Logistics and Supply Chain Management

192
flow-oriented concept with the obiec
Because logistics management is based
on a
to final customere
objective of
r e s o u r c e s across the supply
chain which extends from suppliers ers, it is
integrating performance ot the supply chain. Lac
assess the costs and
desirable to have a m e a n s to
firms to adopt an integrated approachn to
makes it difficult for the
appropriate cost information distribution activity needs to be managed
and distribution management. The total as a
logistics made in one cost area upon the.
complete system, having regard
for the of decisions
effects other
the firm. Conventio
for the cost accounting system adopted by nal
cost areas. This has implications
aggregated categories which will not allow
costs into broad,
accounting systems categorise
the true costs of serving customers with particula
detailed analysis that is necessary to identify
product mixes. It becomes impossible to reveal the potential for cost trade-offs that may exist
to analyse the aggregate cost data.
within the logistical system without the facility
The effect of trade-offs are assessed in two ways: (i) from the point of view of the impact nf
trade-offs on total costs and (ii) their impact on sales revenue. For example, when a firm ofer
better service to its customers, its total costs increase, but because of better service, sales revenue
also increases. If the increase in revenue is more than the increase in costs, then the trade-off mav
be regarded as leading to an improvement in cost effectiveness. To identifytheextent to which a
particular tráde-off is cost-beneficial, it is essential to have an adequate logisties-oriented cost
accounting system.

LOGISTICS COSTS
Logistics costs Logistics costs are created by logistics activities such as customer service, transportation,
comprise customer warehousing, order processing and information, lot quantity and inventory carrying, which are
service expenses, discussed in the following paragraphs:
transportation
costs, warehousing (i) Customer Service Level: The key cost trade-off resulting from varying levels of customer
costs, order service is the cost of lost sales. Expenses for customer service support includes the costs of
processing order fulfillment, parts and service support and costs of return goods handling.
information systems
costs, lot quantity (i) Transportation Costs: These costs are determined by the activity oftransporting goods. Costs
costs and inventory vary considerably with volume of shipment, weight of shipment, distance between point of
carrying costs.
origin and destination and also with the mode of transportation chosen (land, ocean or air).
(i) Warehousing Costs: These costs are due to warehousing and storage activities and
to warehouse and
also due
plant location selection process.
(iv) Order Processing/Information Systems Costs : These costs are related to activities such as
order processing, distribution communications and demand forecasting. Order processing cosIs
include costs of order transmittal, order entry, order processing etc.
(v) Lot Quantity Costs : These costs are due to procurement and
production lot quantities. Lo
quantity costs are related to purchasing production and these costs vary with changes
or
order size frequency. They include: (a) setup costs, (b) capacity lost due to down
or

during change over of production set ups or change over to a new

supplier, (c) material handling
Scheduling, expediting, (d) price differentials due to buying in different lot sizes and (e) order
associated with order placement and follow
costs
up.
(vi) Inventory Carrying Costs : Logistics activities that cause inventory carrying costs includc
inventory control, packaging and salvage and scrap disposal. The costs are made
of: (a) inventory u
capital cost
or opportunity costs, (b) inventory service cost (insurance and taxes
inventory). (c) storage space cost and (d) inventory risk cost including obsolescence,
and damage. pilferag
-Measuring Logistics Costs and Performance
193

Total Cost Concept

total cost concept S the key to

manage logistics process effectively. The
than merely organisation
The
houldhave the oal of reducing the total cost of logistics activities rather focusing on
shoula in isolation. For example, reducing costs in one area, such
cach
transportation,
nventory carrying costs because more inventory is needed to cover longer
as
transit times or
may
increase

nce against greater uncertainity in transit times.

hibit 7.1 shows six major cost categories with which management should be concerned
while making decisior ions regarding logistics activities which drive these major cost categories. These
maior cost categories comprise the fourteen key logistics activities listed below
(i) Customer service (ii) Demand forecasting
(iii) Inventory management (iv) Logistics communications
(v) Materials handling (vi) Order processing

(vii) Packaging (viii) Parts and service support

warehouse site selection (x) Procurement
(ix) Plant and
(xii) Reverse logistics
(xi) Return goods handling
Traffic and transportation
(xiv) Warehousing and storage
(xi)

Exhibit 7.1: Total Cost Concept

Place/Customer Service Levels

Customer service
Parts and service support
Return goods handling

Transportation Costs
InventoryCarrying Costs
Traffic and Transportation

Inventory management
Packaging
Reverse logistics

Warehousing Costs

LotQuantity Costs Warehousing and storage

warehouse site
Plant and
Materials handling
selection
Procurement

Order Processing and

InformationCosts
.Orderprocessing
Logistics communications

Demand forecastingg
 Logistics and Supply Chain Managemer
194

LOGISTICS COSTING
accounting system and (il
Two of accounting systems
týpes
are: (i) the financial the
managerial accounting system.
follows the Financial Accounting Standard Board (An
The financial accounting system FASB)
Accounting Principles (GAAP). Organiood sations
requirements known as "Generally Accepted statement and cash flow staten
such as balance sheet, income tement
following this system provide reports fail to meet the neede
like investors and stock holders. But this system may ds of
to outside parties
managers of the organisation".
system serves the internal
system namely the managerial accounting
comnam.
The second
needs. The logistics accounting system is a type of managerial accounting system. It can heln
help
plan, implement and control logistics systems. L0gistics accounting information i
managers to
useful for budgeting which is an important part of the logistics planning process. It also helns in
allocation of resources for implementing the plans. Also, it provides feedback on logisties
Cs

performance which helps managers to control the logistics system.

Logistics accounting statements are not standardised like financial accounting statements
because the integrated information needs of one manager often differ from those of another. Logistics

generally allow the to analyse decisions based on costs.

accounting systems user

Importance of Accurate Cost Data

Nowadays majority of major corporations accept the notion that a firm's logistics costs can be
reduced, customer service improved and interdepartmental conflicts can be significantly reduced by
the coordination of logistics activities. The application of computer technology, operations research
techniques and systems approach has brought.high-speed processing to the field of logistics. It has
led not only to changes in transportation strategy, inventory control techniques, warehousing location
policy, order processing systems and logistics communication, but also to the desire to manage the
costs associated with integrated logistics management.
The lack of adequate and accurate cost data however has prevented logistics management
from achieving its full potential. Because accounting has not kept pace with the developments in
logistics, many firms are using activity-based costing/activity based management to analyse and
manage logistics costs.
Successful implementation of the integrated logistics management concept using total cost
analysis requires accurate cost data. Also accurate cost data are required to manage and control
logistics operations.

TOTAL COST ANALYSIS

Total cost analysis
A decision makiny
approach that
Total analysis is the key to manage the logistics function. That is, at a given levc of
cost
customer service, the total logistics costs must be minimised rather the
considers total than an attempt to mini
cost of individual activities. A in
system cost non-integrative approach to logistics res
cost analysis may
to within the logistics function, which are less than optimal for the
minimisation and
recognises the attempts
system as
reduce specific costs
a whole. This approach will lead to higher total costs.
inter-relationship
Cost cutting techniques ared to warehouse, transportation or inventory costs will no be
among system
variables such as effective in reducing the total logistics costs. This is because, reductions in one cost bIy

transportation, results in increases in one or more of the others. Hence, cost trade-offs
inva nents

among the various comp

warehousing. of the logistics system are essential. For example, in
inventory and profits can be increased if the reducu
inventory cost is more than the increase in the other functional costs; or improved
ervice

customer service.
at additional cost yields higher over all revenue. custon
 Measuring
Logistics Costs and Performance. 195

heCOSt of logistics increases, there is an

As
The logistics
increasing need for accurate accounting for the
function is relatively more asset and labour intensive than othe
ther areas of the
logistics cos
costs.

The ratio
of logistics
of
ratio costs to the total
firm. company costs has been steadily increasing. The full
potential of logistics cost trade-off can
only be realised if the
olated to separate functional areas and their interaction.management can fully
determine the
Costs

Tmes of Costs: To manage a logistics system, the logistics must understand and use
ty information. Also it is necessary to understandmanager
of cost how the behaviour of one cost
from that of another. The costs can be broken
differs down in many ways: Fixed, variable and
i-variable, c cash
as and non-cash, direct and indirect
and sunk and managerial. A clear
rstanding of these costs helps managers to make logistics decisions effectively.
underst.
Examples of
of costs are as below:
various types
(a Salary paid to the logistics executive per month is a fixed cost because it does not vary with
the number of hours worked per month

(b) The hourly wages paid to the forklift truck driver is a variable cost. If the truck driver works
one hour extra per day, he will receive extra wages.
(o) Semivariable cost has both a fixed and a variable cost component. For example, a sales person
might be paid fixed monthly salary plus a commission that varies according to the sales achieved
per month.

(d) Cost like labour cost which involves cash payment of wages to employees is a cash cost.
(e) Depreciation cost of a capital asset shown in the balance sheet is a noncash cost. No cash
outlay takes place and depreciation expense serves only to reduce the book value of the capital
asset over a period of time.

The depreciation cost traceable to a particular capital asset is a direct cost.

(g) Indirect costs may be traceable or untraceable to a specific product or a specific department.
For exampie, salary paid to the general manager of maintenance department.

Types of Cost Data Needed

The quality of the accounting data has a direct influence on management's ability in the

following aspects:
(iii) to
(1) To enter new markets, (ii) to take advantage of innovative transportation systems,
OOse between common carriers and private carriers, (iv) to increase deliveries or inventories,
to restructure the inventory
) to make in the configuration of distribution centres, (vi)
changes
the extent of automation in the
vels, (vii) to make changes in packaging and (viii) to determine
order processing system.
the logistics managers should be
Dased on the information provided by the accounting system,
able to find following questions
answers to the
iow do logistics costs affect contribution by product,
territory, customer and sales person?
service? What kind of trade-offs are
w n a t are the costs of providing higher levels of customer
and losses?
ecessary? What the incremental benefits
are
to hold inventory? How
sensitive
(i) thee optimal level of inventory?
How much does it cost
1s customer service
levels or warehousing patterns?
C level to changes in
nventory
usea?
mix of transport modes or carries should be
wnat where should they be located?
(v) in the field and
warehouses should be used
any will be used to produce what
be used? Which plant
many production set ups should
plant capacities?
POuuct? What are the optimum manufacturing
 Logistics and Supply Chain Managen
196
Management
alternatives should be used?
(vii) What product packaging
automated?
extent should the order system be
(vii) To what
channels should be used?
(ix) What distribution
must know what costs
and revenues wil
To answer questions, managers
the above
should be determined based on how
chang it
A product's contribution
the logistics system changes. line were dropped, porate
and profitability would change if the product
revenues, expenses
are unable to use the right data, the
accounting data is not available or the managers ne
above
If
to decision making cannot be implemented.
approach

ANALYSIS
THE CONCEPT OF TOTAL COST
arise because all the imDacto
Logistics management has many operational problems which npacts f
Total cost analysis not taken into account throughout the corporate svstem
specific decisions, both direct or indirect, are
is a decision- It is quite likely that decisions taken in one area can lead to unforeseen effects in other areas, Far
making approach
and production schedules that aim to improve
that considers total
example, changes in production batch quantities
result in fluctuations in finished
production efficiency (i.e., reduce cost of production per unit) may
System cost
minimisation and
service. Also changes in distribution policies and
recognises the goods inventory and therefore affect customer
changes in policy on minimum order value may cause problems in other areas. Hence the problems
inter-relationship
among system associated with identifying the total system impact of decisions taken in individual functional areas
variables such as could be immense. Logistics cuts across traditional organisational functions with cost impacts on
transportation, most of those functions. Hence, conventional accounting systems do not facilitate the identification
warehousing.
inventory and of the company-wide impacts, which may result in frequent absorption of logistics-related costs in
customer service. other cost elements. For example, consider the various cost elements involved in the customer
order processing cycle illustrated in Exhibit 7.2. Each of these elements have a fixed and variable
cost component, which will lead to different total cost per order when the order quantity varies.

Also, accounting practices for budgeting and standard setting results in compartmentalisation
of company accounts because budgets are set based on functions of departments. But the problem
is that logistics cuts across functions and effects of specific logistics policies (such as transportation,
warehousing, inventory control etc.) impact the costs in several functional areas, thereby necessitating
cost trade-offs and total cost approach.
Logistics decisions contribute significantly to the complexity of generating appropriate cost
information because they are usually taken against the benchmark of an existing system (a compeno
firm which is doing better). The changes in costs brought about by these decisions can be identieo
by total cost analysis. For example, adding a new warehouse to the distribution network will briug
about cost changes in transportation, inventory investment and communications. To make Suu
ce
need relevant compute the incremental cost ditferen
decisions,
between two
we
accounting information to
alternatives (i.e., options).

IPRINCIPLES OF LOGISTICS COSTING

w
One of the basic principles of logistics costing is that the logistics system should reflect
of materials i.e., it should be capable of identifying the costs that result from providing stomer

service. Also it should be capable of type

enabling separate analyses of cost and revenue custon
wise and market-segment or distribution channelwise.
one of
The problem of developing an appropriate logistics-oriented costing system is basically
focus. What is i.e,
required is the
ability to focus upon the output of the distribution
customer service) and to identify the unique costs associated with that atiDg
output. Traditional ac
methods do not have this kind of focus required for
logistics costing
-
;Logistics Costs and Performance
Measuring -

197

Exhibit2tages in Customer Order Cycle

(from Order to Collection)
Order placement and
communication

Order entry

Credit check

Documentation

Order picking

Order delivery

Invoicing and
collectiqn

To implement the above principles, an 'output' orientation to costing is required. This means.
fist the desired outputs of the logistics system must be defined and then the costs associated with
providing those outputs must be identified. For example, logistices mission (which is a set of customer
service goals to be achieved by the system) defines the desired output of the system within a
specific product/market context. Logistics mission specifies the type of market served, by which
products and within what constraints of customer service and costs.
To achieve the defined mission (objectives and goals) we require inputs from a large number
ot functional areas/activity centres within the firm. Hence, an effective logistics costing system
should seck to determine the total systems cost of achieving the desired logistics objectives and
g0als (the 'output' of the system) and the costs of various inputs involved in achieving these outputs.
s
approach logistics costing in known as "mission costing",
to
of mission costing. As per this
Iramework was developed by Barret for the application
with particular distribution mission (among several
Pch, first the activity centres associated a

identified, For example, transport, warehousing, inventory etc. Then the incremental
v e s ) are that particular mission must be
o r each activity centre incurred as a result of undertaking
which are attributed to some
incremental costs attributable costs i.e., costs
nese are
that would still be incurred even if the
m ractivity and not 'sunk' costs which are the costs
that could be avoided if a product
or a

funs abandoned. (Attributable cost is a cost per unit

the supporting organisational structure).
e r e discontinued entirely without changing analysis.
revenue
combined with a customer
approach becomes powerful when
ve
This iois Lbecaus still be profitable in terms of incremental
sales off-take may
use evencustomers with low
 Logistics and Supply Chain
198 gement-
firm to extend missia
costs if basis. Thus it is beneficial to the
not on an average cost
sion co
for customers, market segments or distribution cha
concept to produce profitability analyses or distribution cha
a customer, market segment
This approach to relate revenue generated by
or distribution channel
is referred to as
the costs serving that customer, segment
of customer
profitability accounting".

LOGISTICS AND THE BOTTOM LINE

In the dynamic and competitive business environment of the late 20th century and the
business managers became more aware of the financial dimenc:
early
years of first decade of 21t century, nension
of decision making. Their focus was on the "bottom line" which became the major driving t
force.
But in some cases, this focus on bottom line resulted in a limiting and potentially dangerous
focus
on the short term profitability of the firm. Firms following this approach cut down their investment
in brand promotion, research and development and establishment of capacity if these investments
ents
did not promise an immediate payback (return-on-investment).
Another powerful dimension of decision making was cashflow. Managers strongly emphasised
positive cash flow as much as the profitability goal desired by the management. The third financial
dimension to decision making was resource utilisation (especially use of fixed assets and working
capital). Managers were under pressure in most firms to improve the productivity of capital.
For this, the concept of return-on-investment (ROI) was used to measure productivity of capital
(i.e., asset productivity).
Profit
Return-on-investment(kOl) Capital employed
Profit X
Sales
Sales Capital employed
The first ratio ie., profit/sales is referred to as the margin and the second ratio i.e., sales!
capital employed is termed as capital turnover. Thus, to improve return-on-investment either or
both of these ratios must be improved. The usual approach by many firms is to improve the margin
but it can often be more effective to use the leverage of the improved capital turnover to increase
It has been observed by many retailers that very small margins can lead to
return-on-investment.
appreciable increase in return-on-investment if the productivity of the capital (i.e., capital turnover
atio) is high. Some of the examples of achieving high capital productivity are through limited
nventory, warehouse that are leased rather than owned, hired transport carriers rather than own
transport carriers etc.
Exhibit 7.3 ilustrates the opportunities for improving return-on-investment either through
achieving better margins or higher asset turnover ratios or both. In the exhibit each
shows the different ways the same
"iso-cur
return-on-investment can be achieved throug specific
combinations of margin and asset turn over ratio. s of
Logistics management attempts to Ind we
moving the "isocurves" to the right
to improve ROI.
The impact of
logistics return-on-investment is illustrated in Exhibit 7.4.
on

Efficient logistics management achieves the following

(i) Inereased Sales Revenue: Eventhough direct Istomer

relationship between sales revenue

service may not be
capable of measurement, it is evident that superior customer an leads
to higher sales turn over. S
(i) Reduced Costs : Distribution costs can be evenue)
reduced (say to 5 to 10
by efficient logistics performance.
By better control of logistics
percent o e CAn be
costs, profit leve
improved. Whatever is saved in logistics costs in a
direct addition to the profit na5 In.
Measuring Logistics Costs and Performanc
199
Exhibit 7.3: The Impact of Margin and
Asset-Turn Over Ratios on
Return-on-Investment
Iso curves

M2 20% ROI

M 15% ROI

10% ROI

A A2 Aa
Asset Turnover Ratio

Exhibit 7.4 Impact of Logistics on ROI

Customer increases Sales

service revenue

Profit

Logistics decreases Costs

efficiency

Inventory Plus ROI

Plus

Asset deployment Accounts

and utilisation receivable
Capital
Plus employed

Cash

Plus

Fixed
assets
200 Logistics and Supply Chain Management
(ii) Reduction in Inventory Costs: Inventory cost is a hidden cost in logistics costs. Itinclue
not only the interest changes or cost of capital on average inventory value, but also othe
such as cost of obsolescence, pilferage, deterioration, insurance, loss of shelf life and invan
control etc. This could be as high as 25 to 30 percent per annum of the average invent

value.
Dry
(iv) Better Asset Deployment and Utilisation: Eficient logistics management can increas th
asset deployment and utilisation by improving the cash flow (by reducing order cycle timeand
increasing order completion rates), reducing inventory costs (by appropriate inventory policio
ies
and service levels), improving the accounts receivables (by increasing invoice accuracy
It
also increases the productivity of assets such as land, building (plant) and equipments h
appropriate use of distribution centres, warehouse space, transportation carriers and material

handling equipments).
(v) Reducingthe Current Liabilities: The current liabilities (accounts payable for bought out
materials, components etc.) can be reduced by integrating purchasing with operations
management through matching supplies with demand (this logistics requirement of the system
can be achieved through materials requirement planning, just-in-time and distribution
requirement planning techniques).
(vi) Reducing Debt/Equity : Alternative logistics strategies involving outsourcing of manufacture
and assembly, leasing plant and equipments, and using third-party' logistics service providers
for warehousing and transportation etec., reduce the funding requirements of the firm which in
turn reduce the debts and the ratio of debt equity. This will result in increase of return-on
investment and improved cash flow because of reduction in interest payments and debt
repayment.

IIMPACT OF LOGISTICS ON SHAREHOLDER VALUE

The shareholder value is an indicator of the worth of the business enterprise. It is also a key
measure of corporate performance. The simplest way of calculating shareholder value is by
determining the net present value of future cash flows. The net cash flow after tax is determined
by deducting the sum of taxes, working capital investment and fixed capital investment from the
net operating income i.e.,

Net operating Taxes + Working capital investment

After tax cash flow =
income + Fixed capital investment
Another recent concept that is linked to creation of shareholder value is the concept or

Economic Value Added" (EVA). EVA is a trademarked financial performance measurement

developed by Stern Stewart and Co of New York city. EVA represents the after-tax operating
profit minus the cost of capital used to generate that profit. The cost of capital includes changes
for both debt and equity. Under EVA which basically measures how efficiently firms use capital to
create wealth, shareholder value increases when an investment earns more than the cost of capita
Another term used for the same concept is "Economic Profit" which is defined as the ne

operating profit after taxes minus the capital charge. Economic profit increases throug
improvements to asset drivers all of which can be influenced to some extent by logistics
performance.
To summarise, we can say that

Economie value added (EVA) = (Profit after tax) - (True cost of capital employed)
If the cost of capital employed is greater than profit after tax, then the EVA would have
negative value which indicates an erosion of shareholder value if sustained over a period ol u
 ring Logistics Costs and Performance -
201
ket
Marke Value Added :
Improvements in
snt "economic
value added" (EVA) will lead to an
of
hancement of shareholder value. If the net
present value
entated this would generate a measure of wealth known ofas expected future EVAs were to De
calcui

ttrue
r u e ,measure of the worth of the
"Market Value Added" (MVA).
is a
This business to its shareholders.
In other words,

Market Value Added (MVA) = (Stock price x Issued shares) Book value of total
capital employed
Or Market value added =
Net present value of
expected future EVA
Creation of Value: Integrated logistics and supply chain management helps in creating three
nectives of values which in turn enhance the shareholder value. These three perspective of
values are
(i) economic value, (i) market value and (ii) relevancy value. These are briefly discussed
in the following paragraphs.
Economic value builds on economy of scale in operations as the source of efficiency. Economy
of scale seeks to fully utilise fixed assets to achieve the lowest, total landed cost. It focuses on
eficiency of product/service creation. The benefit to customer is in terms of high quality of product/
service at a low price.
Market value is concerned with presenting an atractive assortment of products at the right
time and place to realise effectiveness. It aims at achieving economy of scope in product/service
presentation. The creation of multimerchant shopping malls, large mass merchandising retail stores
and multivendor e-commerce fulfillment operations are all initiatives to achieve market value. The
benefits of creation of market value to customers is that they have convenient product/service
assortment and choice.
Relevancy is concerned with customisation of value-adding services over and above product
and positioning, that make a real difference to customers. Relevancy value means the right products
and services, as reflected by market value, at the right price, as reflected by economic value, modified,
The
Sequenced, synchromised and positioned in a manner that creates valuable segmental diversity.
bundle. The simultaneous
Customers benefit in terms of relevancy is a unique product/service total integration of the
acnievement of economic value, market value and relevancy value requires
verall business process and is known as integrative management value proposition.
has a significant impact on
From the above discussions, it is clear that logistics performance
income (profit) and also on
net operating
nolder value. Logistics service has an impactfirmsupon
have realised the negative impact on
EVA
d l efficiency (i.e., asset turnover ratio). Many intensive logistics facilities.
Cgtny logistic supply highly capital
chains and
means of reducing the length
of the
firms nowadays focus on finding ways and
Onsequently, They also examine their
chain and reducing the working capital requirements.
upply carriers and try to reduce these
distribution facilities and transportation
apital deployment of service providers.
Sments on fixed assets through the use of third-party logistics

USTOMER PROFITABILITY ANALYSIS

difference in profitability
have difficulty in
determining the
procedures calculated at the gross-
of Ctonal accounting another. Generally, customer profitability is minus the
ofsstomer compared to by the customer in a period
profit level-in
n otherwords the
net sales r e v e n u e generated
the customer. But
this approach ignores
mix purchased by individual
SOld for the actual product real profitability of an
many ot before determining the
considered
c o s t s that should be
202 Logistics and Supply Chain Managemen -

customer. We have the same problem when we seek to identify the relative profitability ofdi
market segments or distribution channels. ifferent
These costs that occur as a result of servicing custormers can be significant for the develonr
of logistics strategies. Customer profitability analysis will often reveal the percentage of cust elopment
who make a negative contribution. Exhibit 7.5 illustrates this. customers
The reason for negative contribution by some customers is that the costs of servicing a custo
mer
can vary from customer to customer eventhough their purchases are the same. The costs of serd.
service
comprise the costs incurred due to the time spent with customers by the salespersons, time spent
a key accounts manager with the customer and the commissions paid on those sales to the sa
pent by
es
person. In addition, there are the order processing costs which will vary according to the numberat
product lines ordered and their complexity. Beyond this there will be transportation costs, materio
handling costs and inventory and warehousing costs. Also the firm may allocate specific funds f
customer promotions, advertising support, additional discounts etc. For example, a particular
Customer (a retailer) may require a special package for the products supplied.
The fundamental principle of customer
profitability analysis is that the supplier should seek to
assign all costs that are specific to individual accounts (i.e., customers). These costs which can be
attributed specifically to a customer are those which can be avoided if the firm doesn't do
business
with that particular customer.
This principle of "avoidability" has the benefits that many costs of servicing customers are
actually shared amongst many customers. For example, a supplier firm should not allocate a portion
of the total warehousing costs to a
particular customer unless it could release the warehousing
space for other purposes.

Exhibit 7.5 Customer Profitability Analysis

110

100

90

80

70

60

50

40

30

20

10

0 10 20 30 40 50 60 70 80 90 100 110

Cumulative customers (%ge)

 Measuring Logistics Costs and Performance -
203
The
ialls Costs that can be attributed to a
particular customer are:
ct of sales
(actual product mix), (i) commissions to
sales
ev
cost of key
account
accou management time, (v) trade bonuses and people, (ii) cost of sales calls,
ns (vii) cost of order processing, (viii) special discounts, (vi) cost of
(x) dedicated inventory carrying costs,
a
merchandising costs, (ix) cost of non-standard
(xi) dedicated warehouse
pack sts. (xiii) costs of documentation and space costs, (xii) materials
handling

credit costs (actual payment period).

communication, (xiv) cost of returns/refusals, (xv)
trade

nce
Since it is not practicable to conduct profitability analysis for individual customers
accounts, it is possible to do this
mer
ands of custome: because of
analysis on a
sample basis for
uYntative customers. This helps the firm to gain an understanding of the relative costs a selective
represe

associated
ith different types Or Key accounts or distribution channels or market segments.
Erhibit 7.6 illustrates a basic model of customer
profitability analysis.
Exhibit 7.6: A Basic Model of Customer Profitability Analysis

Gross
sales value

Trade discounts

Net sales
value

Direct costs
Production costs Indirect costs
Production
contributions Customer-related
costs (direct)

Sales calls,
(Sales) In-store and
Marketing costs cooperative promotions,
Bonuses,
Merchandising

Overhead costs
(indirect)
Marketing
contribution Sales force management
National advertising
compaign

Customer-related
Distribution costs (direct)
service costs
Transportation,
Warehousing.
Packaging
Customer gross Inventory holding,
profitability Order prOcessing,
Trade credit

Customer contribution
to firm overhead profit
 Logistics and Supply Chain Manageme
204

information can be used (i) when the next sales cos

The profitability analysis

customer
to direct efforts towardi
and marketing strategy
negotiated and (i) as the basis for sales
being can point out the way to altere
the customer profitability analysis
profitable accounts. Also, costs.
having high servicing
strategies to manage those customers

Customer Profitability Matrix

Exhibit 7.7 shows the customer profitability matrix which provides some general guidelki.
Customer nes
for strategic direction to the firm. The quadrants of the matrix indicates the appropriate straten
profitability matrix tegies
net sales value of customer account.
for the combinations of cost of service and
indicates the
appropriate
The four strategies are briefly discussed:
strategies i.a.
build, danger zone, (i) Build: This strategy is focussed at customers who are cheap to serve, but their net sales val
cost engineer and
lue
is also low. The strategy is (a) to increase the volume of sales without a proportionate increase
protect) for the Se
combinations of in the costs of service and (b) to direct the sales team to seek to influence these customers to
cost of service and profitable sales mix.
purchase a more
net sales value of
Customer account.
(ii) Danger Zone: For these customers, the costs of service is high but net sales value is low.
These customers must be carefully watched. The strategy is
(a) to find out whether there is any medium-to-long term prospect either to improve the net
sales value or to reduce the costs of service.
(b) to find whether there is any strategic reason to retain these customers, whether they are
needed for their volume even if their profit contribution is low.
ii) Cost Engineer: These customers become more profitable if the costs of servicing them could
be reduced. The strategy is (a) to determine whether there is any scope for increasing drop
sizes or to consolidate deliveries, (b) to determine whether deliveries would be more economical
if new accounts were developed in the same geographical area and (c) to find whether there 1s
a
cheaper alternative way of obtaining orders
from these customers, for example-tele sales.
(iv) Protect: These customers have low cost of service and high net value of sales. The strategy
for these customers should be (a) to seek
less likely to seek
relationships to retain the customers and make tne
alternati
ve suppliers and (b) to seek opportunities to develop the voune
business done with these customers and at
the same time keeping strict control
servicing them.
on
costs

Exhibit 7.7 : Customer Profitability Matrix

Protect Cost
engineer

Build Danger
Zone

Low High
Cost of service
 Measuring Logistics Costs and Perforr

accounting system that would

[deally an accounting 205

profitabili shouldd developed by firms routinely collect

and analyse data
ccounting systems are
USually m o s ta c c o u n t i n g implementing
product
Product logistics and supply chain on customer
a functional h
functional focused rather than
basis, rather than management.
zenerally
on
a customer focused. Cost reporting
is costs of trans transactional
ansporting a product from a source to basis. For
k n o w

a articular product.wnduct. But it is difficult destination example, it is easy

or the costs
to
to of manu
eustomer. Therefore suppliercompute unufacturing
the costs of
toaparticu.

firms are delivering specific

a
mix of products
customers and marketing as well as
pressed to move towards a system of
to accounting for products. accounting
DIRECT PRODUCT PROFITABILITY
nroduct profitability is a technique that has
ct
Direct

tion been
application of
analysis. It is known as "DPP" in short.widely
of cost
cost accepted in retail industry as
It is somewhat
hility analysis in that it attempts to
fitabilit similar to customer
order as it flows
identify all costs which are
attached
custo mer through
the distribution channel. to or a
product a

Tn many transactions, the customer will incur costs other than the
roduct. This cost is often termed
pro as the "total cost
immediate purchase price of
he
of ownership", These costs are hidden
netimes and often they can be quite
sometim so
high that it can reduce or even eliminate net
particular product. profit
on a

The supplier firm must understand the concept of direct product

he low cost supplier which is influenced
profit and also the ability to
a
by the costs incurred as theproduct
loeistics system of the firm. The objective of the
moves through the
supplier firm is to offer a purchase price of its
products to its customers and prOvide other logistics services in order to enable the
customers to
have lowest total cost of ownership. The collaborative
procurement strategy of supply chain
management focuses on total cost of ownership as contrasted to a traditional focus on purchase
price. Eventhough the purchase price of a material or item is important while negotiating a purchase
contract, it is only a part of the total cost to the buyer firm. Logistics service costs and life
cycle
cOsts must also be considered. For example, the seller may offer quantity discounts as an inducement
to encourage buyers to purchase larger quantities or cash discounts for prompt payment of invoices.
Sut the buyer must consider other costs associated with purchasing. While considering the benefit
ot quantity discounts (reduction in material cost and ordering cost) the buyer must quantify the
LEase in inventory carrying costs. Large purchase quantities increase average inventory of materials
0r Supplies. Size of purchase also impacts administrative costs associated with purchasing. Supplier

Cms of sale and cash discount structures also impact the total cost of ownership.

In traditional
purchasing practice the impact of pricing and discount structures on logistics
considers
ons and costs in not normally considered. For example, while traditional EOQ policy
carrying costs, it generally does not include such factors as the impact of order quantity
O and handling different size shipments.
WL rtation costs or the costs associated with receiving of these logistical considerations
uyers attempt to achieve the lowest purchase price, many
Ma L
may be ignored.
The t standard services which the sellers may offer and
need to consider a number of
evahos yers
evaluate the available value-added services in order to seek to identify the lowest total
cost of

and the logistical interface

Ownership
betwe CO). Many of these services involve logistical operations
the most c o m m o n
standard service offered by

the sella IS and sellers. For example, delivery is all impact cost structures. Many
er when and at what location
sellers followW delivery will be done, a price that
includes delivery. Alternatively
the seller
standard practice of quoting the item at the sellers
may c buyer takes delivery of
offer
the if the
premises. By buyer
allowance or discount total cost, not only through
able to reduce
avai
valing this option,
the buyer may
be
its own transportation
vehicles.
taking adv of such allowances but
also by m o r e fully utilising
g
 Logistics and Supply Chain
Management
206 requirements is to consider
. .

A key aspect
determining
of
the TCO for purchased

cost and price

of each service. To do
thic
the
trade-offs
value added
v e r s u s
considered Durhase
involved in terms of
the prices of services being ach of the
from
item must be debundled
basis so that appropriate Cos
oriate procurement decanalysis
price of an on an independent
available services should be priced most appropria
related to make the
allows the buyer
Debundling
can be performed.
known as life cycle
costs. The total costs of m
various elements ,
and value-added service to includ
TCO also includes
extends beyond the purchase price he
items or other inputs involves the administrative expense acoe
time costs of such items. One aspect of
life cycle costs ociated
related to screening potential suppliers, negotiation ord
with procurement, for example,
expenses
inspection and payment are also imno
preparation and transmission etc. Costs relating receiving
related to defective finished
aportant
g00ds
In addition, other elements cycle costs are costs
of life SCrap
and costs related to warranty administration and repair. Al
and rework due to poor supplier quality,
with recycling or recovery of materiale
Even the costs associated
these costs have impact over TC0.
have impact on TCO.
after the useful life of a finished product
Exhibit 7.8 illustrates a model of various elements that TCO comprises.

Exhibit 7.8: Major Categories ofthe Components of Total Cost of Ownership

Total cost of ownership

Pretransaction Components Transaction Componnets Post-transaction Components

(i) ldentifying need (i) Price (i) Line fallout

(i) Investigating sources (ii) Order placement/
(ii) Qualifying sources preparation
(iv) Adding supplier to (ii) Delivery/transporation
internal systems iv) Tariffs/duties
(v) Educating suppliers (v) Billing/payment
in firm's operations
(vi) Inspection
(vii) Return of parts
(Vili) Follow up and correction
(ii) Defective finished goods
(i) Field failures
(iv) Repair/replacement in
field
(v) Customers good will
(vi) Cost of repair parts
(vii) Cost of maintenance and
repairs

Determination of Direct Product Profit

(DPP)
The net profit
contribution from the sales of a product after allowances added and
that can be
rationally allocated or assigned to an
are a direct
individual product are subtracted equa
product profit i.e.,
(Sales) (Cost of goods sold) Gross
margin =

Gross margin + Allowances and

discounts =
Adjusted gross margin
Adjusted gross (Warehouse costs + Transportation
margin rofit
costs
+Retail costs Direct product pio
COST DRIVERS AND
ACTIVITY BASED COSTING
There is a lack of
Logistics management requires
visibility of costs as they are
incurred through the logistu ards the
chain.

a means of
capturing costs as products and orders ilo
 gistics
-Measuring Logi Costs and Perform
207207
oblems
The problems arising from conventional cost
Custome.
accounting related to logistics management Activity-based
costing is an
are:
eneral ignorance of
onorance of the true costS of accounting
servicing different customer
segments.
types/channels/market approach that
provides

cost allocation is still used. businesses with

Full
better
Functiona oriented rather than output oriented. understanding of its
costs and its
Firms
understand produc costs rather than customer costs.
(p) To overcome the problems with the conventional cost accounting system, it
profits.
is necessary to
radically the basis of cost accounting doing away with the notion that all expenses must be
l d to individual products. Instead the expenses must be separated and matched with the
e s that utilise the resources. This approach to costing is referred to as "activity based costing"
acti
ABC). The key to activity-based costing is to seek out the "cost drivers" along the logistics
chain that «cause costs because they consume resources.
upply
Activity-based costing has the advantage of separately accounting for each customer's uniqque
haracteristics in terms of ordering behaviour and distribution requirements. Once the cost attached
to each level of activity is identified, (e.g, cost per delivery or cost per line item picked), then a
true cost-to-serve can be obtained.
clearer picture of the

I COSTING METHODS
Two costing methods used in logistics costing are: (i) contribution margin and (ii) full costing.
on the Two costing
The contribution margin or marginal cost method focuses on the impact of costs methods are
variable cost. Profit is
contribution margin. Contribution margin is the difference between sales and centribution
once fixed costs are
the difference between contribution margin and fixed cost. In this method, margia and fii) fuli
cOvered by sales revenue, the excess revenue will contribute to increasing profits. costing.
In this approach, price should
plus fixed costs.
The full cost method considers variable costs
include both fixed and variable costs.

llustration
leave in 10 minutes inspite of
be 80 cent full and it is scheduled to
An aircraft may only per
airline can sell the remaining
tickets for more than the
the tickets are sold or not. If the fixed costs will
r al the total contribution to
additional person on the plane,
COSt of adding one fixed cost contributes
to the increase
of profit.
h e contribution exceeding the
The variable cost per passenger
the following cost structure for a
hypothetical airline: If the
ASSume of Rs. 10,000 to each flight.
have allocated a fixed cost its
The firm's a c c o u n t a n t s
determine what price to charge
airora and the airline is trying to minimum of Rs.
ninety nine passengers the airlines will charge
a
nev s contribution margin approach,
mer using the
1000
1000 per passenger. the variable cost
Rs. 1000 covers

then the first

Rs. 1100 per passenger,
he rline charges the airlines fixed
cost.
10,000 fixed cost
CTemaining Rs. 100 reduces airlines would
examine the Rs.
cost would
Alter , n t h e full cost method, the Then the fixed
o n the plane.
lOcated must be covered
that by the 100
passengers
passenger
Tght and divide of Rs. 100 per
be R C fixed cost would be Rs. 1100

along wit
100per passenger. Using1000.
this method, a
the
passenger
minimum price per
can charge a

cost Rs.
Hence
contribution margin approach
Rs, 100 Ie airline using
the Rs. 1050 per passenger,
, * Rs. 100). Thus the If the airline charges
fixed costs.
c o n t r i b u t e to
werprice than the approach.
and Rs. 50
to
the airline cover the airline using full cost
u variable
s c o s t of Rs.
1000 per p a s s e n g e r
208208 Logistics and Supply Chain Managenme
Break-Even-Analysis : Break-Even-Analysis is necessary for logistics accountino
breaks even when the costs of doing business equal the revenue earned by the busi ting. Afim
understanding of the fixed cost and variable cost elements is necessary for successful breat siness. A
analysis. By break-even-analysis, the number of units to be produced by a manufacturinet -even-
be determined and also the sales volume in rupees needed to justify the production ortha Can
price per unit to be charged to the buyer for the product. seling
The formula used in Break-Even-Analysis is as below:
Total sales revenue = Total cost

Total cost Fixed cost + (Variable cost per unit x

=
Quantity produced)
Total revenue = Unit selling price x Quantity sold

If Q is the break-even volume, 's' is the unit

selling price, F is the fixed cost in
rupees and
v is the variable cost per unit in rupees, then nd

F+Vq Sq
(s v ) q = F

F
(s-v
(s v) is referred to as contribution to cover the fixed cost.
The
Break-even-analysis is graphically illustrated in Exhibit 7.9.

Activity-Based-Management (ABM)
Activity-based In this approach,
the firm is examined to
management is an determine: (i) what tasks are combined to
extension of activity activity, (ii)
what activities are combined to produce i
based costing that combined to produce the desired produce a
process and (ii) whether the processes are
result.
provides a The focus of
comprehensive
implementation
activity-based-management
of strategies to
is on the
understanding of the operation and tne
management improve the process on a continuous basis.
framework and
process to assure
Activity-Based-Costing (ABC) is one of the primary tools of
tdesired results. The sources of information required to Activity-Based-Management
fully understand an operation are as below:
(i) Significant information can be obtained the
work is being carried out by managers by visiting the firm's facilities here
This gives an
and observing each and
every operation involved in the work
w
impression to the employees that prou the
working condition and thus motivate managers are concerned about
the workers to improvi"g
(ii) Each individual improve the quality of their
wOrsusstthe
employee or focus
problems faced by the employees ingroup must be interviewed
their area of
by their to
managers dise their
own work better
than anybody work. Since the employees
understan
else, the
operation or process. Managers may information given by them is vital to impro their etak
decisions in their own empower their subordinates including
area
of work. Active cooperation woTkO heir
thein
supervisors is essential for improvement of
between line worKers
work among any process. team

employees and create

harmonious
a Empowerment can also pro
(iii) The flow of each work environment.
process must be examined
the existing work by managers by using a flow chart. ically
processes should be reexamined are
reas.
Significant problems can be solved by to
identify any potential proo1
Activity-Based-Costing (ABC): Firms can use Business-Process-Reengineering
(BPR).
lecision
making integrated logistics
in
management.
activity-based costing to improve overa
 CHAPTER NINE

Benchmarking the Supply Chain

www

Learning Objectives
After reading this chapter, you should be able to:

Understand the meaning of benchmark and benchmarking.

Discuss the philosophy of benchmarking the logistics process.
Describe the mapping of supply chain processes.
Explain the process of supplier and distributor benchmarking.
Identify the logistics performance indicators and discuss the steps involved in

constructing a balanced score card.

Discuss the role critical success factors in benchmarking.

UGTSTS NR SUPPHT GHAIN MARAGAGEL

***
 ind executives f
etition top
management
and
usiness firm
244 coimpetit.
effectivel nanage the
that
hown cosy
intense processes
of business
years ng The reason is that total
Supply chai
recent establishing
In of
the
importance
the supply chain
recognised
and
funds
across

budget (in
some cases
as high
as high as 75 perce
products
total operating cus for t

ner.Thermosefo
providing value to the
information,
of the emphasis on
the majority the
increased
their perform
represent
Anotherreason
is
necd
m e a s u r e m e n t
oftheir e not onl
ns, processes

and supply
chain
management

relative to the
competition beyond that relativ
to
logistics
absolute
terms,
but also
in terms
the
in
best-practice"
in the industry. es age
their business processes against thos
to compare
often find it hclplul in practice. This activity activity is referred to of
Organisations similar processes
other firms having
or even
competitors
benchmarking".
understanding and
adapting
d
of identifytng,
"the process
marking is defined as
other business to hol.
Benchmarkrng Bench
within the same organisation or from elp mprove
refers to a
outstanding practices from an organmsafton s practices and proced
involves comparing
performance". Benchmarking its supply chain en
management tool
or
which the organisation
ways in ake
the "best" in order identify
used for comparing 1o
pertormance against those of
an organisation that improvenents.
that simply measuring
internal performance areac .
In the past, it was usually thought
is widely regarded
utilisation of resources, cost per acti
as outstanding in

sufficient. The focus was on

factors such as producti vity, ctivity
Cite or ni0re areas, measured and controlled. it is
that such factors are continuously also
tn order to improve etc. While it is important
measures are meaningful only
when they are compared against
pertormance
important to recognise that such

relevant metric" or "benchmark".

which things are measured.
Benchmark is ä What is A benchmark is a point of reference against
a benchmark?
point of reference These points of reference or standards can take
forms of questions such as: how many, how much
well made is it etc., regarding the product oF
time, how much money (or cost), how reliable or how
against which
things are service. By studying other organisations and comparing the answers to these questions, a firm willbe
measured.
able to measure its performance against that of others. As a result, the firm will be able to set new
goals and adapt the best practices to satisfy its customers with the best quality, cost, product or service

n the present competitive business environment, the competition is not between compantes
but between supply chains. Hence it is crucial for any organisation to determine the metricC to De

used in assessing the logistics and supply chain performance of its supply chain.
There are several dimensions to the problem of measuring the logistic and supply chain
performance. They are
() The ultimate measuring yard stick is the customer and hence the customers' tion o
performance of a business firm's supply chain is of critical importance.
(t is ate
not just enough to compare the performance of a firm to that of its imme the
competitors. The firm must also compare itself to the "best-in-class" anyw
world.
(i) It is not It is
enough to measure just the outputs and of
others.

compare them with that o

important that the processes that produce the pared.
output also must be measured anu
These three
ideas constitute what today is termed "competitive benchmarkimg
Competitive benchmarking is different from process benchmarking narking. Competitiv
benchmarking is the comparison of an
in
contrast, process organisation's processes with those of compe" ses with
benchmarking refers to the
those of
noncompetitors have been identified ascomparison
that
having
of an
organisation . ple, many
personal computer manufacturers have carefully studied the superior procesSes. ro Computer

even
though Dell is not a direct supply chain practices
competitor.
Benchmarking the Supply Chain-

245
A ni m p o r
decision in benchmarking is the choice
of the
formance of
involved inorganisations
compare p e r f o r internal business units to benchmark.
"his
This. similar operations or Many
ferent
geographic
areas.
approach to benchmarkingis known as located in
Intern
hchmarking, however provides little "internal
information concerning benchmarking"
A firm may be lagging competition without
being aware of it.performance relative
competition.

1o rformance can be useful to identify areas Information about

where
improvement is most needed. But it
ompetitor

tain information about

difficult to obtai
xtremely

ieted benchmarking (i.e.,

competitor's operational processes.
external
benchmarking) involves efforts to compare
Non-r

e and processes to best

both metrics

practices,.regardless of where the relevant

sOurces
does n o t r e s t r i c t . of information to any particular firm or practice is found. It
-restricted benchma marking is that it is
possible to learn from industry. The underlying philosophy
innovative approaches. organisations
7 non-

thathave. evcellent performance or use in unrelated industries

For example, L.L.
company in the US has been
benchmarked in order Bean, the mail
nd catalog fulfillment
nent processes
sUch diverse fields as food, electronics and personal care. by firms from

Manchmarking
B
-
the Xerox
Experience: Xerox corporation used benchmarking as a major
naining competitive advantage.
in Kerox first started
tool
and focused on product quality and benchmarking in their manufacturing
activit improvements of product features.
After achieving success in
manufacturing area, Xerox used benchmarking in all cost
husiness units and adopted it company-wide by the centres
year 1981. Xerox performed
henchmarking in departments such as repair, service, maintenance, process
Aistribution. By looking at competitors processes step-by-step and invoicing, collection and
Nee able to identify best methods and practices in use
operation-by-operation, Xerox
by their competitors. Xerox's objective in
achieving superior performance in each business function was not obtained
Competitors practices. To create comparative advantage, a firm must out-performby looking only at

than matching their efforts. Because of the difficulties competitors rather

involved in obtaining all the information
required on competitors and their internal systems and processes,
from a focus solely on benchmarking was expanded
competitors to a wider, but selective focus on products and processes of
world-class companies irrespective of the
firms in
industry they belong. Collaborative cooperation between
noncompeting industries offers significant opportunity for firms to improve their quality
and
producti vity. For example, in the logistics and distribution unit of Xerox, annual productivity
nas doubled
because of the benefits obtained from
non-competitive collaborative 240 different
0u4y, Aerox has become a world role model for quality improvements. It has somebenchmarking.
Unctional areas which are routinely involved in benchmarking against comparable areas.

Senefits Derived from

Benchmarking9
enables the best practices from any industry to be incorporated into the processes of the
benchmarked function.
(i)
d e s stimulation and motivation to people whose creativity is required to perform
a
implement findings of benchmarking.
lii) It breaks
down ingrained reluctance
(iv) It of operations to change.
may also identify
ider technological breakthrough that would not have been recognised and
thus not
applied in one's own industry (e.g., barcoding).

BENCHMAR
The
THE LOGISTICS PROCESS

mportance nderlying
of philososophy of logistics process benchmarking is
the recognition of the
*ocSS improvement and process control just as the case of benchmarking in total
 Logistics and Supply Chain Mans
246
to improve quality
of Output by controlling the
manu
Management
uring proces In
Logistics process
quality management
chain, the manufacturing
process begins with suppliers, runs
through the
logistics supply value adding activitvl
of value activity)
benchinarking
(involves manufacturing
or any
form
throughi firm
recoynises the
importance of
own business

and on to final customers. Customer

satisfaction can be
achieved at the end

activity that takes place

and controlling every
oe.
alonoethe esicsrmedsunpuarie
process
improvement and chain by carefully monitoring in the logisticS supply chain is
supply chan
to
in improving the performance
first step of materials.and information flowderstand the
process control for The network
inproving the The supply chain
structureofthe process.
performance in the
and procedure that links the suppliers, the firm,
the distribution channel members. activite
logistics supply that a flow chart indicating the
Therefore, it is recommended steps dong
chain. is quite complex. with delivery ofthe Droduct "
with customer order ang' ending product
to the
supply chain beginning
is made use of to define the logisties
supply chain structure. custome
the critical points in the process. These are the stagee
The next step is to identify
. .

wrong, then the entire process

will be affected E
in the process where if something goes
meet a production plan can be critia
a stockout situation
in the warehouse or a failure to to the
entire logistics supply chain process.
Therefore the management must exercise process o
the "best-in-class" firms-in anv ina
these critical points and carryout benchmarking against
so as to achieve significant process improvements and monetary benefits.
industry
If a logistics supply chain can be thought of as, a chain of events from source of materiol
through to the end user having a series of supplier/customer relationships, then th firm has to
carryout benchmarking of process and performance at each of the supplier/customer interfaces im
the logistics supply chain. For example, the various interfaces and the performance to be monitored
could be
(i) Supplier Warehouse (materials inventory level) interface where the supplierdelivery
performance is to be monitored.
(iü) Warehouse Factory interface where material stock availability is to be monitored.
(ii) Factory - Finished goods warehouse where production plan vs actual production is to e

monitored.

(iv) Finished goods warehouse - Wholesalers/distributor/retailer interface where finished go0

stock availability is to be monitored and
ecitic
(v) Wholesaler/Distributor/Retailer - End customer/user interface where customer specu
service levels (on time delivery, order fill rate, product availability for end custonc
to be monitored.

IMAPPING THE SUPPLY CHAIN PROCESSES

step
As discussed in the previous section, flow charting supply chain processes is
tne lthroug
towards understanding the opportunities that exist for improving the productivity
reengineering those processes. The idea of 'value adding" time versus non-value au
is a critical concept that something

underpins the reengineering opportunities. The time spent

which creates a benefit to the customer for a premium price
wlich he or she is prepared to pay a pi
known as value adding time. For example, manufacturing, transporta and the means f cea
a c t ivities
exchange of products are all termed as value
adding activities. The customer value ad the rig
have the objective of
providing the customer "the right product in the right place Classifieda
time" and any activity that
contributes to the achievement of be
value adding this objective cou "yalue-adding
activity and the time spent to carryout such
activity is considered a
time".
 the Supply Chain
onchmarking 247

On the con
trarv, non-value-adding time is the time spent on
an
activity which when eliminated
n o t lead ad any reduction of benefit to the customer.
to
vould,
ecome necessary because of the current
have bece
Eventhough some non-value adding
ies might
ould be minimise. ised as they have a cost.
design of the firm's processes, they
o
rstand how to improve the logistics prOcesses, it is crucial to understand the difference
unders

between value-a
ng time and non-value-adding time.
Aure to
Procedure to identify value-added time versus non value-added time has the following steps:
narting the processes, the managers involved in those processes must be
After flowchar
Step1:
ogether to debate and agree on the elements of the process that can truly be described as
brought
elements or activities.
value-adding
Step
ep 2: A rough-cut graph highlighting visually how much time is consumed in performing
value-adding and non-value-adding activities is made. Exhibit 9.1 shows a generic example of
both

such a graph.

The through-put efficiency in a supply chain can be measured as

Value-added time
in the supply chain 100
Through-put efficiency
=

(End-to-end logistics
supply chain time
A supply chain map
is a time-based
low10 percent which means that about 90 percent of
The throughput efficiency may be as as
representation of
chain can be non value-adding time. Therefore, to make significant the processes and
spent in a supply
the time
improvements in throughput efficiency it is necessary to have a detailed understanding of the process operations that are
involved in a supply
Supply chain. chain mapping helps in this direction.
and activities involved in the supply chain, as the
A supply chain map is essentially a time-based representation of the processes and operations materials or

through the supply chain. The protucts move

that are involved in a supply chain as the materials or products move
through the supply
time during which the materials or products are not in motion i.e., existing as
map indicates the chain.

inventory.
Exhibit 9.1: Rough-cut Graph

Customer
Finished order cycle
product

Goods
in-transit
Regional
Production warehouse

inventory
Raw
material
inventory

Cost-Added
cost of money)
costs and time
transport
(Production, storage,
 Logistics and Supply Chain Mana.
in Exhibit 9.,2
agement
illustrated

is
248 of a supply
chain map

two types
o f time
r e p r e s e n t a t i o n .

orizontal time a
An example Frar
maps,
there
are

time that
1s spent
in process.
les are transit
chain the
In all supply time is proce
planning or

time.
Horizontal
in
production
actiue
k need not
time spent
(i)
vertical

manufacturing
or
assembly
time,
which adds
to
customer
value but atleast some
and hence it indi
being perfor
the time spent
on activity
when no
activity 1s
taking place
No value is being add time during
The vertical time
is the time
is in inventory
storage).
(1.e.,
time by the ring veriea
which the
material or product

cost is
added. The
horizontal
time and
vertical

ontal
that the horizon
spent

time is 60 ial product aæ

days.Iti the
time, but only
9.2. In this map
it is
observed
time
Exhibit
shown in
Chain Mapping
Exhibit 9.2:
An Example of Supply

-
-3
-
 Supply Chain.
achmarking the
249249
otivities/processes such as collecting materials,
various activit,
s p e n to n v a

start to finish. The total vertical time spinning, knitting, dyeing, finishing,
and so is 115
izontal time determines the time that it would days. When there is an increase
demand. On the take for the
inde
to the
dema:
contrary,
when there is a
decrease
supply chain system
volume in demand then the
nineline
respond

to is the pipe which is the sum

of the horizontal critical
measure
drain'"
"dra the and vertical time i.e.,
115
175
= days to
system inventory. In a market
of
ccertain product, where the demand is
60+

yolatilefor a
certain say fashion garments, the
pipeline volume is a dynamic
orv o

chain maps are also used to provide an internal

Supply chai
critical
determinant.
benchmark. Because each day of
Ocessing timne requires day of inventory to cover that day,
a
t the total
ideally, the minimum
inventory time
would be equal to processing lead time. So, a 60 days total
Tequired

resultin 60 days inventory, thereby the pipeline or supply chain

processing time would
volume would
be 60 + 60 120
But in the example given in Exhibit 9.2 the pipeline volume is 175 days, which means there
Gays 175 days of inventory. This means, the more
inventory
area c t

times are highly variable or the demand is

may
be justified if the individual
rocessing
Proce very volatile.
Mapping supply chains provides a strong basis for logistics reengineering projects which need
he aken up to reduce non-value-adding time in a supply chain. In many cases, much of the non-
vwalue adding time in a supply chain are caused because of self-imposed rules such as economic
hitch quantities, economic-order quantities, minimum order sizes, fixed inventory review periods,
furecasting review periods and production planning or processing. To compete effectively, a business
fim needs efficient strategic lead time management for which it has to challenge every activity in
the supply chain and ask the question "does the activity add value for a customer or consumer or
does it merely add to the cost"?

ISUPPLIER AND DISTRIBUTOR BENCHMARKING

The quality of the relationships that extend upstream to suppliers and downstream to distributors
is very crucial in supply chain performance. Hence it is important that both suppliers and distributors
ae included in the benchmarking process. For most firms today, their extent of outsourcing represents

hout S0 percent of their total costs, so it is necessary to understand the efficiency

and effectiveness
of these external suppliers. Likewise, distributors and intermediaries are taking a large percentage
osalesthe to"channel margin" (i.e., the difference between the ex-factory cost and the final value of the
end customers).
both the efficiency
above, it is necessary for the firm to focus upon enhancing
of the
and use chain performance as a whole can
CVeness of supply chain relationship so that the supply with emphasis on assessing8
The supplier and distributor performance has to be reviewed
the in end user customner
l o n to the reduction of total delivered cost and improvement
Servica
are
distributor benchmarking
that are to be addressed in supplier and
Sene in us
Tepresented
issues
the orm of statements/o
ts/questions given below:
() co-worker/partner in the supply
Willingnest
chain.
of the supp.pplier/distributor to function
as a

(i) improvement of the supply chain

amitment by Suppliers/distributors
sup to continuous

performance.
u Acceptance of innovation and change for improvement.
(iv) Focus
v)
on
reduction of throughput time.
ilisation of procedures for managing quality
 Logistics and Supply Chain Manav.

d:
anagement
250 b e n c h m a r k i n g
processes
by suppliers a n d
tributors.
formal system design.
and in logistics
Use of regular the prime goal
(vi) viewed as c o r e values of
concem for
common

to be share
Flexibility
(vii) s u p p l i e r s / d i s t r i b u t o r s

of
employees
(vii)Do the
the
customers"?

suppliers/distributors
seek to improve
communicos

ations with th
of
(ix) Do the employees
quality manageme
ment.
firm?
emphasise
the philosophy of total
Does their
leadership in the supply chain.
(x) areas for benchmarking

illustrates the key monito . Nis

Exhibit 9.3 1s benchmarked and
performance
and distributor between.
if supplier and the firm and
It is not enough between the supplier irm and
interfaces
how the know how other organisations mano
also important that the firm must
managed. For example, coordinate their production ol
the distributor are other firms
or how do
transmission of orders
to suppliers
or customers.
with those of suppliers
formal appraisals of the performance of ha
are usually conducting
Eventhough many firms new to them. Also, it is not enough ifi
benchmarking is quite
vendors, the concept of supplier terms. It should be done comparin
of distributors' performance
is carried out in absolute paring
monitoring for superior performance.
one distributor against other distributors having reputation

Exhibit 9.3 Key Areas for Benchmarking Supply

Chain Performance

Internal
Supplier (Firm)
Distributor

| Quality Communications Through-put Communications

. Value-added
times services
On-time Schedule
performance integration On-time Requirements .Customer
performance planning
Stock Co-makership Concern

availability Stock Partnership .Delivery

availability performance

I SETTING PRIORITIES FOR

Of all the
performance metrics that can be
BENCHMARKING chieved

by other firms which measured and

are
benchmarked,
According to Walleck and other the compar
ared to performance
question arises as to where the iority be placed'
(i) Which co-authors, the priorities are p
processes and firms in the determined by 1de ifying:
(iü) Which process and supply chain are of strategic tance.
of the
firms in the supply chain have a high impo o n the business

company which relative impac

(ii) Where the implements benchmarking
between "make" orpractices.
company can choose
(iv) Where there is
internal readiness to "buy
Exhibit 9.4 implement
illustrates the change for
process of
setting priorities for improvoement.
benchmark
benchmakingtha the Supply Chain-

251
Exhibit 9.4: Setting
Priorities for Benchmarking
Strategic
Importance

Relative impact
on business Benchmark
economics Priorities Organisational
readiness

Make versus
Buy economics

Strategic Importance: Processes Which are likely to play a major role in the success ofthe company in the long-term.

Oraanisational Readiness: Processes which are executed by people who are willing and ready to improve.

Make Versus Buy Economics: Processes which are determined to have high impact on the performance of the
noducts/profitability and which are difficult to be sourced from quality suppliers

Relative Impact on Business Economics: Processes which have a disproportionate income on

(a) total cost, (b)
revenue generation, (c) productivity of fixed assets and (d) productivity of human resources.

guide to the selection of benchmark priorities is the impact of

an activity
However, the ultimate
dimension of
Or function process upon the competitive
or advantage of the company. The two
are "relative cost" and
"relative value" of its
competitive advantage of any business enterprise delivered cost
the company's. ability to achieve a
products/services offered to customers. Therefore, efficient
differential advantage through
wDich is superior to that of its competitors and a perceived Exhibit 9.5
achieve success in the market place.
service will enable the company to
ANOmer marketing department.
uUSTates the competitive goal of a company's
strategic
Logistics
Exhibit 9.5 Strategic Goal of Marketing

High
Low (Eficiency)
R e l a t i v e
delivered cost
 6ent
contribution of an
by activity,
functon
d e t e r m i n e d

be But in .

priority
nmust
and
e f f e c t i v e n e s s .

many firms measy

252 b e n c h m a r k i n g
efficiency
measuring effective
out
withou
iveness. For
The of both perspective

to the
a c h i e v e m e n t

based on
their
internal

in its
ehousing
warech
operations in terms
of examyu
utilisati
might have eliminated the
process
efficiency

only the
efficiency

having
high But its
c o m p e t i t o r s

to their
cucte warek
company
may
be handled
etc.
direct delivery customers, there
a consignment

practice of the comr

space, costper
itself by
resorting
to the
carrying
costs.
This means,
more etfecne
activity inventory practices.
and
lead times
warehousing

cfficient
also enables the the
delivery
than the
company
having
gaps,
benchmarking
company to
deve
the
performance customer service requirem s. Successty
based on
While revealing

strategies
which are firmly
enmployed
are truly cuutting edge or leading edge proc
logistics
ensures
that the process
also
benchmarking

Benefits of Benchmarking
o w n processes (i.e.. strau es

understanding
of the company's h
and
Promotes a thorough
(i)
weaknesses). and adaptation of tha .

for the company

because
ofimitation ctices
(il) Saves time and money invention.
rather than
b e n c h m a r k e d company
of the
non-value added
activities in the existing practices
Enables the company to identify
(ii) in different dimensions, each with est
measures

(iv) comparison of performance

Enables
measure.
practices for that particular
and processes and not on products.
(v) Focuses on performance measures
(vi) Allows companies to set realistic, rigorous new performance targets.
(vii) Allows companies to define specific gaps in performance and to select the process to
improve.
(vii)Provides a basis for training human resources.
The company that has deep commitment to the philosophy of benchmarking wll Dus
change the way it looks at itself. Such companies will never be satisfied with the status quo. 1u
adopt continuous improvenment as their way of life. Such companies have better prospects oftnrv
in a competitive business environment while other companies which do not embrace benchmarku
will ultimately fail.

IIDENTIFYING LOGISTICS PERFORMANCE INDICATORS

Key performance From rigorous approach to logistics and
a clearthat
indicators (KPls) there are a number of critical supply chain benchmarking 1t nes

refer to those
While there are a number of measures of
performance which must be DEemonitore 2onitored

measures of measures of
performance few of
them
continuou.
performance which arecritical dimensions which contribute that can be used in a any, a
compay
are critical for the
market place. significantly
to success orr failure of the companyIn
success or failure Such performance
indicators are referred to
failure
as "key
of the company in
the market place.
The concept of
the balanced score "Balanced score card" has been
performance i d e ab
. ehind

them non-financial
card
approach is that there are a used of a increasingly ators
number of key
measures
strategic goals than the more that will provide the performan
going guidance on those traditional financial management with a
De v i l lprovide

these goals: critical areas where measures. Balanced

action may be sco ure the achieveme

Balanced Score Card required ensu to

:Kaplan and Norton

performance measurement which
and

included (1992) developed

incorporated strategic, framevand financial
a asures

operationa
 the Supply Chain
hrnarking
Benchm

to Kaplan and Norton:

ording 253
"Managers sshould not be madeie to choose between Balanced score
can le a clear
provide
performance target focus
and financial
operational measures.es. No card concept
le od balanced
m e a s u r e

balanced presentation of both

neeaproo
aa
or
attention the critical on emphasise that
g,Managers
bhasness
9.6illustrates the financial and
balanced score card
area of
operational measures".
there are many
non-financial
Exhibir

approach. measures that will

provide the
Exhibit 9.6: The Balanced
Score Card
Financial perspective
Goals
Measures
How do customers
see us? How do we look to
shareholders?

Customer perspective
Internal business perspective
Goals Measures
Goals Measures

Can we continue to What we must

improve and create Innovation and learning excel at?
value? Goals Measures

Four basic questions answered by the balanced score card are: management with a
better means of
) How do our customers see us? (customer perspective) achieving strategic
goais than the more
y What must we excel at? (internal perspective) traditional financial

LAn we continue to improve and create value? (innovation and learning perspective)
measures.

How we look to shareholders? (financial perspective)

for each ofthe above perspective
SCore card works through a process in which managers
L s and specific measures for each are stipulated in order to achieve each g0al.
measures into thee
the key non-financial
lanced score card helps in transferring measures can be
mAnageme 10gistics and supply chain strategies. If suitable performance
form the basis for a more
ientifie k With the achievement of the strategic goals, they
can

9propriate score-card.
Sepseps involved for constructing such a score card are: a firm sees
This indicates the way
1. Articulate Logi
ogistics and Supply
Chain Strategy: and
achievement of marketing
ogistics and supp Chain strategy contributing
to the
overall

BTporate goals. superior

service

Ss ep This means

tep 2. Determine Outcomes of Success:chain as a whole (in otherwords

uality,1 *ne
achievedin shorter
the Measurable
frame at lesser
cost to the supply
beter faster and cheaper).
er time frames
time
 Logistics and Supply Chain
anagement
-

254 on these Outcomes . TThe

that have Impact
Step 3.
Determine the
Processes
logistic supply times
chain times and reduced
and cesses tha
lead to "perfect
order
achievement",

identified.
shorter
cOst-to
serve' need to be these Processes: Th.

the Drivers of Performance

within

performance activities to b
Step 4.
determined are
Determine

those which form the basis

for d e r i v a t i o n
these activities.
of key
icators. "Cause
to identify
can be used
and effect analysis" and Cheaperr". T
outcomes of success are "Better, Faster These goals are
The three key customer-based
measures of performance in terms

significant because they combine utilisation.

of resource and asset
with internal
measures

score card.
the creation of logistics
Exhibit 9.7 illustrates

Score Card
Exhibit 9.7: Creating Logistics

Service quality O Perfect order achievement

Better

Time End-to-end supply chain time

Faster

Cost
Cost-to-serve
Cheaper

What gets measured, gets managed". It is inevitable that once measures are established
management will directits attention to these key issues. Bench-marking plays a pivotal role. It first
helps to identify what current best practices are and then it focuses on how processes might be
reengineered and managed to achieve excellence in these critical competitive areas.

ROLE OF CRITICAL SUCCESS FACTORS (CSF) IN BENCHMARKING

Critical success Critical success factors (CSF) are those characteristics, conditions or variables that when
factors (CSF) are properly sustained, maintained or managed can have a significant impact on the success of a tim
those competing in a particular industry. A critical success factor could be a characteristic such asa
characteristics,
condítionser price advantage (i.e., low price) flexible capacity, design flexibility, quick response
variables that when dependability, reliability, short delivery lead tinme, after sales service, distribution coverags
properly sustained, customised service etc.
maintained or
esstul
For
managed can have a
significant impact on
any business enterprise, the critical success factors which will facilitate the suces The
implementation of any selected strategy should be identified and related across the s.

the success of a firm

process requires busi
in a competitive
industry. (i) Establishing the growth objectives of the firm.
(i) Establishing the current profile of activities and functions of the (e.8
businc
manufacturing, logistics, marketing etc.) and
(ii) Qualifying the critical success factors that underly se
which

may be
the successful companic
potential candidates for
benchmarking).
Box 9.1 1ists some and

important critical success factors and their

action characteristics. strategic impiC
Critical success factors identified for the
forma
an

important input into the firms development of a firm's corpora

logistics/supply chain strategy decisions. At both tne
 Benchm
arking the Supply Chain
255
Box9.1 Critical
Critical;Success
Factors
and Their Strategic
Critical S U c c e s s f a c t o r s Implementation and Action Characteristics
StrategiC implementation and action characteristics
Low price Ability to exploit
profitability acrossexperience curve
a wide range of effects
Design flexibility
Ability to incorporate product/servicevolume activity.
()Flexible capacity Ability to adjust throughput modifications to existing product
volume. design
and creative
)
Innovative
Ability to develop and introduce
to meet customer new products/services product design
( ) Dependability Low level defect rates
pertormance specifications quickly.
(wi) Reliability Ability to provide reliableldurable
wil) Quick response Ability to providefast deliveries products/services.
service
ri) After sales Provisions of after sales support.
(x) Distribution coverage Provision of widespread product availability
(x) Customised servvce Ability to provide specific aspects and levels
of service
and in athe supply chain
the critical success factors become the basis
for identifying best practices
andithen for benchmarking. There are clear linkages between the "macro" issues of corporate
erateov and the detailed CSFs required for formulating logistics/supply chain strategies. The
to be noted:
following points are
(i) Successful strategy requires identification of relevant CSFs.
i) The CSFs should be addressed across the company.
lii) Companies having obvious competitive advantage features should be identified and their "best
practices" benchmarked.
(iv) The best practice characteristic should become CSFs if they have a strong influence on success
and if they are medium to long-range characteristics.

Best Practice, Benchmarking and Supply Chain Strategy

ne corporate objectives of a firm are influenced by the environment and the industry critical
products and
uESS 1actors. These are likely to include an ability to offer environmentally friendly based
and reflect industry-specific requirement, (for example, industry-agreed specification
S
On quality).

Th and industry CSFs will influence the corporate

*Corporate objectives and the environment should be introduced. The CSFs
will
this point, best practice and bench-marking
idenkl.A activities will be identified. These
p i c s for benchmarking from which key processes and functional strategies
e n s u r e that
should form t Dasis for the company's internal
CSFs. This will
are deve Also the key
are and corporate strategies.
developed
performan indicators
which are congr
gruent with the marketing
are agreed.
internal benchmark criteria)
Best Practice Benchmark Criteria for Supply Chain Management
are essential for
set of benchmarking cost and quality performance
ng criteria that report time, productivity and profitability
benchmar
a
kicorporate
ngin internal
for " P p l y
chain management.
From each
are
of these criteria,the criteria which1measure the
developed. To
these,
be necessary (even
level of achie performance
performance
are added.
It may not

thoug possible) tfor a firm to

of customer service

benchmark more
than o n e best
practice company.
characteristics viz., time, cost and
Box 9.2 lists the best best practice criteria
for performance
uality. Ue
pracue
 Logistics and Supply Chain Mana
magement
256 and Quality
Criteria for Time, Cost
Practice
Box 9.2:Best

criteria would
include
(b) Response to customer order progress
Time best practice
rate
delivery (d) Stock turn-over
a) Time for order to
non-availability
(c) Advice on
riteria would include (b) Order progressingcost/order
)Cost best practice
cost/order
(a) Order processing (d) Costpertransaction
transportation/order
(c) Cost of
tonne/warehouse throughput
e) Cost per include
best practice measure would
(i)Quality (b)Availability, orders filled completely
(a) Order picking accuracy (d)Frequency of delivery
c) Reliability of delivery
(e) Emerging response
and benchmarking may be used in the strat
Exhibit 9.8 ilustrates how
both best practice egy

development process.

in the Strategy Development Process

Exhibit9.8: Using Best Practice and Benchmarking
Corporte
objectives

Environment and
industry critical
success factors

Successful best
Corporte practice, competitor
strategy and non-competitor
performance

Company
internal CSFs

Marketing
objectives
Marketing strategies

Logistics CSFs

Successful best
practice, competitor
and non-competitor
Supply chain
strategy statement
performance

Physical distribution Transactions

channels channels

(Suppliers and customers)

 Logistics and Supply Chain Manag
ement
290
demand patterns.
customer

(a) Analysing and volumes.

distribution methods, costs
Delineating present methods and systems and
(b) of alternative
representative range
(c) Developing a plan.
the optimum
alternatives and selecting
(d) Evaluating

ICHANNEL RELATIiONSHIPS
more efficient. But the problem is oers:

make a channel
Middlemen specialists can help work together depends e the
together well. How well they
channel to work
different firms in a
they have.
type of relationship should have a shared product-market commitm.
members of a channel system
Ideally, all the market at the end of the channel and sharing. the
on the same target
-
with all members focussing
functions in appropriate ways.
various marketing
members make little or no effort toco
traditional channel systems, the various channel co
In from each other. Each
is limited to buying and selling
each other. Their relationship the
operate with its own interest. It doesn't bother about
what it considers to be in
channel member does only because the objectives of
other members of the channel. This happens
effects of its policies on
firm may want a whole
various channel members may
be different. For example, a manufacturing
But the independent wholesaler may
and not competitor's products.
saler to sell only its products is attractive.
customers are happy and its profit margin
whose products are sold as long as its
not care
social system in which each
The marketing channel is a
:
Behaviour of Channel Members rewards
different role and agrees to accept certain rights, responsibilities,
channel member performs a
of every other channel
channel member expects certain things
and sanctions for non-conformity. Each inventories and deliver
wholesalers to maintain adequate
member. Retailers, for example, expect and
retailers to honour payment agreements
time. On the other hand, wholesalers expect
goods on
member behaviour include
them informed of inventory needs. Some issues related to channel
keep
conflict and (ii) channel leadership.
(i) channel co-operation, (i) channel
a situation in which the marketing objectives
Channel Cooperation Channel cooperation is
:
and strategies of two channel members are
harmonious. Since there is a great degree o
lot o
members assumes
channel members, cooperation among channel
interdependency among
actions of one channel member may greatly intuen
importance in channel relationships. Since the
the performance of another channel member, the relations among channel members are
considerable interest. For example, the retailer relies on the manufacturer to create an aacqua

sales potential through advertising; product development and other marketing strategic
manufacturer may depend on the successful performance of a small group of wholesalers wn
in unity. and
The objectives and marketing strategies of two channel members must be in harmony a turer

working together they can jointly exploit a marketing opportunity. For instance, a man aS
promptly delivers a quality product with a good reputation and the retailer prices the pr

expected and carries an inventory of the full product line.

Channel Conflict : Channel conflict is a term used to discuss a situation in whicn onnel
of channel members are not sufficiently integrated. The behaviour and actions of onc he
membe

member may be perceived to be inhibiting the attainment of the goals of another channc,
flicts and
There are two basic types of conflict in channels of distribution. They are (i) vertical cou
(b) horizontal
V e r t i c a l c conflicts.
onfliets occur between firnms at different levels of the d i s t r i b u t i o n e f i o r tFthe
nel.
or

example, a producer and retailer may disagree about how much shelf space or promouo
 e Supply
Chain work
Designingthe
291
etailers h o u l d g i v e to the producer's product. Or a
producer who wants to reduce its
more
inventory than the wholesaler inventory
pushesa whor
lesaler to carry
really needs.
between firms at the same level in
canflicts occur
the channel of distribution. For
Hor two retailers located in the same
area, one may offer a
CNample
me brand of an item. Or a chain store is selling some higher discount
same
than the
for
the
product for less than the
wholesaleprice the independent retailer pays.
other

eadership: Channel conflict generally results from the absence of a clearly identified
Channel L e a d e r s t h

nal channel power and disagreements about the channel's common purpose. In the
focuso fformal
channel
leader, a mutually agreed-on authority to reward,
designated chann
absence ofa punish, plan,
ate the activities of its members.
dictate
ate or
otherwise
Cooperation may breakdown. Channel
coore the
the influenco
influence one channel member is able to exert on other channel members.The
is
power nel
anisation having channe power is referred to as the channel leader or channel captain. The
leadership is important because it affects the effectiveness of marketing channels.
channel

LOGISTICS SERVICE ALLIANCES

to share their logistics capability with other firms or to contract (hire) for
Some firms choose
such services,
he logistics
activities to be performed by outside firms specialising in providing
(3 PL) fourth-party
or service providers (4 PL) as an alternative
aled third-party service providers
of the logistics capability (which needs an extensive logistics organisational
n total ownership
held together cooperative arrangements (i.e., collaboration).
structure) or to loosely
alliances or partnerships have some strategic and operating advantages.
They are
Logistics
(i) reduced cost and lower capital requirements
i) access to better technology and managerial skil
customer service
ii) improvement in
market penetration
(v) competitive advantage through higher
) increased access to information for planning

vi) reduced risk and uncertainity. and freed up

potential reduction in costs of transportation/distribution
Or the above benefits, a eliminating capital investment)
rank at the

non-core areas (which are outsourced, thereby advantage. But the

(human resources) is also an important
n e benefits. Reduced personnel critical logistics activities because of outsourcing
control over have been
fa S o the firm is the loss of of their logistics activities by firms
activities. Outsourcing a portion
gistcs transportation of goods
o hiring the courier
services for
to handle
0r
many years. For example, with outside firms
and cusing a bub warehouse to store goods
are ways
of partnering firm and its
is between the
extensive the relationship
event to long-term
upply chain activities. How be based on a single
Qutsida The relationship may illustrates the
1 a matter of degree. Exhibit 10.7
alliance.
COntractuo
COntractual
arrangngements to shared systems of a strategic
SOurcing relationship continuum each firm in the supply
chain has
where
going relationship strategies for
neds trategic Alliance: A planned on
share values, goals
and corporate
that the other an fulfill and both
can
firms
mutual benefit. contractually
oriented and
that is
Contract Lo defined
relationship
goals.
dependent istics:
Dupplier
A specially
meeting the shipper's
defined performance
a series
single event, or
of separate
single

eNentTransact
s usually ion
built on a
EIStics: A relationship
Over a short-term period.
 Logistics and Supply Chain Man
292
Relationship Continuum
Nanagement
10.7: The Outsourcing
Exhibit

Strategic Aiance

Contract Logistics

Transaction LogisticS

Deciding whether to perform the logistics function in-house or to seek other arrangement
such as outsourcing, contracting or alliances etc., is a balance of two factors:
ments
(i) How critical logistics is to the firm's success? and
(i) How competent the firm is in managing the logistics function?
Exhibit 10.8 illustrates the selection diagram perform logistics activities
of where to
For a company having high customer service
requirements, significant logistics costs as a
proportion of total costs and an efficient logistics operation managed by competent personel.
partnering or outsourcing logistics activities will be of litle benefit. In such companies, logistics
activities are best performed in-house.
On the other hand for thosecompanies where logistics is not central to strategy and a nmg
level
of logistics
competency is not supported internally, outsourcing the logistics activities to tnr
party service providers will lead to significant cost reductions ervice.
and in
improvements customer sci
Exhibit 10.8: Selection Diagram of Where to Perform Logistics
Activities

Seek a Perform
competent logistics
partner activities
in-house

Be a
Outsource
partnership
leader

Low
High
Company's competence in handling
logistic
 the Supply Chain Networ
Designing

293
Where logistics is critical to strategy of a company but
it is
neficial for the company to find an outside firm logistics
benefici
management competency is
and to have
low,
partner may provide facilities located in partnership with it. For
ple, a strong existing and new markets, a
uarehousing facilities, administrative expertise not available within the transportation
capabi
company and
the like.

where istics is not critical the

In contrast,
company's strategy but managed by capable
to

Dersonne
the management may want to be aggressive by seeking partners to share the activities of
logistics system.This
This would reduce the company's costs through increased volume and economies
that result.
of scale

IALLIANCES

Eirms which invest heavily in transportation equipment, warehouses, inventories, order

nrocessing systems, logistics technology and administrative personnel should start thinking about
sharing such investments with other firms to reduce its own costs. On the contrary, a company
shari
which is aware of its high costs of logistics, may seek partnership with another firm that has excess
logistics capacity, strategic facility locations, desirable technology and excellent administrative
Capabilities that the firm seek to share. Forming a logistics alliance or partnership may be beneficial
to both firms who enter into alliance or partnership.
A logistics alliance has to be built on trust, a sharing of information that aids logistics
performance, specific goals to achieve a higher level of logistics performance than can be achieved
alone, operating ground rules for each partner and exit provisions for terminating the alliance if

needed.
Eventhough both parties (firms) to the supply chain or logistics alliance can gain significant
benefits, there are not many alliances that actually have been created. This is because of the concerns
that a potential partner has about the alliance when supply channels are to be merged. Major concerns

may include
(0) Loss of control over the logistics channel.

(i) Concern about logistics failure.

4) Difficulty in identifying adequate checks and balances to the satisfaction of the partner.

economies to be achieved as compared with the partner's

Difficulty of identifying the
Current logistics costs.
Reporting system of one partner may not match with
that ofthe other partner.
(vi) Difficulty in identifying the benefits to be shared.

P Lack of mutual trust and trust to try such an arrangement.

(vii)Partners may not view each other as equals.
faith and cooperation can be achieved in
Dificulty in understanding how trust, good
partnership arrangement. are difficult
of the above concerns, we may conclude
that logistics alliance are fragile,
to ause encouraged to explore ways of
form break easily. However managements of firms are

benefits.
tne alliance or partnership work, because of the potential
Collaboration: Firms that do not have a formal partiering relationship
Enering Through collaboration. Partnerships
through
of alliance, also have the benefits by partnering mutual
Am m can
information among
them for their
among the supp channel members occur as they
share
and improved
Pply include lower costs from
reduced inventories
C
denefits from collaboration
Custo er service from higher order fill rates.
 Logistics and Supply Chain
echelons in the supply channel has been
anagement
members
across
echelons
succe when
with suppliers who were better
ahle
Partnering shared with to plan inve
information was
and with requirema Inver
retail point-of-sale vendor-managed inventory
control)
ns share
retail level (i.e., success in collaboration was
levels at the The early
just-in-time systems).
with suppliers (as in
called collaborative
planning, forecasting and replenishment (CPFR) which was a program of
scHedules, order replenishm.
approach
information sharing
that involves forecasts, production shment quantities
and lead times.
and their timings
chain performance hu
chain
Collaboration among
channel members can improve supply performance reducino
times. Sharing information about ena
by
with demand and lead end
the uncertainties
associated
for all members of the supply chain and reduce.
customer
demand can improve forecasting accuracy
at the level of each member
of the supply chain (i.e a
whip effect on demand forecasting etailer,
(accurate) forecasting reduces inventory
wholesaler, manufacturer and supplier). Improved levels
in the supply channel.
However, mass adoption of collaborative partnership is slow because of lack of mutunltm
Companies may not like to share vital data with outside firms on which they do not have :
any
control and such firms may have business relationships with competitors.]

MODELLING APPROACHES TO L0GISTICS/SUPPLY CHAIN

NETWORK DESIGN
Modeling approaches can provide insight into the choice of a logistics network design. The
techniques discussed in this section can be applied to a wide range of issues pertaining to (i) the
locations of plants, (ii) location of distribution centres, (ii) location of customers and (iv) the flows
of product and information to support the functioning of the logistics/supply chain network.
The principal modeling approaches discussed are (i) Optimisation models, (i) Simulation
models and (ii) Heuristics models.
The use of appropriate modeling techniques will facilitate a comparison of the functioning
and cost/service effectiveness of current proposed logistics networks. After an appropriae
versus
modeling procedure has been
selected, it should be used to help identify a logistics network tnat
consistent with the key objectives identified in the
After identifying the
logistics/supply chain network design proces
preliminary solutions, subsequent "what-ifr" types of analysis should
conducted to test the
sensitivity of the recommended network designs to changes in key 1og stics
variables.

Overview of Supply chain Models and

n
Modeling Systems
recent years, the number and
have grown scope of successful application of models and modeling sy
ystems

significantly. The information revolution has

accelerated significantly in
Widespread implementation of
enterprise resource planning (ERP) systems offers re
homogeneous, transactional data base that will
facilitate nee
integration supply chain acuv
of
Competitive advantage in
supply chain management is not and

Cheaper communication of data. Ready access to transactional gained simply through la 0

data does not
better decision
making. Hence, to effectively apply information automatical
Chain, a firm
must technology in
managing fion
distinguish between the form and function of
Transactional Intor
Technology and Analytical Information Technology.
Manufacturing and distribution firms are seeking to analyse
their corporate
databases to identify plans for develop or acquire systems them
more redesigning their supply chains and op
efficiently. An essential component of these ch can
systems are optimisation modes
_ Purchasing and Suppl Cl .

Why Purchasing is Important?

y lain Dec·1s1ons
.
----------- ----------- -10--
Despite the apparent co .
mp 1exay of
chains for competitive adv ant s~pp IY c1uuns,
· some firm s are able to exp I01t
· tI1e1r
· supp ly
th
erformance while simultane age. In eir pursuit of increasing customer value by improving
P ously rectu · . . . .
d supply management _ ti . emg costs. many firms focus thell' attention on purchasmg
an 1at part of .
inbound goods and service . . ~upp 1Y cham management that focus es on the management
of s into the fir 111 'l'I1 ·
chasinoO and supply manao · . e ma.1or benefits that: can be obtained by focusing on
pu r cement are:
(i) Cost reduction and improvement
(ii) Improved delivery of materials

(iii) Shorter cycle time including produ t d .

c eve 1opment cycle time
(iv) Access to product and process technology
(1') Improvement in quality

SOURCING VERSUS PURCHASING

Two major areas of procurement activities are: ( i) strategic sourcing and (ii) tactical purchasing. Two major areas of
Strategic Sourcing is related to purchasing activities having broader scope. It is a cross- procurement
activities are :
functional process that involves members of the firm other than those who work in the formal (i) strategic
purchasing department. sourcing and
(ii} tactical
Activities associated with strategic sourcing management are: (i) supplier identification, purchasing.
(ii) supplier evaluation and selection, (iii) supplier management, (iv) supplier development and
improvement and (v) supplier integration into ongoing processes. The topic of strategic sourcing
will be discussed in more detail later in this chapter.
Tactical purchasing refers to a functional activity carried out in every company. The term
purchasing refers to day-to-day management of materials flow and information.
The activities involved in tactical purchasing are:
(i) Commodity analysis
Iii) Market research
(iii) Purchase order tracldng and follow up
liv) Determining the needs and requirements of internal customers

(v ) Transmitting forecasts of future needs to suppliers

/vi) Transmitting actual orders for goods and supplies to suppliers

(vii) Supplier performance measurement

(viii/Management of supplier quality
(ix) contract management and . .
negot1at10n
Ix) M .
. anagement of inbound transportat10n
(xi) Pri /
ce cost analysis
Purch · . d t ·1 later in this chapter.
asing activities will be discussed m more e a1

SOURCING DECISIONS IN SUPPLY CHAIN MANAGEMENT

One f . . the question of whether to produce
sa11\e ProdO the • . facmg
· an y business
most important decis10ns . is chain partner. In add'1t10n,
· the
1
Uct or service internally or to source it to an outside supp y
 Logistics and Supply Chain Management _

--8\. .---- ----- ----- -----

. ents
----.
of matena
-c-ompone nts. sub-units and finished prod
s, . 1 1· UCfa
.
fi which outsources its requirem 1· k them with their upstream supp iers.
irm . rocesses that m
must manage the purchasmg P . sourcing decisions and purchasing actil'iti
d. t •ngmsh between .
Supply chain managers often . is I I t tegic decisions regardmg what products or servic
. . art
· Uy h1gh-Ieve •bs ra· from external supp IY c h am W ·
Sourcing decis10ns are typica P ners. hlle aim
. d h t products too tam_ . . . . I.
to provide internally an w a t t the decis10n to source cnt1ca items or servic
• g to some ex en ,
all organisations depend on sourcm.
ber of strategic quesuons.
Iead to a num . . . associated with identifying needs, locating and selectin
. . 1 d s all those act1v1ues t nsure supplier performanc e.
Purchasmg me u e
su pliers, negotiating terms and follow up o e . . .
p f ti'onal drivers of the supply cham, we will discuss
S. · ·s one of the cross- unc . .
mce sourcing 1 h . rce managemen t and strategic sourcmg management ia
sourcing decisions in the supply c am, sou
this chapter.

The Sourcing Decisions

. d • • h. h level often strategic decisions that address which products
. . .t
Sourcmg ec1s1ons are 1g - , . .
Sourcing decisions wdl be
• w1-11 be prov1'd ed us,·ng resources within the firm (known• as msourcmg ). and which
. . .
are strategic services
decisions regarding provided by a firm's supply chain partners (known as outsourcm g). The sourcmg dec1S1on 1s also
which products/
known as "make-or-buy decision".
services will be
made in-house and While 'purchasing' or 'procurement' is the process by which firms acquire raw materials_
which will be components, products, services or other resources from suppliers to execute their operations, sourcing
purchased from the
refers to the entire set of business processes required to purchase goods and services. For any
firm's supply chain
partners. Also supply chain function, the most important decision is whether to outsource the function or activity
known as make-or- or perform the same in-house. Outsourcing requires the supply chain activity to be performed by a
buy decisions.
third party (i.e., supplier).
It is important to distinguish between outsourcing and off-shoring . A firm off-shores a supply
chain function if it moves the production facility off-shore, still maintainin g its ownership on that
facility. On the other hand, a firm outsources if it hires an outside firm to perform an activity or
function or process rather than executing the same in-house. In this chapter we discuss the issue
outsourcing rather than off-shoring.
The sourcing (or outsourcing) decision is critical to supply chain managers because it defin
th~ir responsibilities. For example, if a firm decides to outsource a product or service, the emph
shifts ~o the purchasing activities associated with identifying the most qualified suppliers
managmg the ?uyer:s~~plier relationship. Also supply chain managers, need to address the outsourc ·
of supply cham actIVIt1es based on the following two questia'ns:
(i) Will th~ third party (i.e., supplier) incre:Se the supply chain profitabilit y I I • . I

performmg the activity in-house?

(ii) ~o what extent do risks increase upon outsourcing ?

Advantages and Disadvantages of lnsourcing and Outsourcing

.
Insourcing gives a firm a hi g h d egree of control over Its .
manufa t • operat10ns. Insourcino0
can also lowet
c urmg costs when the firm . . •

of scale Also • . can enJoy production volumes necessary to achieve econoIDJ

. , msourcmg encourages devel opment Of core competenc ies - oroanisatio nal stren
or abilities devel d •ffi
, ope over a long term that cus tomers fimd valuable and competitoro
s find d1 1c
or even impossible t • . '
o imitate. Therefore when a fiirm owns proprietary desions or processes
could evolve into co . . '
re-competencies ' mso urcmg . . 1 . o
H . is a og1cal decision rather than outsourcing.
owever msourcing can be ri k b . • _,._.
in the semiconductor · d s Y ecause It decreases a firm's strateoic flexibility. For examp-
m ustry the f · e& 6
' manu acturmg technologie s have short life cycles (as short as
- purchasing and Supply Chain Decisions
------------:--------10-
onths) and firms fa~e risk of investing in old process technologies just as new ones emerge. Also
~ suppliers can provide a product or service more effectively, managers must decide whether to
I JilIDit scarce resources
co . to upgrading their processes or outsource the product or service.
r
Outsou cing mcreas~s a firm's flexibility and access to state-of-the-art products and processes.
nd
markets a technologies change, it is easier for a firm to change its supply chain partners ra th er
~~
1 changing internal pr~cesses. Also outsourcing results in less investment in resources needed to
'de a product or service, thereby improvino the financial viability of the firm.
prov1 . . . . o . . . .
Of course, outsomcmg has Its nsks. The suppliers may misrepresent their capacities, their
Proce Ss technologies may . be obsolete, or their performance may not meet the buyer 's expectations.
ther issues in outsourcing are that o: control and coordination. The buying firms may have to
O t costly safeguards to ensure quality, availability, confidentiality or performance of outsourced
crea e . Al d. . . . . h
d or services. so coor matmg the flow of materials across separate organisations m t ef
goo s . h 11 . .
ly chain can be a maJor c a enge especially in global or international outsourcing, because o
supp one differences, language baniers and differences in information systems used. Firms which
urne z . . h .
outsou rce their products
. or services also may lose key skills and technologies that are part of t eu
core Competencies.
Box J5.l summarises the advantages and disadvantages of insourcing and outsourcing.

Box 15.1 : Advantages and Disadvantages of lnsourcing and Outsourcing

Box 15.2 lists the factors which will influence the decision to insource or outsource . .

Box 15.2 : factors Affecting the Decision to lnsource or Outsource

<if.i(~;~>

One 0f the ma,ior

s .
. benefits of outsourcing is the increase • th e supply chain surplus.
m
11
thelotaJPPI~ · surplus is the difference between the value O f a. pro d uc t for the customer hand
cha1n •
cost of all supply chain activities in bringing the product to the customer. The supp1y c am
 Logistics and Supply Chain Management .._

h · n participants (including the customer)

. d by all supply c a1 . . .fi I .
. al ofit whjch 1s share h
surplus ,s the tot pr . . . s the supply c ai•n surplus without s1gm h . y affecting
I 1cant . .
Outsourcmg . .s advantageous if it increase . . l for the survival of a supp y c am Part1c1pan1
1 . l s 1s essentla , fi · l
. • the supply
nsks . Increase m cham t d that each supp Iy c ha1·n participant s pro 1t 1s corre ated With
surp u
Al so it must be no e
in the long-run. h ply chain surplus.
the extent to which it increases t e sup

Key Sourcing - Related Processes . ocesses start. They include: (i) selection
· taken the sourcmg pr . .
Once a decision to outsource is '' . ts ( iii) product design collaborati on
. . d . n of suppher contrac , '
of suppliers (sources), _(ll) esig . valuation of supplier performance. These processes
(iv) procurement of matenals or services and ( v) e
are illustrated in Exhibit 15. 1•

► Exhibit 15.1 : Key Sourcing - Related Processes ◄

Supplier Supplier Sourcing

Scoring Selection Design Planning
and and Collaboration
Procurement and
Assessment Contract Analysis
Negotiation

These processes are briefly discussed in the following paragraphs :

Key sourcing--
related decisions
(i) Supplier Scoring and Assessment : It is the process used to rate the performance of t~e
include supplier. The basis of comparison between suppliers is their impact on the supply cb~m
(i} selection of surplus and total cost. In addition to the price charged by a supplier for the product or serv_1ce
suppliers,
offered other characteristics such as supply lead time, reliability to supply, quality and design
(HJ design of
supplier contracts, capability also affect the total cost of doing business with a supplier. A good supplier scoring
(iii} product design and assessment process must identify and track performance along all dimensions that affect
collaboration, the total cost of doing business with a supplier.
(iv) procurement of
materials/services (ii) Supplier Selection : The output from the supplier scoring and assessment is used to identify
and M e-,aluation the appropriate supplier(s). A supply contract is negotiated with the selected supplier(s). A
of supplier
good contract should take into account all factors that affect supply chain performance and
performance.
should be designed to increase supply chain profits so as to benefit both the supplier and the
buyer.

(iii) Design Collaboration : Since about 80 percent of a product is determined during the product
design stage, it is crucial that suppliers are actively involved at this stage.
Design collaboration facilitates the supplier and the manufacturer to work together when
designing components/parts for the final product. It also ensures that the manufacturing firm
can effectively communicate any design changes to all parties involved with designing and
manufacturing the product.

(iv) Procurement: Once the product design has been completed, procurement process follows .
Procurement is the process whereby the supplier supplies products in response to orders placed
by the buyer. Procurement process ensures that orders are placed and delivered on schedule at
the lowest possible overall cost.

(v) Sourcing Planning and Analysis : Its role is to analyse expenditures incurred across various
suppliers and component categorise in order to identify opportunities for reducing the to tal Ct)SC.
,,,.-
purchasing and Supply Ch .

Effective sourcing proces

.
a1n Decisions

. .
---------------- -----0-
•n surplus in many ways Thses ~ tth in a firm can improve profits for the firm and total supply
chat . . · e drivers 0 f • . . . . k'
C
ina decISions. improved profits must be clearly 1dent1f1ed when ma mg
sour "
Benefits of effective sourcin d . .
. g ecis1ons are:
(i) Better economies of scale can b .
.. Th overall cost of . e achieved by aggregating orders within a firm.
(u) e purchasm o ca b . . .
.
tr ansactions. This is espe Cia ° . n e significantly reduced by efficient procurement
11 Y Si 00 nif t C
ican 10 r items havmg a large number of low value
• •
transactions .

•'i) Design collaboration facilitates easie . .

(It er overall costs This fa t . r manufacturmg and distribution of products resulting in
1ow · c or is most crucial f ·h d · · · · ··
to product cost and value. or pure ase items which contnbute s1gmf1cantly

(1v. ) Efficient procurement process can result · b

• . m etter co-ordination with the supplier. It can also
improve forecasting and planning· low · . .
, er mventones and improve the matching of supply and
demand.
of r·IS k , resu It'mg m c b h
· h'1gher pro f'its 1or
· Appropriate
(,·) d h bcontracts can permit sharing
. supplier ot
the supp11er an t e uyer.
(vi) Firms c~n r~duce their_ purchase price by increasing competition among suppliers through the
use of biddmg or auct10ns.
Sourcing Strategies : Once the decision has been made to outsource a product or service, the
Sourcing strategies
buying firm has to choose between (i) single sourcing and (ii) multiple sourcing. refer to (i) single
In single sourcing, the buying firm depends on a single supplier for all or nearly all of a sourcing,
(ii) multiple
particular item or service. In multiple sourcing, the buying firm shares its business across multiple
sourcing,
suppliers for the same item or service. · (iii) cross-
Table 15.1 lists the advantages and disadvantages of single sourcing versus multiple sourcing. sourcing and
(iv} dual sourcing.
The disadvantages of single sourcing and multisourcing can be overcome by a sourcing strategy
known as cross-sourcing. In this strategy, the buyer firm uses a single supplier for a certain
component or service in one part of the business and another supplier with the same capabilities in
another area of the business. Each supplier is then awarded new business based on its performance,
creating an incentive for both to perform well and improve their performance. This also provides
for a back-up supplier if the primary supplier fails to provide the required volume.
A similar purchasing strategy is known as dual sourcing. This strategy has two suppliers who
~reused for the same purchased item or service (say supplier A and supplier B). The order quantity
IS s r f
pIt as 70 percent to supplier A and 30 percent to supplier B. If the performance O supp ier
A r
suffers 1.t ·11
' WI lose the business to supplier B. ·
I . ~nternal Sourcing : One of the major challenges of business today having specific impact on
ogistical • 1b 1 · ecially from ·
l management is the dramatic increase in internat10nal or g O a sourcing, esp
ow.cost .
countries such as China and Malaysia.
Increa d . . . f t identify and establish
suppr . se need for global competitiveness 1s dnvmg many urns 0
iers in I · · 't' t' es are·
!iJ ow-cost countries. The reasons for such sourcmg tnI ia IV ' ·
Sourcin f f t ·no cost But at the same
r11 . g rom countries with low wage rates reduces manu ac un t, • • • h
ne it i . • 1 ourcing particularly wit
re s necessary to consider the total cost impact of mternatwna s
fii) Sspe_ct to the logistics cost components of transportation and inventory. .
eek1ng O • th mber of possible sources
.. and thus _ut suppliers in low-cost countries can also mcrease. e nu
r,,iJ lo Increase the competitive pressure on dome stic supphers. d
W-cost-co . ' to state-of-the-art product an
Proces untry sourcing can increase the firm s expoSure
s technologies.
 Logistics and Supply Chain Manag
enien1
"-

. (iiJ , 9~.p.in~r~as~ fi_~~ in case

. ii. ?h, .R8.rl~9~
8 7suppiiers
?r1
i ill.a~.•.·• Yt ~~pply their
·. :.< ; prefern:~d customers
:, .,.· :-,:·-- ....
·-;::-·••:,--·· .. - _,.,. .
(ii!);>~ay?fe~ult iii, different
.. ·. produ,cr?nributes with
. varying;quality.levels.

(iv) Global suppliers may focus on new technologies to establish a competitive position in foreign
markets.
(v) Low-cost-country sourcing helps the buyer firm to establish a local presence to facilitate its
sales in the foreign country.
While the rationale for low-cost-country sourcing is substantia l, there are also many
issues and challenges related to such sourcing strategies . These issues and challenges are
complicated because the benefits and costs related to low-cost-country sourcing accrue to different
· .
umts ?f the buyer f'irm. For example, procurement or manufacturing departments may receive · the
be~ef1t through lower-~ost materials or components. But many of the costs and the challenges to
nd
ship ~ guarantee delivery of the materials are the responsibility of logistics department. Hence,
benefits and costs must be inteor t d h k rrect
sourcmg
. dec1s1on.
. • b a e across t e full supply chain process in order to ma 'e a c0
The various challenges are:
( i)
The identification of sources ca able f . . ualitY
O
and quantity required. p prn ducmg the components/parts/products m the q
(ii) The protection of a firm's intellectual . / , ed and
transported. The suppliers d _Prnperty as products or components are produc ct
designs and related tract an countries involved need to have leoal constraints to prote
( iii) U d e secrets. .:,
n erstandino import/
d. export complia .
nee issues. There may be oovernmen t regu Iations
b
regar mg the volume of co .
I' mmoctny th . .:, . s are
en1orced. at can be imported before duties or other resrricuon
( iJ,) Challenges relatin O t
b o commu .
procurement neo · • nication w·th
1 p·1111 ~~
e,Otiations with 1 suppliers and transporta tion com ' . , ,r~
OW-cost co . . . t· n r :ttl l
untnes, dealing with carriers, frei ght 0
- .
Purchasing and Suppl y Ch am ..
0 ec1s1ons --------------,~
and government customs become difficult because of time zone, language and technology
differences.
(v) Need to guarantee the security of the product while it is in transit - the supply chain security
requires not only the product to be secure, but also the containers and vehicles, both full a nd
empty.
(vi) Challenge concerned with inventory and obsolescence risk associated with extended transit
times. The transit time is usually 1 or 2 months in case of low-cost-country sourcing.
(vii) Need to u~derst and the difference between unit price and total cost. The unit price may include
the matenal as well as direct and indirect labour costs. The total cost perspective needs to
consider other cost elements including freight, inventory, obsolescence, duties, taxes, recovery
and other risk considerations.
Guidelines for Sourcing : The decision to source materials and components domestically or
internationally is a complex one. While the direct and indirect product costs represent one major
factor, there are many other factors to be considered and weighed appropriately. Products and
components which have extended times between manufact4ring changeovers are ideal for low-cost-
country sourcing. On the contrary, electronics components havjng snort life cycles would generally
tend to be sourced domestically. Also products and components that have many variations should
oenerally be domestically sourced because the extended lead times associated with low-cost-country
:ourcing makes it difficult to forecast the precise product-mix that will be demanded. Products and
components with high labour content should take advantage of low labour rates in low-cost-countries.
Products or components with high intellectual property content, should be sourced domestically as
the legal systems in many low-cost-countrie s do not provide adequate trade secret protection.
Also products and components with relatively high t_pp-1sport11tion cost (those that are bulky
and/or damage easily) should be sourced domestically. Products and components with low value
are ideal for low-cost-country sourcing, as the inventory carrying cost while in transit is not
significant. Box 15.3 lists the general sourcing criteria.

►
Box 15.3 : Sourcing Guide Lines

· that directs. supply managers Stratenic sourcing

t0
Strat egic
·
Sourcing : Strategic sourcing is a systematic process . . refers to a
Plan . f , t tegic obJectives. Strategic systematic process
sour . ' ~anage and develop a supply base in line with a irm s s ra . h f 11 b fi·ts of
cing 1s I · f to achieve t e u ene · that directs supply
integ . a so viewed as the application of current beS t prac ices . 'thin
managers to plan,
rating . . ing is a core process wi
thela Supphers into the long-term business process. Strategic sourc manage and
rger funcf10
n of supply chain management. develop a supply
While th . . . . of the supplier whose costs, base in line with a
qualities t he obJective of sourcing is the identification and selection f" ' eeds strategic firm's strategic
S() ' ec noI · . · b t meet the irm s n '
. Urcing 1·s ogies, timeliness dependability and service es b · 1i·ne with the objectives.
11 . con ' f" , pply ase m
rrn-s strat . cerned with the design and management of a irm s su
eg1c (I
ong-term) objectives.
 Logistics and Supply Chain Management _
~,_ ___ ___ ___ ___ ___ ___ ___ ___
base management or strategic sourcin
~ . 1
. the area of supp y g
Several actions that mus t be taken m . .
are: . " )iers to ensure that 1t 1s adequate to meet
. 's base of active "upp
(i) f
Periodically reviewing the irm . . . .
resent and likely future needs. . h' (transa ctional , co11aborative or alliance) for
P . . of relations tp
(ii) Identifying the appropnate type
each commodity -base.
(iii) Optimising the supply base.
. s
Strategic ourci·ng Management . . . . but has a somewhat broader scope. Strategic
Major activities . . .d rchasm g act1viti es, ..
Strategic sourcing 1s relate to pu . mbers of the firm other than those who work
associated with ·
sourcino is a cross-functtona proce 1 ss that mvo 1 "~s me .
strategic sourcing d . ourcing team may mclude members from
e .
in the formal purchasing epar tment The strategi c s .
management are : · . k t' accoun ting, strateg ic plannmg etc. Strategic
. •
(i) supplier enoineenng, quahty, design, · manufacturing, mar e mg,
. d i·ng and integra tino
.
with
• ...
identification, e f on manaom g, eve 1 op supphe r capab1h ties
sourcing management ocuses e
0
t't've advantages gained may be through cost
(ii) supplier . · ·
to achieve a competitive a va d ntage. The compe 1 1 . .
. .
h 1 d elopment quality improveme nt ' cycle time reduction and improved delivery
evaluation and
.
selection, reduction, tee no ogy ev '. Th ·or
(iii} supplier capabilities to meet customer reqmrements. e maJ activities associated with strateg k sourcin g
management. management are as follows: ..
(iv) supplier
development and
•
(i) Supplier Identification • · d'
: Fm mg supp 1er
r s to meet existin g or ant1c1p
.
ated purchase needs.
.
an d seIec t·10n .. Determininoo whether supphe rs are capable of meetmg
improvement and
(ii) Supphe • ··
r Evaluatrnn
M supplier
integration into on-- the needs.
going processes. (iii) Supplier Management : Ongoing management of the supply base.
(iv) Supplier Development and Improvement : Taking actions to improv
e over-all supply-base
performance.
(v) Suppli er Integra tion into On-go ing Proces ses : Involv ing supplie
rs in new-product
development and new process development.

Trends in Strategic Sourcing or Supply Base Management

Earlier, buyers used to play suppliers off against each other, switch suppliers
frequently and
offer only short-term contracts. This adversarial model, while not ideal, worked
when all buyers in
the industry practiced the same form of supply management. Nowadays globali
sation of markets
and supply sources has forced global competitors to collaborate with suppliers to
achieve competitive
market advantages. Many changes are occurring in how firms approach and manage
their supply
base.
These changes are:
(i) There will be a Continued Reduction in the Size of a Purcha ser's Supply Bases :
Mo st
firms are willing to reduce the number of suppliers they maintain. Supplier reducti
on sometimes
involve only a reduction in the number of first-ti er suppliers. For exampl
e, automobile
manufactures rely on larger, full-service suppliers to design and build entire subsyst
ems. Instead
of bu~ing components from many smaller suppliers, the purcha ser uses one
major subunit
supplier, wh? then depends on many smallr:r suppliers to supply components require
d for the
maJor subunit. Thus many former first-tier suppliers have become second-tier supplie
th e purchas rs. While
e maintains fewer first-tier suppliers, integrated supply chain management requires
th at b_uyers
maintain a keen interest in first, second and even third tier suppliers. Advanc
ed
sourct~g st rategies require closer interaction between the purchaser and the
seller which
necessitates a smaller supplier base.
 Logistics and Supply Chain Manage
lllent
'
. f turing Interface .
The Logist1cs/Manu ac . f' must work together closely for the sue
. t'vities of a trrn . . k b
Log1s. tics and manufactunng ac '. . rovernent, Just-m-t1me ( an an) MRP andcessfu1 Dn
nunuous imp • • fl' 1\P
l' ation of systems such as co . erative effort and mm1mum con tct. This requ· .
app 1c . . f JIT requires coop . . 1 Th f ires
cessful implemen tation o . e o1lowing act· ·
Suc . . .· planmng an d dec ision making be done JOmt y. tons
that logistics and manufactu1 mg .
. d . ake improvements. .
are reqmre to 111 .• in the area of product10n scheduling to red
(i) Joint effort of logistics and manufactullng
uce
roduction planning cycle time. . .
P . . . ies such as reduction of lead time, set up time and productio
s
(ii) Manufacturing and logi tics s_tI~te~ •nventory levels and stock outs.
run sizes must be used to mmnmze average I
n-
• . .
. . d t. t gi·es foi· reduction of supplier lead times for parts and supplies
(iii) Log1st1cs must eve1op s ia e
·
. . .
(1v) Products wit11 1ow mven tory turn-over ratio should be produced only after orders are received
instead of producing and holding in stock.
There are many other areas of logistics/manufacturing interface. Each fundamental area of the
firm must examine its role in the system such as MRP, DRP and JIT and identify how it can work
individually and jointly in the effort to optimize the firm's strategic position.
For instance, a computer manufacturing firm installed a "Preferre d Logistics Supplier Program"
which focuses its business with a small number of high-performing suppliers. Another area of focus
is linking with the customer in the field. With a "prelim" order program, which allows the company
to see what potential orders are coming in and anticipate its material needs. The third area is staff
reduction "It is important for everyone to understand what the goals are, why the goals have been
set up and how to monitor the process on achieving those goals to keep everyone informed. " With
these logistics strategies the firm has achieved significant reduction of order-to-shipment, better
spare parts supply lead time and substantial cost savings.
Transportation Management
The
.
transportation system is the ph · 11· k · ·a1
.
supp11ers, manufacturmg plants wareh ysica md which connects a firm's customers ' raw maten s
fixed points in a logi·st· ' h . ouses an members of its distribution channel, which are
ics supp1y c am The f1 d . .
activity temporarily halts th fl f · _se _xe pomts m the logistics system are where some
which connect these facilitiese ow ff o hmatenals m the 1og1stics
· · · ·
p1pelme. · frms
The transportation 1 '.
. . . , a ect t e transportat'
fac1ht1es. ion costs as well as the operating costs at these

The Role of Transportation in Logistics

Trans11ortation
refers to the Transportation physically mo
needed Th'
physical movement · is movement of materialves f products from where they are produced to where t hey are
of products from referred to as place utility. s rom one place to another adds value to materials which is
where they are
I1roduced to where Time utility is created by w h .
they are needed, needed T • are ousmg and t ·
thereby adding
. ransportation determines how fi s onng materials and finished goods until they are
one place to anothe Th' . ast and how c .
11alue to the r. is is known as t' . onsi stently a product or material moves frol11
Non a ·1 bT
materials being d' . - _va1 a I ity of a product at th ime-m-tra
.
nsit d
an consisten cy of service.
transported 1ssat1sfact1on and prod t' e time when it · mer
(i.e., place utility). Transportation mov uc ion down time (when th is needed, may result-in lost sales, cu 5ta )
es products tO e product i d• •
value to customers by t
ranspo t'
markets which a s use m the manufacturing Process dd d
·
re geog h'
Thus, transportation affect h r mg products on ti·
. rap !Cally dispersed and prov1'des a.. e
s t e lev 1 me, undam
satisfaction. e of customer s . age d and m
. • d anuue 5·
the reqmre qu r
erv1ce Whi h .
c is an important element of cu sto!'Ile
 -,
------------------------

/
111tegrated Logistics A c t i v i t i e s - -
th place utilit y and. time
~---

utilit y crea t d b Y transport f

e
0 --
Bo .. a ton are significant for succe ssf u1
·ng efforts. Thedava1 1ab1ltty adeq uacy and cost of transp . • •
arketl (b) h ortatton impact business d ec1S1
!11 . (a) what pro ucts shou ld be plac ed , w ere shou ld } ons
ch as. rials b t iey be sold, (c) wher e shou ld
su •/'hes be located and (d). wher e shou ld mate e sour ced? .
Jaci l•• . .
portat1on 1s a maJo r com pone nt of logis tics al
rrans
. . f costs and may . so account for a significant
.. n of the sel 1mg pnce o some prod ucts such · 1
as raw materials h avmg ow value per unit of
Pos1t1°
. ht (say kilogram) wher eas. trans porta tion costs for c
ornputers elect roni
we1g .
g pnce . In gene ral the eff'1c1en . ' c components may account
small percentage of sellm • t mana geme nt 0 f t .
for a f'
und and outb d' ransp ortat10n may
me more impo rtant to a trm as inbo oun transportation 's sh are of product cost
beco . total trans porta tio .
. reases . Even for high valu . e prod ucts, n cost m absolute terms is significant.
1nc .
tion syste m 1s .basic to the e ff1c1en . a
Knowledge of trans porta Th . t and economic opera. tion of .
. . f . tion lmk facili tates fl f
fi m's logistics unct1 h •
0n. e trans porta
d b •ct ow O goods between vanous fixed
tr
1 n ges the gap betw een the buye r and the seller.
points of a supp y c am an
• d •. .
er utili.zed by a. firm to perform the lt'nk servi·ce 1s a ec1sive factor m
The. transportation . carri
ly chain facility and has an impact on the company's
determirung the effic iency of oper atmg the supp
n market.
competitive edge and prod uct dem and in a give
ation of supply chain in the global economy
The role of trans ~orta tion is vital in the oper tion
rs and sellers which results in greater transporta
because of the long er dista nce betw een the buye whic h
et place require more transportation time
costs. Also, oper ation s with in inter natio nal mark
high er storage costs.
necessitates higher inve ntori es and resul ting in
tics". It implies that transportation operates
It can be even state d that "transportation is logis
quali ty of transportation service provided bears
independently of othe r logis tics func tions . The
at a facility as well as upon the costs of operating
directly upon inven tory costs and stock out costs
decision is important. No firm can make the
a facility. Cost servi ce trade -off in trans porta tion and
shou ld apply the total cost or system approach
transportation decis ion in a vacu um. The firm ple,
othe r elements of the logistics system. For exam
consider how the trans port deci sion s will affec t a supp lier to the plant ,
to mov e raw materials from
if a firm switches from rail to air trans porta tion tories
it time) permits the firm to hold lo~e r inven
then the air carri er's incre ased spee d (or lowe r trans st
dema nd durin g trans it time and to use less warehousing space and les~ nnge nt pro~uct
to meet
portation costs .. Hence, the firm must consider
packaging as against the expe nses of high er trans
decisions regardmg mode of transport.
trade-off between cost and serv ice whil e maki ng

Traffic and Transportation Strategy I · · anagers are ··

Four strategic decis ions to be mad e by integ rated ogtSUcs m

(i) What modes of trans porta tion will the

firm use?
(ii) Wh t . . . l • ? . . ?
a carries m each mod e will the firm use · ·ct iers for transportation service.
Facto rs affecting
(iii) w·i the choice of
1 1 the firm ·oper ate its own fleet or hire outst e carr transportation
(iv) w·n
. hire a third party?
modes are:
1 the firm man age trans porta tion oper ation or
(i) nature of goods,
Characte risbc• . s of Transportatio . n Modes and Selection . . water and pipeline may be (ii) access to
. d amely road, 1' mbin
ra1 air, ·1 bl
ations are also avai at. e. carriers, (iii) price,
An of five trans porta tion mo es n ,:, 1 b. (iv) transit time,
se1 Yone or more h intermoua inatio co
ected t er, ,, comb n. Intermodal com ma i~n (v) security of
i,e " . o transport mate rials and prod ucts. Furt ts
"rail-wat er ·1 bl when a single transport mode goods,
in~' rail-road" "roa d-wa ter" "roa d-air " and suall y ava1 a e (vi) government
y offe , '
Used r specialised or lowe r cost servi ces not u d" advantages. The choice of
regulations and
(vii) safety.
. nd is • speed or transit
advantages a
AU th offer some ss to carri ers, price ,
trans e modes of trans porta tion ,F good s acce
Portar10
n mode depe nds on the natu re OJ '
 Logistics and Supply Chain Manage

-- 0 .
ti111 e. sec11nty of goods, 8.
. . r.,,y
. ,ove m111 en t regulat1011s , .\Ct1 e. and
.
fit with integ rated logistics st
. rategy _
tnent----.

I . the follo wing parag iaph s.

These factors are bttc .· ,fl)' dtscusscc 111
· . .·,
.. is obvio usly cann ot be trans porte d by air
v va lued bulk matei lil ·
( i) Nature 4 Good/j • Lo, . " .. · . . L'kew ise costl y mate rial . , rather
s such as comp uter rne
than hy roacl or ra1·1 ti,in ·•·
sp <
ort·1t1on c,1111c1s. t .
. i . •c not t ranspot tc
• . db shil) rathe r than by aircr aft. How ever, the chrnory .
chips ancl cl1amonc s. ,\I Y·
• . ,, e r good s need more analy sis . Otce
between truck ancl rail for pack agcc1 consul and care for rnak·
tng
the ctccision.
. . Cl . f tr·rn sport ation mode al so depe nd s on the acces
( ii ) A cc e ·s- to Carn e rs . 101cc o ' sibility the
F
s. or exam p le, to transport iro
ii , . . . . .- ers or tran sport ation mode
shi per has to the trans pot t C01111
• P . . . . n
,
ore from the mme to stee 1 P1an t, it may be econ omic al to use wate r trans port (by river or sea)
.-. .
But ,t nav10-able wate1 .ways a1e , . ot avail able the ore may have to be trans porte . ·
n ' , d by raI!. Also
.111 man y :::, t .· ,
coun 11es, 1·oa· ds <·ire avail <
able to reach almo st any place , most good s are
. transported
· . d t· t· ons
by tru e k to tI1e11 es ma 1 . How ever , beca use of the high er cost of transportat10n •

. . by truck ,
·
mterm o da I namt .e of tr·a, 11 spor·tat 1·011 beco mes more econ omic al
when ever feasible.
(iii) Price : Air transportation costs are far more highe
r than rail or road trans porta tion costs. Road
transportation costs more than rail, whic h in turn
costs more than wate r-tran sport . However,
for transportation of liquid materials, pipel ine is the
chea pest mode . Cons ideri ng transportation
costs alone , it may be observed that net cost direc tly
relate s to speed , But in integ rated logistics,
time is measured in how quickly the good s move .
For exam ple, a good s train may move faster
than a truck, but if the goods spend a week in the
rail yard for final deliv ery, it may take more
time than road transport (truck). Pricing based on
costs takes into acco unt the total cost of the
service which includes both time and mone y.
(iv) Transit Time : It is the time from the shipm ent
of the orde r at the place of origi n to the point
of receipt of goods at the destination. Tran sit time
is a signi fican t part of the order cycle , i.e. ,
the time from order placement to order recei pt.
Usua lly shipp ers prefe r short er transit time
w"hich improves customer service and reduc e in-tr
ansit inven tory.
(v) Security of Goods : Terminals and other stora ge
point s in the integ rated logis tics systems may
affect the s~fety of goods . When goods are in trans
it, it is less likel y that theft or damage may
occur, but rn some cases movement itself may cause
dama oe if the oood s are not properly
packed or handled carelessly. Incre ased hand ling
and stori n; of good : reduc e safety .
(vi) Gove rnme nt Regu lation s · Regular"
. · ions once gove rned every econ omic aspec t of transp ·
but no~ regulations focus on safety even thoug ortatio n
regulat10n s. For exam ple certa· • l · h econ omie s may be effec ted because of
• fl . · ' 111
iegu ations gove rn the trans porta tion of oas petrol and h
111 ammable items truck s have . ot er
carry. 1 · . . 0
' iegu ations iegar dmg maxi mum weig ht (tonn '
age) they can
(vii) Safety : Selection of tran s t t' . .
as well as carrie . I poi a ion mode ts often guide d by safe ty conc .
erns of general publtC
safety point of vie:m~oo:e ~s whlo lo~d and unloa
1
d the good s. Som e good s are packed from
and consequent dang · exam p e, acids ·ne packed ·
111 conta .
er to
peop 1e 1
1andl1
.' ' mers and seale d to avo1·ct Ieakaae
0
concerns which in turn affe t 11g the tra . • . safety
. 'nspo rt carn_ers. Pack ing addresses
. c c 1101ce of trans porta tion mode
The general criteria In rn~egratecl_logis tics manageme nt, the se lect
for selection of and handling equipment custom . . . . . . .
carrier are : , e1 se1 vice ed mode of tran sport ation .mus t fit with stron°aer
•
ooocl
0
s . 11 d
1 ot 11er aspec .
(i) price,
Carner Characteristics and Sele
' ts of integ rated logistics.
(ii) accessibility, ction
{iii) responsiveness, After selecting the trans portat'
{iv) claims record . . 100
I1
c 01ce will depend on which carri e. b mode ' .the next cl ecis1
. . . · The
on 1s selec tion of trans port earne
and (v} reliability. 1 r. .
road transport mode is selected th est ma111fests ti1 h
1 e c aracl eristi cs of the mode
' en t 1e next que st ion is "whi ch truck in o firm
. For examp /e' 1f,
is most fl exibk ?'
0
 d Logistics Activities 175- -
- - - - - -- - - - - - - - - - - - - - - - - - - - - - -- - - 8
,..... In tegrate
rriers are chosen on the basis of price acces 'b I•t · .
Sport ca ' Sl tty, responsiveness claims record and
rran . . ' '
/iabifrf) . . . . .
re '[he oueneral cntena for earner selection are discussed be 1ow..
. . Many integrated logistics systems dema d th b as1c · .
(r') p,ice.mode of transportation. . n e service (or core service) offered
The logistics managers will h h •
bY a . . c oose t e 1ow cost earner that
'des the basic service expected.
prov1
ii) Accessibility :_
1
T!
is means th at tra~sporta~ion capacity must be available where and when the
( I·nteurated
o logi s tics sy stem needs It. , Carners which can load
products at manufacturer's site
st
and unload the same at cu omer s site are preferred, because they provide a competitive
advantage over those that do not.
(iii) Responsiv~1zess : . This m~ans, ho:W readily the ~arrier responds to changin~ ~u~tomer nee?s.
Some earners which provide service under detailed contracts may be very ngid m the service
offered as described in the contract. Hence, customers may prefer carriers which are flexible
and respond better to customer's changing needs.
(ii') Claims Record : Low priced carriers may cause damage to the goods carried. Hence the low
priced carrier may not be the low-cost carrier. Damaged goods can not be used by the customer
and hence must be discarded or returned to the supplier. The customer experiences poor service,
the shipper has a dissatisfied customer and the carrier firm pays a damage claim resulting in
no benefit for anybody. Even on-time delivery will not be useful if the goods arrive in a
damaged condition.
(v) Reliability : Transport carriers that consistently deliver goods on time add more value than
those that do not. Firms practicing JIT system of production need reliable delivery from
suppliers, regardless of the mode of transport. Otherwise JIT system will fail. If the reliability
requirements are high, it is more likely that goods will move by faster modes and faster carriers.

Carrier Selection Decision

Exhibit 6.4 illustrates the carrier selection process.

► Exhibit 6.4 : The Carrier Sele~tion Process , ◄

Step 1

Step 2

Model
Choice Specific Carrier
Basic Mode Legal Type
lntermodal Individual
Transport
Carrier
Carrier

S!eps involved in the carrier selection process are : b . d of road

(i) Se! . . The choices include the as1c mo es ,
. ection of transportation mode by the firm. . hich used two or more modes to
ra11 d I t ansportat10n w .
' Water, air and pipeline. Inter mo a r d E mples of inter modal transportat10n
Prov·ct . . y be selecte . xa
. 1 e service over a given traffic 1ane ma
incluct . k · and rail-water.
("11 e rail-road (piggy back), true -air d . ter modal form . This involves
J Sele · •th · he chosen mo e or rn .
Chon of a specific carrier from wi in t gulate d con tract , exempt or pnvate.
seJe 1· '
c ing the legal carrier type: common, re
 Logistics and Supply Chain Manag

-0
en,ent
.......
. t . The salient carrier selection determinants are: (i)
• s I ction Determman s •
Carrier e e .
The relevant service performance determinant er
carri
costs an d ( zz service per/ormance. •
. ") s are :
d (d) urity
a transit time, (b) reliability, (c) capacity an sec . . . ' . . .
( ) . d t minants interact m the firm s log1st1cs function is disc
How carrier cost and service e er Ussed
in the following section: .. . . .
. Th' • maJ·or carrier select10n determinant. It mcludes the
(i) Transportation Cost : IS IS a . .. . d . . rates,
. . . ht loading and unloading fac11It1es, packagmg, amage m -transit and spec· I
mm1mum we1g s, . . . 1a
services available from a carrier-for example, stopping m transit.

(ii) Service Performance : . .

( a) Transit time is the total time that elapses from the time the cons1g_nor makes the goods
available for dispatch until the carrier delivers the same to the consignee.
(b) Reliability refers to the consistency of the transit time a carrier provides.
Transit time and reliability affect inventory and stock-out costs. Reliable transit time enables
the marketer to gain product differentiation and competitive advantage in the market place.
( c) Capacity and accessibility determine whether a particular carrier can physically perform
the transport service desired. Capacity refers to the carrier's ability to provide the facility
required.
( d) Accessibility considers the carrier's ability to provide service over the route in question. It
refers to carrier's physical access to facilities
(e) Security concerns the arrival of goods in the same condition they were in when tendered
to the carrier.
The basic modes of transportation available to the logistics managers are : (i) road (trucks),
(ii) rail (goods train), (iii) water (river, ocean shipping), (iv) air (transport aircrafts) and (v) pipe
lines (for liquids and gases).
The relative importance of each mode can be measured in terms of system mileage, traffic
volume, revenue and the nature of the traffic composition.
Transportation infrastructure consists of the rights-of-way, vehicles and carrier organisations
which offer transportation services on a for-hire or internal basis
To understand the impact of each mode of transportation, it is necessary to consider their
relative revenues and volumes. Ton-mile or Tonne-Kilometer is a standard measure of freight activity
which considers both the quantity in weight and the distance moved.
(i) Road Transport: In developed countries, highway transportation has expanded rapidly because
of the infrastructure available. The road transportation through truck facilitates door-to-door
op~rating fl~xibil~ty and speed of intercity movement. Road trucks compete with air for small
shipments a nd rail for large shipments. The average length of haul for truck carriers is about
SOO miles (or BOO kilometers). Trucks are very flexible and versatile. A wide network of roads
enabl~s ~rucks to offe~ point-to-point service between almost any origin - destination
co~bmation. Trucks are versatile because they can transport products of varying sizes and
weights over any di st ance. They have become an important part of the logistics networks of
most firms because their ch t · ·
arac ensttcs are more compatible than other transport mo des.
(ii) R 'I Ti
_ai ran.sport : Rail roads are primarily long-distance large volume movers of low value,
high density goods A ma·
·
d . . '
Jor a vantage of usmg rail-road transportation is the long is a
a· t nee
movement of com d1·f · ks
T mo ies 10 large quantities at relatively low rates Rail transport lac
versatl _1dty and fl_exibility of road transport carriers because it is limited t~ fixed track faciJitie~ -
I t prov1 es termmal-to-terminal · 'bT ty 1s
• d' service rather than point-to-point service. Low acces st 1 1
one pnmary 1sadvantage of rail transport.
 111tegrated Logistics A c t i v i t i e s - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
/ ~ h
ssibility re1ers to t e carrier's abil't
~
~
p.cce . . Th ·1 i y to provide se .
ticular situation. e rai carrier cannot d . rvice to and from the f Tt' .
par f . . eviate from th aci i ies m a
the shipper o consignee is not adjacent to the ·1 e route that the rail track follows If
. d t f ·1 rai track rail t .
Another disa van age o ra1 transport is long t ' . ransport is not easily accessible.
f bl .d 1· ransport time as
h' compared to road transport.
Rail roads avoura y provi e re tability and safet
· r B t ·
t logistics manage · u moving goods by· ra'l Y w . ich are service · that are important
qua1·Ities
o t i requues consid bl
packaging coS s. era e packaging and resulting
.. "'ater
1 Transportation : Several distinct categ .
(iii) '' • ones of water tr ·
aterways such as nvers and canals (b) lak ( ansportation are: (a) inland
w ' es, c) coastal and · t
(d) international deep sea. In some countries w t . m ercoastals ocean and
a er earners
. compet ·
. e pnman ,1y wit . and
. h rail
Pipeline. Majority of commodities carried by water
transported in bulk. (coal, uon • ore, petroleum). Very earners are semi-processed
d . or r aw ma tena · 1s
1
used to transport petroIeum or crude 011 . from oil producin arge cru e. earners . or super . tankers are
. . . g countries to oil consummghcountries . ·
Container ships carry cargo in containers either owned or leased b th h'
origin. The container 1s transported by rail or trucks to a point ~
. . y d'es ipper at t e. pomt .of
. . . . 1or 1oa mg on a contamer ship.
At the destmatton port, t~e container 1s unloaded and put on the rail or road transport carrier
and delivered to the consignee.

The use of containers in inter modal logistics reduces staffing needs, minimizes transit damage
and pilferage and shortens transit time.

(iv) Air Transport: Although increasing number of shippers are using airfreight for regular service,
air transport is viewed as a premium, emergency service because of its high cost. But when an
item has to be delivered to a distant location quickly, airfreight offers a quickest "time-in-
transit" of any mode of transport. However, air transport is the least utilised mode of transport
because of the high freight costs. But the high cost can be traded off for high speed which
allows other elements of logistical design such as warehousing or inventory, to be reduced or
eliminated.

Air carriers generally handle high-value products and for international transportation o~ goods.
Air transport provides frequent and reliable service and rapid time-in-transit, but termm_al and
delivery delays and congestion may reduce these advantages to some degree on a pomt-to-
point basis. Over short distances, air freight may not be economical as compared to r?a~ or
·
nu·1 transportation taking into consideration · the totaI tr an sit time rather than the transit time
from terminal to terminal. .
A' . shi ments or shipments which are highly
Ir transportation is necessary for movmg emergenc~ . pd R . b'lity of air transport is also
perish bl · "b ·1·ty · omewhat hm1te . e1ta i
a e. Au transport accessi i i is s th r conditions But air transport
som h f· t ption due to wea e ·
ew at of a disadvantage because o m erru t for international shipments. The
has become a very reliable alternative to ocean transdpl?r osts and reduced packing costs
rectu d • nd port han mg c .
ce au transit time reduced de1ays, a . . t and improve customer service.
enabl ' d O verall logistics cos
s
( e exporters and importers to re uce • 't ble for general commodities
~) Pi 1· tation is not sui a d
Pe zne Transportation : Pipeline transpor f de oil liquid petroleum pro ucts,
tran8 0 . . h ovement o cru ' . 1.
P rtation rather its use is restricted to t e m t d movement of iron ore or coa m
Water, chemi~als and natural gas. Some firms havebatt::n:ageous (i.e., gradient) Natural gas
slurry t0 h f land can e a
'!
a rm wherever the topograp Y O . ·ne traffic. .
nct crude oil account for the majority of pipeh . dependability at a relatively low
Pip 1· . h level of service
Cost,
e ines offer the shipper an extremely hig

.
Ii; •Actvant ages of pipeline transportation
are·· onitored and con trolled by computers.
fhe fl . . can be close1y m
ow of products within the pipelme .
 Logistics and Supply Chain Ma
- e f - - - - - - - - - - -- - - - -- - - nagelllent .....__

( ii) Losses and damages due to pipeline leaks are minimal. . . . .

.. .· · I effect on products moving rn the p1pehne.
(iii) Climatic cond1t1ons have mmima
(iv) Pipelines are not labour intensive and strikes or employees absence have little effect on their

operation . . . . .
. d t other modes for transportat10n of liqmd matenal s or gases
( v ) Low cost as compa1e o ·
(vi) High dependability.
The di sadvantages or limitation s are :
(i) Limited to only liquid and gaseou s products.
( ii ) Limited accessibility, only shipper adjacent to the pipeline can use this mode directly.

(iii) Pipelines are not flexible and are limited with respect to commodities that can be transported.
( iv) The speed is quite low, typically Jess than ten miles per hour, resulting in long transit times.

(v) High fixed cost for installation.

lntermod~I Transportation
lntermodal Intermodal transport service refers to the use of two or more carriers of different modes in the
transportatio n through movement of a shipment. The logistics man::tger, through routing, uses different modes
10
refers to the use of get a product to its final destination. The basic reason for using intermodal transportation are:
two or more
(i) service characteristics of various transport modes and (ii) costs. For example, the limited
transJ)Ortatio n
modes to transport accessibility of air transport necessitates use of road transport carriers for pick ups and deli veries.
freight, for By manufacturing the modes of transport, logistics manager can overcome a given mode's service
example, rail to
disadvantages and retain its basic advantage usually low costs.
ship to truck.
Various intermodal Intermodal services maximise the primary advantages inherent in the combined modes and
transport services minimise other disadvantages. Various types of intermodal transport services are (a) truck-rail
are {i) tru ck-rail
(referred as to piggy back), (b) truck-water (fishy-back), (c) truck-air (birdy-back), (d) rail-water,
{piggy-hack),
{ii) truck-water (e) pipeline-water and (f) pipeline-truck.
(fish y-back),
(iii) truck-air {birdy- Private Fleet or For-hire Carriage or Third Parties for Transportation
back ) etc.
Some firms operate their own fleet while some other firms hire outside carriers (i.e., for-hire
carriers). Some firms use both their own fleet and outside carriers.
The private fleet is chosen because of accessibility to specialised transport equipment and the
need for tight control over delivery. Where general use vehicles are adequate, then for-hire carriage
would be the choice.

. ~ any ~irms rely _on th ird parties to manage their transport;tion needs or other aspects of
log1st1cs. ~h!fd pa_rty firms provide linkage between shippers and carriers. Often they do not own
tran~portat1on eq~1pment themselves, instead they have partnership arrangements with a numbe~ of
earners w~o pr~v1de the transport equipments. The various types of third parties are : (i) transportatIO~
brokers, (u) fre1g_ht forwarder~, ~i ii) shippers association, (iv) intermodal marketing firms (shippers
agent) and (v) third-party logistics service providers.

Activities of Transportation Managers

Three basic types of
Some of the common activities of tr . f fi rms in
t ransport which they work are . (') a~s~ortat1on managers irrespective of the types o . of
documentation are : · t contract negotiations ( · ') ff • . · · ·) evaluauon
customer service quality I d . . . ' tt e 1c1ency improvement, ( Ill
{i) bills of lading, eve I an (t v) superv1s10n.
(ii) freight bills and Transport Documentati on . Th h . . ration are:
(iii) ship1>irtg · b 'll f 1 ct· ·· freight
· bills and e t I ee basic types of t an sport documen
• r ···)
(t) 1 so a mg, (tt} h' . r
manifest. tu s ippmg manifests.
 ---- ---- ---- ---- ---- ---- ---- ----
~ 1~
,,,.....111tegrated Logistics Activities

The bill of lading is the basic documen t utilised in ur . .

. t and document s commodi ties and qua t't• h" P chasmg transport services. It serves as
receip n i ies s ipped It s "f
a ·er liability and documen ts responsib ility for all cause · peci ies terms and conditions of
earn G d . s of loss or damage except those defined
as acts of o .
method of h ..
Thefireight bill represent s a carrier's c argrng for transportat1· on services· d d
ren ere .
be either prepaid or collect. A pre aid bill
It maY . p means that transport cost must be paid prior to
ortation service, whereas a collect shipment shifts payment responsib1 . ..
trans P hty to the consignee.
The shipping manifest lists h .
individua l stops or consign ees w en mu 1tlple shipments .
. . . are placed
a single vehicle. Each shipment requues a bill of lading · Th e mam.fest 1.ists the stop, bill .
on d f of
lading, weight an case co~nt or eac? _shipment .. It provides a single account which defines the
contents of the total load without requmng a review of individu~l bills of lading.
Responsibilities of Traffic Departm ent
The tr~ffic departme nt has the respoqsib ility for mana~iµg all freight-re lated transportation
activities. It mflue~ces over SO_ per cen~ ~f the average logistics. cost of the firm. Other responsibilities
include: (a) handmg and claim admmistr ation, ( b) equipmen t scheduling, ( c) rate registratio n,
(dJresearch and (e) tracing and expeditin g.

4. Inventory Management
Inventory planning and managem ent is one of the most misunderstood activities in inteorated
e,

logistics management. Inventory decisions are high risk and high importanc e decisions from the
perspective of logistics operation . A number of logistics activities become necessary because the
of
commitment to a particular inventory assortmen t and its shipment to a market in anticipation of
future sales. Without the proper inventory assortmen t, sales would be lost and customer satisfaction
would decline. Also, inventory planning is critical to manufactu ring because raw material shortages
can shut down a manufact uring line or alter a productio n schedule, which in tum will result in
increased expenses and shortage of finished goods. Just as lack of inventory can disrupt planned
marketing and productio n operation s, overstock ed inventorie s also create problems. Overstock ing
increases costs and reduces profitabi lity through added warehous ing, working capital needs,
deterioration, insurance , taxes and obsolesce nce.

Rationale for Having Inventory

A firm's different functiona l areas may view inventory differently. For instance, marketing
wants high inventorie s over a broad range of products to allow quick response to customer demands .
M_anufacturing wants high inventori es to support long productio n runs an~ also to ensure that there
Will not be any productio n stoppage due to non-avail ability of raw matenals
and componen t parts.
Also , manufacturmg. wants to gam . advantag es o f economie· s O f scale by producin°0 lar00 e . batches . of
products, so that the per unit fixed costs can be reduced. Finance generally prefers low mventone s
so as t0 · . d nt assets and increase return-on -assets.
mcrease inventory turn-over rat10, re uce curre . . . .
Integrated 1 . . concurs wit .h h . t f v•ew of finance. High mventory mcreases• mventoryd
og1sttcs t e porn o • d t ial handling costs.. Both fmance an
carr · .
. Ying costs, warehous ing costs, packagm g costs, an ma er
integ . . . which should be opt10nal.
rated logistics recognise the need for some mventory
Basic Inventory Concept s .
Th . . . . f 0 r holding inventory and vanous types of
·1 e basic mventory concepts mclude: (i) reasons
nvento ry. Why hold inventory ? Inventory serves fve
1 purposes:

(i) It enables the firm to achieve economie s of scale .

Ui) It b
alances supply and demand
 Logistics and Supply Chain Managernent---..

- e f - - -- - - - - - - - - - - - - - - - - -,-f-p-ro- duct availability is affected by the bul]wh·

'I bTty . The !eve o . h I fl . ip
( vi) Level of Product Avar a I I • . the supply chain. T e arge uctuat1on in orcte
. ·e stock outs inf'. to supply all d'1stn'b utor an d reta1·1er order rs .
ffect This results 111 mOI · factunn . . . sin
e · 1 g urn ·
makes it difficult for th e mam ' · . , . 1 rs will run out of stock, resulting m lost sales f .
. . . . s th e likelihood that retai e o,
tllne. This , net ease.

th e sup pl y chain . . . The bullwhip effect has a negative effec t

. • ,. 11 . Supply Cham • . 'ff on
(vii) Rclahonslup Ac1 oss · ie , t·f. t , the relationship between d1 erent stages of th e
,. t·1Ye and thus cl ec s h .
performance at evciy s 'gin the supply c·I,am . has a tendency to blame t e other stages because
• I ,a
suppl y cham. Eac•.1 ·statoe . The bull-whip effect thus . leads to .a loss of trust
· a the best 1t can .
d0111 .
eac h stage fee ls it is to h •n and makes any potential coordination efforts
betwee n different stages of the supp Iy c ai
more difficult.
b ct· ssion it fo II ows ti1 at t he bullwhip effect and the resulting lack of co ·
From th e a ove iscu ' . . ton the supply chain 's performance .
ordi nation have a significant negative impac . . .
. ·
The bullwhip effect reduces thee ff1c1ency of the supply chain by rncreasmg cost and decreasin bo
responsiveness . .
·
Box 16.2 summarises ·
the 1mpac t 0 f bullwhip effect on supply cham performance.

► ◄
Box 16.2 : Impact of "Bullwhip Effect" on Supply Chain Performance

'Performance Measureii/

Manufacturing cost
Inventory Cost
Replenishment lead time
Transportation cost
Shipping and Receiving Cos( .
"~ \
Level of Product_Avail~bilitY, ,., ii :: ·
Profitability

The bullwhip effect reduces the profitability of a supply chain by making it more expensive to
provide a given level of product availability.

I OBSTACLES TO co .. oRDINATION IN A SUPPLY CHAIN

O!Jstacfe~ to co-
ordination in a It is necessary for supply chain managers to identify the obstacles to co-ordination in rhe
supply chain can he supply chain so that they can take suitable actions that help achieve co-ordination.
cateyorised as : The major categories of obstacles are
(i) incentive
obstacles, (i) Incentive obstacles
(iii info rmation
(ii) Information processing obstac les
processing
obstacles, (iii) Operational obstacles
(iii) opuralional
(iv) Pricing obstacles and
obstacles,
(iv} pricing (v) Behavioural obstacles
obstacles and
(v) behavioural Incentive obstacles refer to situations in which different incentives are offered to different
obstacles. me~bers ~f the supply cha~n leading to actions that increase variability and reduce total Suppl~
charn profits. For example, if a transportation manager is given incentives if he or she reduces th
.
average transportation . then the actions taken by the transportation to use cheaper
cost per unit,
 - Coord ination and I •
nforma tion Technology in a Supply Chain - - - - - - - - - - - - - - - - -~
j~
modes of transp ort .
delayed delive ries . In turn may increase rn • ventor . g cost
y carryin or affect customer service · d
ue to
Inform ation proce s .
as it flows betwe en dift sing obS tacles refer to situ ati ons in which
demand information is distorted
within the supply chain e~~ st ages of the suppl y chain , resul ti ng
in increas ed variability in orders
demand m<!-y be magnifi.ed ase: ~orecaS ts are based on orders recei
ved , any vari ability in cu stomer
(i.e. , bullwh ip effect) Also lack r t ·s move _u p the suppl y chain to manufa
0 ctures and their suppl iers.
the bullwh ip effect. mfonn ation sharing betwee n stages of the supply chai n mag nifi es
Opera tional obstac les refer t . . .
lead to an increa se in variab il"t Wol actw~ s taken 111 the course of placing
1 y. 1en a firm places •d and fillin g orders that
he Jot sizes in which dema d 01 . · 1 · •
t ei s in ot sizes which are much larger than
n occurs , then variabilit O f d · ··
F1·rms may result to orderi no in 1 0 Y or ers 1s magnif ied up the supply chain.
are,e 1ots becaus e there rn b
w1
'th placino receiv ino or trao
°• nsport
.
mo ay e a s1gm 1cant r·1xe d cost associa
· ·f· ·
ted
O an order orb
0
d on Jot sizes. In such ca h h ·
• e~ause t e supplier may offer quantity di scount s
base . ses t e order stream WIil not match with the demand stream .
In replem shmen t lead times betw · .
. b
effect w111 e magm 1e .
•t· d een st ages m a supply chain are large, then the bull whip
Pricing obstacles refer to situati ons ·
. . .. m w h.1c h th e pncmg
· · · ·
policie s for a product lead to an
increase m vanab illt~ of 0rd ers placed . Lot size-b ase quantity discou
nts may increase the lot size of
orders placed. Lot size-b ased quanti ty discou nts may increase
the lot size of orders within the
supply chain and the large lots would magni fy the bullwh ip effect
within a supply chain.
Trade promo tions and other short term price discounts offerer
by a manufacturer result in
forward buying in which a whole saler or retaile r purcha ses large
lots during the promotion period
to cover future deman d also.

Behavioural obsta cles refers t9 proble ms in learnin g within organi

sations that contribute to
the bullwhip effect. These proble ms are related_Jo the way the
supply chain is structured and the
communication betwe en differ ent st~ges in the_supply chain.

MANAGERIAL LEVERS TO ACHIEVE CO-ORDINATION

WITHIN A SUPPLY CHAIN
. . . : h · ·,
a supply c am are 1· den t'1fie d a supply
Once the obstac les to co~or dinati on withm chain mana00 er Them are certain
. . . h manayerial levers
needs to take certain action s to overc ome these Ob st ac 1e. Th e fOllowin g manao 0 enal actions mt e
or actions in the
. . b h' ff t to a
supply chain increa se the total profit 1 h ·
s m the supp Y c am d also reduce the u11 w 1P e ec supply chain that
an
moderate level· help managers tn
. . . overcome obstacles
(i) Aligning the goals of suppl y chain manag ement wit . h the incent ives provid ed to each supply
to co-ordination
within the supply
chain partici pant.
(" . ~ . h in chain, increase
. . differe nt stages m the supply c a .
ll) Improvmg the accura cy of inform at10n availa ble at total profits and
Wi . • ·ng scheme in also reduce the bull
J Improvmg operat ional perfor mance and desigm g PP
. .n a ropria te produc t rat10m
whip effect to a
case of shorta ges. modernte level.
(iv) Des· ·
igning pricin g strate gies to stab1·1·1se or ders · .
(v) Bu·rct·
1 . h' a supply
ing strateg ic partne rships and trust wit rn cham. d.
The .. briefly discusse m
. .
the f se manag erial action s to achiev e co-or dmau o n in a supply cham are
Ol!o .
wing section.
·
 o b aL
l ogistics and Supply Chain Management

T h isst r a t e g y
(i.e., low-cost strategy) is most appropriate 449

mands for local

d where dema where there are
O S sr
eductions.
t edt

s u i t a i
responsiveness
consumer goods markets where are minimal.
strong pressu
However
ssures for
this strategY
be

lobalglobal firm may have to demands for local

nay
nol
Such
willdiferentiateits
acases
a responsiveness remain
re nroduct offerings through pursue "differentiation strategy"
highs
superior product design, where the firm
high
resnonsiveness and customer
local
res
quality and functionality to
service levels. Such
ic strategy. Thus global firms are able to a
strategy is
m u l t i d o m e s t i cs t r a t e g y
ohieve
known as

ter return on investment from their skîlls

and core
( i l earn

location economies where they can

competencies
realise perform most effectively and
i l ealise greater nce
experience curve economnies which reduces the
cost of
ahove
the above discussions on
topics
such as
production.
From global economic environment, economic
gration and global strategy, we infer that all these
topics are relevant to global logistics and
sUDDly c h a i n management.

THE CONCEPT OF GLOBAL LOGISTICS AND

GLOBAL SUPPLY CHAINS
la the present era of globalisation, trade barriers between countries have disappeared and
ahhal business activity is accelerating at a very fast pace. Global markets have developed because
f similar global needs and wants. Virtually the same products are sold around the world to consumers,
sinesses and organisations. Customers all over the world prefer high quality, low-priced products
hat are more highly standardised. The availability of high quality merchandise at locally reasonable
mice levels attracts customers throughout the world. These standardised products (global products)
ue produced in any location in the world that offers advantages in cost or access to research and
markets. They are supplied through complex production and distribution systems under a variety of
in
organisational and legal arrangements. These products become the focus of global competition have
These companies must
markets where global companies strive for market shares and profit.
on time at desired locations
thie ability to supply products to a constantly changing market place
success and failure of a company both
Eiiciently. Such an ability will make the difference between Two aspects of
in the market and in financial return. global logistics and
chain management are:
1wo major aspects of global logistics and supply supply chain
management are:
) global or international sourcing and global sourcing,
i) giobal
global manufacturing or focused manufacturing manufacturing.
of raw materials,
iObal sourcing which outsourcing involves procurement
is also referred to as
suppliers. It is a critical component of
on from foreign
h s, parts, sub units and finished goods The major reason for outsourcing
is lower
companies.
istics supply chain in many global for materials and higher profits
countries mean lower prices
forsthe
tor
rlabour costs in developing
buying firm. world that offers a
cost advantage and
of the
The trend todayi
1s to outsource from any part
chain. This concept
is extended by shifting
move it to logistics
any destination through the global focused manufacturing.
Productionny
production to a which is known as global manufacturing or
world-wide suppliers
Itis Strat foreign«
reign country manufacturing plants
as the
are designated
e n s u r e that the finished
a
of a strategy
giay
i
In which few
one or
logistics is responsible to
the global
ven product or product line. The global time anywhere in
at the right
products are at right place, in the right
quantity,
market place.the
 Tldin Mana

450
Aanagement
formulate strategy on

Global Competitive Strategy:

Global companies
seek to
influence their industries?
s'
aa
world-wide b
compettitive
opportunities. They
to exploit new market
efficiently and
effectively. balance
implement global strategy multidomestic companias
successrul than

Global companies

strategies which help

tend to be m o r e

them to achieve
their business objectives
simultaneousl
materials and compone
develOcatopiionsng
strategically sOurce
throughout the world. They
are likely to

select global locations for key supply

depots and
distribution

transfer
tres, use
centr

existing logistics
wornetworks
existing logistics1 ld-wide,
when sourcing and distributing
new products
and
technologi new
markets.
their operating strategy objectives around four
Global corporations Global corporations design compond
design their marketing, (i) manufacturing and (rv) logistics. While it is essents
(ii)
operating strategy
(i)
initiatives in all four areas should function synchronousiy, the logistics system serves as the c tha
technology,
objectives around infrastructure upon which the other systems operate. In addition, global firms have recognised
four components fact that global logistics system itself may provide a source of competitive advantage.
the
technoBoyy.
ii) marketing, For example, Toyota has a strategy of producing more automobiles within the national mark
fi) manufacturing markets
and outsource parts and components from Japan and other countries instead of producing automobiles
and fiv) logistics
solely in Japan for export throughout the world. Toyota has developed the Just-In-Time concept for
global operations. By refining its information and planning systems, it is capable of outsourcing
parts and components from many different countries for its manufacturing plants in twenty-five
countries all over the world.
Global competition has the following four prominent characteristics:
(i) Companies competing globally seek to create standardised, yet customised markets.
(ii) Product life cycles are shortening (some times less than one year), for high-tech products such
personal computers, audio visual equipment etc.).
as

(iii) More companies are utilising outsourcing and offshore

manufactåring.
(iv) Marketing and manufacturing activities and strategies tend to
converge and be better coordinated
n firms
operating globally.
For
companies serving global markets, logistics networks tend to become more
complex. As a result, usually, lead times increase and expansive and
successfully in a time-based competitive environment,inventory
levels rise. Therefore, to operate
firms emphasise managing logistics
system, shortening lead times when possible, and as
factories that produce limited moving towards focused manufacturing (focuseu
product lines for geographically specific areas).
In designing and
implementing global logistics strategies, the most
understand the service needs
of important step to
This is an essential customers in locations
widely dispersed throughout the d
prerequisite to developing effective
strategies to satisfy the needs of global markets. manufacturing, marketing and
1og
From the previous discussion it
is inferred that
is o f critical importance in global
global logistics and supply chain
business. The global company should have the o r i e n t a t oment

The global logistics

managc on
managing the product flow in an international
and supply chain market place and how it can
management
supply chains as an integral part of its develop and uu the
corporate strategy. The global
enphasises three management emphasises three essential components: logistics and supp
and (iii) process. (i) structure, (ii)
Bssential
components:
organisational n
The scope and complexity of a
i structure, world wide
i) organisational following questions to be addressed by a global logistics and supply chain network the

networks and (i) What the

company:
fiil processes.
are
important issues in managing the global
supply chain as part of corporate sua
 451
Global Logistics and Supply Chain Management

from the
What specific chains of
operations are materials and products
necessary to move
itial source to the final destination?
intricate
bal
How can global
companies manage these chains of planning, coordinating
nply processes and delivering products to final
supply,
customers while at the same time meceting
the corporate objectives?
context how does crossing international borders luence management decisions
In a global

supply chain?
in the
iow can
(1) How can management organise this process to serve the needs of global corporations?
p o s s i b l c to manage a task of such a large size and
1)
Is it scope?
The forces that guide the development of global logistics and supply chains are:
chain concept
)Thesupply
The
trends within lobal business and
The new orientation of companies toward core competencies.

Clabal Supply Chain Management Versus Domestic Supply Chain Management

There are sonie
and concepts
supply chain management (GSCM) has many of the same basic functions
Global similarities and
but there are substantial differences between the
domestic supply chain management (DSCM),
do
some major
differences between
necessitating different managerial approach.
uO global supply chaia
Similarities between domestic andglobal supply chain management are: 1anagemnent and

framework of linking supply sources, manufacturing plants,

warehouses domestic suppBy
The conceptual logistics chain management
is the same in both.
and customers

Both systems involve management

of movement and storage of products.
Information is vital for effective provision of customer service, inventory management, product
vendors and control of costs.
and service quality monitoring by
warehousing, order processing,
7 Both require the functional processes of inventory management,
carrier selection, procurement and vendor payment.

exist for transportation in both domestic and global supply

Economic and safety regulations
chain management.

Major differences between domestic and global supply

chain management are
which the products have to be moved;
distance through
1he most obvious difference is the
wWith the global SCM being greater than the domestic SCM.
few languages
guage is another obvious difference. In the
domestic supply chain one or
be used. For
whereas in a global supply chain, two,
three or more languages may
pOken Greek ship owner, an Italian
a buyer firm may have to deal with a Spanish supplier,
ple, it necessary for the buyer
to
war
operator and Indian Trucking company, making
Se
nave
an

command of multiple languages.

It is used in communication in global supply
necessary to examin
ine the meaning of words "short ton"
chain different meanings such as
For example, the word "ton" has
(2000 managemea "metric ton" (2205 pounds) and a "long ton" (2240 pounds). The different
"ton" unless it is
Particinan different meanings to
the word
Supply chain may attribute
i)
elearly specified as short, long or metric ton.
Many cultural differences among the people have to be encountered in global supply
may and
a

chain. For examrferences

business (say lengthy meal), over a
national

way of conducting
Telof global
igious holida
holidays
sup
: e
work ethics may vary among countries. This the productivity means
chain.
tne the
countries involved in
supply
nanagement will vary among
 Logistics and
-Global
Supply Chain
Managem 455
Cueategic choice
(iil) Strategic of
international
(iv) Scheduling production and warehousing facilities.
kaging, monitoring the
Onitoring
v ) Pac
transportaion and
final
delivery
progress of items
items through
thrc the production
proceo
(vi) nalysis transportaion costs which
of to
customers.
0des of transport available in involves the critical examination of
relation to customer various alternauv e
Aelivery, reliability of delivery needs such as
uolved include freight charges,
invol schedules, convenience of collectionspeed and
frequency
etc. The various
insurance, intermediate handling and
nackaging costs, documentation expenses, co ial
and interest
on
capital in the expected
form of transit
storage, Spe
pilferage, spoilage and stock holding costs
inventory etc.

GLOBAL LOGISTICs
Of
Clobal/International logistics is the design and
materials
into, through and out of the management of a system that controls the Global logistics is
compasses the total movement
logistics. It encon international corporation. It is also called as global the design and
acerned with movement of goods, including both
conce.
concept by covering the entire rangege of operations management of a
exports and imports at the same time. system that
Svstems approach enables a firm to recognize the contrals the flow of
links among the
mnonents within and outside of a corporation. The firm
Compo traditionally separate logistics materiais into,
can build through and out of
ncfomers and all partners the firm in the areas of
of unity of purpose for
suppliers, the international
f svstems considerations, the firm can performances, quality and delivery. As a result
nd, electronic data interchange (EDI)develop just-in-time (JIT) delivery to reduce inventory Corporation.
cost
for more efficient
order processing and
inyobvement (ESI) for better planning of production and early supplier
movement of goods. The use of such
Sstems enables a firm to focus on its core
other firms. For example, a firm can focus
competencies and to form out sourcing alliances with
only on manufacturing (as its core
sQurce all aspects of order filling and competency) and out
delivery to an outside provider. Firms can also
eficient customer response (ECR) systems by working closely with retailers. develop
This can track sales
activity on the retail level. As a result, manufacturers can
efectively respond to actual shelf replenishment needs rather precisely
co-ordinate production to
than based on forecasts.
International logistics has two major
phases of movement of materials: (i) Materials
management which is concerned with the timely movement of raw
Supliers into and through the firm. (ii) materials, component parts and
im's finished
Physical distributions which involves the movement of the
goods to its customers.
in both
phases the movement is viewed within the context of the entire
process including the
ate
obort
storage and inventory. Logistics management is concerned with the effective coordination
pnases and their various components in order to achieve maximum cost effectiveness while
antaining service goals and requirements.
gr
Concepts in Global Logistics
Three Concepts are: (i) The systems concept, (ii) the total cost concept and (ii) the
hdeoff
rnde-off concept. Three major
concepts in glabal
The systems
s conceptt ingistics are : } the
is based on the notion that material-flow activities within and outside
im are SIVe systems concept,
eraction. Theextensive
syst and complex
con and hence can be considered only in the context of their i) the total cost
concept, (ii) the
Sems concept provides the firm, its supplier and its customers (both domestic
gn) with the trade-off concept.
benefits of synergy.
atormation
iknoeÁormlogistics flow andinfluer
tico availability
W and partnership trust are instrumental for the working of systems concept.
luences both to day decisions and network planning process and
day
pOty is highly dependent on the availability of information.
 Logistics and Supply Chain Management

456
o u t growtn
or the systems concept. Tos
concept is the logical
the total cost logistical activities. The n s
Development of evaluate and optimise
to
purpose
basis for
measurement
logistiCs
cost through the implementa
tation
cost is used as a overall
the firm's
to minimise
of the total cost concept is

of systems concept. understanding of the source of cost For

total cost concept requires the
Implementation of
the It is a technique designed to more
has been de veloped.
this. a system of activity
hased costing
firm to the activities performed
based on
s o u r c e s of a
the direct and indirect nro
accurately assign the c o n s i d l e r a t i o n of total after-tax
concept must also incorporate
consumption. The total
cost
functions into account. This is tan import
on the logistics
the impact of national tax policies cote
by taking after-tax profits rather than minimising total
in order to achieve
the objective of maximising
which result from the
the links within the logistics system
The trade-off concept recognises
of inventories through implementation of
interaction of their components.
For example, a reduction
for costly emergency shipments
but may increase the need
Just-in-time system will save money cost but additional costs
customer may reduce transportation
Also a warchouse near the
locating with new warchouses. Hence such trade-offs must be recognised and analysed by
are associated

decisions to maximise the performance of logistics systems.

managers while taking

IGLOBAL SUPPLY CHAIN MANAGEMENT

Activities involved Supply chain management is the management of activities that transform raw materials into
in the supply chain intermediate goods and then into final products and that deliver those final products to customers.
are purchasing For most firms. supply chain management involves operating a network of manufacturing and
fn manutacturing distribution facilities that are often dispersed all over the world. The activities involved in the
fuu logistics
fiv distribution supply chain are (i) purchasing. (ii) manufacturing, (iü) logistics, (iv) distribution, (v) transportation
tv transportation and (vi) marketing.
end fvi merketing
The integration of the three concepts namely the systems concept, the total cost concept and
the trade-off concept discussed in the previous section has resulted in the new paradigm of supply-
chain management where a series of value-adding activities connect a firm's supply side with the
demand side. This approach views the
supply chain of the entire extended enterprise, beginning8
with the supplier's suppliers and with ending consumers or end The
perspective comprises the entire product and information and funds flowsupply-chain management
users.

that form one cohesive

ink to acquire, purchase,
manufacture, assemble and distribute goods and services to the ultimate
consumers or end users. Efficient
supply chain management can increase customer
profitability of the firm by reducing costs. satisfaction and
The International Supply Chain/Global
Supply Chain
The term international or global supply chain covers
both logistics and
activities such as
sourcing, procurement, order processing, operations. It includes
contrel, servicing and
warranty, customs clearing, manufacturing, warehousin8, mve
management is a key component in a firm's wholesaling and distribution. Supply ea
plant and service location. It increases the global strategy. It influences major decisions suen a
The Globalisation of competitiveness of firms.
Supply Chains
To deliver a
product or service effectively, firms
distribution in a few strategic increasingly consolidate production a
locations. The shift from
rapidly increasing capital
costs and domestie to
global supply chain is driven
enhanced
global business. Firns have
evolved technologies as well as
by regional integrato
customisation to meet customer flexible
demands manufacturing
at reasonable cost. systems
Consolidation
(FMS) of transportau
to achieve
nass
industries in different countries facilitates tion
seamless
transportation.
 clobal Logistics and Supply
Chain
Non Econo
Management 469

SOme
ssure on shippers
exert p r e s s
to use countries national governments may own airlines and may
national carriers, even if more onomical alternatives exist.
For balance or payments econ
reasons,
proposed. The United Nations Conference international
on Trade and
quota systems of
transportation have Ec
that 40 percent of the traffic between
two nations be
Development (UNC
NCTAD) has recommended
country, 40 percent to vessels of
fry, 40 allocated to the
the
importing country and 20 percent to vessel: of the exporting
sels
third-country vessel1s.
5. International Narehousing and Storage lssues
International business firms can store goods in their own
ts and by docks and
harbour authorities. Also premises or in warehouses owned by
oetors influencing the aecision where to warehouse warehouse are
provided by freight forwarders.
estomers, likelihood pilferage, depot rents or
of goods include the whereabouts of concentrations
to warehouse itself acquisition costs and the ease of
both the and from the warehouse to transportation
major outlets taking into consideration
d
road and rail links, traftic congestion etc., A firm that warehouses its local
aet the products goods in
quickly, but only at higher administrative multiple locations
to customers very
can
and storage costs.
Storage Facilities: Bonded warehouses are
ing import duties. Duty is paid only as
buildings to which goods may be sent without
goods are released from bonded stores and
m duty if they are
reexported. National customs authorities exempted
exert tight control over bonded
warehouses.

Free Ports and Free Zones: A "free

port" comprises a designated wider area at a sea
goods be stored and
can port
where manipulated free of duty. Inland 'free zones' are equivalent to free
port but usually located near air ports.

Since customers expect quick responses to their orders and

rapid delivery, the supplier firm
wOuld require locating many distribution centres or warehouses around the world. But
warehouses is expensive.
having many
In addition, the larger volume of
inventory increases the inventory carrying cost. Fewer
warehouses allow for consolidation and therefore lower transportation rates to the warehouse.
However if the warehouses are located far from customers, the cost of
outgoing transportation
would increase. The international logistics manager must consider the trade offs between customer
Sservice and cost to the supply chain in order determine the
to appropriate levels of warehousing.

IGLOBAL DISTRIBUTION
A distribution channel is a route from the producer ofa good to the final consumer. Functions
Stribution channel include: (i) the physical movement of goods, (ii) storage otgoods awaiing
nd/or sale, (ii) transfer of the title to goods and (iv) delivery of goods to final purchasers.

Ur main categories of distribution systems are (i) Direct to consumers, (i) Producer to
,(ii) Producer to intermediary and (iv) Through agents.
nter
ternational distribution«differs from its domestic counter part in the following respects:
A more varied range c distribution system
in varied of options is available. An MNC can establish its own

various countries or may opt to use locally existing channels.

b) DiDistrib
ulon channels are usually longer than those in domestic business.
(e)
Delays and holds
4) Wholesaling O1ds ups at various
a points in international distribution systems
are common.

to continent.
Cho nd
retailing systems differ markedly from continent
Choiceof consider must
the odlowin
wing Distribution Systen
racteristics in
tem: In selecting a distribution

alternative.
system, the producer

respect of each
 Logistics and Supply Chain
Management
470
channel. the channel.
(a) Cost of the be
exercised
over
can
control that of the goods.
Extent of the the image
(b) or
worsens

channel improves
Whether the
(c) channel.
coverage
of the
Geographical
(d)
distributors.
(e) Reliability
of
total order cycle (i.e., the period likely
likelv tto
elapse betw
Consequences ofthe
duration of the delivery of the goods).
(N and the actual
placing an order
the customer
in certain markets through ueie .

Probabilities of the
non-availability of the producton long-run sales.
certain
(8) occasional
stock-outs
channels and the impact of
which handles its own distribution
international business rather
.

The
Use of Intermediarics: advantages:
intermediaries have the following
than engaging
distribution process.
control over the entire
(a) Total distribution.
skills in international
(b) Development of managerial
outsides.
commissions and discounts to
(c) No need to pay
economies of scope in the distribution process.
(d) of economies of scale and
Possibilities
distribution process.
(e) Committed staff in the
matters.
(f) Continuity of personnel in distribution
8) Distribution staff familiar with the firm's products and how they need to be presented.

(h) Distribution staff fully accountable for their action.

On the other hand, there are certain advantages that arise from using intermediaries. They are
(a) The international business firm does not require an extensive foreign sales organisation.
(b) Intermediaries are more objective in their assessments of the prospect for sales of the product
in a particular region.
(c) No need to train and develop in-house staff in specialist distribution functions.
(d) Savings on overheads.
(e) Intermediaries are more
knowledgeable of foreign market situations.
(f) Many intermediaries may be willing to take full
of foreign non-payment. possession of the goods and assume all
nsa
Considerations that international business should take into
an
to handle its account when deciding hether Wi
own distribution or engage intermediaries
include the following:
(a) Volume of Sales:
If the sales within
particular worth-while
a
for the firm to have its market are modest, then it
is not
own distribution network.
(b) Nature of
the Product: High-tech
likely to be distributed directly theproducts which require complex after-sales scv
Vice are

by producing firm.
(c) Availability of Competent
intermediaries. Distribution Network in the Local Market: Firm to use nc
(d) Feed back on how well
obtained from local the firm's products are selling in the local market can sily
distributors. o
(e) The
firm can know whether the scale
intermediaries in the of sales can be increased
country concerned. substantiauy
Selection of
Intermediaries: The major criteria to be examined
incude the intermediaries'
when selecung
diary
geographical coverage, product and ]uired margins
market expertise,
requ
 Global LOgISlcs and
supply Chain Management
size of salesrorce, credit rating, track record, corporate image, customer care facilities and ability to
promote produc effectively.

GLOBAL DISTRIBUTION CHANNEL STRATEGIES

The factorS
intluencing firms to enter global markets are: (i) Market potential, (ii) Geograpnie
diversification, (n) EXCess production capacity and the advantage of a low-cost position due to
onomies of scale and experience-curve economies, (iv) Source of new products and laeas,
econ
iiv) International product life cycle, (vi) Foreign competition in the domestic market.
Global firms have many options to do international marketing. These are
(i) Exporting,
i) Licensing. (ii) Jont ventures, (iv) Ownership, (v) mporting and (vi) Counter trade.
Several options are available with each channel strategy. Exhibit 17.6 identifies some of the
maior participants in global logistics transaction including flow of products and information.

Successful completion of various logistics activities in a global distribution channel can

contribute to the development of global markets in the following ways:
) door-to-door freight services which offer speed and reliability of delivery.
)allow order lead times to be quoted accurately
i) reduced delivery cost through order consolidation

Exhibit 17.6 Major Participants in GlobalLogistics

Domestic bank Domestic Seiler

Domestic government Export facilitators

agencies

Inland transportation
carrier

Legend
Product movement Domestic port or
- - Information flow terminal of exit

International carrier

Foreign port or
Foreign government terminal of entry
agencies

Foreign inland
transportationcarrier

Foreign Buyer
Foreign bank
 Logistics and Supply Chain.
472 Management
(iv) expansion into new markets

reasonable after sales-service

or replacement policy to global markets
marl..

(V) ability to offer a

an overseas
market already captured, despite intense co.

(Vi) ability to hold and expand tion

levels of customer service offered through distribution services.
because of high

IGLOBAL LOGISTICs STRATEGIES

In developing a global logistics strategy a number of issues arise which may requira

consideration. These considerations are

(i) What degree of centralisation is appropriate in terms of management, manufacturing
and
distribution and
(ii) How can the needs of local markets be met at the same time as the achievement of econom.
mies
of scale through standardisation.
Firms have sought to implement their global logistics strategies in the following ways:

(i) through focused factories

(ii) through centralised inventories and
(ii) through postponement and localisation.
These are briefly discussed in the following paragraphs. CUS

i) Focused Factories
By limiting the range and mix of products manufactured in a single location, a firm can achieve
considerable economies of scale. This approach to manufacturing is referred to as focused
manufacturing and the plants are referred to as focussed factories. Focused manufacturing is a
strategy in which one or a few plants are designated as the world wide supplier(s) of a given
product or product line. Global logistics will take the responsibility to ensure that the finished
products are at the right place, in the right quantity, at the right time anywhere in the global
market place. Focused factories approach may overlook the effect of
lead time on logistics performance while
transportation costs and delivery
emphasising low cost production through greater economies
of scale. The costs of
shipping products across greater distance may offset the economies gained CO
through savings in production costs due to economies of scale. The long lead times involved may
need to be countered by local
inventory holding which in turn will increase the inventory carrying
costs and possibly offset the
production cost advantage.
Further, when customers order a variety of
products from the same firm in a single order, tnesc
products are produced in a number of focused factories in different locations to have the
of economies of scale. In such
cases, transhipment or
advantd
cross-docking operation where flows o na
goods from diverse locations and sources are merged for onward
delivery to customer, may becal
necessary. Another problem that may arise due to focused
factories is the impact on produein
flexibility.
Firms that give higher
priority for low cost production through volume and f
scale have the risk in markets where econome e
success factors.
responsiveness and the ability to provide variety are Othe

(ii) Centralisation of Inventories

Globalisation of business has
encouraged firms to rationalise
which in turn has led to a trend towards production into few loca
centralisation of inventories. Consolidating inventory
fewer locations substantially reduce total inventory requirement. However
can e can

achieved by locating inventory greater ga

strategically near the customer or production plants and
and controlling inventory
centrally. The advantage of centralised inventory is i h
the "square root rule". This thumb rule illustratcu
provides an indication of the opportunity for reductu
- Coordinat. hation and Information Technology in a
Sup
upply Chain 431

Vertical integration Traditional ways

:

to one
anoune. For that firms in the
example, in supply chain organisationaluy
manufacturing firm, processeic
a
vertically integrated with all traditional computer
the resecarch,
capabilities in-house. devclopment, manufacturing and
distributtO
aborative
laborative Pla
Planning, Forecasting and Replenishment
CPFR is a web-based standard that
replenishment by incorporating joint enhances vendor managed inventory (VMI) and continuous
itten comments and
series of writte forecasti With CPFR, partics exchange electronically a
motions and forecasts. The parties
promo.
supporting data that include ast sales
past trends, scheduled sales
try to find the cause of
and improved forecasting figures. The mission of CPFR is differences and come up with joint
Lerween buyers sellers through co-managed
and to create collaborative relationships
processes and shared information. CPFR will
iencies. increase sales, reduce fixed assets
and working improve
entire supply chain wniie
satistying consumer capital and reduce inventory for the
needs.

INFORMATION TECHNOLOGY IN SUPPLY CHAIN

In modern management information has become
a central feature of
d
and control. Computers and information technology have been used to management planning Information has
support logistics and supply become a cantral
hain management for many years. The
application of information technology to the processof feature of
slanning and control of supply chain activities management
(including logistics activities) has grown rapidly planning and
ththe introduction of microcomputers in the
early 1980s. Nowadays, information technology is Controf in modern
ewed as the key factor that will affect the growth and
development of logistics and supply chain management.
management. Computers and
This section focuses on how information can make information
logistics and supply chain management technology support
decisions more effective, considers the role of information logistics and supply
managrment in the development of
suply chain strategy and then discusses the issues from an operational perspective.
chain management
to a great extent.
Many firms today view effective management of logistics and supply chain activities as a
prerequisite to the achievement of overall cost efficiency and as a key to ensuring their ability to
Ce their
products and services to meet and beat the competition. Logistics competencies of a firm
OVIdE the
unique ways in which the firm is able to differentiate itself in the market place. Information
EnmIology is being used by leading-edge firms to increase their competitiveness and develop a
ble competitive advantage. Capabilities relating to information systems and information
g e s have been traditionally regarded as key strategic resources and expertise in these
OW thought to be the most valuable and essential of all corporate resources. Hence there
toki10r effective management of corporate information systems and technologies which are
relevant and most important to logistics and supply chain management.
mportance of Logistics and Supply Chain Information Systems
nformation Technolog9Y
y
fective
eustor hers.information manage gement can help ensure that a firm meets the logistical needs of its
Firms elements such as on time delivery,
need toplace priorities logistical
stock-o
ock-out levels, order on

status, shipment tracing and expediting,

order convenience, order
completeness,
leten creation of customer pick up and back-haul opportunities and product
subst
flow ioftutmeanins
ion The logistics manage
gers responsible for these
are
activities and timely and accurate
caningful information
ena the same. The logistics
actsystiveimtiescant
assist
nables them to successfully implement
significantly in neeting needs and an accurate
information
and relevant
meeting
acilitate the logistics mission.
customer
 ogistics and Supply Chain Managemen
432 hardware and
software to manage, control
nd measure
combine
systems the
(ii) Logistics information
within specific firms as well as
across overall
pply chain.
activities which occur
logistics technologies, ancillary technolan:.
and servers, Internet Such
Hardware includes computers channels and storage media.
communication

as barcode and RF devices, used for logistics and

and applications
programs ply sunnt

Software includes systems the power of these technologies ma

and thus leverage the
activities. The ability to integrate do not have such abilities.
successful than other firms which
firms more as customer service and
their customers (Such
information on sales
better
(iii) Companies need
information on their suppliers,
(such as production planning and sourcin and
forecasting), decision support systemsinformati
systems including
purchasing). Areas of technology activities were not delivering
needed information to
the
technology and logistics management
decisions.
management for making strategic
the logistics and supply chain svstem
is the nerve centre of
(iv) The order processing system logistics process in motion
A customer order provides the
communication message to set the
are impacted by the speed and quality of the
The cost and efficiency of the entire operation
information flows. Slow and erratic communication can result in loss of customers or excessive
costs together with posible manufacturing
transportation, inventory and warehousing
inefficiencies caused by frequent changes in the production line. The order processing and
information system forms the foundation for ihe logistics and corporate management information
systems.
(v) Leading-edge organisations are utilising computerS-extensively to support logistics activities.
Computers are used in order entry, order processing, finished goods inventory control,
performance measurement, freight audit/payment, and warehousing. World-class logistics
practices include use of logistics information systems as a key to competitiveness.
(vi) Computer based decision support systems (DSS) support the executive decision making
process in logistics and supply chain management. To support time-based competition, firms
are increasingly using information technologies as a source of competitive advantage. Systems
such as a quick response (QR) just-in-time (JIT) and efficient consumer response (ECR)
are integrating a number of information based technologies in an effort to reduce order cycle
times, speed responsiveness and lower supply chain inventory. More sophisticated applications
of information technology such as decision support systems, artificial intelligence and expPOr
systems are being used directly to support decision making in logistics and supply chain
management.
(vii) Today, companies are restructuring
their b isinesses to function in the new era of
electro
commerce. Organisations can have a deluge of information on dotcoms, business to busInes
requirements and online customer and supplier linkages. ERP
and data warehouses, electronic data systems, purchasing datdoa
commerce recent
interchange (EDI), business to business elecou
are
developments which are applied in logistics and supply chan ment.

manas
DRIVERS OF NEW SUPPLY CHAIN
SYSTEMS AND
To be successful in the new visual
APPLICATIONOS
e-based economy, even traditional taking
notice of the need for new information companies aare ote the
systems. The next generation of
free flow of perfect information systems will pro
instantaneously
up and down the supply chain. To
Surv
in a

perfectly competitive market, firms need to develop fluid and swift ve

advantage in terms of speed and excellence of supply chain having co t e m s
and the new e-economy are: education. The drivers of new supply chain o
 Coordination and lnformation
Technology in a Supply Chan 429
Characteristics of Information:
ceful when making supply
usef
chain
Information must have the following characteristics to De

) Information Must be
decisions
information that Aceurate : To make good supply chain decisions,
gives a time picture of the e
i) Information Must be Accessible in situation
supply chain. in the
it must be available in Time : lt is not
enough if the information is accurarc b it
time. Often
accurate information may be outdated b
available or if it is
current, it may not be in an by the time i ade
i) Information Must be of the Right Kind: accessible form.
decision making. Having large amounts Managers need information that they can use
of data may not be Tor
valuable information should be collected and helpful for making decisions. Ony
on information. recorded for use while making decisions based

Information is a key ingredient not just at each stage of the

nhase of supply chain decision making supply chain but also within each
i.., from the strategicinformation
phase to theandplanning
implementation phase (or operational phase). For example, phase play
its analysis to the
a
significant role during the formulation of supply chain
uch as the location of the push/pull boundary strategy by providing the basis for decisions
of the supply chain.
Information also plays a key role in the operational decisions such as what
produced during a day's production run. products will be
Information is used while making a wide variety of decisions about each of the supply chain
drivers as discussed below:

i) Facility: Determination of the location, capacity and schedules of a facility requires information
on the trade-off among supply chain
efficiency and flexibility.
(ü) Iuventory: Information regarding demand patterns, cost ofcarrying inventory, stock-out costs
and ordering costs are required for seting optimal inventory policies.
üi) Transportation: Information that includes costs, customer locations and shipment sizes is
required to make good decisions about transportation network, routing, modes, shipments and
vendors.
(iv) Sourcing: Information about product margins, prices, quality, delivery lead times etc., are
important in making sourcing decisions.
() Pricing and Revenue Management: For setting pricing policies, information on demand,
its volume and various customer segments' willingness to pay, as well as other supply
oth on these information,
15Sues such as product margin, lead time and availability is required. Based
s can make intelligent pricing decisions to improve their supply chain profitability.

INTERNAL SUPPLY CHAIN MANAGEMENT Internal supply

all
Interna operations internal to the firm. It includes chain management
uPPIy chain management focuses on
Pea
proces order and fulfilling the same. The various processes
focuses on

nelnanvolved in planning for a customer aperations internal

luded in internal supply chain management are: tothe firm.It
) Strat chain. A includes strategic
the design of the supply
network
process focuses
on
lanning: This book. planning, demand
detail the scope of this
detailed discussi on network design in the supply chain is beyond planning, supply
(i) Dema
4) Demand Planhing demand and analysing
the impact of demand planning, fulfillment

nning This consists of forecasting and field service.

management
nent tools (such as pricing and promotion)
on demand.
includes the demand
forecasts
Supply Planning: The input to the supply planning
process
Tne supPiy
produced by
e m a n d planning and the resources provided by strategic planning.
 Logistics and Supply Chain Management.
430

planning process produces

an optimal plan
to meet the
demand. Supply plannino
nning software
planning capabilities.
provides factory planning and inventory
it must be implemented. The fulfillment proceso
(iv) Fulfillment: Once a plan is formulated, links
source and means of transportation. Transnorh
each customer order to a specific supply
and warehousing applications (software)
fall into the fulfillment segment.
it is necessary to provide aft.
(v) Field Service: After the product is delivered to the customers, ter
sales or field service to them. Service processes involve setting inventory levels for spare nors
parts
and scheduling service calls.
Since the internal supply chain management (1SCM) macro process aims to fulfill the demand
generated by the customer relationship management (CRM) processes, there should be a ng
integration between these two processes. When forecasting demand, interaction with CRM is essentiat
because CRM applications have the data and insight on customer behaviour. Likewise, ISCM
processes should also have strong integration with the supplier-relationship management (SRM)
macro process. This is important because supply planning, fulfillment and field service are all
dependent on suppliers (and hence SRM processes).
In addition to the above, order management must be integrated closely with fulfillment and
should act as an input for effective demand planning.

IMANAGING SUPPLIER RELATIONSHIPS/SUPPLIER ch.

RELATIONSHIP MANAGEMENT (SRM)

Traditionally, many organisations view suppliers as adversaries. Buyers and logistics managerS VIE
Supplier
choose suppliers on the basis of one criteria only-price (not the total cost) rather than having a
relationship Illd
management (SRM) focus on establishing and maintaining an
on-going supply chain relationship. Companies practicing
provides the supply chain management are attempting to develop closer relationship with their suppliers. Given
interface to the dependance of firms on dec
Suppliers for supplier performance some organisations are adopting strategies that
can help faster u
transaction improvement, including greater information sharing between parties and the
exchange as well development of "co-destiny'" relationships. This refers to the commitment of the focal firm using
as collahorative a single or dual source of
activities.
supply over an extended period of time.
Supplier Partnerships: A. partnership' is a tailored business relationship based on mutual prlc
trust, openness, shared risk and shared rewards that pro
business performance greater than would be
yields a
competitive advantage, resulting n
achieved by the firms
or synergism). individually (i.e., synergic etfect Sus
Types of Relationships: Relationships between ect
relationship to vertical integration of the two organisations can range from arm's lengu area
organisations.
(a) Arm's length relationship consists of either
one time
often over a long period of time, but
without any sense of
exchanges or multiple transaco Nig
between the two organisations. In this joint commitment or joint operauo
case, when
(b) Type I partnership in which the
exchanges end, relationship ends.
organisations
limited basis/co-ordinate activities and involved recognise each other as partners on and
planning.
involves only one division or functional area
The partnership has short term focus and
within each a
(c) Type II partnership has a long-term horizon. organisation.
firm are involved in the Multiple divisions and functions within
partnership.
(d) Type IlI partnership in which the
organisations share a significant level of
party views the other as an extension of their own
firm. No end date for the
integration. a
(e) Joint Venture: An agreement between two
or more
partnership exis
business. partners to own and control an ovei as