the stock
register/computer.
o Cost of final feeding of data in the logistics information system.

II. Inventory-Carrying Cost

This element includes various costs incurred by way of:

o Space rent for the storage of goods.
o Cost of working capital locked in the inventory.
o Cost of spoilage in the quality of goods in storage, breakages in handling.
o Cost of insurance of goods.
o Cost of deterioration due to passes of time and change in weather.
o Cost of obsolescence of goods or depreciation.

III. Stock-Out Cost

The stock out cost is the economic consequence of either an external or an internal shortage.
An external shortage occurs when a customer order are not filled, whereas an internal
shortage occurs when an order of a group/department within the organization/internal
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customer is not filled. Internal shortages can result in lost production (idle resources) and a
delay in a completion date, whose cost depends on the reaction of the customer in the stock
out situation. The external shortage incurs back order costs, present profit loss due to loss of
potential sale, and future profit cost due to loss of corporate image, affecting future sales. The
back order cost is due to delay in the supply of goods to the customers. Additional clerical
and sales cost will occur due to additional transportation and handling when such orders
cannot be filled through the normal systems.
It is very difficult to measure stock-out cost in quantitative terms properly as it depends upon
the specific situation.
Inventory Management
It has already been discussed that neither too high nor too low level of inventory is beneficial
for the health of any company at the same time, there is no cut-and –dried formula to estimate
or predict r as there is no thumb-rule to forecast demand, especially in the highly dynamic
marketplace. Furthermore, globally, companies are continuously under the thrilling pressure
to cut down their total logistics cost, especially inventory cost. That is why, in the last 20
years, new tools and techniques like JIT, MRP DRP, etc. have been invented, which are
further complemented by rapid innovation in the field of information technology, enabling
logistics and supply chain business solution like Electronic Data Interchange (EDI), Bar
coding, Internet, etc. and their extensive use empowered corporate enterprise/enterprises to
reduce inventory level without stock-out situation due to real-time communication of
information regarding the point of requirements.
Traditionally, for the proper management of inventory level, two issues or needed proper
attention and analysis, namely,
o Order quantity: how much to order of each material with either outside suppliers or
production department within organization. It is also called Lot Sizes or Economic
Order Quantity (EOQ).
o Order points: when to place the orders. It is also called Reorder point.
Determination of Economic Order-Quantities
There is no single formula which can be used for the determination of EOQ due to different
conditions or factors which play a major role in it. The most prevailing conditions
(MODELS) are as follows
MODEL- 1 (Basic EOQ)
This model for determination of EOQ is based on the following assumptions:
o Annual demand, carrying cost, and ordering cost for a material can be estimated.
o Average inventory level for a material is half of order quantity, i.e., there is no safety
stock.
o Stock-out, customer responsiveness and other cost having no effect and
o Quantity discount are not exist.

Let D= Annual demand for a product.

Q= Quantity of product ordered each time.

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 C= Cost of carrying one unit of inventory for one year.(Rupees per unit per
year).
S= Average cost of completing an order for a product.(Rupees per order).
NOW,
Annual carrying cost = average inventory level *carrying cost
Q/2*C
Annual ordering cost= order per year*ordering cost
D/Q*S
Total Annual Stocking Cost (TSC) = Annual carrying cost+ Annual ordering
cost
[Q/2]*c + [D/Q]*S
To get the value of optimal quantity, the total stocking cost should be minimum,
which can be possible when
Q*Q= 2DS/C or Q= √𝟐𝐃𝐒/𝐂= EOQ

Assumptions
o Annual demand, carrying cost and ordering cost for a material can be estimated.
o Average inventory level can be estimated at either.
o Q/2- if the assumptions of Model – 1 prevail: no safety stock, orders are received all
at once, materials are used at a uniform rate, (d), and materials are entirely used up
when the next order arrives.
o Stock out, customer responsiveness, and other cost have no effect.
o Quantity discounts do not exist. As large quantities are ordered, price breaks apply to
all units ordered.

ABC ANALYSIS
The concept ABC (Always Better Control) analysis is based on “”think on the better and then
on the rest”. Generally companies are required to keep stock of a large number of items used
in production and distribution. In practice, it is not possible to maintain and control a
similar/proper level of inventory of all items, which is also not feasible due to resource
constraints. Hence, the prevalent practice is that sincere efforts are made to have a proper
control on the most circulating items and least on rare circulating ones.
ABC analysis offers a basis for grouping of items on certain basis of annual/monthly
consumption value. In other words, of an items unit price is very little but if it is a most
circulating items and its monthly/annual consumption value is maximum, then closer and
careful control will be done and vice versa. Hence, in ABC analysis, items are categorized in
three broad groups, namely A,B,C on the basis of their monthly/annual consumption value .
A Category
Most monthly/annual consumption valued items are classified as A Category items.
Generally, 20 percent items accounts for approximately 65 percent of the total sales or
consumption value. This category of items needs most close and careful inventory
management because they are most important items from the control point of view. Any
stock-out on these items costs the company either in a production and consumption pattern

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along with maintenance of records to get the up-to-date position of stocks at any point of time
as required.
B Category
Average monthly/annual consumption valued items are grouped in category B. generally, 30
percent items account for approximately 25 percent of total sales or consumption value. This
category of items needs a closer and more careful inventory management. These items cannot
be overlooked but need lesser degree of attention and control than those in class A but more
than C category items.
C Category
The low monthly/annual consumption valued items are grouped in C. again, generally, 50
percent items account for approximately 10 percent of total sales or consumption value. This
category of items needs the least attention for inventory management. No doubt, a loose
control of C category items leads to a total inventory cost but this will not be so much to
affect overall inventory cost.
ABC-VED MATRIX
The emphasis of ABC analysis is to control the various inventory items on the basis of
priority based on monthly/annual consumption value. Normally, one practical problem is
always associated with thisis mechanism-that stock-out of an items which falls under ’C’
category may costs to the company heavily because that items is very critical for either the
smooth flow of the production process or the goodwill of the company in the market in the
case of the finished products. To overcome this problem, logistics mangers can have a matrix
approach which will be an integration of both ABC and VED analysis.

Category of items on the Consequence in the case Degree of inventory

Basis of critically of use of stock-out management

V (Vital) Bring production to a loss Significant

of corporate image

E (Essential) Dislocation of production Special

Schedule/loss of sale

D (Desirable) Temporary additional cost due to Considerable

Arrangement of a substitute

VED Analysis
The ABC-VED matrix is a hybrid model wherein every category (A, B, and C) of items is
further classified into three sub-categories (V,E and D) so that an in-depth consideration and
due reorganization can be given to various items for their inventory management.

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Material Requirement Planning (MRP) Equation
Nowadays, manufacturers are using MRP most frequently because they strive to reduce
inventory levels, increase production capacity, and enhance profit. Material requirement
planning begins with the formula that many materials held in an inventory have dependent
demands. Dependent demand is the outcome of the requirements generated for their use in
the production of other items, as in the case of raw materials, parts, etc. used in the
manufacturing of a finished product. For e.g., two wheels are required for the manufacturing
of one bike. It means, demand for wheels is dependent to the demand of bike.
MRP is a computer-based inventory control system that determines how much of each
material, any inventory item with a unique part number, should be purchased or produced in
each time period to support the master production schedule (MPS).
In manufacturing organizations, there is requirement of a variety of dependent demand items
to facilitate manufacturing of the finished product. So, proper inventory management of those
dependent-demand items is critical for the smooth flow of total production system. MRP is,
by necessity, a computer-based system which is designed to:
o Release production and purchase orders to regulate the flow of raw materials, in-
process inventories necessary to meet the production schedules for finished goods.
o Ensure availability of materials, components and products for planned production and
customer delivery.
o Maintain minimum levels of dependent demand items.

Objectives of MRP
MRP enables an organization to develop and implement realistic plans for meeting delivery
schedules of dependent item by proper timing of order placement. The major objectives of
MRP are:
o Improve Customer Service: MRP ensure not only timely delivery of goods to
customer as per delivery commitment, but it also bring the replenishment cycle’s time
down by the proper implementation of information system.
o Reduce Inventory Cost: MRP brings control of quality, quantity, and timing of
deliveries of raw materials, components, sub-assemblies, assemblies to production
operation with flexibility resulting into considerable reduction in inventory cost.
o Enhancing Operation Efficiency: MRP improves efficiency by means of :
1. Reduced number of stock-out and delivery delays, resulting into more production
without increase in the number of employees and machines.
2. Reduction of sub-standard products due to use of quality-ensured inputs, and
3. Efficient movement of goods leads to deceased idle time and confusion.
The chief benefit of MRP systems is that production operation work on those parts
that are really needed on their due dates so that production capacity is being used
to directly support the master production schedule.
Elements of MRP
The operation of MRP system consists of various elements, in terms of inputs MRP computer
programme, and outputs. Master production Schedule (MPS) is the driver of the entire MRP

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system. Apart from the MPS, other input informations are provided by the inventory status
file, bills of material file. These input informations are fed into the MRP computer
programme, which after processing and manipulation generated the outputs in the form
planned order release coupled with exception, performance and planning reports for the use
of management.
Master Production Schedule (MPS)
A master production schedule (MPS) is devised to either replenish finished goods inventories
or to fill customer orders. It is a schedule of the number and timing of all end items to be
produced in a manufacturing plant over a specific planning horizon. If these requirements
cannot be met by the materials available from inventory or from materials in order, or if
sufficient time is available for new orders, then the MRS will need to be modified to a new
MPS.
Inputs Elements of MRP
o Bills of Material File- Another major input element of MRP system is the Bills of
Material File. A bill of material file is a computerized file containing a complete list
of materials along with their quantity and specification required in the production of
one unit of a finished product. Therefore, each material such as assemblies, sub-
assemblies, parts and raw materials has a bill of material, which is regularly updated if
there is any redesign of the product.
For the smooth application of MRP System, an accurate bill of material files is a
prerequisite, starting the product structure records coupled with specification and
quantity requirement of each material.
o Inventory Status File- An inventory status file is a computerized file containing a
complete record of each material held in inventory. A material record includes the
low-level coding, on-hand balance, open orders, lot sizes, lead times, safety stock, and
customer order for the item. These records are kept up to date by inventory
transaction such as receipts, disbursements, scrapped materials, planned orders, and
order releases.
MRP Computer Program
The MRP computer program operates in the following manner:
o First, with the MRS, it begins to determine the number of end items needed in each
time period. Next, the numbers of service parts not included in the MPS but deduced
form customer orders are included as end items.
o Next, the MPS and service parts are exploded into gross requirements for all materials
by the time period into the future by consulting the bills of materials file.
o Next, the gross materials requirements are modified by the amount of materials on
hand and on order for each period by consulting the inventory status file. The net
requirements of each material for each, buckets are computed as follows:
Net Requirements= Gross requirements-[inventory on hand-safety stock-inventory allocated
to other uses]
If the net requirements are greater than zero, orders for the material must be placed.

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 o Finally, the orders are offset to earlier time periods in order to allow for lead times at
each step in the production process and supplier lead time.
This procedure results in inventory transaction data (order released, changes in orders and so
on), which are used to update the inventory status file, the primary output reports, and
secondary output reports.
The output of MRP system dynamically provides the schedule of materials for the future-
amount of each material required in each time period to support the MPS.
Two primary output result in:
I. Planned Order Schedule- A plan of the quantity of each material to be ordered in
each time period. This schedule is used by purchasing to place orders with suppliers
and by production departments. The planned orders become a guide for future
production at the supplies and for in-house production schedules.
II. Changes in Planned Order- Modification of previous planned orders. Quantities of
orders can be changed, order can be cancelled, or the orders can be delayed or
advanced to different time periods through the updating process.
The secondary MRP output provides this information:
a. Exception Reports-- Reports the flag items requiring management attention
in order to provide the right quantity of materials in each time period. Typical
exceptions noted are reporting errors, late orders, and excessive scrap.
b. Performance Reports-- Reports that indicate how well the system is
operating. Example of such planning information are inventory turns,
percentage of delivery promises kept, and stock-out incidences.
c. Planning Reports-- Reports to be used in future inventory-planning activities.
Examples of such planning information are inventory forecasts, purchase
commitment reports, trace to demand sources, and long-range material
requirements planning.
Distribution Requirement Planning (DRP)
DRP is a powerful sophisticated tool for improving the distribution operation that emphasize
on multiple distribution system taking into consideration the characteristics of each state.
DRP is the application of MRP logic to distribution inventories. The major points of
distinction between DRP and MRP are as follows:
o DRP system deals with the finished goods inventory, whereas MRP deals with
dependent demand items for production of finished goods.
o MRP system generally operates in a demand situation which is defined and controlled
by the enterprise, whereas DRP operates in an independent environment of uncertain
consumer demand which is not in the control of the enterprise.
o These bills of materials are used in MRP, whereas bills, of distribution are used in
DRP.
o DRP uses time-based order point (TBOP) logic to determine network replenishment
requirements, while MRP applies time-phased logic to subassemblies and components
of products in a manufacturing bill of material network.

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 o DRP is an impulsion process from the lowest levels of the distribution network to the
central distribution Centre, whereas MRP is an explosion process from the master
production schedule to the detailed scheduling of component replenishment.
DRP systems are intended to link the production process to other inventory level positioned
further down in the distribution channel. In other words, DRP system relies on forecast at the
lowest level in distribution network in order to derive inventory demand at all higher levels.
Thus generally, it requires that different levels of channel be linked electronically with high-
level inventory managers who have visibility of demand, inventory assets and planned
reorders for all lower level inventory customers. Gross requirements for items are developed
from forecasts in a time-phased manner at all the local distribution Centre/stock keeping units
(SKUs) in a TPOP format. The planned order releases for a given product accumulate and
become gross requirements at the central distribution centers. DRP system coordinates
inventory levels, plans inventory movements, and reschedules inventory between the various
levels.
Logic of DRP
DRP place emphasize on scheduling rather than on ordering. Inventory items are not
replenished unless there are future requirements to be met. DRP anticipates the future
requirements by forward planning at all levels, of a distribution network. Periods of potential
shortage can be identified early enough to develop alternative plans. It can predict problems
before they actually occur and provide visibility to the distribution network. The basic logic
of DRP is as follows:
o From forecasts at local distribution centers, it calculates the time-phased net
requirements, which indicate when the stock level will be consumed by gross
requirements. For a given period, net requirements= (gross requirements+ safety
stock)-(scheduled receipts+ projected-on-hand for the previous period). Only the
positive values of net requirements are recorded.
o It creates a planned order receipt for the net requirements quantity in the period of net
requirements.
o It calculates the planned order release date (shipping date) by offsetting the planned
order receipt date by the lead time. In other words, the stock must be ordered one lead
time prior to its need.
o The planned order release quantity becomes a gross requirement in the same time
period for the parent supply Centre at the next higher level of the distribution
network.

Benefits of DRP
An integrated inventory planning system such as DRP offers a number of benefits for the
management. Major organizational beneficiaries include marketing and logistics. The major
marketing benefits are:
o Improved service level that increase on-time deliveries and decrease customer
complains.
o Improved and more effective promotional and new-product introduction plans.

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 o Improved ability to anticipate shortage so that marketing efforts are not expended on
products with low stock.
o Enhanced ability to offer customers a coordinated inventory management service.

Constraints of DRP
despite having a significant contribution in the efficiency improvement of distribution
operation, as stated above, DRP has certain constraints to its effectiveness, like:
o As the DRP is guided by customer demand which is normally beyond the control of
the enterprise, demand forecasting is an important in gradient of any DRP system.
Hence, an accurate forecast is the heart of any DRP system to avoid excess/stock-out
of any inventory at any location. In the present day’s era of dynamic environment,
there is every possibility of forecast error which limits the effectiveness of DRP.
o Any DRP uses time-phased order point logic. Hence, inventory planning requires
consistent and reliable performance cycle for movement distribution facilities. But,
practically performance-cycle uncertainty reduces the planning system effectiveness.
o Effective use of integrated planning is always affected by system nervousness, or
frequent rescheduling due to delivery delay or performance cycle breakdown.
Uncertainty such as delay in delivery schedule by vendors by in-transit delay affect
the efficiency and effectiveness of the DRP system.
Just- in time system
It was Tailchi Ohno of Toyota Motor Corporation, Japan who rolled the coin of just-in-time
(JIT) in 1950s. He is widely known as father of JIT concepts and claims that it is need of the
hour to develop a system for manufacturing small quantities of different kinds of automobiles
to increase customer responsiveness and decrease the cost. Toyota’s Motomachi plant is
receiving materials directly at the assembly line. Trucks go inside for delivery of parts and
components to the plant. There is no store or warehouse inside the plant premises.
In not only Japan but also throughout the world Schonberg, an early propagator of JIT,
broadly defined the concept of JIT as ‘produce and deliver finished goods just in time to be
sold; sub-assemblies just in time to be assembled into finished goods; fabricated parts just in
time to go into assemblies and purchased materials just in time to be transformed into
fabricated parts’. The above concept of JIT emphasizes on the fact that it is not merely a tool
of inventory control but, in fact, a total manufacturing philosophy where producing one extra
piece is just as bad as being one piece short. In this concept, anything over the minimum
required quantity is viewed as waste, because effort and material expanded for something not
needed now cannot be utilized now. Other activities like fork trucks, expeditors and safety
stocks add to the cost but not to the value. Cost without value is waste. Anything which does
not directly add value to the product is a loss and should be minimized if not eliminated.

The classification of waste incurred during the production process is due to:
o Over production
o Waiting time for loading
o Waste in transportation

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 o Waste in process
o Waste in motion
o Production of defective items
Hence, the objective of JIT philosophy is to ensure zero-defects, zero set up time, zero lot
excesses, zero handling, zero queues, and zero breakdowns and zero lead time. It
emphasizes on solving the whole spectrum of production problems, not only with excess
inventory, safety stock, or load times. Thus, the philosophy of JIT refers to:
o All materials to be active as work-in-process
o Never a pause to collect carrying charge
o Hand-to-mouth operation, in which the ratio of production and delivery quantities
approaches to one
o Flow of material resources through the logistics system in such a way that they arrive
at the point of intended use just in time
o No idle inventory, only that to which value is being added.
In short, JIT system refers to make available the right goods in the right quantity at the right
time without the need for inventory as safety stock.
Characteristics of JIT system
The various characteristics of the JIT system include:
o Zero inventories, emphasis is on operation from source to customer.
o Emphasizes customer service and timing, so fulfilling the mission of logistics and
supply chain management.
o Less lead time, reducing inventory-carrying cost.
o Flexibility of operations to increase-customer responsiveness.
o Efficient flow of goods.
Advantages of JIT
o Inventory levels are drastically reduced.
o Process time, space requirement and set up time are reduced considerably.
o Leads to time-based competition, using speed as a weapon to capture market share.
o Eliminating waste by prohibiting overproduction, waiting, undue warehousing and
handling facilities, and defective production.
Disadvantages of JIT
o High risk is involved due to short-term planning and a minimum level of inventory.
o Suppliers of input materials need to be educated about the quality by the customer.
o Needs continuous and close evaluation and follow-up of the whole process.
Prerequisites of JIT System
JIT system is much above than inventory control system. During the course of
implementation, it substantially affects other functions like purchasing, transportation,
warehousing, production quality control and information system ad requires a high degree of
coordination between them. For the successful implementation of JIT systems, following
points of fact should be taken into consideration.

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 I. Purchasing
o Must cultivate a limited number of highly-reliable suppliers/vendors with long term
partnerships.
o Using local suppliers to reduce replenishment cycle time.
o Suppliers must be particularly strong in lead-time dependability and quality.

II. Transportation
o Delivery schedules and turn-around times of high discipline are required in JIT
system.

III. Warehousing
o Focus on material movement not on material storage. Hence, emphasis must be on the
ability to move material quickly and efficiently as against automated storage system.

IV. Inventorycontrol
o Elimination of safety stock
o Reduction of errors in inventory system.
o Low variety and stability of demand.

V. Quality control
o Elimination of wastage of resource and efforts on continuous improvement of system
for reducing the path lead to quality control and improvements.

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 LESSON–5

PROTECTIVE PACKAGING

Introduction
Protective packaging has a great impact on the cost and productivity of a logistical system. It
can optimize logistics and supply chain efficiency and effectiveness. Packaging is closely
related to several topics currently considered on the cutting edge of logistics thinking and
operations. Along with extensive use of computer and electronic communication devices,
packaging is the facet of logistics operations in which the greatest technological innovations
have been made in the recent years. Today, these innovations and related environmental
issues provide a wide range of alternatives which must be understood, selected, and managed
effectively for the attainment of logistical objective to deliver the desired level of customer
service at the lowest total cost.
The purpose of packaging material and their installation for operations and the subsequent
need for material disposal are the most obvious costs. However, as productivity effects
permeate a logistics system, packaging-related cost are often overlooked and underestimated.
Few firms manage packing with a systematic approach. Packaging affects the cost of every
logistics activity. Transport and storage cost are directly related to the size and density of
packages.
Concepts
Packing, package and packaging are words which are most interchangeably used in practice
yet still have some fine line of distinction in their concept.
Packing: It is a process of covering, wrapping or crating of goods before they are transported
or stores.
Package: It is the actual container or wrapper in which the product is enclosed or sealed.
Packaging: It is the general group of activities which concentrate in formulating the design
of a package and producing an appropriate and attractive container or wrapper for the product
which will protect the attributes of the product till it is used by the user and/or creates a
demand. Export shipment moving by ocean transportation requires more stringent packaging
than domestic shipments normally do. An export shipment undergoes more handling: it is
loaded at the origin, unloaded at the dock, loaded onto a ship, unloaded from the ship at port,
loaded onto a delivery vehicle, and unloaded at the destination. This handling usually occurs
under favorable conditions-in inclement weather or with antiquated handling equipment, for
example, if storage facilities are inadequate, the goods may remain exposed to the elements
for a long time.
The shipper may find settling liability claims for damage to export goods very difficult.
The term package and packaging can be understood in terms of a ‘hierarchy of containers’.
Consider toothpaste, for example.
1. First, the toothpaste has to be put into some kind of container so it can be handled
easily by the consumer. So, it is put into a tube.

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 2. The tube is handy to use, but it’s soft and fragile, so it is put into an oblong box to
protect it on the store shelf and in a shopping cart.
3. Since tubes of toothpaste are ordered by stores in multiple of tens or dozens, or more,
the manufacture packs that number of boxed tubes of toothpaste in a small carton.
4. To facilitate economical handling by distributors, a fixed number of such small
cartoons will be packed in a large carton.
5. Fifteen or twenty of those larger cartons may then be placed on a pallet for handling
by a forklift truck as the pallet is leaded on and later unloaded from a truck or rail car.
6. Even a closed truck, trailer, container or rail car is ‘packaging’ as its role is
protection- from theft, rain, extreme temperature, damage, and so on.
Similar packaging hierarchies could be developed for most items that are transported,
handles, stored. ‘Package’ and ‘packaging’ are very broad terms and require careful
definition when used in logistic context.
Hence, packaging is an art of designing and producing the package for a product with
the objective to create demand, provide protection and convenience during handling.
Packaging is generally categorized into two broad categorized into two broad types,
namely; consumer packaging and logistical packaging.
Consumer packaging (what consumer take home) is often based on marketing
considerations in terms of advertising and sales value.
Logistical packaging, on the other hand is what facilitates product flow during
manufacturing, shipping, handling and storage. It includes shipping containers for
consumer goods, industrial packaging for production-related materials, and
institutional packages. There is also a packaging aspect to a vehicle required for
protection during loading and unloading, as well as inter-model containerization. In
the logistics and supply chain management perspective, we are more concerned about
logistical packaging required for protection and identification of goods in their
journey from the point of inception to the point of consumption. That is why, instead
of using mere packaging, we have used the term ‘protective packaging’, specifying
the logistical emphasis.

Product Packaging
With the exception of a limited number of items, such as raw materials in bulk, automobiles,
and furniture items, most products are distributed in some kind of packaging. There are
number of reasons why a packaging expense is incurred. The reason may be to:
• Facilitate storage and handling
• Promote better utilization of transport equipment
• Provide product protection
• Promote the sale of the product
• Change the product density
• Facilitate the use of the product
• Provide reuse value for the customer.
Not of all these objectives can be met through logistics management. However, changing
product density and protective packaging are of concern in this area. Protective packaging is
a particularly important dimension of the product for logistic planning. In many respects, it is

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the packages that must be the focus of planning, with the product itself of secondary concern.
It is the package that has shape volume and weight. The product may not have same
characteristics. The point is that if a television set were removed from its shipping carton and
replaced with shock-testing equipment, as is frequently done to test for damage during rough
handling the logistician would not treat the shipment differently, assuming that the change
was not known. The package gives a revised set of characteristics to the product.
The protective packaging is an added expense that is counterbalanced with lower
transportation and storage rates as well as fewer and less extensive damage claims. The
logistician brings these costs into balance while working closely with sales and engineering
to achieve the overall objectives for packaging.
PACKAGING LOGISTICS
Packaging is a coordinated system of preparing goods for safe, secure, efficient and effective
Handling, transport, distribution, storage, retailing, consumption and recovery, reuse or
disposal
Combined with maximizing consumer value, sales and hence profit (Saghir, 2002). It’s
Fundamental function of protecting, containing and preserving the product, the functions of
Packaging have manifold and are complex and the definition here can be related to three
main categories i.e. logistics, marketing and environment.

Packaging Logistics is “An approach which aims at developing packages and packaging
systems in order to support the logistical process and to meet customer/user demands.” This
definition reflects a traditional point of view that considers packaging as a part of the
logistical system, and addresses only a one-sided relation where packaging adapts to the
logistical system.
The packaging system is considered are one of other logistical sub-systems as the transport
system, inventory management system, order-processing system, performance measurement
and warehousing System. Packaging is also considered as “an important warehousing and
materials management Concern” (Lambert et al. 1998). Ballou (Ballou 1998) considers
packaging as a supportive Activity to Business Logistics, where he calls it “protective
packaging”.
Some efforts to recognize the role of packaging on various levels, but fail to stretch its
influence beyond traditional limited thinking.

Logistics plan, implement and control, while Packaging contains, protects, secure, promotes,
Sells, informs and is a source of profit. Packaging logistics focuses on the packaging system,
address the interfaces between the two systems of packaging and logistics and aims at
increased efficiency and effectiveness in the combined system, optimally from point of origin
to point of consumption and further to reuse/recovery or disposal. Saghir (2002) suggests the
Following definition of Packaging Logistics: “The process of planning, implementing and
Controlling the coordinated Packaging system of preparing goods for safe, secure,
efficient
And effective handling, transport, distribution, storage, retailing, consumption and
Recovery, reuse or disposal and related information combined with maximizing
consumer
Value, sales and hence profit.”

Packaging Logistics should be considered as an integrated approach, where both systems of

Packaging and logistics interact, complement and adapt to each other. The total potential of

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Improvement should be larger if an integrated approach was adopted. Three distinguished
Strategies improving during, when adopting the concept of packaging logistics has been
identified, handling cost depends on unit loading techniques. Inventory Control depends on
the accuracy of manual or automatic identification systems. Customer service depends on the
protection afforded to products as well as the cost to unpack and discard packing materials.
And the packaging postponement/speculation decision affects the cost of the entire logistical
system. Furthermore, the characteristics of the logistics system determine the requirements
and costs for packaging. An integrated logistics approach to packaging can yield significant
logistics value.”

Logistical Functions
Packaging can optimize logistics and supply chain efficiency and effectiveness by:
• Reducing the weight and space requirement for material handling and transit
• Ensuring product quality en route through the logistics system and supply chain
• Selling the product.
Hence, the major functions of packaging in logistics and supply chain are to provide
containment, protection, utilization and communication. However, logistical packaging
provides no great value of its own but adds value only as its function in a logistical system
1. Containment
Products must be contained before they can be transported from one location to another.
Packaging provides space in which a product is contained. From logistics and supply
chain point of view, the containment function of packaging is concial as it refers to
minimization of weight and space requirements on the package so that overall logistics
cost can be curtailed be means of minimization of transportation and storage cost. For
instance, many Coca-Cola beverages are delivered to bottles in powered form. Then they
are hydrated or reconstituted. Or salt and species are packed for convenient use in the
kitchen.
2. Protection
Packaging protects its contents on its route from the manufacturer to the consumer and even
during its life with the consumer. It protects the products from spoil, discolor, loss of
fragrance, damage, break, contamination, or physical deterioration of the product. Take the
instance of delicate product like eggs, the carton is designed to protect the transport and
storage of the eggs while providing for stock ability. Each cracked egg is an unrecoverable
cost.
The amount of protection that a package must provide depends on the characteristics of the
product and conditions in the logistical system. The relationship can be conceptualized in the
following way:
Product characteristics + logistics hazards = package protection
Product characteristics refers to the features of the products such as perishability, fragility,
etc. which are likely to deteriorate during transit and handling.

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Logistics hazards deal with types of transportation, storage, and handling used.
3. Utilization
The utility function of packaging relates to how packaging affects the productive and
efficiency of the total logistical system. All logistical operation that are transportation,
storage, warehouses and productivity are affected by package utility. It describes the physical
grouping of master cartons into ne restrained load for material handling or transport.
Productivity of logistical operations is the ratio of real output to real input.
Productivity = number of package output/logistics inputs
Most of the logistical output are described in terms of packages such as number of cartons
loaded per hour into a trailor, number of packages picked per hour at a distribution Centre
and cube utilization. That is why utilization improves the productivity of most handling
operations, and picking products in ordered quantities improves warehouse order picking
operations.
Cube utilization refers to the number of packages that fit into a cubic foot of vehicle or
warehouse, which can be improved by reducing the package size. Package size can be
reduced by concentrating products.
Johnson and wood (1996) have suggested the following ten functions of protective
packaging:
• Enclose the materials, both to protect them as well as protect other items from them.
• Restrain them from undesired movement within the container in transit.
• Separate the contents to prevent undesired contact, such as through the use of
corrugated fiberboard partitions used in the shipment of glassware.
• Cushion the contents from outside vibrations and shocks.
• Support the weight of identical containers that will be stacked above it as a part of the
building-blocks concept. This could mean, in some situations, stacks in a warehouse
that are up to twenty feet-high.
• Position the contents to provide maximum protection. While packaging a combined
set of wastebaskets and lamp shades, the package would be designed for packages
would be designed so that the lamp shades were protected by the wastebaskets.
• Provide for fairly uniform weight distribution within the package, because most
equipment for the automatic handling of packages is designed for packages whose
weight is evenly distributed. Also, individual handling packages manually assume that
the weight is evenly distributed.
• Provide enough exterior surface area so that identification and shipping labels can be
applied along with specific instructions such as ’this side up ’ or ‘keep refrigerated’.
Today, this would also mean providing a uniform location for the application of bar
codes. Handling symbols, such as a picture of an umbrella, meaning ‘keep dry’ might
also be used.
• Be tamper-proof to the extent that evidence of tampering can be noticed. We think of
chat mainly at the retail level of packaging for some foods and drugs.

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 • Be safe in the sense that the package itself is (both in Conjunction with the product
carried and after it has been unpacked.) present no hazards either to the consumer or
to other.

4. Communication – The communication function of protective packaging is gaining

importance due to wide and extensive use of the logistical information system.
Practically, package symbolizes the product throughout logistical channels. It serves
as the function of identification by consumers and even by the laborers of warehouses
for storing, picking and transportation.
Packaging symbols and other data inform buyers abut contents, attributes, weights, storage
sizes, perishability, and handling instructions of the Products. Other information is aimed at
inventory management. Machine-readable bar codes are becoming a norm in packaging.
Extensive use of bar coding system highlights the communication function of packaging,
which has a direct interface with firm’s logistics information system. Using bar code
scanners, channel member can quickly record in-bound shipments, fulfill order requirements,
and proper out-bound shipments.
Packaging is also becoming an important consideration in the light of growing environmental
responsibility. Globally, packaging standards are of growing concern highlighting recyclable
packaging and required that each channel member join in waste reduction and recovery
activities.
Distribution Centre

Secondary and tertiary packagings are handled at the DC. The packaging logistics processes
at the Distribution Centre are receiving, warehousing, order picking, handling materials and
shipping. Most activities performing in supply chain management depends on packaging.
Labor generally represents the greatest cost in a DC as there is an extensive amount of
manual handling on facilities can provide numerous services, depending on the requirements
of the supply chain. In traditional distribution operations, four primary functions are carries
out:

1. Accumulation – It involves the receipt of goods from a variety of sources. The

distribution serves as a collection point for product coming from multiple origins and
provides required transfer, storage, or processing services. The accumulation function
allows organizations to consolidate orders and shipments for production and
fulfillment process.
2. Sortation -- It focuses on assembling like products together for storage in the
distribution facility or for transfer to customer. During the receiving process, goods
are segmented according to their key characteristics -production lot number, stock-
keeping unit (SKU) number, case pack size, expiration date, etc. and prepared for safe
storage in the facility or immediate distribution. Proper sortation is essential for the
effective management of inventory and fulfillment of customer orders.
3. Allocation- It focuses on matching available inventory to customer orders for a SKU.
The finished goods are stored in warehousing without packaging and is compared to
inventory levels as per the customer order, and available units are retrieved from
storage according to the quantity requested by the customer. This break-bulk capacity
promotes product availability for multiple customers, and allows them to purchase
needed quantities rather than excess volume that is not desired.

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 4. Assortment- It involves the assembly of customer orders for multiple SKUs held in
the distribution facility. This facility provides a product mixing capability, allowing
customers to quickly order a variety of items from a single location. This avoids the
expenses related to placing numerous orders and having them shipped from a variety
of location.

Suggested Packaging Logistics Analysis Procedure

First, one needs to stress that the fundamental function of packaging to protect the product
and meet its requirements must be fulfilled, along its whole life cycle.

Step 1--The more traditional relation between packaging levels is often given quantitatively
in number of primary packaging per secondary packaging (packages per case), number of
secondary packaging per tertiary packaging (cases per layer and layers per pallet), and
thereby number of primary packaging on tertiary packaging or the volume efficiency (filling
rate). These relations are useful, but other properties as stability and compatibility should be
added.

Step 2-- is to investigate how the different levels of the packaging system fulfill basic
packaging requirements, see the packaging basic requirements.

Step 3-- in the analysis process is to investigate the relation between the different levels of
the packaging system and the packaging logistical processes in the supply chain. This can be
done by relating corresponding packaging level to the different requirements identified in the
defined grocery retail supply chain. This system in the matrixes are qualitative and usable in a
relative comparative Investigation, but can be replaced by more quantitative measures e.g.
costs, time, or indexes. The availability and measurability of the packaging related factors
involved determine if this is Possible. Notice that compulsory requirements e.g. protection
are easily determined in absolute terms.

Step 4-- is to analyses the significant relationship between the different levels of the
packaging System and their actual performance. As suggested in packaging logistics steps.
The three first steps are usable based on pre identified requirements, available historical Data
and tools and represent the purpose of early evaluation of packaging concepts. The fourth
step is on the other hand aimed at linking actual performance data along the supply chain to
investigated packaging system. Allowing this kind of packaging level step based analysis
facilitates identifying insufficiencies and pointing out on what level improvements are
needed.

Forms of Protective Packaging

Most of the new packaging systems at the advent of logistics and supply chain arena are
simple variations of traditional packaging norms, using traditionally material in new and
innovative ways. The logistical/protective packaging materials and forms include:

• Wood pallets, crates, blocking and bracing.

• Fiberboard boxes, dividers, inserts and dunnage.
• Solid fiberboard slip-sheets and boxes.
• Multi-wall paper bags and drums.
• Steel canes, pails, drums, and straps.

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 • Steel racks and cages.
• Fabrics (burlap and woven plastic) bags and blankets.
• Low-density plastic film shrink-wrap, stretch-wrap, bags, and barriers.
• High-density plastic boxes, slip sheets and pallets.
• Plastic strapping.
• Plastic foam cushioning and dunnage for fragile or irregular shapes.
Current Trends in Protective Packaging
Out of the above listed various protective packaging materials and forms, following forms
are widely used by the corporate enterprises taking into consideration logistical productivity
and efficiency along with growing concern about environmental responsibility.
1. Film-Based Packaging
Film based packaging uses flexible packaging materials to replace rigid materials such as
corrugated fibre board boxes. Traditionally, film-based shrink wrap and stretcher wrap
system have been used to stabilize unit loads.
In today’s emerging applications, film-based packaging is used to form actual shipping
‘packages’ for consumer goods such as cans and bottles, furniture, appliances, and small
vehicles. The new packages are generally combined with rigid materials: cans are shrink-
wrapped into a corrugated fibre board tray, plastic bottles trays have corner support for
stacking, filing cabinets have corrugated corner protection from and appliances have panel
protection on two sides to facilitate clamp handling.
The major benefits of film-based packaging are:
• Minimum shipment weight and cube
• Reduction in inventory storage space
• Less trash (waste material disposal costs)
• Less damage
• Work best for strong products

2. Blanket Wrapping
Blanket wrapping is the traditional form of packaging for household goods shipped by a
moving van. It is an ideal method for packaging irregularly shaped products like chairs
because the uncarted chairs can be nested. Product surfaces are protected by blankets and
stacked; decking is erected with plywood and bars that lock into the trailer walls. Blanket
wrapping can double the number of chairs shipped in a trailer, compared with packaging
chairs in corrugated fiberboard boxes.
Commercial uncartoned transportation is a premium service offered primarily as a division
of some household goods carriers. The carrier owns and manages the packaging system
(clean blankets, strapping, plywood, and decking materials) and ensures that the shipper has
enough. Trailers are loaded by trained workers directly accountable for preventing damage.
The major benefits of blanket wrapping are:

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 • Best suitable for truckload quantities of large rugged products such as wooden
furniture’s
• Elimination of package materials and waste
• Minimization of transportation cost
• Easier unpacking of products.

3. Returnable Containers
Returnable containers have always been used for some products in some logistical systems.
Automobile manufacturers have always used returnable racks for interplant shipment of auto
body parts; chemical companies have always reused steel drums; and locally-produced
beverages have been ‘sold’ in returnable bottles. There is a trend, however, to more
returnable/reusable packaging for products like assembly parts, ingredients, and snack chips,
and totes for transportation from wholesale warehouses to retail stores and intraplant
shipments.
The growing number of returnable container applications needs a short and integrated
marketing system that enables proper control of movement of containers. All partners in a
returnable system must cooperate to maximize container use, and an explicit relationship is
required for coordination and control. The decision to invest in a returnable packaging system
is a very different task from the decision to purchase expendable containers. One must
consider the explicit relevant cost- purchase cost and return transport cost-versus the explicit
relevant cost- purchase cost of expendables. Intangible benefits such as improved factory
housekeeping, improved ergonomics, and decreased damage are often considered. There may
be several unexpected cost, including sorting, tracking, reconditioning, and cleaning. Most
financial analysis of returnable system has been limited to ‘payback period’ justification
rather than net present value calculations, which would demonstrate the strategic benefits and
profit potential of a returnable packaging system investment.
The automobile industry is the best example which uses returnable containers extensively in
the assembling function for the procurement of various components and material from
vendors. Primarily, in the era of just-in-time manufacturing, and kanban system highlights
returnable containers for the smooth flow of logistical system in the supply chain network.
Intermediate Bulk Containers: IBCs are used for granular and liquid product shipment
qualities that are smaller than tank cars but larger than bags or drums. Typical products
include resin pellets, food ingredient and adhesives. The widely used of intermediate bulk
containers are bulk bags and boxes. Bulk bags are made from woven plastics with a liner
barrier and have a one-to two-ton capacity. Bulk boxes (sometimes called ‘gay lords’ after
the major manufacture) are usually pallet sized lined with a plastic bag. IBCs for wet
products require the use of a rigid box or cage.
Pallet Pools: Pallet pools have been developed to overcome traditional problems with the
disposal and exchange of pallets. Palletization is a arguably the most important contribution
to logistical productivity. Pallets are, however, a costly investment and a significant disposal
problem. Poorly-constructed pallets fall apart easily and are more likely to cause product
damage. Distribution Centre and warehouses routinely exchange their worst pallets and keep
the higher quality ones when pallet transfer occurs.

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Pallet pools are third-party suppliers that maintain and lease high-quality pallets throughout
the country. They offer reduced damage, lower disposal costs, and improved utilization of
pallet resources. Pallet pools are common in Europe and are making substantial inroads in the
North American grocery industry.
Plastic Pallets: Plastics pallets have been an issue of research and examination for many
years particularly, within the grocery industry. They attempt to address the shortcomings of
wooden pallets and are sanitary, lightweight, and recyclable. Their life-cycle costs are
comparable to traditional wooden pallets. However, they do require greater initial investment,
and because of that expense, the only way they can be utilized on an industry wide basis is
through tightly- controlled networks of management.
Protective Packaging Problems
Basically, there are three types of protective packaging problems which logistics managers
generally face, namely:
Engineering Problems
Cost Considerations
Logistical Problems with Packaging Solutions
1. Engineering Problems
Logistics managers and professionals generally face problems when they use engineering
principles of material science to develop new packages and solve protection problems. They
are also using some industrial engineering principles to configure package operations and
selection of packaging machinery.
However, the total management of protective packaging is not a mere blend of material and
engineering but also requires due considerations of management perspective, which needs
divergence from the main principles of engineering. Most packaging problem solving is not
associated with developing new packages for new products. In fact, most new protective
packages are simple variations of packages used for similar products and require very little
engineering.
2. Costs
Another main problem faced by logistics professionals in the field of protective packaging is
to reduce the cost of packaging material along with packing operations. It includes light
weighting, material substitution, size reduction, automation of manual tasks, and
standardization. Rapid innovations in the field of science and technology have discovered
incremental packaging solutions which contributed significantly in the reduction of
packaging cost and improvement of packaging operations.
3. Logistical Problems and Opportunities
The third type of packaging challenge concerns logistics problems and opportunities with
packaging solutions. Packaging can reduce the cost of every logistical activity: transport,
storage, handling, inventory control, and customer service. Furthermore, changing the
packaging postponement/speculations decision can dramatically reduce the cost of an entire

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logistical system. Integrated management of packaging and logistics is required if a firm
expects to realize such opportunities.
Ideas for innovative packaging solutions to logistical problems arise from many sources,
including serendipity. Sometimes, it simply takes a new perspective. Speaking with
packaging consultant and packaging professionals from other firms and industries often
yields positive creative advice, once a problem has been identified. The topic can be
approached in terms of several different challenges:
i. Postponement and speculation
ii. Transportation, warehousing, and handling efficiency
iii. Logistical information management
iv. Workers’ ergonomics and safety
v. Customer service
vi. Damage
vii. Trash reduction
viii. Hazardous materials packaging
ix. Packaging for international logistics

Packaging Policy
For an appropriate packaging policy to attain both marketing and logistics objectives, the
following five alternatives are in the hands of management followed by consideration of
packaging factors.
1. Packaging Alternative
2. Consideration of Packaging Factor

1. Packaging Alternatives

• Packaging Changes
A company may adopt the policy of periodic changes in product package in order to achieve
one or more of the following purposes:
o Desire to ensure more protection and convenient handling of the product
o Rectification of defects in the current package
o Adoption of innovative packaging materials resulting into huge savings in packaging
costs
o Required for changed promotion strategy or repositioning strategy for the products.

• Family Packaging
This kind of packaging policy refers to an almost similar package for the entire-range of
product line or group of product lines. For example, Park Avenue range of accessories and
toiletries have similar packaging. This alternatives policy emphasizes more on marketing
purposes and less on logistical ones.

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 • Multiple Packaging
This packaging refers to a policy of packaging in which a number of heterogeneous products
are packed in one package which is to be used by one customer. For instance, shirt, tie,
handkerchief are packed in one package. This alternative is not popular and practiced
commonly in India.

• Reuse Packaging
Again, this policy emphasizes more on marketing values in which marketers offer products in
such a package which may be reused for their purpose one product has been exhausted or
taken out of it stimulating purchase. For instance, Nescafe Instant Coffee is being packed in a
glass jar, which later may be used as a tumbler.

• Ecological Packaging
The ecological packaging refers to that policy alternative which emphasizes on preserving the
physical environment by the company while formulating a compatible packaging policy. It
may include:
o Use of returnable bottles and containers
o Use of containers that decompose over a reasonable period of time
o Use of light weight packaging

1. Consideration of Packaging Factors

While formulating a packaging policy, the firm should take into consideration these factors:

• Consumer Considerations
This factor includes:
o Easy product use and storage
o Easy handling, carrying and operation
o Easy acquaintance for direction to uses
o Easy disposal of package
o Re-use possibility of package

• Economic Considerations
This factor includes:
o Cost of packaging materials and equipment
o Cost of package fabrication and process
o Cost of manpower
o Cost of damages

• Customer/Reseller Considerations
This factor includes:
o Minimum space requirement for storage of products
o Easy identification and other information
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 o Number of packages per caste
o Easy handling

• Company Considerations
This consideration includes:
o Package requirement of consumers and customers
o Promotional appeal
o Sales stimulation
o Company’s image

Logistical Considerations:
This factor includes:
o Impact of packaging on logistical productivity
o Requirements of transportation, handling and warehousing
o Cost and space containment
o Returnable and recyclable use
o Ecological aspect.
With the exception of a limited number of items, such as raw materials in bulk, automobiles,
and furniture items, most products are distributed in some kind of packaging. There are a
number of reasons why a packaging expense is incurred. The reason may be to:
o Facilitate storage and handling.
o Promote better utilization of transport equipment.
o Provide product protection.
o Promote the sale of the product.
o Change the product density.
o Facilitate the use of the product.
o Provide reuse value for the customer.
Protective packaging is a particularly important dimension of the product for logistics
planning. In many respects, it is the packages that must be the focus of planning, with the
product itself of secondary concern. It is the packages that have shape, volume, and
weight. The product may not have the same characteristics. The point is that testing
equipment, as is frequently done to test for damage during rough handling the logistician
would not treat the shipment differently, assuming that the change was not known. The
package gives a revised set of characteristics to the product.
The protective package is an added expense that is counterbalanced with lower
transportation and storage rates as well as fewer and less extensive damage claims. The
logistician brings these costs into balance while working closely with sales and
engineering to achieve the overall objectives for packaging.
Logistical consideration in package design can be important for marketing to achieve its
objectives. Controlling product density can be critical to the success of a product.

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 LESSON – 6

PERFORMANCE MEASUREMENT

Introduction
On several occasions in earlier chapters, discussions have highlighted the need to ensure a
high level of customer satisfaction while generating the highest value to shareholders so as to
sustain growth and core competence in the global competitive environment. It has also been
said that normally, logistical costs range from 15 to 45 per cent of total costs next to the cost
of raw material cost. Any effort to maximize customer satisfaction necessitates the
availability of goods as per their specification and quality at the least price. Hence corporate
enterprises are continuously under pressure to slash the price of the products and add values
through logistical services. Furthermore, it is very difficult to project a considerable growth
in sales volume due to market maturity and corporate profitability due to swelling marketing
and distribution costs.
Logistics and supply chain management contribute significantly to fulfill the above
requirement by ensuring cost-efficient, value-added services, promising considerable
improvement in productivity by integrating the total system and cost curtailment, state-of-the
are customer satisfaction by means of quick response. That is why logistics and supply chain
management have attracted the attention of the top management of most of the companies. In
fact, a growing number of enterprises have realized the need for strategic sourcing and
harmonious relationships with supply chain patterns for competitive advantages, although in
many firms, logistics has not been managed as an integrated system. Even in firms that have
accepted the concept of integrated logistics management, evidence suggests that cost data
required for successful implementation are not available. Hence, it is essential to take a closer
look and monitor the function of total logistics and supply chain system in terms of
performance measurement and control of customer service quality and total logistical costs.
Dimension
A.T Kearney, consultant, noted that firms engaging in comprehensive performance
measurement realized improvements in overall productivity in the range of 14 to 22 percent.
Taking into consideration the present global competitive scenario, improvement of
productivity and profitability on a continuous basis are the order of the day for survival. That
is why, proactive corporate enterprise are always concerned about performance measurement.
It helps them not only to improve productivity and profitability but also ensure efficiency and
effectiveness in utilization resources for maximization of customer value by means of
competitive advantage and shared value. As there is enough scope for improvement in
productivity and profitability, logistics managers are always striving to collect, analyze, and
interpretative qualitative information to measure and compare in order to give the right
directions to logistical performance. They develop and redefine a comprehensive
performance measurement systems to monitor, control and direct total logistics operations on
a continuous basis. They also incorporate the entire supply chain process as an integrated
system. Hence the scope of performance measurement systems ranges from all activity-based
measure to entirely process-based measured.

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The focus of activity-based measure refers to individual tasks required for processing and
shipping of goods to fill orders. Whereas, the process –based measure deal with customer
satisfaction delivered by the entire supply chain, hence, there are three dimensions of
performance measurement namely,
1. Internal Performance Measurement
Internal performance measurement refers to a comparison of the present level of logistical
functions and/or goals with the previous operations and/or goals. These measures enable the
management to locate the existing gaps identify deviations in the actual performance to
logistical services in order to meet current and future requirement. According to Donald J.
Bowersox, there are five broad categories of logistics performance measures:

• Cost
Cost is one of the most important aspects which reflects the logistics performance of an
enterprise. It has been said earlier that logistics cost generally came after the raw material
cost in most of the cases. Hence, to improve the productivity and profitability, logistics costs
are of prime concern to managers for the achievement of its objectives. The measurement of
logistics cost is in terms of total rupees, as a percentage of sales, or as a cost per unit of
volume. Total logistics include the cost of material handling, procurement, inventory,
transportation, warehousing, protective packaging, order processing, etc.

• Customer Service
The mission of logistics is to ensure and offer the best possible customer service. Hence, it is
imperative to measure the logistics performance in terms of customer service capability with
regard to consistency and reliability. Any deficiency in it costs to the company not only in
sales volume and profitability but also in corporate image.

• Asset Management
This category of logistics performance measurement deals with the utilization of capital
investment in the development of logistics infrastructure and procurement of equipment as
well as involvement of working capital in inventory to achieve logistical objectives. Asset
management measures focus on how fast liquid assets such as inventory ‘turnover’ as well as
how well fixed assets generate return on investment.
• Quality
Quality measurements are mostly process-oriented performance evaluation. They are
designed to determine the quality of logistics service which incorporate a series of activities
including stock-out, defective delivery, damage, number of credit claims, number of
customer returns, cost of return goods, cost of recovery from defective delivery,
inconsistency, and unreliability of services.
• Productivity
Logistics refers to the integration of cross-functional activities of the enterprise. Hence,
measurement of performance is a very crucial issue for the maximization of productivity.
Productivity is a relationship between the output produced and the quantities of inputs
utilized by the system to produce that output.

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The concept and application of productivity is very simple but it became quite difficult and
frustrating in the case of complexities, in the measurement of output and utilization of inputs,
continuous change in input-output configuration and unavailability of data. Conceptually,
there are three basic types of productivity measures: static, dynamic and surrogate. If all the
output and input in a given system are included in the productivity equation, it would be a
total factor static productivity ratio. The ratio is considered static because it is based on only
one measurement. A dynamic measure, on the other hand, is completed across a period of
time. If outputs and inputs in a system compare static productivity ratios from one period to
another, the result is a dynamic productivity index, for example,
Output 1994 / inputs 1994

Outputs 1990 / inputs 1990

The third type of productivity measure is called a surrogate productivity measure. These
represent factors that are not typically included in the concept of productivity but are highly
correlated with it (customer satisfaction, profits, effectiveness, quality, efficiency, etc.). Most
managers operationalize productivity in this manner (Bowersox and Closs, 1996). Thus
internal performance measures primarily focus on various logistics functions required to
ensure cost-efficient optimum customer service. To remain in the competition actively, it is
essential for enterprises to measure the logistical performance on a continuous basis for the
achievement of logistical objectives and standards.
. External Performance Measurement
External performance measurement of logistics activities of the firm refers to visualizing it
from the customer and competition point of views. It is necessary to monitor, understand, and
maintain the logistics performance to keep the customer happy and loyal as well as
remaining-competitive terms in the market. Thus, external performance measures involve two
measure aspects, namely.

• Customer Performance Measurement

Due to global competition and explosion of choices, the expectations of customers and end-
users are significantly increasing on a daily basis. Hence, to survive in such a situation, it is
essential to take into consideration perception of customers regarding logistical performance
so that improvements can be made in it. The leading-edge enterprises conduct customer
perception and satisfaction surveys on a regular basis. They as have customer-monitoring
cells in their organization so that logistics performance measurement can be made on a
regular basis.

• Competitive Performance Measurement

The companies use logistics and supply chain management to bring competitive advantage in
the market place in the long run. So, to achieve this objective, it is essential to measure the
firm’s logistics performance with the competitors’ performance. This external performance
measurement helps firms to innovate new tools and techniques of logistics activities to enjoy
the overwhelming contribution of logistics as a differentiator. It also facilitates in
benchmarking the best points of the competitors’ logistics systems in the firms system as well
as identifying opportunities and threats.

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 2. Comprehensive Supply Chain Measurement
In recent times, there has been an amazing increase in the focus on supply chain performance
measurement that offers an integrated perspective. Without an integrated performance
measurement system, it is not possible to achieve the corporate objective of state-of-the-art
customer service and there is every possibility of gaps in it. For instance, the manufacturer
may measure service quality as the ability to ship when ordered, while the whole seller may
measures service as the ability to ship when promised. To bridge the gap, a growing number
of enterprises are realizing the need for strategic sources and supply management. That is
why the contribution of the sourcing function has increased dramatically in recent years in
managing the supply chain effectively, because it improves service levels and
simultaneously, reduces costs. The need to control and manage costs becomes more crucial as
suppliers account for higher percentage of a finished product’s value.
While developing an integrated supply chain performance measurement system the integrated
framework incorporates four types of matrics, namely: customer satisfaction/quality, time,
costs and assets which monitor both outcomes and diagnostics for effective supply chain
management.
The focus of outcome measures is on the overall process results in terms of customer
satisfaction and time management process, whereas diagnostic measures deal with specific
objectives within process.
Integrated Supply Chain Matrics Framework

Outcomes Diagnostics

Customer Satisfaction/Quality

Prefect order fulfillment Delivery-to-commit date

Customer satisfaction warranty cost, returns, and
allowances
Product quality customer iniquity response time
Time

Order fulfillment lead time source/make cycle

time
Supply chain response time
Production plan achievement

Costs

Total supply chain costs value-added productivity

Assets

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Cash-to-cash cycle time forecast accuracy
Inventory days of supply inventory obsolescence
Asset performance capacity utilization

• Customer Satisfaction/Quality
Customer satisfaction/quality matrics measures the ability of the enterprises in providing
overall customer satisfaction in terms of perfect order fulfillment, product quality and zero-
defect delivery. It is measured by perception regarding performance-cycle-time, point-to-
point information sharing regarding the status of order and delivery schedule, and other
customer service components. Quality is the third category of metrics. Several dimensions in
the quality category are important to logistics and supply chain management. The perfect
order concept is a good example of the increased emphasis being placed upon customer
service because it is simultaneously measures multiple metrics that must be achieved to get a
positive metric.
The key element of customer satisfaction diagnostics are exhibited in:
o Delivery to original committed date: the percentage of orders full filled on or before
the original committed date.
o Warranty costs: the average of actually incurred warranty costs expressed as a
percentage of revenue.
o Customer inquiry response and resolution time: the inquiry response time is the
average elapsed time between the receipt of a customer call and connection with the
proper company representative. Inquiry resolution time is the average elapsed time
required to completely resolve a customer inquiry.

• Time
This matric measure the firm’s ability to respond to customer demands, i.e. consistent and
reliable replenishment-cycle-time. Effective monitoring of time performance requires
measurement of the overall process from the customer perspective and the segmentation into
the individual elements.
The key elements of time diagnostic are portrayed.
o Supply chain response time: the theoretical time to recognize a major shift in market
place demand, internalize that finding, replan demand, and increase production by per
cent.
o Production plan achievement: the average actual frequency of production schedule
achievement (=5%).

• Cost
Costs are the major management aspects of supply chain performance. Various elements of
supply chain costs matrics include order fulfillment costs, material acquisition costs,
inventory carrying costs, information costs, and labor and other overhead costs.

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 • Assets
The last but not the least the matrics focuses on asset utilization. In other words, it refers to
maximization of return on assets deployed in the overall supply chain process in terms of
inventory, facilities, and equipment. Thus, asset matrics focus on the sales level than can be
supported with specific asset levels.
Hence, comprehensive supply chain performance measurement offers a common integrated
framework for evaluation of performance and further improvement of total system.
BASIC TOOLS
The top management is always interested in locating tools and techniques to improve overall
logistical performance so that resources can be optimally utilized and service capability can
be improved. There are two basic tools, namely activity-based costing and benchmarking,
which are widely used by firms for the above said purposes.

• Activity-based Costing (ABC)

Activity-based costing is a relatively new methodology which has received increased
attention as a method of solving the problem of insufficient cost data. This method of costing
assigns cost other than normal conversion costs (labor, factory overhead) directly to products
or service by allocation methods other than direct labor or machine hour. Traditional
accounting systems often fail to accurately reflect resource consumption. With activity-based
costing, variables, fixed and overhead costs are assigned directly to each product using the
activities required to produce the product. Thus, ABC differs from conventional by tracing
costs to products according to the activities preformed on them. Hence, ABC assists logistics
managers by revealing the link between performing particular activities and the demand those
activities make on an organization’s resources.
The assumption of activities causing cost enables ABC to adopt to two-stage assignment
procedure for assigning costs to a cost object. The first stage focuses on determining the costs
of activities within an organization. The second stage traces these activity costs to the
products consuming the work performed. The first step of the assignment process splits apart
resources, activities, and products within an organization. The second step combines the costs
of performing specific activities into cost centers at the activity level.
Benefits of Activity-based Costing
The major benefits of ABC are:
o It improves overall management of overhead by determining factors that actually
results in the requirement for overhead resources.
o It also provides greater visibility of how different products, customers, or supply
chain members impact profitability by more accurately tracing costs and determine
areas generating the greatest profit or loss.
o Activity-based costing ensures greater accuracy by using multiple cost drivers rather
than traditional costing techniques.
o Performance measures appear as a logistical consequence of an ABC system. The
performance measures can be used to track products returns damages claims, or data

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 entry errors. The linkage between the performance measures and the activity provides
a relatively direct means for computing the cost of poor or improved performance.
o ABC provides a framework for continuous process improvement by identifying place
for incremental improvements at the activity level so that overall performance of the
enterprise can be improved.

• Benchmarking
Benchmarking is a technique which has gained popularity in the recent past. It emphasizes on
measuring performance not just in absolute terms, but rather, in terms relatively to the
competition, and beyond that to ‘best practice’. In other words, it helps managers to measure
how the organization’s performance of logistics activities compares with that of other
organizations.
Various functions which come under the scope of benchmarking include billing, inventory
management, distribution, manufacturing and procurement. Hence, the operational definition
of benchmarking is ‘finding and implementing best practices’.
Benchmarking Fundamentals and Process
To attain organizational objectives, it is essential that benchmarking should be supported by
two basic beliefs. First, progressive firms must seek to continuously improve all facets of
their operations. Therefore, their attitude should be one of fixing or improving a work method
before it breaks, as contrasted to the ‘don’t fix it if aren’t broke point of view’. Second the
best practice should be identified and studied, which typically means searching outside one’s
own enterprise. Commitment to avoiding a ‘not invented here’ mentality means that a firms
should un -restrictively seek to identify best overall practice wherever it may be. An industry
executive recently spoke of the need to get outside the firm to avoid becoming the ‘queen of
the hogs’.
Write striving for benchmarking activities, managers require the following three
fundamentals.
o Know your operation: Assess the strength and weakness. This should involve
documenting work process steps and practices as well as defining critical performance
measurements used, including per-, post- and in-process measures as well as overall
results.
o Know industry leaders and competitors: You can differentiate capabilities only by
knowing the strength and weakness of the leaders.
o Incorporate the best and gain superiority: Emulate the strength of the best and go
beyond.
Benchmarking can be divide into two parts- practices and measures. In Xerox’s experience,
benchmarking should first investigate the industry’s best practices. The measures that
quantify the effect of incorporating the practices in an operation can be analyzed or
synthesized later. Generally, measures chosen should be true indicators of the process
performance and may include customer satisfaction, unit-cost, cycle time, and appropriate
asset measurements.

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It is equally important that the benchmarking process and findings be understood by the
organization in order to obtain commitment to take action to change. This requires carefully
designed communication to the organization as well as concerned management support.
After taking into consideration the above fundamental aspects of benchmarking, mangers
should follow an eleven steps systematic process as shown in
For better understanding and discussion, all of the eleven steps are grouped into five essential
phases, namely: planning, analysis, integration, action and maturity.
Eleven steps are very helpful to provide us systematic process of benchmarking these are:
Recalibrate Benchmarks
Implement Plans and Monitor results
Develop Action Plans
Establish Functional Goals
Communicate Results
Project Future Performance
Determine Data collection method
Identify Benchmark partner
Identify Benchmark subject

Benchmarking Process Phases

Recalibrate benchmarks
Action
c

Implement plans and monitor results

Develop action plans

Integrat
ion Establish functional goal

Communicate result

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 Project future performance

Analysis

Determine competitive gap

Determine data collection method/collect data

Planning
Identify benchmark partner
r

Identify benchmark subject

Planning
o What to benchmarking? Every function has a product or output. These are priority
candidates to benchmark for opportunity to improve performance.
o What companies to benchmarking? World-class leadership companies or functions
with superior work practices, wherever they exist, are the appropriate comparisons.
o Data source and data collection: A wide array of sources exist, and a good starting
point is a business library. An electronic search of recently-published information on
the area of interest can be requested.
Analysis
o Measuring the gap: It is important to have a full understanding of the internal business
processes before making a comparison to external organizations as the baseline for
analyzing best practices.
o Projecting the gap: whether negative, positive, or parity, these provide an objective
basis on which to act and to determine how to achieve a performance edge.
Integration
o Report progress: progress should be reported to all employees who need to know.
Based on the benchmarking findings, a vision or end-point picture of the operation
can be developed.
o Excise performance goals.
Action
o Specific actions: specific implementation actions, periodic, measurements, and
assessments of achievement should be put in place.
o Assign responsibility: people who actually perform the work should be responsibility
for implementing the benchmarking findings.

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 o Continuous improvement: The Company should stay current with the ongoing
industry changes by continuously benchmarking and updating work practices.
Maturity
o Institutionalize: maturity is achieved when the best practices are incorporated in all
business processes and the benchmarking approach is institutionalized.
Impediments to Improve Performance
Talking about productivity enhancement and performance improvement are quite alluring in
principle but introduction of a new system against an established one, even for the
betterment, is very difficult to implement. There are several factors which restrict business
performance improvement efforts; such as:
• Failure to Adopt Customer Expectation
Normally, it has been felt that one of the biggest hurdles in the logistics and supply chain
performance improvement is the manager’s failure to recognize customer’s expectation about
logistical services. For instance, customers recognize information about status of order and
shipment schedule as one of the most important service factor so that they can have
commitment for delivery of goods with their future customers. But in most of the cases, firms
fail to provide such information mainly due to failure of managers to give due weightage to
this expectation.

• Lack of Requisite Cost Data

While discussing total cost approach for logistics and supply chain management, it has
clearly been discussed that various elements of logistical cost exhibit conflicting and
overlapping behavior among themselves. Hence, it is very difficult to have an appropriate
cost data about individual elements of logistical costs required for the performance
measurement purpose. For instance, all payments for salaries came under the head salary
account whether they apply to production, marketing, logistics, finance, etc. Furthermore, it is
very difficult to segregate the portion of the salary of a person who is raising bills, which is a
logistical function as well as maintaining books of account of the firm, which is solely
finance.

• Lack of Comprehensive Management Skills

Over a period of time, logistics and supply chain management have jumped from mere
operational activities of warehousing and transportation to the most strategic functions of the
enterprise to even to the supply chain process of external integration with vendors,
transporters, customers for core competency. But, unfortunately, there is still a lack of formal
education and training about it. In most of the management education course curriculum,
there is an absence of appropriate weightage to this vast emerging jargon resulting into a gap
in professional skills required and available.
• Failure to Think as a System
Logistics and supply chain management always work as an integrated system, including
several sub-systems such as transportation, warehousing, order processing, customer service,
inventory management, etc. But practically, these sub-systems get a status of individual

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functions in the enterprise, which limit the scope for further performance improvement. For
instance, a manager who is responsible for transportation functions is primarily concerned
with the minimization of transportation cost by adopting shortest route of vehicle movement,
utilization of full truck load capacity, and relatively slower mode. This may result in higher
inventory cost and poor customer service capability, but when logistics and supply chain
activities will be visualized as an integrated system only then total logistics can be minimized
and customer service capability can be improved.
• Lack of Transformation in Corporate Vision and Culture
In order to encounter intense global competition, there is the need for transformation in
corporate vision and overall organizational culture towards logistical system. For survival,
corporate vision should be well defined in terms of customer service capability and real-time
responsiveness so that competitive effectiveness can be gained. Furthermore, to implement
corporate vision, it is essential to have a major cultural change in the mindset of people of the
organization that customer service and satisfaction are essential to remain in the market place
actively. Failure in this aspect leads the company towards core rigidity and logistical
performance cannot be improved.
• Lack of Infrastructural Facilities
Last but not the least, the major impediment to improve performance of logistics and supply
chain management is the lack of infrastructural facilities in terms of transportation network
and quality of vehicle, public warehousing, information and communication technological
networks, etc., for speedier movement of goods and related information.
Measures of performance measurement

Non - Financials Measures

The metrics of non-financial measures comprise cycle time, customer service level,
inventory levels, resource utilization ability to perform, flexibility, and quality. We will
discuss the dimensions of the metrics −

• Cycle Time
Cycle time is often called the lead time.

• Inventory Levels

As the inventory-carrying costs increase the total costs significantly, it is essential to carry
sufficient inventory to meet the customer demands.

Every inventory is held for a different reason. Hence gauging the actual inventory levels will
supply a better scenario of system efficiency.

• Resource Utilization
In a supply chain network, huge variety of resources is used. These different types of
resources available for different applications are mentioned below.

o Manufacturing resources − Include the machines, material handlers, tools, etc.

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 o Storage resources − Comprise warehouses, automated storage and retrieval systems.
o Logistics resources − Engage trucks, rail transport, air-cargo carriers, etc.
o Human resources − Consist of labor, scientific and technical personnel.
o Financial resources − Include working capital, stocks, etc.

In the resource utilization paradigm, the main motto is to utilize all the assets or resources
efficiently in order to maximize customer service levels, reduce lead times and optimize
inventory levels.

Performance metrics for logistics and supply chain management should include
logistics operations cost, logistics service metrics, transaction cost and revenue
qualification, and channel satisfaction metrics.

In terms of logistics operations costs, a good example is transportation cost. By calculating

the tradeoffs between using less expensive (slower and less reliable) and more expensive
(faster and more reliable) transportation service, an organization could quantify the total cost
impact on transportation and inventory cost. Using faster and more reliable transportation
would result in higher transportation costs but lower inventory usually in an increase in each
flow for the organization.

Logistics services can fall into any one of five categories. Product availability is a logistics
metrics that is used frequently because it is a good indicator of supply chain performance
and its influence on customer inventory requirements, order fill rates, and seller revenue.

Order cycle time is another very important logistics services metric. Order cycle time
influences product availability, customer inventories, and the seller’s cash flow and profit.
Once an expected order cycle time is established for customer, service failures can be
measured. One such measure is the number of late deliveries per 100 shipments. From a
revenue or cash flow perspective, an organization can calculate the impact of a late delivery
on revenue, profit and cash flow

All the logistics output can be utilized in some form to develop metrics for service
performance. As indicated previously, the service output metrics reflect the quality of
service being provided to customer, which is important to sustain and hopefully, increase
revenue and cash flow.

Transaction cost and revenue relates to the value added by logistics. In other words what
is the service and price relationship, and what specifically is the customer’s perception of
service quality? To add logistics value from the seller’s perspective, there are three basic
alternatives as follows:

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 • Increased service with a constant price to the customer.
• Constant service with a reduced price.
• Increased service with a reduced price.

All of these alternatives result in the customer receiving more service per dollar for the price
they are paying for the service.

Another perspective on transaction cost and revenue focuses on how a seller’s cost
influences a customer’s profit and on how a seller’s service impacts a customer’s revenue. If
the cost of a seller’s logistics service allows a customer to make more profit from the seller’s
product, the customer should be willing to buy more products from the seller.

For example, the manufacturer has an in-stock rate at the buyer’s store of 98 percent,
compared to 90 percent for the competition. The higher in-stock service level allows the
buyer to realize higher revenue from the higher product Availability. So, transaction cost and
revenue highlight the need to emphasize the impacts of logistics cost and service on supply
chain profit and revenues.

The final category is channel satisfaction. This essential looks at how logistics cost and
service are perceived by channel members. The research in this area is limited. Most of the
focus on measurement has been on the perception of supply chain members of how well
suppliers are performing on logistics cost and service. Leading-edge organizations are
beginning to identify the impacts of customer satisfaction on revenue and market shares.

Overall much progress has been made during the last few years towards developing
appropriate metrics and using them proactively to measure performance in terms of the
impacts upon the financial results of the organization and its customers.

Measuring Supply Chain Success

A food manufacturing company finds the perfect recipe for increasing profit growth and cost
saving. And a hand and power tool manufacturer nails its targets for improving year –over-
year return on net assets.

What helped these companies achieve amplified success in their supply chain- and ultimately
throughout their organizations? “World-class purchasing/sourcing measurement systems are
the key” says Philip carter, a professor and executive director of the center for strategic
supply research at Arizona State University’s W.P Carey School of Business.

Comprehensive measuring systems allow organizations to clearly set priorities for

purchasing and strategic sourcing, measure accomplishments, and effectively demonstrate
purchasing/strategic sourcing contribution to the company’s overall goals, according to
Carter’s research.

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“Corporations today rely on outside suppliers more than ever and consequently need
measurements to determine if their supply relationships are effective”. Carter says.

“It is vitally important that companies use metrics to measure the performance of both
purchasing/supply activities within the company, and the performance of the supplier base”.
He explains.

Best Practices
Carte’s finding-gleaned from extensive research at 15 fortune 500 organizations in a
multitude of industries-show several best practices prevalent among companies with world-
class purchasing/supply measuring systems. To succeed, carter says, these measuring
systems should be

• Aligned with other strategic business units within the company and with overall
corporate goals.
• Comprehensive, dynamic, and aggressive.
• Communicated efficiently throughout the organization.
• Tied to performance-based initiatives.
• Backed by organizational resources.
• Supported by technology system
• Championed by C-level executives.

Cutting costs, naturally, is the primary driver for many companies implementing
measuring systems. But companies are also starting to gague how efficient operations are
by measuring such benchmarks as dollars spent per employee in purchasing, number of
suppliers per buyer, percentage of sourcing done through electronic system, and number
of suppliers being used, among others.

Strategic measures, while harder to quantify, are also gaining attention.

“These measurement can be subjective, but they are vital” carter says. “Chief purchasing
officers need to know whether or not their purchasing department has an impact on new
product/new service development, bring good ideas from the supplier has base back to
the company, and impacts revenue generation.

World Class Metrics

Companies that look at cost, efficiency and strategic measure together gain a greater
understanding of their supply and its overall impact on the organization. But they are
uncommon.
“Only 10 percent of fortunes 500 companies have a world-class measurement system”,
says carter. Most companies employ some types of systems but outside of leading

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companies, the systems are usually random -- they measure a little of this and a little of
that.
Poor metrics make it difficult for organization to make decision and allocate resource, he
continuous. “How can you gauge the number of people to add to a department, for
example, if you don’t track the department’s efficiency”.
It is not that companies with sub-par measuring systems don’t care, carter explains,
“rather they lack available financial and/or technological resources”. Such measuring
systems can be cumbersome, time-consuming, and expensive to develop and maintain.

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 LESSON – 7

PURCHASING AND FORECASTING

A. PURCHASING

Introduction

Purchasing is the first phase of Materials Management Purchasing is an operation of market

exploration to procure goods and services of desired quality, quantity at lowest price and at
the desired time. Suppliers who can provide standard items at the competitive price are
selected.

Purchasing Strategies

Companies implement Purchasing strategies in order to make cost effective purchasing

decisions from a group of efficient vendors who will deliver quality goods on time and at
mutually agreeable terms.

Other companies may decide to undertake a single source procurement strategy that involves
obtaining excellent dedicated service from a single vendor. These strategies are predominant
when sourcing for IT or indirect purchasing such as office supplies and cleaning.

Other companies may use a procurement strategy of using a core purchasing cycle. This is
where they order from a group of regular vendors and use outsourcing procurement or their
larger and ad hoc purchases.

Still others, particularly when they are seeking labor for short-term projects will
use procurement auctions in order to obtain the best pricing levels. Regardless of the size of
the company, there is a core group of purchasing strategies that most of them implement.
These are:

Types of Purchases

Organizations buy many different goods and services. All purchases represent a tradeoff
between what an organization can either produce or service internally versus what it must
purchase externally. For many items, the make-or-buy decision is actually quite simple.
Few firms could manufacture their own production equipment, computers, or pencils.
However, all firms require these items to support continued operations. The challenge is
deciding which suppliers offer the best opportunity for items an organization must
purchase externally. The following sections outline the variety of goods and services a
typical purchasing department is responsible for buying. Please note that for each
category, organizations should establish measures that track the amount of goods in
physical inventory.

• Raw Materials
The raw materials purchase category includes items such as petroleum, coal, and lumber,
and metals such as copper and zinc. It can also include agricultural raw materials such as
soybeans and cotton. A key characteristic of a raw material is a lack of processing by the
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supplier into a newly formed product. Any processing that occurs makes the raw material
saleable. For example, copper requires refining to remove impurities from the metal.
Another key characteristic is that raw materials are not of equal quality. Different types of
coal, for example, can differ by sulfur content. Raw materials often receive a grade
indicating the quality level. This allows raw materials purchases based on the required
grade.

Semi-finished Products and Components

Semi- finished products and components include all the items purchased from suppliers
required to support an organization’s final production. This includes single-part number
components, subassemblies, assemblies, subsystems, and systems. Semi- finished products
and components purchased by an automobile producer include tires, seat assemblies,
wheel bearings, and car frames.

Managing the purchase of semi- finished components is a critical purchasing responsibility

because components affect product quality and cost. Hewlett-Packard buys its laser jet
printer engines, which are a critical part of the finished product, from Canon. HP must
manage the purchase of these engines carefully and work closely with the supplier.
Outsourcing product requirements increases the burden on purchasing to select qualified
suppliers, not only for basic components, but also for complex assemblies and systems.

• Finished Products
All organizations purchase finished items from external suppliers for internal use. This
category also includes purchased items that require no major processing before resale to
the end customers. An organization may market under its own brand name an item
produced by another manufacturer. Why would a company purchase finished items for
resale? The purchase of finished products also allows a company to offer a full range of
products. Purchasing (or engineering) must work closely with the producer of a finished
product to develop material specifications. Even though the buying company does not
produce the final product, it must make sure the product meets the technical and quality
specifications demanded by engineering and the end customer.

• Maintenance, Repair and Operating

Maintenance, repair, and operating (MRO) items include anything that does not go directly
into an organization’s product. However, these items are essential for running a business.
This includes spare machine parts, office and computer supplies, and cleaning supplies.
The way these items are typically dispersed throughout an organization makes monitoring
MRO inventory difficult. The only way that most purchasing departments know when to
order MRO inventory is when a user forwards a purchase requisition. Because all
departments and locations use MRO items, a typical purchasing department can receive
thousands of small-volume purchase requisitions. Some purchasers refer to MRO items as
nuisance items. Consequently,

1. They have not tracked their MRO inventory investment with the same concern with
which they track production buying,
2. They have too many MRO suppliers, and
3. They commit a disproportionate amount of time to small orders.
With the development of computerized inventory systems and the realization that MRO
purchase dollar volume is often quite high, firms have begun to take an active interest in
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controlling MRO inventory. At FedEx, an agreement with Staples allows purchasing to be
free of the burden of tracking office supply requests. Instead, Staples provides a website
listing all supplies with prices; users can point and click on the items they need, and the
supplier will deliver them to the users’ location the next business day.

• Production Support Items

Production support items include the materials required to pack and ship final products,
such as pallets, boxes, master shipping containers, tape, bags, wrapping, inserts, and other
packaging material. Production support items directly support an organization’s
production operation; this is a key distinction separating production support from MRO
items.

• Services
All firms rely on external contractors for certain activities or services. An organization
may hire a lawn care service to maintain the grounds around a facility or a heating and
cooling specialist to handle repairs that the maintenance staff cannot perform. Other
common services include machine repair, snow removal, data entry, consultants, and the
management of cafeteria services. As with any purchase category, careful and specialized
attention can result in achieving the best service at the lowest total cost. More and more,
companies are negotiating longer-term contracts with service providers just as they would
with other high-dollar purchase categories.

• Capital Equipment
Capital equipment purchasing involves buying assets intended for use exceeding one year.
There are several categories of capital equipment purchases. The first includes standard
general equipment that involves no special design requirements. Examples include
general-purpose material-handling equipment, computer systems, and furniture. A second
category includes capital equipment designed specifically to meet the requirements of the
purchaser. Examples include specialized production machinery, new manufacturing plants,
specialized machine tools, and power-generating equipment. The purchase of these latter
items requires close technical involvement between the buyer and seller.

First, capital equipment purchases do not occur with regular frequency. A production
machine, for example, may remain in use for 10 to 20 years. A new plant or power
substation may remain in operation over 30 years. Even office furniture may last over 10
years. A second feature is that capital equipment investment requires large sums of money.
This can range from several thousand dollars to hundreds of millions of dollars. High
dollar contracts will require finance and executive approvals. For accounting purposes,
most capital equipment is depreciable over the life of the items.

• Transportation and Third-Party Purchasing

Transportation is a specialized and important type of service buying. Few purchasing

departments involved themselves with transportation issues before the early 1980s.
However, legislation passed during the late 1970s and early 1980s deregulated the air,
trucking, and railroad industries. This legislation allowed buyers to negotiate service
agreements and rate discounts directly with individual transportation carriers.

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Previously, the U.S. government, through the Interstate Commerce Commission,
established the rate (referred to as a tariff) that a transportation carrier charged. It
was common for suppliers to arrange shipment to a purchaser and simply include the
transportation cost as part of the purchase cost.
It is now common for purchasing personnel to evaluate and select logistics providers the
same way they evaluate and select suppliers of production items. Buyers are also selecting
suppliers that are capable of providing coordinated transportation and logistics services for
an entire company, including warehousing, packaging, and even assembly. Because many
carriers now provide service throughout the United States, a buyer can rely on fewer
transportation carriers. The cost savings available from controlling and managing logistics
are significant.

Improving the Purchasing Process

Most companies spend too much time and too many resources managing the ordering of
goods and service, particularly lower-value items. Some purchasing departments spend 80
percent of their time managing 20 percent of their total purchase dollars. Recent research
on maintenance, repair, and operating purchases reported that while the average MRO
invoice was $50, the total cost of processing an MRO transaction was $150.1 In another
example, a U.S. government agency reported that in a single year it processed 1.1 million
transactions at an estimated cost of $300 per transaction! A recent study by Trent and
Kolchin addressed how organizations are improving the purchasing process by reducing
the time and effort associated with obtaining lower-value goods and services. The
following sections summarize the approaches and methods

Online Requisitioning Systems from Users to Purchasing

Online requisitioning systems are internal systems designed primarily to save time through
efficient and rapid communication. Users should utilize these systems only if they require
purchasing involvement to support a material or service need.

Advanced organizations are much more likely to allow users to request low-value
purchases through internal electronic systems when the need requires purchasing
involvement. Organizations that have made less progress managing low-value purchasing
use company mail or the phone to receive user requests. Users should rely on efficient
requisitioning systems for items that require purchasing involvement. A longer-term focus
should be to create systems and processes that empower users to obtain low-value items
directly from suppliers rather than involving purchasing.

Procurement Cards Issued to Users

One tool or system that most organizations agree is central to improving the purchasing
process is the use of the procurement card, which is essentially a credit card provided to
internal users. When users have a lower-value requirement, they simply contact a supplier
and use the card to make the purchase. Cards work well for items that do not have
established suppliers or are not covered by some other purchasing system. The users make
the buying decisions (the money for which comes out of their department’s budget) and
bypass purchasing completely. The dollar value of the items covered by procurement cards
is relatively low. The cost to involve purchasing or engage in a comprehensive supplier
search would likely outweigh the cost of the item.
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The primary benefits from using cards include faster response to user needs, reduced
transaction costs, and reduced total transaction time. In most organizations, purchasing is
responsible for introducing and maintaining the card program.

Electronic Purchasing Commerce through the Internet

Electronic purchasing commerce through the Internet refers to a broad and diverse set of
activities. Using the Internet to conduct purchasing business is not extensive today,
although commercial Internet usage by purchasers should increase dramatically over the
next several years. The highest expected growth areas in e-commerce purchasing include
the following:

• Transmitting purchase orders to suppliers

• Following up on the status of orders
• Submitting requests for quotes to suppliers
• Placing orders with suppliers
• Making electronic funds transfer payments
• Establishing electronic data interchange capability

Purchasing Policies—Providing Guidance and Direction

Purchasing management develops policies to provide guidance and support to the
professional purchasing and support staff. These policies are general outlines clarifying
purchasing management’s position on a subject. Although many purchasing policies exist,
most fall into one of five categories:

• Policies defining the role of purchasing

• Policies defining the conduct of purchasing personnel
• Policies defining social and minority business objectives
• Policies defining buyer-seller relationships
• Policies defining operational issues

The following discussion does not include all possible purchasing policies. Organizations
will also develop policies to meet unique operational requirements.

Policies Defining the Role of Purchasing

This set of policies defines purchasing authority. It usually addresses the objectiv es of the
purchasing function and defines the responsibilities of the various buying levels. These
policies often serve as a general or broad policy statement from which more detailed or
specific policies evolve.

Origin and Scope of Purchasing Authority

Personnel at all levels must be aware of purchasing authority to conduct business and to
represent organizational interests. An executive committee usually grants this authority
and develops this policy. This policy may also detail the authority of purchasing to
delegate certain tasks or assignments to other departments or functions.
An important section of this policy describes the areas where purchasing authority does or
does not exist. The policy may exclude the purchasing function from any responsibilit y for
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purchasing real estate, medical insurance policies, or other areas where purchasing may
not have direct expertise. (However, purchasing is increasingly becoming involved in all
types of purchases, including these nontraditional areas.) This policy outlines the overall
authority of purchasing as granted by the executive committee while describing the limits
to that authority.

Policies Defining the Conduct of Purchasing Personnel

These policies outline management’s commitment to ethical and honest behavior while
guiding personnel who are confronted with difficult situations. Some business practices
are technically not illegal but are potentially unethical or questionable.

Because of this, purchasing management must develop policies that provide guidance in
these gray areas. Because purchasing personnel act as legal agents and representatives,
they must uphold the highest standards as defined by executive policy and the law.

• Ethics Policy

Most organizations, particularly medium and large-sized ones, have a written policy
describing management’s commitment to ethical purchasing behavior.

• Reciprocity Policy
A formal policy often exists which details management’s opposition to reciprocal purchase
agreements .when suppliers are pressured to purchase the buyer’s products or services as a
condition of securing a purchase contract. A reciprocity policy usually describes
management’s opposition to the practice and lists the type of behavior to avoi d. Personnel
must not engage in behavior that suggests any of the following:

o A buyer gives preference to suppliers that purchase from the buyer’s organization.
o A buyer expects suppliers to purchase the buying company’s products as a
condition for securing a purchase contract.
o A buyer looks favorably on competitive bids from suppliers that purchase the
buyer’s products.

This area requires an executive management policy because disagreement occurs regarding
this topic. Reciprocity is relatively easy to control once management issues a policy on the
subject.

• Contacts and Visits to Suppliers

An understanding must exist regarding direct visits or other communication contacts with
suppliers or potential suppliers. This policy should address not only purchasing personnel
but also other departments or functions that visit or contact suppliers. Purchasing wants to
control unauthorized or excessive contacts or visits because these can impose an
unnecessary burden on suppliers.

Also, unauthorized supplier visits or contacts by non- purchasing personnel undermine

purchasing legitimate authority as the principal commercial contact with suppliers.
Purchasing wants to avoid situations where suppliers might interpret statements and
opinions offered by non- purchasing personnel as commitments.

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Former Employees Representing Suppliers Occasionally, an employee may leave to work
for a supplier. This is a concern because the former employee probably has knowledge
about business plans or other confidential information that might provide an unfair
advantage over other suppliers. One way to address this issue is to establish a policy
prohibiting business transactions with suppliers that employ former employees known to
have inside or confidential information. This exclusion can range from a period of a few
months to several years, depending on the employee and the situation. Another possibility
involves including a clause in the employee’s original employment contract prohibiting
employment with a competitor or a supplier for a specified time. This can offset the
advantage a former employee may have from his or her previous employment.

• Reporting of Irregular Business Dealings with Suppliers

This policy may establish a reporting mechanism for buyers or other employees to report
irregular business dealings. Examples of irregular dealings include accepting bribes from
suppliers, cronyism, accepting late bids, owning a stake in a supplier’s company, and other
types of behavior that are not considered part of the normal course of business. The policy
can specify the proper office to which to report the irregularity, the safeguards in place to
protect the reporting party, and the need to report suspected irregularities as soon as
possible. This policy sends the message that management will not tolerate irregular
business transactions involving employees.

The sourcing snapshot below suggests that even well-known Fortune 500 companies are
guilty of using bribes as a mechanism to win bids. This is especially prevalent in countries
where unethical actions are often dismissed and put “under the table.” In any case, the
repercussions for unethical behavior are severe, with the penalties far outweighing the
potential benefits.

Purchasing Objectives

Objective 1: Supply Continuity

Purchasing must perform a number of activities to satisfy the operational requirements of
internal customers, which is the traditional role of the purchasing function. Purchasing
may also support the requirements of physical distribution centers responsible for storing
and delivering replacement parts or finished products to end customers. Purchasing also
supports engineering and technical groups (such as IT), particularly during new-
product/service development and outsourcing of key processes.

With the dramatic increase in outsourcing, enterprises are relying increasingly on external
suppliers to provide not just materials and products, but information technology, services,
and design activities as well. As a greater proportion of the responsibility for managing
key business processes shifts to suppliers, purchasing must support this strategy by
providing an uninterrupted flow of high-quality goods and services that internal customers
require. Supporting this flow requires purchasing to do the following:

1. Source products and services at the right price.

2. Source them from the right source.
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 3. Source them at the right specification that meets users’ needs.
4. Source them in the right quantity.
5. Arrange for delivery/service performance at the right time to the right internal
customer.

Supply managers must be responsive to the materials and support needs of their internal
users (sometimes also called internal customers).

Objective 2: Manage the Sourcing Process Efficiently and Effectively

Purchasing must manage its internal operations efficiently and effectively, by performing
the following:

o Determining staffing levels

o Developing and adhering to administrative budgets
o Providing professional training and growth opportunities for employees
o Introducing improved buying channels within the procure to pay systems that lead
to improved spending visibility, efficient invoicing and payment, and user
satisfaction
Purchasing management has limited resources available to manage the purchasing process
and must continuously work toward improved utilization of these resources. Limited
resources include employees working within the department, budgeted funds, time,
information, and knowledge. Organizations are therefore constantly looking for people
who have developed the skills necessary to deal with the wide variety of tasks faced by
purchasing.

Objective 3: Develop Supply Base Management

One of the most important objectives of the purchasing function is the selection,
development, and maintenance of suppliers, a process that is sometimes described as
supply base management. Purchasing must keep abreast of current conditions in supply
markets to ensure that purchasing (1) selects suppliers that are competitive, (2) identifies
new suppliers that have the potential for excellent performance and develops closer
relationships with these suppliers, (3) improves existing suppliers, and (4) develops new
suppliers that are not competitive with current suppliers. In so doing, purchasing can select
and manage a supply base capable of providing performance advantages in product cost,
quality, technology, delivery, and new-product development.

. This objective also requires that purchasing work directly with suppliers to improve
existing capabilities and develop new capabilities. In some cases, supply managers may
need to challenge internal customers who want to add new but unqualified suppliers to the
supply base. A good part of this text focuses on how purchasing can effectively meet these
objectives.

Objective 4: Develop Aligned Goals with Internal Stakeholders

Global organizations have traditionally maintained organizational structures that have
resulted in limited cross-functional interaction and cross-boundary communication. During

the 1990s, the need for closer relationships between functions became clear. In order to
achieve this objective, purchasing must develop positive relationships and interact closely

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with other functional groups, including marketing, manufacturing, engineering,
technology, and finance.

Objective 5: Develop Integrated Purchasing Strategies That Support Organizational

Goals and Objectives
Perhaps the single most important objective for supply management is to support
organizational goals and objectives. Although this sounds easy, it is not always the case
that purchasing goals match organizational goals. This objective implies that purchasing
can directly affect (positively or negatively) the long-term growth, revenue, and operating
outcomes and plans of internal customers. For example, let’s assume an organization has
an objective of reducing the amount of working capital across its supply chain. Purchasing
can work with suppliers to deliver smaller quantities more frequently, leading to inventory
reductions and lower working capital levels. Such policies will show up as improved
performance on the firm’s balance sheet and income statements.

There are a number of reasons why purchasing may fail to integrate their plans with
company plans. First, purchasing personnel have not historically participated in senior -
level corporate planning meetings, because they were often viewed as providing a tactical
support function. Second, executive management has frequently been slow to recognize
the benefits that a world-class purchasing function can provide. A purchasing department
actively involved within the corporate planning process can provide supply market
intelligence that contributes to strategic planning. Effective supply market intelligence
involves the following:

o Monitoring supply markets and trends (e.g., material price increases, shortages,
changes in suppliers) and interpreting the impact of these trends on company
strategies

o Identifying the critical materials and services required to support company

strategies in key performance areas, particularly during new-product development

o Developing supply options and contingency plans that support company plans
supporting the organization’s need for a diverse and globally competitive supply
base.

Strategic Supply Management Roles and Responsibilities

Functional groups carry out certain duties on behalf of the organization. We refer to this as
a function’s responsibility or span of control. Purchasing must have the legitimate
authority to make decisions that fall within their span of control. Span of control is
established through senior management policies and support. Although internal customers
influence many important decisions, final authority for certain matters must ultimately be
assigned to the purchasing department. This section details those decision areas that are
rightfully part of purchasing operating authority in most organizations. (Further details on
the factors that influence how senior management determines purchasing span of control

• Spend Analysis
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The result is a common understanding of historical spent relative to demand from each end
user within an organization, based on accurate information collected through defined and
automated procure-to-pay systems. Spend analysis requires that you drive all spend to a
UNIT of consumption and a RATE of consumption. Demand Management and
Specifications/SOW’s

Demand management is the process of using UNIT and RATE consumption levels to
forecast and estimate future consumption in an internal functional customer, and providing
guidance and input on how to optimize usage and educating the user on the tradeoffs.
Demand management activities may involve, (but are not limited to):

o Optimization of sourcing strategies based on how much the team projects they will
be buying
o Proactively setting policies, procedures and measurement systems that throttle the
consumption and total expenditures of a unit of category of spend.
o Ensuring appropriate levels of capacity in the supply base required to minimize
risk.
o Establishing a fixed set of standards to limit options, and restricting the supply base
to include only preferred suppliers who comply with risk and compliance
requirements.
The authority to review material specifications (and for services, a statement of work) is
also within purchasing span of control in managing demand, although internal stakeholders
sometimes disputes this right. Purchasing personnel work hard to develop knowledge and
expertise about a wide variety of materials and services but must also make this
knowledge work to an organization’s benefit. The right to question allows purchasing to
review specifications where required. In the case of services, it also allows purchasing to
ensure that the work being performed is correctly documented and performed. For
example, purchasing may question whether a lower-cost material can still meet an
engineer’s stress tolerances. They may also question the rate at which a consultant or
maintenance provider is charging for a specific project or activity, and revise the work
statement accordingly. A review of different requisitions may also reveal that different
users actually require the same material or services. By combining purchase requirements,
purchasing can often achieve a lower total cost.

• Category Management and Supplier Evaluation/Selection

Category management is the process of developing external industry intelligence and
analysis, internal demand, supply base capabilities and operational risks, and a strategy to
approach that marketplace with our needs to match it with what suppliers can offer.
Sourcing events are a specific activity contained within the strategy used to explore the
market to identify competitive value. A critical element in the strategy is a business case
that identifies the rationale for the plan, a risk mitigation plan, and the business value
derived from the strategy. The output of a category strategy is a plan for negotiating a
contract, a supplier scorecard used to monitor the relationship, as well as a sourcing work
plan developed for communication of the strategy to the internal user.

In many cases, category management requires having senior executives acknowledge that,
ultimately, purchasing has the strategic responsibility to evaluate and select suppliers. It is
important to retain this right to avoid maverick buying and selling -- a situation that occurs
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when sellers contact and attempt to sell directly to end users (purchasing internal
customers). The right to evaluate and select suppliers also does not mean that sales
representatives are not allowed to talk with non- purchasing personnel. However, non-
purchasing personnel cannot make commitments to the seller or enter into contractual
agreements without some formal interaction with purchasing, either through a category
team or through contract negotiation. The selection decision in category teams requires
that the members reach a consensus in selecting suppliers.

Contract Management

An important area of control is that purchasing has the right to determine how to
award purchase contracts. Will purchasing award a contract based on competitive
bidding, negotiation, or a combination of the two approaches? If purchasing takes a
competitive bidding approach, how many suppliers will it request to bid? Purchasing
should also lead or coordinate negotiations with suppliers. Again, this does not mean
that purchasing should not use personnel from other functions to support the
negotiation process. It means that purchasing retains the right to control the overall
process, act as an agent to commit an organization to a legal agreement, and
negotiate a purchase price. Because the source process involves multiple
communications among internal customers, purchasing, sales, and the suppliers’
internal functions, purchasing will generally retain the right to be the primary
contact with suppliers in the contracting process. However, involving other people
from these functions can improve the transfer of information and knowledge between
buying and selling organizations as part of the contracting process.
Today, we recognize that purchasing must act as the primary contact with suppliers, but
that other functions should be able to interact directly with suppliers as needed. However,
purchasing is ultimately responsible for developing and validating a contract with
suppliers. Hence, “contract management is a process associated with defining the contract,
defining roles and responsibilities of both parties, and advising when to modify and ensure
appropriate escalation.” In doing so, purchasing ensures accuracy of contracting terms and
conditions (“T’s and C’s”), and alignment with the category strategy, required service
level agreements, and periodic audits to ensure that post-delivery invoices are aligned with
contracted requirements. In addition, contract management should be used to trigger
proactive sourcing events before contracts expire. Often, this occurs through maintenance
of a contract database, which allows internal users to reference documented relationships,
while keeping the contracts current, protected, and referenced. When there are disparities
between what a supplier is delivering, and the terms of the contract, then contract
compliance actions may be required to establish resolution of disparate standard terms and
conditions.

• Cost Management

Once the contract is signed, purchasing job is not over. In fact, it is just beginning. One of
the most important roles from here on is cost management, that is understanding the true
underlying cost of what is purchased. This involves a process of unbundling the price paid
and her components of price over the life cycle of a product or service, to deliver a target
cost and a unit rate to determine if it is priced competitively in the marketplace. Cost
management may involve different decision-support tools and databases to create insights
into:
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 o The cost of supporting a process or commodity

o The gap between cost drivers and the assumed business case

o Identifying the business case (e.g., is it a reasonable expense after we deliver it to

the customer?)

o The total cost of offering a service, including all of the elements of receiving, use,
and disposal over the life cycle of the offering.

• Managing the Procure to Pay Process

Improving the Procure to Pay (“P2P”) system involves automation of all

transactional activities associated with the thread of events that occurs from the
time of buying a good or service, through the release mechanism, to the point of
issuing payment, including:
o Requisitioning
o RFX
o Contract award
o Orders
o Approval
o Receipt
o Payment
P2P process improvement is associated with establishing controls on the front end of this
process to minimize the need to monitor the back end and drive efficiencies, which free
resources to work on strategic initiatives. An effective P2P system ensures automated
capture of clean, usable spend, invoice, performance, and Accounts Payable / General
Ledger data as input into future spend analysis, demand management, commodity strategy
development, and cost management activities.

• Supplier Relationship Management

Supplier relationship management (SRM) is the end-to-end process of managing a supplier
through the entire sourcing life cycle, which includes first identifying the abilities of a
particular company with regard to performing a service for the internal customer,
completing a sourcing event, negotiating a contract, executing an order, and determining
payment. This involves all aspects of the relationship including:

o Day-to-day transactions
o Identification and mitigation of operational risk and deliverables
o Business continuity planning
o Understanding the suppliers’ business challenges
o Identification of opportunities to improve value and reduce cost

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 o Establishing scorecard metrics for improvement and reviewing progress towards
these objectives
o Contract T’s and C’s
o Leveraging the flow of information between key internal process owners and the
supplier to create value
When problems are identified, this may drive a supplier development initiative, which is a
hands-on six sigma approach to support suppliers to achieve quality delivery and cost
targets. Supplier development occurs when there is an existing supplier who is performing
at a certain level that has deficiencies—and working to fill the gaps in performance -- or
when the supplier relationship is not generating the savings projected. This is a critical
component for minority suppliers.

• Establish a Supply Management Strategy

A supply management strategy is, very simply, an overarching plan for designing the
organization, assigning resources, and aligning these resources against the demands placed
on the supply chain by the business. Supply management strategies are reviewed at the
highest level of the organization, and they drive a work plan that establishes how different
businesses must work together to meet the organizational needs through stable and robust
processes.

Characteristics of a mature, well-developed supply strategy include:

o A repeatable and well-defined process for building strategy and governance around
defining, planning, managing, and receiving products and services for a business
o Clear alignment with executive vision and internal user-specific business goals
o A process based on well-developed supplier market intelligence and input from
executives and internal customers
o Established goals and metrics for short-term project plans, as well as a definite
five-year plan
o Established communication plan to inform senior management and all lines of
business updated and reviewed quarterly against defined goals and objectives

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 B. FORECASTING

Introduction

Demand level and their timing greatly affect capacity levels, financial needs and general
structure of the business. Each functional area has its special forecasting problems. Logistics
forecasting concern the spatial as well as temporal nature of demand, the extent of its
variability, and its degree of randomness.
High Inventory
If your business supplies perishable goods, you might incur a further loss due to deterioration
of unsold inventory. In such a case, you might need to sell inventory at a discount, which
reduces your company's profit margins and income.
Forecasting Time Horizon
• Short range forecast-
o up to 1year, generally less than 3 months
o Purchasing job scheduling, workforce levels, job assignments, production levels.
• Medium-range forecast
o 3 months to 3 year
o Sales and production planning, budgeting.
• Long range forecast
o More than 3 years.
o New product planning, facility location, research and development.
Forecasting Method
There are two types of forecasting methods:
1. Qualitative Method
2. Quantitative Method

1. Qualitative Method

• Sales Force Polling

Some companies use as a forecast source salespeople who have continual contacts with
customers. But main drawback behind sales force polling is that salespeople’s being overly
optimistic or pessimistic regarding their predictions and inaccuracies due to broader
economic events that are largely beyond their control.

• Consumer Surveys

Some companies conduct their own market surveys regarding specific consumer purchases.

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 2. Quantitative Methods

Using quantitative approach, a company forecasts based on:

a. Historical data forecasts – Grouped under historical data forecasts are the followings:

o Naive methods
o Moving average
o Exponential smoothing
o Trend analysis
o Decomposition of time series

b. Associative (causal) forecasts – Grouped under the associative forecasts are the
followings:

o Simple regression
o Multiple regression
o Econometric modeling

• Naïve
Estimating technique in which the last period's actuals are used as this period's forecast,
without adjusting them or attempting to establish causal factors. It is used only for
comparison with the forecasts generated by the better (sophisticated) techniques
Demand in next period is the same as demand in most recent period
May sales= 48
Company predict sales in June forecast = 48
It is usually not good

• Moving Averages
In statistics, a moving average (rolling average or running average) is a calculation to
analyze data points by creating series of averages of different subsets of the full data set. This
can be divided into two ways of moving averages:
1. Simple Moving Average
2. Weighted Moving Average
Simple Moving Average
Simple moving average is probably the simplest to develop method in basic time series
forecasting. It makes forecasts based on recent demand history and allow for the removal of
random effect. The simple moving average method does not accommodate seasonal, trend or
business cycle influence. This method simply averages a predetermined number of periods
and uses this average as the demand for the next period.

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A simple moving average (SMA) is an arithmetic moving average calculated by adding the
closing price of the security for a number of time periods and then dividing this total by the
number of time periods. ...
𝑭𝒕 + 𝟏 = 𝑨𝒕 + 𝑨𝒕 − 𝟏 + 𝑨𝒕 − 𝟐 + … + 𝑨𝒕 − 𝒏 + 𝟏
𝑵
Ft+1= forecast for the upcoming period
N= number of periods to be averaged.
At= actual occurrence in period t
The simple moving average formula is calculated by taking the average closing price of a
stock over the last "x" periods.

Weighted Moving Average

The weighted moving average method assigns a weight to each previous period with higher
weights usually given to more recent demand. The weight must equal to one. The weighted
moving average method allows emphasis to be placed on more recent demand as a predictor
of future demand.

• Exponential Smoothing

Exponential smoothing is one of the most commonly used techniques because of its
simplicity and its limited requirements for data. Exponential smoothing needs three types
of data: an average of previous demand, the most recent demand, and a smoothing
constant. Has the most recent demand is a better predictor of future demand.

Ft + 1= Ft + α (At -- Ft)

Ft + 1 = forecast value for time t+1

At = actual value at time t
α = smoothing constant

Choose α depends on the emphasis you want to place on the most recent data.
Increasing α make forecast more sensitive to recent data.
So here comes the “exponential” part. If we use 35% as the smoothing factor, the weighting
of the most recent period’s demand will be 35%. The weighting of the next most recent
period’s demand (the period before the most recent) will be 65% of 35% (65% comes from
subtracting 35% from 100%).
For example, a businessmen is interested in finding out his likely sales in the year 1996 or as
a long term planning in 2001 or the year 2010 so that he could adjust his production
accordingly and avoid the possibility of either unsold stock or inadequate production to meet
the demand. Similarly, an economist is interested in estimating the likely population in the
coming year so that proper planning can be carried out with regard to food supply, jobs for
the people, etc. however, the first step in making estimates for the future consists of gathering
information from the past. In this connection one usually deals with statistical data which are
collected, observed or recorded at successive intervals of time.

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• Time Series

A few definitions of time series is given below:

o A time series is a set of statistical observations arranged in chronological order.
o A time series consists of statistical data which are collected, recorded or observed
over successive increments.
o A time series may be defined as a collection of magnitudes belonging to different time
periods, of some variable or composite of variable, such as production of steel, per
capita income, gross national product, price of tobacco, or in index of industrial
production.

It is clear from above definitions that time series consists of data arranged chronologically.
Thus if we record the data relating to population per capita income, prices, production, etc.,
for the last 5, 10, 15, 20 years or some others time period, the series so emerging would be
called time series. It should be noted that the term ‘time series’ is usually used with reference
to economic data and the economists are largely responsible for the development of the
techniques of time series analysis. However, the time series can apply to all other phenomena
that related to time such as the number of accidents occurring in a day, the variation in the
temperature of a patient during a certain period, number of marriages taking place during a
certain period, etc.
Example:
The following are the figure of the sales of refrigerators of a firm in a thousand units:
Year Sales of Firm A Year Sales of Firm A
1998 40 1992 43
1989 42 1993 48
1990 47 1994 65
1991 41 1995 42
If we observe the above series, we find that generally the sales have increased but for two
years a decline is also noticed. The statistician, therefore, tries to analyze the effect of the
various forces under four broad heads:

• Changes that have occurred as a result of general tendency of the data to increase or
decrease known as ‘secular movements’.
• Changes that have taken place during a period of 12 months as a result of change in
climate, weather conditions, and festivals, etc. such changes are called ‘seasonal
variations’.
• Changes that have taken place as a result of booms and depressions. Such changes
classified under the head ‘cyclical variations’.

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• Changes that have taken place as result of such forces that could not be predicted like
floods, earthquake, famines, etc. such changes are classified under the head irregular
variations’.
Components of Time Series
It is customary to classify the fluctuations of a time series into four basic types of variation
which superimposed and acting all. In concept, account for changes in the series over a
period of time. These four types of pattern, movement or as they are often called, components
or elements of time series are:
Models for Decomposition of Time Series
• Multiplicative Model – In traditional or classical time series analysis, it is ordinarily
assumed that there is a multiplicative relationship between these four components that
is if it assumed that any particular value in a series is the product of factors that can be
attributed to the various components.

• Additive model - Another approach is to treat each observations of a time series as

the sum of these four components.

Y=T+S+C+I

The additive model assumes that all components of the time series are independent of one
another. While the additive model may work well within limits, it is doubtful if one always
can rely on the independent of components that it assumes.
In the multiplicative model, it is assumed that the four components are due to different
causes but they are not necessarily independent and they can affect one another. Different
models will lead to different results. Although the additive assumption is undoubtedly true in
some cases, the multiplicative assumption characterizes the majority of economic time series.
Consequently, the multiplicative model is not only considered the standard or traditional
assumption for times series analysis but it is more often employed in practice than all other
possible models combined.
The task of performing a time series analysis, just like the analysis of a channel in breaking a
substance into its constituent parts, is to operate on the data in such a way as to bring out
separately each of the components present
I. Secular Trend
The term ’trend’ is very commonly used in day to day parlance. For example, we often talk of
rising trend of population, prices, etc. trend also called secular or long term trend is the basic
tendency of population, sales, income, employment, etc. to grow a decline over a period of
time. The concept of trend does not include short-range oscillation but rather steady
movements over a long time.
Secular trend movements are attributable to factors such as population change, technological
progress and large scale shifts in consumer tastes.

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 II. Seasonal Variations
Seasonal variations are those periodic movements in business activity which occur regularly
every year and have their origin in the nature of the year itself. Since these variations repeat
during a period of 12 months they can be predicted fairly accurately. Although the word
‘seasonal’ seems to imply a connection with the season of this year, the term is meant to
include any kind of variations which is of periodic nature and whose repeating cycle are of
relatively short duration. Seasonal variation is evident when the data are recorded at weekly
or monthly or quarterly intervals. Although the amplitude of seasonal variations may vary
their period is fixed being one year.
Seasonal influences on forecast: Many organizations are faced with seasons that repeat
themselves during a particular period. These seasons might be by time of day (for example,
demand for hamburgers at a fast-food outlet,) by day of the week (for example, the demand
for gasoline,) by wee, by the month, or by some combination of these. Adjusting a forecast
for season basically uses a combination of seasonal factors and average demand to arrive at
an adjusted forecast. Assume that LuAnn’s chocolates experience five separate seasons per
year: Valentine’s Day, Easter, summer, Halloween, and Christmas.
III. Cyclic Variation
The term cycle refers to the recurrent variations in time series that usually last longer than
year and are regular neither in amplitude nor in length.
Most of the time series relating to economics and business show some kind of cyclical on
oscillatory variation. Cyclical Fluctuations are long –term movements that represent
consistently occurring rise, and declines in activity. A business cycle consists of the
recurrence of the up and down movements of business activity from some sort of statistical
trend or normal. By normal we mean some kind of statistical average, we do not mean that
there is anything very permanent or special. There are four well-defined periods or phases in
the business cycle namely:
• Prosperity
• Decline
• Depression
• Improvement
The study of cyclical variations is extremely useful in framing suitable policies for stabilizing
the level of business activity, i.e. for avoiding periods of booms and depressions as both are
bad for an economy-particularly depression which brings about a complete disaster and
shatters of the economy.
But despite the great importance of measuring cyclical variations they are the most difficult
types of economic fluctuation to measure. It is because of the following two reasons:
• Business cycles do not show regular periodicity -- they differ widely in timing,
amplitude and pattern which make their study very tough and tedious.
• The cyclical variations are mixed with erratic, random of irregular forces which make
it impracticable to isolate separately the effect of cyclical and irregular forces.

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 • The fluctuations in a business cycle result from a different set of causes. The period of
prosperity, decline, depression and improvement viewed as four phases of a business
cycle are generated by factors other than weather, social customs and those which
create seasonal patterns.

IV. Irregular Variations

Irregular variations also called ‘erratic’ accidental, random, refer to such variations in
business activities which do not repeat in a definite pattern. In fact the category labeled
irregular variation is really intended to include all types of variations other than accounting
for the trend, seasonal and cyclical movements. These latter three, if they are actually at
work, act in such a way as to produce certain systematic effects. Irregular movements on the
other hand are considered to be largely random, being the result of chance factors which like
those determining the fall of a coin, are wholly unpredictable.
Irregular variations are caused by such isolated special occurrences as floods, earthquakes,
strikes and wars, Sudden changes in demand or very rapid technological progress may also be
include in this category. Quantitatively, it is almost impossible to separate out the irregular
movements and the cyclical movement. Therefore while analyzing time series the trend and
seasonal variations are measured separately and the cyclical and irregular variations are left
altogether.
Preliminary adjustment before analyzing time series
Before beginning the actual work of analyzing a time series it is necessary to make certain
adjustment in the raw data. The adjustments may be needed as:
• Calendar Variations- A vast proportion of the important time series is available in a
monthly form and it is necessary to recognize that the month is a variable time unit.
The actual length of the shortest month is about 10 per cent less than that of the
longest, and if we take into account holidays and weekends, the variation may be even
greater. Thus, the production or sales for the month of February may be less not
because of any real drop in activity but because of the fact, that February has fewer
days. Thus, the purpose of adjusting for calendar variation is to eliminate certain
spurious differences which are caused by peculiarities of our calendar. Thus, arriving
at daily average for each month. Comparable monthly data may them be obtained by
multiplying each of these values by 30:4167, the average number of days in a month.

• Population Change- Certain types of data call for adjustment for population changes.
Changes in the size of population can easily distort comparisons for income,
production and consumption. For example, national income may be increasing year
after year, but per capita income may be declining because of greater pressure of
population. Similarly, the production of a commodity may be going up but the per
capita consumption may be declining. In such case where it is necessary to adjust data
for population changes a very simple procedure is followed i.e. the data are expressed
on per capita basis by dividing the original figures by the appropriate population
totals.

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 • Price Changes- An adjustment for price changes is necessary whenever we have a
value series and are interested in quantity changes alone. Because of rising price the
total sales proceeds may go up even when there is a fall in the number of units sold.

• Comparability- For any meaningful analysis of time series, it is necessary to see that
the data are strictly comparable throughout the time period under investigation. Quite
often it is difficult of even impossible to get strictly comparable data. If such types of
changes are not taken into account, the data cannot strictly be compared and its
analysis would lead to fallacious conclusions.
Measurement of Trends
Given any long term series, we wish to determine and present the direction which it takes -- is
it growing or declining. There are two important reasons for trend measurement
• To find out trend characteristics in and of themselves -- in studying trend in and of
itself, we ascertain the growth factor. For example, we can compare the growth in the
textile industry with the growth in the economy as a whole or with the growth in other
industries, or we can compare the growth in one firm of the textile industry with
growth in other industries as a whole. The growth factor also helps us in predicting
the future behavior of the data .If a trend can be determined the rate of change can be
ascertained and tentative estimates concerning future made accordingly.
• To enable us to eliminate trend in order to study other elements.-This elimination of
trend leaves us with seasonal, cyclical and irregular factors. We can then, in two or
more series, compare or use the impact of these three relatively short-term elements
divorced from the long-term factors.
The various methods that can be used for determining trend are:
1. Freehand or Graphic Method- This is the simplest method of studying trend. The
procedure of obtaining a straight line trend by this method is given below:
• Plot the time series on a graph.
• Examine carefully the direction of the trend based on the plotted information.
• Draw a straight line which will best fit to the data according to personal
judgment. The line now shows the direction of the trend.
It is clear from the above that there is no formal statistical criterion where by the adequacy of
such a line can be judged and it all depends on the judgment of the statistician. However, as
such a rough guide the line should be so drawn that it passes between the plotted points in
such a manner that the fluctuations in one direction are approximately equal to those in the
other direction and that it shows a general movement.
When a trend line is fitted by the freehand method an attempt should be made to make it
conforms as much as possible to the following conditions.
1. It should be smooth-either a straight line or a combination of long gradual curves.
2. The sum of the vertical deviations from the trend of the annual observations, above
the trend should equal the sum of the vertical deviation from the trend of the
observations below the trend.

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 3. The sum of the square of the vertical deviation of the observations from the trend
should be as small as possible.
4. The trend should bisect the cycles so that the area above the trend equals that below
the trend, not only for the entire series but as much as possible for each full cycle.
This last condition cannot always be met fully but a careful attempt should be made to
observe it as closely as possible.
The trend line drawn by the freehand method can be extended to predict future values.
However, since the freehand curve fitting is too subjective, this method should not be used
for predictions.
Merits and Limitation
Merits
1. This is the simplest method of measuring trend.
2. This method is very flexible in that it can be used regardless of whether the trend is a
straight line or curve.
3. The trend line drawn by a statistician experienced in computing trend and having
knowledge of the economic history of the concern or the industry under analysis may
be a better expression of the secular movement than a trend fitted by the use of a rigid
mathematical formula which while providing a good fit to the points, may have no
other logical justification.
Limitation
1. This method is highly subjective because the trend line depends on the personal
judgment of the investigator and therefore, different persons may draw different rend
lines from the same set of data.
2. Since freehand curve fitting is subjective it cannot have much value. If it is used as a
basis for predictions.
3. This method appears simple and direct
It is only after long experience in trend fitting that a statistician should attempt to fit a trend
line by inspection.
2. Method of Semi-Average
This method is used for the given data is divided into two parts, with the same number of
years. For example, if we are given data from 1978 to 1995 i.e. over a period for 18 years, the
two equal parts will be first nine years, i.e. from 1978 to 1986 and from 1987 to 1995. In case
of odd number of years like 9, 13, 17 etc. equal parts can be made simply by omitting the
middle year, for example, if data are given 19 years from 1978 to 1996. The two equal parts
would be from 1978 to 1986 and from 1988 to 1996- middle year 1987 will be omitted. The
line can be extended downwards or upwards to get immediate values or to predict future
values.
Merits
1. This method is simple to understand as compared to the moving average method and
the method of least squares.

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 2. This is an objective method of measuring trend as everyone who applies the method is
bound to get the same result of course, leaving aside the arithmetical mistakes.
Limitation
1. This method assumes straight line relationship between the plotted points regardless
of the fact whether that relationship exist or not.
2. The limitation of arithmetic average shall automatically apply.
For the above reasons if the arithmetic averages of the data are to be used in estimating the
secular movements, it is sometimes better to use moving averages than semi-averages.
3. Methods of Moving Averages
When a trend is to be determined by the method of moving averages value for a number of
years is secured, and this average is taken as the normal or trend value for the unit of time
failing at the middle of the period covered in the calculations of the average. The effect of
averaging is to give a smoother curve, lessening the influence of the fluctuations that pull the
annual figures away from the general trend.
While applying this method, it is necessary to select a period for moving averages such as 3-
yearly moving averages, 5-yearly moving average, 8-yearly moving average etc. the period of
moving averages is to be decided in the light of the length of the cycle. Since the moving
average method is most commonly applied to data which are characterized by cyclical
movements, it is necessary to select a period for moving average which coincides with the
length of the cycle, otherwise the cycle will not be entirely removed.
This danger is more serve, the shorter the time period represented by the average. In such a
case we should take a moving average period equal to or somewhat greater than the average
period of the cycle in the data. Ordinarily, the necessary period will range between three and
ten years for general business series but even longer periods are required for certain types of
data.
The 3-yearly moving average shall be computed as follow:
A + b + c/3 b + c + d/3 c + d + e/3 d + e + f/3
And for 5-yearly moving averages
A + b + c + d + e/5 b + c + d + e + f/5 c + d + e + f + g/3

Merits and Limitation

Merits
1. It is flexible method of measuring trend for the reason that if a few figure are added to
the data, the entire calculations are not changed -- we only have to calculate some
more trend values.
2. This method is simple as compared to the method of least squats.
3. If the period of moving average happens to coincide with the period of cyclical
fluctuations in the data such fluctuation are automatically eliminated.
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 4. The moving average has the advantage that it follows the general movements of the
data and that its shape is determined by the data rather than by the statistician choice
of a mathematical function.
5. It is particularly effective of the trend of a series is very irregular.
Limitation
1. Trend value cannot be computed for all years. The longer the period of moving
average the greater the number of years for which trend values cannot be obtained.
For example, in a three-year moving average trend value cannot be obtained for the
first year and last year in a five year moving average for the first two years and the
last two years, and so on.
2. The best results would be obtained by a moving average whose period was equal to
the average length of all the cycles in the given series.
3. Finally when the trend situation is not linear the moving average lines either above or
below the true sweep of the data. Consequently the moving average is appropriate for
trend computation only when:
o The purpose of investigation does not call for current analysis or forecasting.
o The trend is liner.
o The cyclical variations are regular both in period and amplitudes.

4. Methods of Least Squares

This method is widely used in practice. It is a mathematical method and with its help a trend
line is fitted to the data in such a manner that the following two conditions are satisfied:
1. ∑ (Y – Y c ) = 0
i.e., the sum of deviation of the actual values of y and the computed values of y is zero.
2. ∑ (Y – Y c ) 2 is least
Is the sum of the squares of the deviations of the actual and computed values is least from the
line and hence the name method of least squares. The line obtained by this method is known
as the line of best fit.
This method of least square may be used either to fit a straight line trend or a parabolic trend.
The straight line trend is represented by the equations.
Y c = u + bx
Where y is used to designate the trend value to distinguish them from the actual value y
value, a is the y intercept or the computed trend figure of the y variable when X=0, b
represent the slope of the trend line or the amount of change in y variable that is associated
with a change of one unit in X variable. The X variable in time series analysis represents
time.
Forecast Errors
Some forecasts will be higher than demand, and some will be lower. Managing the
forecasting process requires minimizing the errors between actual demand and forecasted
demand. The key to successful forecasting is to choose the techniques that provide the least
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amount of forecast error. To determine which forecasting technique is best for a set of data,
the forecast error must be measured.
The first is called cumulative sum of forecast errors (CFE) and can be calculated using
formula.
CFE= ∑et
CFE calculates the total forecast error for a set of data, taking into consideration both
negative and positive errors. This is also referred to as bias. This gives an overall measure of
forecast error. However, taking into consideration both negative and positive errors, this
method, can be produce and overall low error total although individual period forecasts can
either be much higher or much lower than actual demand.

The second measure of forecast error is mean squared error (MSE). This can be calculated
as below formula:
∑ 𝑬𝐭^𝟐
MSE = 𝒏

This measure squares each period error so the negative and positive errors do not cancel each
other out. MSE also provide a good indication of the average error per period over a set of
demand data.
Closely related to MSE is the third type of forecast error measure: mean absolute deviation
(MAD). It can be calculated using formula below:
∑ |𝑬|
MAD = 𝒏

By taking the absolute value of each error, the negative and positive signs are removed and a
good indication of average error per periods is calculated. This measure is popular because it
is easy to understand and provide a good indication of the accuracy of the forecast.
The final measure of forecast error is mean absolute percent error (MAPE). MAPE can be
calculated using formula
∑(|𝐸|/𝐷t)100
MAPE = 𝑛

MAPE relates the forecast error to the level of demand so different types of forecasts can be
computed.
Each technique became more sophisticated by including trends and seasons in forecasts.
Using MAPE as the forecast measure became more accurate as it moved from using simple
moving average seasonal influence. This would also be true if MAD was used as the forecast
error measure.
Forecasting demand is a highly scientific art. Rigorous quantitative techniques exist to
manipulate historical data to predict the future. However, the assumption made here is that
the future will repeat the past. This is normally not the case. As such, it is important to choose
the technique that best fits the data in order to minimize the forecast error. Minimizing this
error this results in the most accurate forecast.
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Collaborative Planning, Forecasting, and Replenishment
This replaces the traditional method of forecasting single execution plan. This replace the
traditional method of forecasting where each trading partner developed its own developed its
own forecast for an item and each forecast was different for each partner.
The first attempt at CPFR was between Wal-Mart and Warner-Lambert (now a part of
Johnson &Johnson) in 1995 for its Listerine product line. In addition to rationalizing
inventories of specific line items and addressing out-of-stock occurrences, these two
organizations collaborated to increase their forecast accuracy so as to have the right amount
of inventory where it was needed, when it was needed. The three-month pilot produced
significant results and improvements for both organizations. This resulted in the adoption of
CPFR by both Wal-Mart and many of its other suppliers to manage inventories through
collaborative plans and forecast.’
Theoretically, an accurate CPFR forecast could be translated directly into a production and
replenishment schedule by the manufacturer since both quantity and timing are included in
the CPFR forecast. This would allow the manufacturer to make the products to order (based
on the quantity and timing of demand) rather than making them to inventory, thus reducing
total inventories for the manufacturer. Although CPFR has not yet fully developed into a
make-to-order environment, it has enjoyed the benefits of reduced supply chain inventories
and out-of-stocks.

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 LESSON – 8

INFORMATION SOLUTION

Introduction

Integrated information technology (IT) solution for logistics and supply chain management
In the present day’s global competitive environment, the success of logistics and supply chain
management is largely conditioned by the extent of use and development of information
technology. L&SCM is characterized as a transaction- oriented and information-intense
business function where orders must be entered, processed, and tracked; inventory must be
received, put away, picked, and shipped; transportation must be arranged and scheduled,
followed by generation of required documents and measurement of performance of the whole
process. For efficient and smooth flow and management of these activities, real-time
communication of information is essential. Furthermore, monthly or quarterly planning is
gradually becoming history and being replaced by weekly or even daily planning. It is mainly
due to quick information processing and speedy communication service capability of a
computer complied with a sharp decline in the price of computer due to continued reduction
in import duties. The relevant capture of data, its transmission to facilitate decision-making
and ability to communicate the decision to many people in time for effective implementation
is the need of the hour. The requirement of on-time delivery, time to market and efficient use
of resources highlight the importance of availability of accurate, specific and real-time
information inevitably need IT solutions to L&SCM. That is why, most of the corporate
enterprises are considerably investing in the development of a probable integrated IT
infrastructural solutions for L&SCM in terms of computer hardware, software, and
connectivity by means of Electronic Data Interchange (EDI), Bar Code System (BCS),
Enterprise Resource Planning (ERP), and Intranet, Extranet and Internet.
Logistics Information System
Logistics Information System is an interacting structure of people, equipment, and procedures
which together make relevant information available to the logistics manager for the purpose
of planning, implementing and control. Information flow makes a logistical system dynamic.
Quality and timeliness of information are key factors in logistical operations.
Logistic information system combines hardware and software to manage, control, and
measure logistics activities.
Logistics information system performs three vital roles in business firms.
o Logistics processes and operations.
o Logistics decision making.
o Strategic competitive advantage.
Major application categories of information system include:
o Operations support systems and
o Management support system.
Logistics information system benefits
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 o Increase product visibility and control
o Improved knowledge of key logistics network component capabilities and capacity
o Enhanced economic value; cost reductions and sales increase.
o Creation of competitive advantage from direct linkage to customers.

TECHNOLOGIES
The latest Technologies being used in Logistics and Supply chain Management are
segregated into
1. Communication Technology
2. Automatic Identification Technology
3. Information Technology

1. Communication Technology
The communication, either oral or written has a very crucial role in business successes. The
following are the few emerging communications technologies, which are enablers to superior
customer service leading to competitiveness through the speed and accuracy in
communication.

• Electronic Data Interchange (EDI)

EDI is an inter-organization computer-to-computer exchange of standard business documents
in a structured and machine-process able format with the objective to eliminate duplicate data
entry and to improve the speed and accuracy of the information flow. In an EDI-based
system, communication of business information such as request for quotations, purchase
order, invoice, shipping advices, etc. between two organizations is made available
electronically instead of mail, courier, fax or even e-mail and does not need the intervention
of human beings for interpretation of data. For instance, in a computerized purchasing
system, a purchase order in a standard electronic information format (called transaction sheet)
electronically entered into the supplier’s order entry system directly. And, after the receipt of
the purchase order information automatically flows into processing without any human
interpretation or even coding, resulting into more data accuracy and less delay information
transmission and processing.
Hence, EDI-based system has a significant advantage over the manual paper-based system in
terms of built-in delay due to several processing points during transit, data in accuracy or
error due to repeated data entry at several steps, labor-intensive uncertainty about delivery of
information along with high costs of transmission.
With EDI the business documents such as invoice, cheques and challans are sent
electronically from one organization to another. The difference between the email message
and EDI message is that, E-Mail is composed and interpreted manually, while EDI messages
is composed using one software and interpreted by other software. E-mail data is not
structured while EDI data or message is structured. EDI message has legal standing in the
court of law.
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Components of EDI
EDI is a very simple technical system with three basic components into the framework of
information flow, namely: EDI standards, EDI software and a communication medium.
I. EDI Standard – As we have already defined, EDI is an inter-organization computer-
to-computer exchange of standard business information in a structured and machine-
process able format. These machine-process able formats are nothing but EDI
standards. According to Margaret A. Emmelhainz, EDI standards are rules and
guidelines that establish a basic syntax for formatting information electronically.
Standards are critical to the smooth operation of EDI, because for a computer to
present the exact meaning of the information, the exact format is essential to read and
understand it.
Furthermore, basically there are two types of EDI standards, namely: proprietary and
generic.
Proprietary standards are guidelines for electronic communications that are unique
to one company and its partners, whereas generic standards are used by companies
on an industry wide, nationwide, or even international basis.
II. EDI Software- EDI standards provide the language and structures of EDI software,
which translates data into the proper standard language for electronic communication.
The major functions of EDI software are data extraction, formatting and transmission
of the outgoing EDI and data receiving, formatting and integration of the incoming
EDI.
III. Communication Medium- The final element of EDI is a communication medium for
electronic transmission of information through a computer-to-computer dial up
arrangement. It may be through one’s own network (intranet) or a third party network,
commonly called as ‘value added network’ (VAN). VAN is mostly preferred by most
of the EDI users, which also function like a mail box. The buyer sends an electronic
document to the VAN, which sorts messages and sorts them in the mail box of the
designated receiver. The receiver can either have all messages delivered by the VAN
at a set time or may call in to the VAN to receive mail.
Benefits of EDI
The major benefits of EDI in logistics and supply chain management are:
o Improving customer responsiveness.
o Reducing transaction costs and times.
o Increasing accuracy and productivity.
o Enhancing supply chain relationship.
o Increasing ability to compete globally and
o Improving quality of decision to exploit business opportunity.

• Very Small Aperture Terminal (VSAT) –

The satellite communication channels are playing a crucial role in real time data collection
and its exchange, which is vital for customer service. This allows the communication

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between driver, consignor and consignee. The real-time interaction helps in having the up-to-
date information on the location of truck and delivery position.
Example- Wal-Mart the retail giant of USA is using this system for controlling the inventory
movement.

• Geographical Positioning System (GPS) –

The GPS is more accurate system used in developed countries where in a vehicle could be
traced accurately with the help of Geo Stationary Satellites to the accuracy of one meter in
terms of latitude and longitude.

• Geographical Information System (GIS) –

GIS are the software tools for visualization of video location of any entity on earth which is
stored. This could be in terms of physical maps of the surface of the earth, it means that we
can say that layout of inner surface of an earth or a layout of streets or roads. GIS in
integration with GPS is used in logistical operation for tracking and tracing of the
consignment location to the extent of road or street in particular city.

• Web Based Tracing –

The clients can download this report by connecting through the internet. This information
helps in planning in the efficient way to dispatch schedule and also making follow up with
clients for payment collections.

• Automated Guided Vehicle System (AGVS) –

The system makes use of magnetic or optical guidance system. The magnetic system uses
energized wire laid on the warehouse floor or guiding the material handling equipment. In
AGVS operator is eliminated. The new generation AGVS are guided with video and do not
follow the fixed path. AGVS could performing all the material handling operation without
any human involvement.
• Information Directed System (IDS) –
In this a centralized computer controls the material handling equipment in very efficient
manner. The communication is between the equipment and the computer with the use of
radio frequency. The required movements are fed into computer and it assigns the jobs to the
individual equipment considering its maximum loading capacity and handling speed.
2. Automatic Identification Technology
Automatic identification (Auto ID) is the term used to describe the direct data entry of data or
information in the computer system, which uses as programmable logistic controllers or any
microprocessor-controlled device without operating a keyboard.
• Bar Code System (BCS)
In logistics and supply chain management, the accurate identification of products along with
of their information in monitoring the entire process comprise of the key factors. The bar
code system is an identification technology that facilitates speedier flow of logistical
information such as quick tracking receipt, movement details, products identification, etc.
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with a lesser probability of error. It refers to the placement of computer-readable cods on
items, cartons and containers which is grouping of parallel bars(usually blocks) of different
widths separated by light spaces(usually white), again of different widths. These bars (black
and white), again, of different widths are used to define a particular character which can be
identified by an electronic scanning machine system. Bar coding is a sequence of parallel
lines. These bars are nothing but the items of information in the codified form, which can be
read with the help of a scanner. Historically bar codes were first used in a supermarket in
USA in 1952. The information printed in bar code include, country code manufacturer name,
product details, date of manufacture, material content etc. these details are required at user
end for inventory management. The bar codes are used in diverse industries such as retail,
pharmaceutical, consumer goods, electronics, automobiles etc.
In the bar code system, wide black bars, narrow black bars, wide white (blank) bars and
narrow white bars are all used to define a character. Depending on the symbology there can
be anywhere from 3 to 9 elements used in the code for a single character. At present, there are
more than 100 symbolizes used. For example 2 or 5 is one of the standard symbolizes where
the code has a total of five bars, two wide and three narrow. All narrow bars are called the
‘X’ dimension and have to be of the same width. The width bars are a width factor of the
narrow bars (between two to four times as thick). The selection of a symbology depends on
the application area.
The Universal Product Code (UPC) is a specific type of barcode. That is widely used in the
United States and Canada for tracking trade items in stores.
o Turkey code: 869 Code 128, code 39
o EAN code(international article number)- Europe and turkey
o TOBB, Milli Mal Numaralandirma merkezi.
Benefits of Bar Code System
The following are the benefit of bar code technology in a supply chain:
o Speeds Data Entry.
o Enhances Data Accuracy.
o Reduces Material-Handling Labor.
o Minimize On-Hand Inventory.
o Monitors Labor Efficiency.
o Improves Customer Service.
o Reduces Product Recall
o Verifies Orders at Receiving and Shipping.
o Reduces Work-in Process Idle Time.
o Monitors and Control Shop Floor Activity.
o Improve Shop Floor Scheduling
o Optimizes Floor Space and
o Improve Product yield/reduces Scrap
Impact of Bar code Technology on operations of Logistics and Supply Chain Management
o Procurement Operation – The parts and components buying from suppliers are
assigned bar codes, which also contain information on item name, batch number, date
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 of manufacture, order no, serial no, manufacturer name, company name etc. these
information which is in bar code helps in identifying and tracking the component.
Processing – During the order processing the bar code will help in keeping
identification of items based on their date of entry into the warehouse or store. This
will ease material storage, retrieval and dispatch in FIFO (first in first out) inventory
management system.
o Production Operation – During the production process the identification and
analysis of goods of in-process and finished items become easier due to bar coding.
The various bathes at different stages of production can be easily tracked.
o Distribution Operation – During distribution, barcode helps in identifying and
tracking the transit goods it means where it is transit, of finished goods to the
customers.

• Radio Frequency (RF) Tags

An even more promising alternative to bar codes are radio-frequency (RF) tags, which
communicate data via radio waves to a reader typically connected to a host computer
system. The RF tags or transponders, as they are sometimes called, have been around
for a number of years.
RFID (Radio Frequency Identification) is an automatic identification and data capture
technology. RFID first appeared in tracking and access application during 1980.
RFID-based systems allow for noncontact reading and are effective in manufacturing
and other hostile environment where bar codes could not survive. Basically, an RF
tags consists of an antenna and a piece of silicon, a microcircuit for data storage. They
have intelligence that allow the data to be coded into the tag and the data is
communicated through radio waves.
Active tags are much longer range and larger memories than passive tags, as well as this tags
have capability to store additional information sent by the transceiver. Some active RFID tags
include sensors such as temperature logging which have been used to monitor the
temperature of fresh produce or certain pharmaceutical products.
RF tags come in a variety of forms. For instance, there are passive and active tags. The
active variety contains a transmitter that has the power to send signals. The passive variety, in
contrast, relies on energy from the reader to initiate communication. Tags can be ‘read-only’
or ‘read-write’. On a read-only tag, the data encrypted can’t be altered. But on a read-write
version, which is more expensive, the data can be changed as easily as any other magnetic
medium such as floppy disk or videotape. These tags have a reading range from 1 to 10 feet.
In the United States, fleet operators have begun booking at transportation as a low-cost
alternative to satellites for shipment tracking. Strategic locations like customer sites would be
equipped with readers. Readers, in turn, would scan trucks bearing transponders each time the
vehicles entered a distribution Centre or terminal.
Besides serving as tracking devices, read-write RF tags also could be used in trucks to collect
operational data like revolutions per minute, shifting patterns, and other pertinent trip data.

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Likewise shippers could use RF tags as probable databases for truck shipment. The tags
would contain the basic manifest information- shippers, content, consignee. This could prove
valuable in speeding up border crossings. In theory as a truck passed a border station, the
transponder would identify the vehicle’s consents to customs authorities. If the carrier had a
record of compliance, the truck could be waved through the gate.
Although RF tags have proved useful in tracking and traffic control, at least one industry
expert questions whether existing technology has practical applications in distribution census.
The development of co-readers -- scanners that could decipher both bar codes and RF tags --
would facilitates the adoption of RF tags in warehousing. Barcode labels then would be
applied to individual boxes, while read-write tags would be found on pallets, trailers, and
containers.
RFID has Significant Important for Logistics and Supply chain on many Sectors

o RFID helps from Indian exporters to global retailers like WAL-MART get better and
more visibility into movement of goods within their supply chain and thus become
more competitive.
o Improve the ability of manufacturers to better manage the inventory levels.
o Improve the complex distribution system for the Defense operation.
o Improve the complex tracking and distribution operation of the Indian postal services.
o Improve the tracking, logistics and planning operations of Indian Railways, state
public transport agencies.
o Implement automatic toll collection on vast network of highways.
Examples of RFID Technology:
o Procter &Gamble (P&G) Company
BEFORE-- P&G used bar codes to track shipment of goods from factory to retail outlets, but
couldn’t do much to halt the supply shortages on store shelves.
AFTER-- P&G used RFID is tracking shipment, and eventually individual products, so that
they can be stocked on demand in stores.
o FORD Motor Company
BEFORE- Assembly-line worker running low on parts would have to pick up a phone and
call the replenishment department to get more parts and then wait for parts.
AFTER – Ford puts RFID on each parts bi. Warehouse operators now know in seconds,
when supplies run low, and automatically deliver parts as needed to workers on the assembly
line.

• Point of Sales Data

o Technology that allow firms, in real time to know what and where an item is being
sold through scanning of individual barcodes when an item purchased when an item
purchased at the retail level.

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 o Using this information, product forecasting, make better purchase decision and
customization, and reduce the chance that and item will be out of stock.
o Zara-POS usage.

3. Information Technology
IT consists of hardware and software that captures, analyses and provide information
wherever it is needed. Since the supply chain management is defined as network of
organizations, these organizations cannot form a network unless they are connected through
IT resulting into transparency in the supply chain and aligning the supply chain activities
toward customer.
Example- The success of supply chain where internet was used to collect order from
customer directly and shared the information with the suppliers so that they can forecast
better, and supply to the requirement.
The IT tools used in logistics and supply chain management are:

• Enterprise Resource Planning (ERP)

ERP is a computerized integrated business process of the organization used by firms to derive
competitive advantages in the production, distribution and financial areas. In other words, it
is an integrated set of application software modules providing operational, managerial and
strategic information to improve the productivity, quality, and competitive advantage.
Furthermore, ERP integrates the entire enterprise, starting from supplier/vendor to the
customer, including all resources such as financial, human, introduction, logistics, etc. by
means of an integrated workflow with a flexible assignment of tasks and responsibility to
different positions, jobs, groups or individual. The information system of ERP stores
information in a summarized format. In a large data warehouse and can be either updated
online from the transaction system or trailed periodically. Furthermore, a mangers can
retrieve required data across function in a format in which he/she would like to view.
Although there have been difference between ERP and logistics and supply chain
management system of late, ERP and L&SCM software are fast converging. The ERP
software suppliers have started adding logistic and supply chain management functionality,
whereas L&SCM solution providers too are expanding their preview by adding ERP
functionality to their products.
Benefits of ERP
The Major Benefits of ERP in L&SCM are:
o Improving productivity and enhancing a competitive edge by optimizing the use of all
its resources.
o Bringing about a tradeoff between demand and supply
o Bringing together people who work on shared task within the same firm or in their
dealings with suppliers, customers and third-party logistics service providers
o Ensuring a smoother flow of inventory and information at all levels and between all
parties, coupled with ready access of up-to-date information
o Reducing the replenishment cycle time and hence capital lock-up

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 o Ensuring a high level of customer service with flexibility
o Overall organizational lock-ahead capability and control.

Intranet, Extranet and Internet

Intranet is an internal web of an organization, which allows only internal users (company
employees) to access and share data through electronic messaging and publishing over the
network from external sources, while restricting access to it by outsiders.
Extranet is an extension of the corporate intranet set-up. Extranets operate outside of the firm,
connecting suppliers, channel partners, third-party logistics service providers and/or users to
access and share internal corporate information. Different supply chain members have
different access powers and a unique identification, as firm does not wish to give all
information to everyone. So, firms are quite selective when building their extranets to ensure
that only authorized users have access to only the necessary information pertaining to the
transaction. By making the connectivity among various players who contribute to the value-
chain, extranets focus on improvement of the information transformation system so as to
enhance business strategic alliance for flexible approach.
On the other hand, Internets refer to the firm’s website which can be accessed from anywhere
in the world, i.e. Internet provides a huge amount of information to the public. Further, it is
transforming the entire nature of supply chains by eliminating middlemen, making
transactions more democratic as well as transparent. So, if a supplier wants to know the
production schedule/stock position of his goods or a consumer wants to know the order
status/inventory level of a firm’s product, he has to simply get connected to the Internet and
access the firm’s website. Now days, Internet is largely used by firms for connectivity.

Benefits of Intranet, Extranet and Internet

The major benefits in L&SCM are as follows:
o Better collaboration by means of real-time communication of information between
functional departments of the firms, suppliers, customers, third-party logistical service
providers, etc.
o Reduced transaction costs, communication costs and response time across the supply
chain
o Bringing about a proper balance between demand and supply resulting into lower
inventory level and prevention of stock-out position
o Enhanced supply chain relationships, which ultimately lead to develop strategic
capabilities for competitive advantages.

• Distribution Requirement Planning (DRP)

DRP helps in consolidating the shipments to multiple locations spread over the vast
geographical area, and thus help in reducing freight cost. DRP improves inventory visibility
in the supply chain resulting into reduction in inventory level and warehouse space
requirement.

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 • Automated Inventory Tracking System (AITS)
The AITS is an IT tool that gives real time status of the inventory levels of all items at
retail stores, feeder and mother warehouses. For replenishment of items sold, information
is conveyed directly to the supplier after the item inventory level is checked at feeder and
mother warehouses. The suppliers initiates the action to replenish the inventory item
depending on the item take-off rate at retail stores, its safety stock, inventory in transit etc
thereby optimizing the inventory in the supply chain.
Example – Wal-Mart, a leading US retail chain giant controlling the inventory investments
throughout the supply chain with the help of AITS.
Emerging Technologies in Logistics and Supply Chain Management
Three emerging technology-voice systems, memory buttons, and RF tags- promise to
expedite the flow of goods.
When the subject of technology comes up, most logistics managers immediately think of bar
codes, satellite communications, or computer software. All of these technologies have helped
to speed up the movement of goods through the distribution pipeline. But a number of
emerging technologies may have an even greater effect on the industry. Some say they could
revolutionize the flow of materials from the manufacturing process through customer
fulfillment.
What are these new miracle devices? There are three very premising technologies looming on
the horizon: speech-recognition system, touch-memory buttons, and radio-frequency tags.
Although each plays a different role in logistics, they all have the potential to further
automate distribution and transportation activism. With such change comes the promise of
speedier product flow and lower distribution costs.

• Voice Systems
Twenty-first century warehouses will likely turn to speech-recognition systems to manage
their diverse workforces. Developed 1980s, this technology has taken hold mostly in the legal
and medical professions as a replacement for dictation.
Nonetheless, a growing number of warehouses overseas have begun employing speech-and –
voice technology because it allows workers to exchange data with a computer without the
need for keypad entry.
In fact, because voice-recognition systems free up the warehouse workers hands, the
technology can expedite picking, receiving, and quality inspection of goods. For instance, a
worker can read the part number of an incoming shipment while placing the box on a
conveyor, or operator a forklift truck while being directed by the computer to a particular
pallet location.
Speech-recognition systems generally consist of a voice synthesizer and a headset.
Originally, these systems were voice-dependent. In other words, each unit had to be ‘trained’
to recognize an individual user’s speech patterns. An operator would create a voice template
for every word he or she might utter during a dialogue with the computer. The system them
would store these templates in its memory.
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Currently, voice/speech technology companies are working toward independent-voice
system. This technology would allow anyone to engage in an oral discussion with a
computer.
The appeal of voice and speech technology in today’s high-tech warehouses is that it enables
a low-silk workforce to interact with computers and maintain high picking and receiving
levels.
But voice search technology may someday see even wider use in logistics than simply
directing warehouse activities. Advances in this technology may make it available for
customer-service application. Some envision a day when consignees will be able to pick up
the phone and check on a shipment status just as they do now- except the communicator on
the other end of the phone line won’t be a person, but a computer using a voice-recognition
system.

• Memory in a Button
Although bar codes are developing as the most common means of identifying goods in
warehousing and transportation, other emerging technologies may either supplement or
supplant them soon. One of these is the memory button, which contains an encapsulated
microprocessor. Several pages of information can be stored on a button, which a reader must
physically touch to extract the same.
Buttons are suitable for use in product identification and as portable databases in harsh
environments .The technology could also be used by motor carriers and private fleets to keep
maintenance records on individual vehicles.

• Radio Frequency Identification

RFID is an automatic identification and data capture technology. RFID first appear in
tracking and access applications during 1980s. RFID-based systems allow for noncontact
reading and are effective in manufacturing and other hostile environment where bar codes
could not survive. These are used and widely accepted technology and have alternative to
barcodes to communicate the inventory data to the reader via radio waves.
SCM Software
One of the key components of a strong SCIS is the software that is used to manage the supply
chain. The supply chain software market space includes technologies that address virtually
every function and task that occur in the supply chain. Whether you need to develop a sales
and operations forecast, analyze facility relocation, options, optimize the delivery of goods,
maintain visibility of inventory, or monitor order fulfillment performance, there is software
available to assist your efforts. These tools attempt to harness the computational power and
communication abilities of today’s technology to help organizations plans, execute and
control supply chain activities in real time.
1. Planning- Supply chain planning applications and suites help organizations evaluate
demand for materials, capacity, and services so that effective fulfillment plans and
schedules can be developed. These planning tools are employed across supply chain
process, assisting with decisions regarding the number and locations of facilities, where
to purchase materials when to build goods, and how to deliver the goods, just to name a
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 few tasks. This category encompasses a comprehensive set of software tools designed to
help managers gain more accurate, detailed insight into issues that affect their
development and planning of supply chain activities.

2. Execution- Supply chain execution tools and suits carry out key tasks from the time an
order is placed until is fulfilled. This order-driven category of software focuses on the
day-today activities required to buy, make and deliver the materials that flow through the
supply chain. Traditionally, execution tools have focused on a company’s internal
logistics activities-order, management, warehouse management, inventory management,
labor optimization and transportation management. As attention shifts to integrated
supply chain capabilities, the category is encompassing a boarder array of functionality
including procurement and supplier relationship management, manufacturing execution
and shop floor control, and customer relationship management.

3. Event Management- An important feature is their ability to define business rules that
triggers alerts when specified event occur, or when they fail to occur. This capability
allows supply chain managers to focus their attention on managing exception rather than
having to monitor every movement and compare it against plan. Hence, supply chain
event management tool are becoming more important, and more organizations are
turning towards these solutions to help them detect, evaluate, and resolve issues before
they snowball into major problems. The newest tools use optimization techniques to
evaluate the severity of the situation and propose alternative solutions to decision makers
or initiate action based on established guidelines. Interest in these capabilities is so high
that wintergreen research predicts spending on these tools will grow from $1.7 billion in
2005 to $7.1 billion in 2012

4. Business Intelligence- Business Intelligence tools build upon the traditional reports and
output systems that provided historical accounts of functional performance for internal
planning, operations and control. The newer capabilities are more dynamic, frequently
delivering data from transactional systems across the supply chain to a data warehouse.
The data can be analyzed and fresh information sent to frontline employees and
executives for more effective planning and decision making in addition to the data
collection and analysis capabilities, business intelligence software supports self-service
reporting, performance score carding versus goals, development of dashboards and other
graphical report displays, and activity monitoring in support of event management. These
tools can provide better access to data residing on multiple SCIS without the need for
technology department involvement, improve knowledge of decision makers, and
support collaboration across the supply chain.

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