Logistics and Distribution Management: Sub Code - 335

Logistics and Distribution
Management
Sub Code - 335
Developed by
Prof. Sandeep Narvekar
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
!  
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe  2. Dr. B.P. Sabale  3. Prof. Dr. Vijay Khole  4. Prof. Anuradha Deshmukh 
Group Director  Chancellor, D.Y. Patil University, Former Vice-Chancellor  Former Director 
Welingkar Institute of Navi Mumbai  (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

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NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.
1st Edition, August 2007 2nd Edition, August 2008 3rd Edition, May 2019
CONTENTS
Contents
Chapter Chapter Name Page

No. No.
1 Introduction to Logistics 4-34
2 Transportation Infrastructure 35-93
3 Transportation Operations 94-130
4 Operational Integration 131-174
5 Global Strategic Positioning 175-198
6 Network Integration 199-240
7 Logistics Design and Operational Planning 241-290
8 Logistics Outsourcing and Best Practices 291-315
9 Warehousing 316-350
10 Packaging, Material Handling and Storage Systems 351-393
11 Cold Chain Management 394-431
12 Relationship Development and Management 432-462

13 Operational, Financial and Social Performance 463-490
14 IT in Logistics 491-519
15 Containerization 520-534
16 Reverse Logistics 535-569
17 International Logistics and Intermodal Transportation 570-597
18 Incoterms 598-609
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INTRODUCTION TO LOGISTICS
Chapter 1
Introduction To Logistics
Objectives
After going through the chapter, students should be able to understand:
• The concept and definitions of Logistics
• The system life cycle and functions of Logistics
• The customer value chain and supply chain synchronization
Structure
1.1 Introduction and Concept
1.2 Logistics Definition
1.3 Scope of Logistics
1.4 Logistics in the System Life Cycle
1.5 Customer Value Chain
1.6 Logistics Functions
1.7 Supply Chain Synchronization
1.8 Summary
1.9 Self Assessment Questions
1.10 Multiple Choice Questions
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1.1 Introduction and Concept
In a world which increasingly relies on the division of labor and

fragmentation of workflows, goods and commodities need to be
transported from their place of origin to their place of consumption or place
of use.
Logistics Management is the part of supply chain management that

plans, implements and controls the efficient effective forward and reverse
flow and storage of goods, services and related information between the
point of origin and the point of consumption in order to meet customer
requirements.
So, it can be seen that transportation, warehousing, information systems

and customer service play important roles in the logistics function. In this
module, many logistics activities are discussed along with logistics
nomenclature, the global logistic issues, cultural pitfalls, the impact of e-
commerce and reverse logistics.
The concepts of logistics are:
1. The actual work of logistics is supportive in nature. Logistical support is

a must for manufacturing and marketing operations.
2. The concept of logistics is based on a total system view of the multitude

of functions in movement of materials and goods from sources of supply
to users. Accordingly, it forces management to think in terms of
managing the total system; rather than just one part of it.
In the course of changing socio-economic and ecological conditions, the

logistics industry is considered as a sector with one of the highest
adaptation and innovation potentials. Innovations in logistics integrate the
dynamics of the flow of goods, people, information, energy and financial
resources, and create novel cooperative services involving sophisticated IT
solutions. The objective is to increase long-term efficiencies of costs and
resources.
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1.2 Logistics Definition
“Logistics is that part of Supply Chain Management (SCM) that plans,

implements, and controls the efficient, effective, forward and reverse flow
and storage of goods, services, and related information between the point
of origin and point of consumption in order to meet customers’
requirements.”
So what does the definition mean?
1. The definition says that it is part of the supply chain management – this
means that supply chain involves a bigger process which engages
different organizations; however, logistics determines how well or how
poor an individual firm can achieve their goals.
2. It is part of SCM that plans, implements, and controls – this means that
logistics must cover all these areas not just one or two.
3. It also mentions the efficient, effective, forward and reverse flow and
storage – this means “How well does the company do what they are
going to do?”
4. Goods, services, and related information between the point of origin and
point of consumption – this means that information about what you are
delivering is as important as the delivery itself.
5. To meet customers’ requirements – this means logistics strategies

should be focused on customers’ needs and wants
Activity A
•What is the objective of logistics management?

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1.3 Scope of Logistics
It is of critical importance to the organization how it delivers products and

services to the customer, whether the product is tangible or intangible.
Logistics must deliver products to a customer at the time, method and cost
to satisfy that particular customer's requirements [Fig. 1(a)].
Responsiveness is needed, the quicker the better, the smoother the better.
Flexibility is needed to meet the quickly changing market and customer
demands.
Effective and efficient physical movement of the tangible product will speak
of intangible services associated with the product and the organization
which is delivering it. In case of intangible product, the delivery of
tangibles at the right place and right time will speak about its quality. On
the macro level, infrastructure such as various modes of transport,
transportation, equipment, storage facilities, connectivity and information
processing are contributing to a large extent in the physical movement of
goods produced in manufacturing, mining and agriculture sectors.
This speed and reliability in distribution of products and services contribute

to a great extent in the growth of a country’s domestic and international
trade.
At micro level, logistics plays a critical role in the value delivery system of
business organization to provide superior customer service, i.e., to achieve
a desired level of delivered services and quality at the lowest possible cost.
In a nutshell, any productivity improvement that could be achieved in any
part of logistic system, at the micro or macro level, would help in cost
reduction and proper deployment of scarce national resources to their
productive purposes. India’s logistic cost as a percentage of the GDP is as
high as 13%-14%.
Supplier ! Manufacturer ! Resellers ! Customer
Direct Supply Chain

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Figure 1(a): Basic Logistic Function
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Activity B
• What is the importance of logistics and how does it affect the delivery
system?
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1.4 Logistics In the System Life cycle
In response to some of today's challenges, logistics and its related support

infrastructure must be considered as a major element of a "system," and
not as a separate and independent entity.
It is the process by which all elements of logistic support are planned,

acquired, tested and provided in a timely and cost-effective manner.
A system, which may constitute an integrated mix of components (e.g.,

equipment, software, people, facilities, data, information, etc.), must have
a functional purpose and be directed to the accomplishment of some
designated mission objective. If a system is to ultimately accomplish its
intended purpose, there must be a logistic support infrastructure in place
and dedicated to the fulfillment of mission objectives.
To date, these somewhat different approaches to logistics have not been

all-inclusive (in terms of including all of the applicable life cycle activities
necessary), have not been addressed from a total system's perspective,
the different elements have not been very well integrated, and logistics has
basically been considered "after-the-fact" and downstream in the system
life cycle. As a result, many of the systems in use today are not very cost-
effective in terms of their operation and support. Further, there is a lack of
total cost visibility at the times early in the system life cycle when decisions
are made relative to future logistics requirements. For many systems, the
costs associated with the initial design and development, construction, the
initial procurement of capital equipment, production, etc., are relatively
well known. However, the costs associated with the distribution, utilization,
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and sustaining maintenance and support of the system throughout its

planned life cycle are somewhat hidden.
Decisions pertaining to the selection of technologies, the selection of

materials, equipment packaging schemes, the design of a manufacturing
process, the design of a maintenance and support infrastructure, etc., have
a great impact on the "downstream" costs and, hence, life cycle cost.
Thus, including life cycle considerations (and the elements of logistics) in

the decision-making process from the beginning is critical. While
improvements can be initiated for cost reduction purposes at any stage,
the greatest impact on life cycle cost (and hence logistics and maintenance
support costs) can be realized during the early phases of system design
and development.
Given that a system/product will likely fail at some point in time during its
operation, some maintenance will then be required in order to restore the
system to normal operational use so that it can continue to accomplish its
mission.
In other words, one needs to address all of the activities in the life cycle for
a given system, to include not only what is presented in Fig. 1(b), but
those activities which support material phase out, recycling, and/or
disposal.
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Figure 1(b): Logistics in the System Life Cycle
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System is shown as a logistic mix including following areas:
Information Flow:
• Order registration
• Order checking and editing
• Order processing
• Coordination
Warehousing:
• Material Storage
• Load Utilizing and Material Handling
• Site Selection and Network Planning
• Order Picking and Filling
• Dispatch Documentation
Inventory Control:
• Material Requirement Planning
• Inventory level decisions for customer service objectives
Packaging:
• For Handling and Damage Prevention
• For Communication
• For Inter-modal Transportation
Transportation:
• Route Planning
• Mode Selection (Air, Sea, Road, Rail, Pipeline, Ropeway)
• Vehicle Scheduling
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1.5 Customer Value Chain
A key component of customer value chain is defining collaborative

relationships with customers and suppliers across all dimensions of those
relationships. To create more visibility and understanding of end-customer
behavior and demand patterns, companies are extending the value chain.
Some companies add value to traditional commodity products by offering
services to their customers over and above the product itself. It implies the
series of business operations in which utility is added to the goods and
services offered by the firm so as to enhance customer value.
Organizations increasingly find that they must rely on effective supply

chains, or networks, to compete in the global market and networked
economy. In recent decades, globalization, outsourcing, and information
technology have enabled many organizations, to successfully operate
collaborative supply networks in which each specialized business partner
focuses on only a few key strategic activities.
Outsourcing is an acceptable trend in businesses. Corporations have

realized that doing everything by themselves does not result in effective
and efficient use of scarce resources available to them. It is better to
outsource functional areas to experts who can do job at the lowest cost
and that too efficiently and effectively.
The logic of this trend is that the company will increasingly focus on those
activities in the value chain in which it has a distinctive advantage and
outsource everything else. As shown in the Fig. 1(c), the value chain
activities of a firm can be categorized into primary activities: Inbound
Logistics, Operations, Outbound Logistics, Marketing and Sales, and
Services. Support activities such as: Firm Infrastructure, Human
Resources, Technology and Procurement.
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Figure 1(c): Customer Value Delivery Chain
Logistics delivers value to the customer through three logistical phases:

inbound logistics, operations, and outbound logistics.
Inbound logistics: It involves the relationship between the supplier and

the firm which has the activities of supplies of raw materials, the receiving,
delivering and storing as well as keeping the raw materials safe. The
distribution to manufacturing of these raw materials is also concerned.
Operations: In this type of activity, the process and the steps of

transformation of goods and services means to transform inputs into
outputs that is product and services.
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Outbound logistics: It includes most of the activities from collection to

distribution. First, it requires the activity of collection, then it needs to
store the warehouse and the final stage is to distribute those products.
Marketing and Sales: Involve activities that create awareness among the
general public regarding the product.
Services: All those activities that increase the value of product or services.
Activity C
• Why are companies extending the value chain?

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1.6 Logistics Functions
Logistics is a process of movement of goods across the supply chain of a

company. This process consists of various functions those which have to be
properly managed to bring effectiveness and efficiency to the supply chain
of the organization. While the role covers a range of functions, each with
its own challenges and skills, they are all interdependent and practitioners
must work together and understand the impact on the whole supply chain
to deliver results.
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Figure 2: Logistics Functions
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The major logistical functions are:
Order Processing
While many aspects of information are critical to logistics operations, the

processing of orders is of primary importance. Failure to fully comprehend
this importance resulted from not fully understanding how distortion and
operational failures in order processing impact logistical operations. Order
processing is concerned with the information flow in the logistics system
and includes a number of operations. The beginning of the process consists
of a request from a customer for a particular product via an order form.
These orders are then transmitted and checked for completeness and
accuracy. The availability of the requested product and the customer’s
credit status are verified. Finally, products are retrieved from the stock,
packed, and delivered along with their shipping documents. Throughout
this entire process, the customers have to be kept informed about the
status of their orders Figure 2(a).
Current information technology is capable of handling the most demanding

customer requirements. When desired, order information can be
exchanged between trading partners.
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Figure 2(a): Order Processing Cycle
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Activity D
•What due process is followed once an order is received from a customer?

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Inventory Management
Definition and Functionality: Inventory Management is the management

of inventory and stock. As an element of supply chain management,
inventory management includes aspects such as controlling and overseeing
ordering inventory, storage of inventory, and controlling the amount of
product for sale. It is all about having the right inventory at the right
quantity, in the right place, at the right time, and at the right cost.
Stocking the right amount of inventory is crucial. If you order too little,
your customers will start looking elsewhere. If you order too much, there is
a chance you will be stuck with lots of extra stock that you will be forced to
sell at clearance prices, or risk having them become obsolete.
An inventory management system is the combination of technology

(hardware and software) and processes and procedures that oversee the
monitoring and maintenance of stocked products, whether those products
are company assets, raw materials and supplies, or finished products ready
to be sent to vendors or end consumers. A complete inventory
management system consists of:
• A system for identifying every inventory item and its associated

information, such as barcode labels or asset tags.
• Hardware tools for reading barcode labels, such as handheld barcode

scanners or smartphones with barcode scanning apps.
• Inventory management software, which provides a central database and

point of reference for all inventory, coupled with the ability to analyze
data, generate reports, forecast future demand, and more.
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• Processes and policies for labeling, documentation, and reporting. This

should include an inventory management technique such as Just-in-time,
ABC Analysis, First-In First-Out (FIFO), Stock Review, or any other
proven methodology.
• People who are trained to follow these policies and processes.
Activity E
• What do you understand by the term “inventory”?
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Just-in-Time
Just-in-time (JIT) manufacturing originated in Japan in the 1960s and

1970s. Toyota Motor Corp. contributed the most to its development. Using
the just-in-time inventory management technique can be risky, especially if
it is not implemented with precise accuracy, but if you do it right, it can be
rewarding and seriously slash carrying costs. Just-in-time does what the
name suggests. It involves having products arrive as soon as the customer
orders them. It can be risky because it is based on customer behavior,
which is not always perfectly predictable. Keep in mind when using this
technique that it will take a lot of time to research your customers’ buying
habits, along with seasonal demand and location-based factors in order for
this to be effective.
The method allows companies to save significant amounts of money and

reduce waste by keeping only the inventory they need to produce and sell
products. This approach reduces storage and insurance costs, as well as
the cost of liquidating or discarding excess inventory.
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ABC Analysis
This is a popular way to analyze your inventory. Under this method, you
classify the inventory into three categories, such as A, B and C. These
categories are based upon the inventory value and cost significance. Also,
the number of items and values of each category are expressed as a
percentage of the total.
• Items of high value and small in number are termed as “A”
• Items of moderate value and moderate in number are termed as “B”
• Items of small in value and large in number are termed as “C”
The nice thing about Group C is that it can be fairly hands-off, while Group
A requires special attention. You can use ABC analysis in conjunction with
the just-in-time technique to help you get your reorder timing just right.
Figure 3: ABC Method
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First-in First-out Method
The first-in first-out (FIFO) method of inventory valuation is a cost flow

assumption that the first goods purchased are also the first goods sold. In
most companies, this assumption closely matches the actual flow of goods,
and so is considered the most theoretically correct inventory valuation
method. The FIFO flow concept is a logical one for a business to follow,
since selling off the oldest goods first reduces the risk of obsolescence.
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Figure 4: FIFO Method
Last-in First-out Method (LIFO)
The last-in first-out (LIFO) method is used to place an accounting value on

inventory. The LIFO method operates under the assumption that the last
item of inventory purchased is the first one sold. Picture a store shelf
where a clerk adds items from the front, and customers also take their
selections from the front; the remaining items of inventory that are located
further from the front of the shelf are rarely picked, and so remain on the
shelf – that is a LIFO scenario.
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The trouble with the LIFO scenario is that it is rarely encountered in

practice. If a company were to use the process flow embodied by LIFO, a
significant part of its inventory would be very old, and likely obsolete.
Nonetheless, a company does not actually have to experience the LIFO
process flow in order to use the method to calculate its inventory valuation.
Activity F
•Why is FIFO method of inventory considered to be better than the LIFO

method?
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Stock Review
Stock review is a regular analysis of stock versus projected future needs.

This can be done through a manual review of stock or by using inventory
software. Defining your minimum stock level will allow you to set up
regular inspections and reorders of supplies. It is also important to take
into account certain situations that can arise, such as vendors taking
longer than average to replenish stock. This will aid in using just-in-time
ordering, where the inventory is held for a minimum amount of time before
it moves to the next stage in the supply chain.
In businesses where manual inventory management techniques are still in

use, the primary inventory control methods include:
• Visual Control originally referred to inventory small enough that the

purchasing/ inventory manager can physically see the critical supplies.
When supplies are visibly lean, he or she orders again.
• Tickler Control is slightly more involved, with the manager or a

designee counting a portion of the inventory daily, ensuring a 100%
inventory every so many days and ordering anything that is unacceptably
low.
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• Click Sheet Control is a manual tracking of sales or usage. By recording

usage, it provides reorder data. Some of the most advanced Point of Sale
systems are an electronically managed and monitored click sheet control
system.
For larger enterprises, an information system executes visual, tickler, or

click sheet control but on a much more massive scale. The term “visibility”
still applies to being able to check virtually for an item in a locator file.
Manual reviews should not be performed because they can take a lot of
time and possibly produce errors. Businesses are starting to invest in
software to automate the review, and it will help organizations keep track
of their inventory, ensure timely reorders, and avoid costly shortages.
Benefits of Inventory Management
In addition to helping a business stay organized, an effective inventory

management system can also helps to:
• Keep the business profitable

• Reduce costs
• Achieve economies of scale
• Analyze sales patterns and predict future sales
• Analyze performance against competitors
• Prepare the business for the unexpected
With the right inventory management system in place, a business has a

better chance for profitability and survival.
Materials Requirement Planning
The Materials Requirement Planning (MRP) inventory management method

is sales-forecast dependent, meaning that manufacturers must have
accurate sales records to enable accurate planning of inventory needs and
to communicate those needs with materials suppliers in a timely manner.
Calculating what is known as “buffer stock” is also the key to effective

inventory management. Essentially, buffer stock is additional units above
and beyond the minimum number required to maintain production levels.
For example, the manager may determine that it would be a good idea to
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keep one or two extra units of a given machine part on hand, just in case
an emergency situation arises, or one of the units proves to be defective
once installed. Creating this cushion or buffer helps to minimize the chance
for production to be interrupted due to a lack of essential parts in the
operation supply inventory.
Inventory is made to flow from one warehouse to another, factory to

warehouse, plant to plant or warehouse to customer. Companies need to
strategically manage the types and quantities of materials they purchase,
plan which products are to be produced and in what quantities and ensure
that they are able to meet current and future customer demand – all at the
lowest possible cost. MRP helps companies maintain low inventory levels by
helping them plan manufacturing, purchasing and delivering activities.
Making a bad decision in any of these areas will make the company lose
money. By maintaining appropriate levels of inventory, manufacturing
organizations are empowered to better align their production to rising and
falling demand.
Types of Data Considered by Materials Requirements Planning
The data that must be considered in an MRP scheme include:
• How much is required at a time (the final product).
• When the quantities are required to meet demand.
• Shelf life of stored materials.
• Inventory status records – records of net materials available for use

already in stock (on hand) and materials on order from suppliers.
• Bills of materials – details of the materials, components and sub-

assemblies required to make each product.
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Warehousing
Warehousing plays a vital role in providing the desired level of service to

the customer at the lowest possible cost and is an important link between
the producer and the customer. Improving the flow of goods through a
warehouse by minimizing handling and movement can generate significant
and measurable business benefits. The major criteria in choosing a
warehouse are:
Warehousing Location
Area or Size of Warehouse
Number of Warehouses
Warehouse Layout and Design
Ownership of the Warehouse
Strategic warehousing has a great influence in the logistic system and

needs a thorough evaluation before making the decision to have own
warehousing or to outsource, otherwise a firm might incur unnecessary
cost and/or lack the competitive edge in the market.
Transportation
Freight transportation plays an important role in today’s economy since it

enables production and consumption to take place at locations far away
from each other. Freight transportation accounts for two-thirds of total
logistics costs and has a major impact on the level of customer service.
Therefore, transportation planning plays a key role in logistics system
management.
The main modes of transportation used by logistics system management

are ship, rail, truck, air, and pipeline. All are combined in numerous ways
to obtain door-to-door services. Rail transport is inexpensive especially for
long distance shipment and is more energy efficient than the alternatives.
Trucks are used mainly for moving semi-finished and finished goods by the
truckload or by partial truckload. Air transportation is often used in
combination with road transportation to provide door-to-door service. Air
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transportation is theoretically the fastest mode of transportation but in

practice it is slowed down by freight handling at airports.
The major advantages of using a logistics system are:
1. It helps capital reduction.

2. It reduces total cost of transportation.
3. It helps improve service level.
Material Handling and Storage
“Material handling is the movement and storage of material at the lowest

possible cost through the use of proper method and equipment”.
The focus is on the methods, mechanical equipment, systems and related

controls used to achieve these functions. In the modern era of competition,
this has acquired greater importance due to growing need for reducing the
manufacturing cost. The importance of material handling function is
greater in those industries where the ratio of handling cost to the
processing cost is large. Today material handling is rightly considered as
one of the most potentially lucrative areas for reduction of costs. A
properly designed and integrated material handling system provides
tremendous cost saving opportunities and customer services improvement
potential.
Storage has always been an important aspect of economic development. As

transportation capability developed, it became possible to engage in
specialization. Product storage shifted from households to retailers,
wholesalers, and manufacturers. Warehouses stored inventory in the
logistics pipeline, serving to coordinate product supply and consumer
demand.
Logistical Packaging
Logistical Packaging is the science, art and technology of enclosing or

protecting products for distribution, storage, sale, and use. It also refers to
the process of design, evaluation, and production of packages. Packages
can have features which add convenience in distribution, handling, display,
sale, opening, use, reclosing and reuse. It also aids the control of
inventory.
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Volumetric Weight Formula = Length × Width × Height / 5000

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Example of Package Measuring = (60 × 50 × 40 cm)
(60 cm × 50 cm × 40 cm) / 5000 = 24 kg
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Figure 5: Volumetric Weight Formula
The Chargeable Weight of Air Freight shipments are calculated as the

Actual Weight (Gross Weight) or the Volumetric (also called Volume or
Dimensional) Weight of the shipment, whichever is the greater. This uses
an estimated weight that is calculated based on the dimensions (length,
width and height) of a package (shipments are always shown in the order
of L × W × H). Typically, large items with a light overall weight take up
more space on an aircraft than a small, heavy item. That is why the airlines
charge according to chargeable weight.
Chargeable weight is commonly used by air freight forwarders, domestic

motor carriers and brokers to calculate their air freight and/or domestic
trucking charges.
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Information
Information flow identifies specific locations within a logistical system that

have requirements. Information also integrates the three operating areas.
Within individual logistics areas, different movement requirements exist
with respect to size of order, availability of inventory, and urgency. The
primary objective of information flow management is to reconcile these
differentials to improve overall supply chain performance.
Information facilitates coordination of planning and control of day-to-day

operations. Without accurate information, the effort involved in the
logistical system can be misdirected.
1.7 Supply Chain Synchronization
Synchronizing the supply chain is, in essence, getting all of the partners
operating in a manner that is mutually supportive (flexible, cooperative)
and seamless (smooth, unnoticed by customers).
The synchronization process starts with a clear definition of roles and

responsibilities. That is, making sure that all supply chain partners know
specifically what tasks they are expected to perform (e.g., storing goods,
modifying them, reassembling quantities, price marking), when they are
expected to do them (lead times and deadlines), how they are expected to
perform them (i.e., to what operating specifications), and what results are
expected (sales quotas, customer satisfaction ratings).
Often, vertical channel conflict (i.e., between layers of the supply chain)
occurs due to ambiguous or conflicting roles and responsibilities. That is,
conflicts such as poor service levels, passive sales efforts, and missed
deadlines.
On a day-to-day basis, many tasks and activities require operating

synchronization: entering orders, conforming schedules, tracking
shipments, communicating status information, invoicing, collecting
payments, processing returns, resolving disputes. Whenever a partner has
a process failure, the entire supply chain may be disrupted and operational
conflict may occur.
! !25
Over time, the bulk of the operating synchronization activity is PSI

planning (production, sales, and inventory) which is the information-based
scheduling of product flows throughout the system.
Practical synchronization involves making the supply chain “capable” and

broadcasting demand information in parallel to all of the trading partners,
i.e., the supplier, the factory, the wholesaler, and the retailer, must have
sufficient capacity to process the statistical peak of daily demand each day.
To achieve the highest level of supply chain synchronization benefit, eight

different dimensions of the supply chain need to be addressed.
1. People, Communication, Coordination and Education
Practical synchronization is possible by the support of motivated, interested

a n d e d u c a t e d p e o p l e . Sy n c h r o n i z i n g p e o p l e e n s u r e s p r o c e s s
synchronization.
Educate the people. Explain in simple terms what synchronization is, what
it intends to achieve, how it intends to achieve it and what is their role in
it.
Continue direct communication. Communicate throughout the project to

help develop linkages between employees of participating trading partners.
When faced with unforeseen difficulties, the strength of prior personal
contact makes the difference in motivating individuals to make rapid
changes needed to keep the initiative on track.
Facilitate communication about data. Ongoing communication is critical to

ensure product ordering and systems information are correctly
synchronized for coordinated delivery scheduling. This ensures the fewest
possible errors once the scheduled supply chain is "switched on.”
! !26
2. Process and Delivery Timing
Customers generally evaluate a supplier’s performance on four factors:

product performance (features), price, quality, and delivery within a
reasonable time. Now, customers are increasingly emphasizing two
additional performance criteria: flawless delivery, that is, very short cycle
on-time delivery, and responsiveness to the customers’ changing needs
• Develop the supply chain schedule. This varies for each supply chain.
Mapping and understanding current supply chain flows and timings, and
developing a new optimized supply chain synchronization model are
essential.
• Have realistic expectations. Complexities of multiple companies come

together because capabilities and limitations vary. Schedules also vary
for each participant.
• Map the current process. Map it from start to finish, including volume and
timing for all trading partners. Trends and levels of competency within
the group of players will become apparent during this process. Use
current supply chain timing to compare with proposed timing models to
identify any opportunities at hand.
• Allow for variances. To assume that everything will function perfectly

according to plan is a risk. The new process flow and timing should allow
for variance in timings for the players identified.
• Leave a margin for error. Be conservative when setting initial delivery

lead times to ensure that the schedule is consistently met. Tighten lead
times later if capabilities improve.
• Overlay volume and density information. Develop a schedule for each

partner, and then exceed volume and bulk to define the entire supply
chain flow and create a model from which expected delivery frequency
determinations can be made.
• Inform the participants. Define requirements to become part of the new

synchronized process specifically for each trading partner.
! !27
3. Product/Information Linking
Collect data in parallel with the overall effort, streamlining the process to
minimize additional work. Data collection should be a byproduct of the
supply chain process, not activity unto itself.
4. Information of Movement and Synchronization of Orders
This process is initiated by barcode tracking or RFID (Radio Frequency

Identification) in advanced cases and the purchase order. These two key
data streams can be easily integrated into the supply chain synchronization
processes. Integrate scanning into the handling process and collect
information electronically at the source. This is a large and valuable
assimilation of data, but collected this way, it can be almost transparent to
those carrying out the process.
5. Process Exception Monitoring and Reporting
Develop rules to test items as they move through processes and flag those
exceptions requiring action for monitoring and improvement purposes.
If all of the above dimensions have been synchronized, exceptions should

be manageable. However, flaws in the information used to build the
synchronized system may become obvious and are to be fixed right away,
or the entire process could rapidly deteriorate into chaos.
Flagged exceptions should be immediately reported to the supply chain

partner and fixed either electronically or via equally effective auto-
generated communication system. Report the key metrics to important
personnel at the partner firms and point out significant ongoing issues
which may identify players who are not playing their part of the program
objectives.
! !28
6. Physical Movement and Modal Optimization
In the end, clients will remember the final execution, and not the
attempted synchronization if in their case failed to deliver. Physical
movement and modal optimization (objective function) must be
synchronized. Whether provided directly by the synchronizing party or by
another supporting carrier, they must be foolproof.
The result of the synchronization process should allow accurate

measurement of the Perfect Order Rate* for the supply channel, which if all
is functioning well, should represent significantly improved, if not world
class, results for this metric.
(*A Perfect Order is characterized as deliveries being on time, complete,

damage free, and having accurate documentation.)
The first step in defining the physical movement process is to determine

the required service level or delivery lead time that is acceptable to the
supply channel partners. This is the base level of service required.
Secondly, once this determination is made, and a transportation mode

selected, determine optimal load mix density, based on the total usable
cube of the vehicle and maximum allowable transport weight.
Finally, define the optimal trailer (carrier) as the goal of the load
optimization process. This methodology can be built into load-building
algorithms in the provider's system, based on the total order flow cube,
density and quantities for all products moving to a given destination in the
same service timeframe.
! !29
7. Dynamic Process Adjustment and Optimization
Define rules and methods for ongoing adjustments and optimization of the
processes in response to rapidly changing variables which can impact the
supply chain. Integrate the ability to switch to the varying size and
capacity of containers should volume fluctuations so dictate. Analyze cubic
imbalances and actively solicit new business partners to balance these.
8. Greater Synergies among Partners
Finally, as the supply chain synchronization effort proceeds and grows, so

do the destinations, complexity of service and opportunities for greater
synergies among the players. These should also be actively monitored and
acted upon when appropriate. There is no doubt that the continual addition
of critical mass to such a program will at some point hit justification levels
for implementing advanced handling and automation equipment to speed
and simplify the process. In the end, it is through careful monitoring of
these optimization opportunities which will make the appropriate timing for
such initiatives to be implemented readily apparent.
1.8 Summary
Robust GDP growth, coupled with a sharp rise in domestic as well as

international trade, has been driving logistics business over the past
decade in India. The purpose in this chapter was to provide a brief
overview of logistics as it is being practiced today, in the commercial
sector; to identify the various logistics and related activities being
accomplished in different phases of a system life cycle; to suggest that
these logistics activities could be integrated and considered as a major
"element" of the system; and to recommend that the logistics and support
infrastructure be addressed as an inherent part of the systems engineering
process, applied in the development of systems from the beginning. In
other words, the subject of logistics must be addressed from a total
system's life cycle perspective from the beginning.
! !30
1. What is the scope of logistics?
2. What are the key elements and activities of the business logistics
function?
3. What are the logistic requirements of delivering a product to a

customer?
4. Discuss the importance of logistics at macro and micro levels.
5. What is the importance of maintaining a buffer stock?
! !31
1. Physical items that can be perceived by the sense of touch, e.g., cars,
food items, computers, telephones, etc. are known as:
(a) Intangible products
(b) Tangible products
(c) Sensible products
(d) Delivery products
2. An asset that cannot be perceived by the senses.

(a) Intangible products
(b) Tangible products
(c) Sensible products
(d) Delivery products
3. It constitutes an integrated mix of components, e.g., equipment,

software, people, facilities, data, information, etc.
(a) Custom
(b) Lifecycle
(c) System
(d) Products
4. Selection of technologies, the selection of materials, equipment

packaging schemes, the design of a manufacturing process, the design
of a maintenance and support infrastructure, etc. have a great impact
on:
(a) Delivery schedules
(b) Requirements for smooth operation
(c) Downstreaming of costs
(d) Upgrading of systems
! !32
5. Activities in the value chain in which they have a distinctive advantage

can be categorized into primary activities such as:
(i) Inbound and Outbound Logistics
(ii) Operations
(iii) Marketing and Sales
(iv) Services
(a) All of the above

(b) None of the above
(c) (i), (ii) and (iii)
(d) (ii), (iii) and (iv)
6. Strategic ______________ has a great influence in the logistic system

and needs a thorough evaluation before making the decision to have
own ______________ or to outsource, otherwise a firm might incur
unnecessary cost and/or lack the competitive edge in the market.
Fill in the blanks with a common word:

(a) Transportation
(b) Equipment
(c) Warehousing
(d) Inventory
7. “Material handling is the movement and storage of material at the

lowest possible cost through the use of proper method and equipment”.
(a) True
(b) False
8. On a day-to-day basis, many tasks and activities require this: entering

orders, conforming schedules, tracking shipments, communicating
status information, invoicing, collecting payments, processing returns
and resolving disputes.
(a) Operating synchronization
(b) Operating system
(c) Operating tasks
(d) Operation handling
Answers: 1.(b), 2. (a), 3. (c), 4. (c), 5. (a), 6. (c), 7. (a), 8. (a)
! !33
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
Video Lecture - Part 2 
! !34
TRANSPORTATION INFRASTRUCTURE
Chapter 2
Transportation Infrastructure
Objectives
• The concept transportation and importance of transport management
• The functionality provided by transportation, underlying principles of

transportation and the participants of transportation
• The various methods/forms of transportation, modes/types of

transportation service and different activities of transport department
administration.
Structure
2.1 Importance of Transport Management System (TMS)
2.2 Analytics in TMS
2.3 Benefits of TMS
2.4 Transport Functionality, Principles and Participants
2.5 Transportation Infrastructure
2.6 Transportation Service
2.7 Transport Department Administration
2.8 Summary
! !35
Introduction
“A transportation management system (TMS) is a subset of supply chain

management (SCM) that deals with the planning, execution and
optimization of the physical movements of goods. In simpler terms, it is a
logistics platform that enables users to manage and optimize the daily
operations of their transportation fleets.”
Logistics has been instrumental in the globalisation of modern society; the

demands of retailers, shippers and manufacturers, and the growth of
information systems and technology, making it possible to link people,
products, business, cities, regions and countries more closely than ever
before.
The potential and opportunities created by easier international movement

of goods has, however, created new challenges – within the context of
increasing complexity in the manufacturing, buying and distributing of
goods, companies are being placed under pressure to develop faster, more
efficient transnational supply chains.
The ultimate goals of using a TMS are to improve shipment efficiency,

reduce costs, gain real-time supply chain visibility and enhance customer
service.
2.1 Importance of Transport Management (TMS)
Transportation Management System (TMS) is a holistic process that

brings together supply chain partners and service providers to drive
inefficiencies out of the transport planning and execution process. The
objective of TMS is to improve the operating performance of all parties
involved by eliminating inefficiencies in the transportation component of
the supply chain.
TMS is a critical component because it automates business processes,

which reduces labor costs, enhances productivity, and improves service
levels. It provides information about freight costs, on-time delivery, and
other metrics that have a direct impact on corporate performance; and it
monitors real-time events and activities, thereby allowing companies to
react quickly and efficiently to exceptions.
! !36
TM focuses on enhancing the interaction between three principal parties –

a shipper, a carrier, and a receiver, as well as secondary participants such
as third-party logistics (3PL) service providers. Participants collaborate by
sharing information about demand and supply (e.g., forecasts, event plans,
and expected capacity), ideas and capabilities to improve the performance
of the overall transport planning and execution process, and assets, where
feasible (e.g., trucks).
The process begins with an order/shipment forecast, and includes capacity

planning and scheduling, order generation, load tender, delivery execution,
and carrier payment.
Activity A
• What are the objectives of transport management?
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2.2 Analytics in TMS
Data is very important in a supply chain. As the goods flow forward in the
supply chain, information flows backward to the supplier. The tracking of
data in the supply chain operations is called analytics. The data that a
company collects is dependent on whether the company wants to reduce
manufacturing defects, increase sales or effectively manage resource use.
First, the information on the allocation of resources is very important. In
the supply chain, this data can help the company in its merchandising
strategies.
Other important data is the sales per location. This information enables
firms to shift their local inventory so that they can meet the demand of
different areas. The companies that have a lot of resources can use this
information to forge new paths and to find advantages in other areas. This
data is also important for online retailers because they reduce their
delivery time and manage their store inventories.
! !37
Thirdly, the information on industry trends is important to the company.

This data enables it to plan for inventory and distribution. It also helps the
company to identify which goods to stock and distribute.
Analytics requires an enterprise approach. E-commerce is driving the

demand for smaller, more frequent last-mile deliveries. As a result, parcel
rates are soaring at twice the rate of inflation.
With the advent of parcel TMS platforms, data warehouses and business
analytics technology, it is easier and more affordable than ever to manage
multi-carrier shipping costs.
TMS software automates such functions as carrier selection, routing and

rating; in the process, it helps users reduce their shipping and labor costs.
TMS applications usually work between a shipper’s order processing and

distribution modules. The software examines various transportation
scenarios, suggests routing solutions, and selects the best mode and the
least-cost provider. Once the choice is made, the solution manages the
load tendering and track and trace, performs freight bill audits and
payments, and conducts analytics.
Parcel TMS platforms can capture and store shipping data from across the
enterprise in a single data repository and then match it against carrier
invoice data. Business intelligence tools can analyze and identify
transportation cost reduction opportunities that can then be enforced by
improved parcel shipping processes in order entry, purchasing, fulfillment
centers, drop ship suppliers, stores, offices, mail centers and customer
service. The more data you have, the more opportunities there are to mine
for nuggets of cost savings.
Activity B
•How can Analytics help in reducing shipping costs?

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! !38
2.3 Benefits of TMS
1. Reduce freight expenses: One of the greatest benefits that a TMS

provides is reducing freight-spend. This system is able to provide
savings by analytics and optimization.  
A transportation management system provides suggestions of how to
reduce expenses and uses data that provides valuable information.
2. Track deliveries in real time: A TMS provides the ability to view

where drivers and shipments are located in real time. This provides
information as to the amount of time a route takes and this can then
create an efficient route schedule. Also, this provides information as to
which drivers and routes are most efficient.
3. Increase customer service: A TMS provides improved customer

service levels with the ability to monitor on-time performance, also the
ability to locate where shipments are and the distance from the
destination. The TMS provides an online portal where customers are
able to see exactly where their shipments are and inform their
customers. This provides increased customer service as customers have
the ability to access shipment and freight information when needed.
4. Improve warehouse efficiency and productivity: With the constant

flow of incoming and outgoing inventory, a well-organized warehouse is
an important part of the logistics process. Pairing a TMS with a WMS
(Warehousing Management Systems) can create a record of orders and
track where they are located in the warehouse, in transit and when they
arrive. This will allow users to review processes and ensure they are
efficient.
5. Increase supply chain efficiency: The ability to track drivers,

inventory and other processes will allow your business to increase
productivity. This can improve the supply chain and reduce
inefficiencies.
A transportation management system provides increased efficiencies in the

supply chain and provides savings to users. TMS provides us full visibility
during shipments, which allows customers to be fully informed about the
shipment.
! !39
A big impediment to TMS adoption had been its cost. Until recent years,
software had to be purchased and installed on a company’s servers. This
was expensive and inflexible. Installing a TMS in a modern business is
likely to be a five-figure spend, including computer hardware, software
licenses, maintenance and required expertise to manage the software.
Today, an application can be leased as a cloud-based program, and is

available from multiple vendors. This has brought down the expense and
dramatically accelerated a user’s ROI.
A fully deployed transportation management system can also benefit

organizations in the following ways:
• Transportation order planning and execution: TMS integrates well

with enterprise order management, warehouse management and
purchasing systems, customer relationship management (CRM), supplier
relationship management (SRM), and other systems for managing
transport demand. It enables users to plan and manage both
international and domestic shipments, and determines the cheapest and
most efficient carrier and mode using better route planning, load
optimization, carrier mix and mode selection.
• Supply chain visibility and better control of inventory

management: TMS enables users to track and monitor the lifecycle of
orders and shipments in real time and get status updates on each. This
offers users an accurate forecast for the inventory and improves the
visibility and accountability of the supply chain network.
• Reduce invoice errors: By automating the freight payment and audit

processes, users can reduce errors that may arise from manual
procedures.
• Transport intelligence: Most TMS software offers users extensive

insights and reporting capabilities that provide them with detailed
visibility into freight data and metrics to help pinpoint any discrepancies.
With this data, users can make the necessary changes to improve service
delivery and reduce cost, and they can also create reports.
! !40
• Additionally, there are TMS service vendors that provide not just the
technology, but also services to the shippers to run their daily
transportation operations. In this arrangement, however, shippers retain
control over the key relationships between carriers and customers.
TMS manage four key processes of transportation management:
1. Planning and decision-making: TMS will define the most efficient

transport schemes according to given parameters, which have a lower
or higher importance according to the user policy: transport cost,
shorter lead-time, fewer stops possible to ensure quality, flows
regrouping coefficient, etc.
2. Transportation execution: TMS will allow for the execution of the

transportation plan such as carrier rate acceptance, carrier dispatching
and EDI.
3. Transport follow-up: TMS will allow following any physical or

administrative operation regarding transportation: traceability of
transport event by event (shipping from A, arrival at B, customs
clearance, etc.), editing of reception, custom clearance, invoicing and
booking documents and sending of transport alerts (delay, accident,
non-forecast stops.)
4. Measurement: TMS have or need to have a logistics key performance

indicator (KPI) reporting function for transport.
! !41
!
Figure 2.1: Transport Management System
Activity C
• What are the challenges in implementing TMS?

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! !42
2.4 Transport Functionality, Principles and Participants
Transportation is one of the most visible elements of logistics operations.

As consumers, we are accustomed to seeing trucks and trains moving
products or parked at a distribution facility. While this experience provides
a good visual understanding of transportation elements, it does not allow
the necessary depth of knowledge to understand transportation’s role in
logistics operations. This section establishes that foundation by reviewing
functionality provided by transportation and the underlying principles of
transport operation.
Transportation Functionality
The purpose or function of transportation is to serve as a connecting link

between separate units within a firm’s own organization (such as between
plants and warehouses) and between units of the firm and units of other
firms and individuals (such as suppliers and customers). Good
transportation has the effect of holding to a minimum the time and cost
involved in the relationships of the firm. In economic theory terms,
transportation’s function is to create place utility for the goods produced or
distributed by the firm. Transportation enterprises provide two major
services: product movement and product storage.
1. Product Movement
Whether the product is in the form of materials, components, assemblies,

work-in-progress, or finished goods, transportation is necessary to move it
to the next stage of the manufacturing process or physically closer to the
ultimate customer. A primary transportation function is product movement
up and down the value chain. Transportation utilizes temporal, financial,
and environmental resources. It is important that items be moved only
when it truly enhances product value.
The major objective of transportation is to move product from an origin

location to a prescribed destination while minimizing temporal, financial,
and environmental resource costs. Loss and damage expenses must also
be minimized. At the same time, the movement must take place in a
manner that meets customer demands regarding delivery performance and
shipment information availability.
! !43
2. Product Storage
A less common transportation function is temporary storage. Vehicles make

rather expensive storage facilities. However, if the in-transit product
requires storage but will be moved again shortly (e.g., in a few days), the
cost of unloading and reloading the product in a warehouse may exceed
the profitability. A second method to achieve temporary product storage is
diversion. This occurs when an original shipment destination is changed
while the delivery is in transit. Traditionally, the telephone was used to
direct diversion strategies. Today, satellite communication between
enterprise headquarters and vehicles more efficiently handles the
information.
Activity D
• What is the primary objective of transportation?

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! !44
Transportation Principles
There are two fundamental economic principles that impact transport

efficiency: economy of scale and economy of distance.
1. Economy of Scale
It refers to the characteristic that transportation cost per unit of weight

decreases when the size of the shipment increases. For example, truckload
(TL) shipments (i.e., shipments that utilize the entire vehicle’s capacity)
cost less per kg than less-than-truckload (LTL) shipments (i.e., shipments
that utilize a portion of vehicle capacity). It is also generally true that
larger capacity transportation vehicles such as rail or water are less
expensive per unit of weight than smaller capacity vehicles such as road or
air. Transportation economies of scale exist because fixed expenses
associated with moving a load can be spread over the load’s weight. As
such, a heavier load allows costs to be “spread out,” thereby decreasing
costs per unit of weight. The fixed expenses include administrative costs of
taking the transportation order, time to position the vehicle for loading or
unloading, invoicing, and equipment cost. These costs are considered fixed
because they do not vary with shipment volume.
2. Economy of Distance
It refers to the characteristic that transportation cost per unit of distance

decreases as distance increases. For example, a shipment of 600 miles will
cost less than two shipments (of the same combined weight) of 300 miles.
Transportation economy of distance is also referred to as the tapering
principle since rates or charges taper with distance. The rationale for
distance economies is similar to that for economies of scale. Specifically,
the relatively fixed expense incurred to load and unload the vehicle must
be spread over the variable expense per unit of distance. Longer distances
allow the fixed expense to be spread over more miles, resulting in lower
overall per mile charges.
Activity E
How can you achieve economies of scale and economies of distance?

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! !45
Transportation Participants
The participants in the world of transportation are (Fig. 2.1):

• The shipper (often called the consignor)
• The receiver (or the consignee)
• The carrier
• The government
• The internet and
• The public…
!
Figure 2.1: Major Relationships among Transportation Participants
Shipper and Consignee
There is a mutual interest in moving goods from origin to destination within

a given time at the lowest cost between the Shipper and Consignee.
Services such as specified pickup and delivery times, predictable transit
times, and zero loss and damage as well as accurate and timely exchange
of information and invoicing are included.
! !46
Carriers and Agents
Carriers hope to maximize their revenue for movement of goods while

minimizing associated costs by charging their customers the highest rate
possible while minimizing overhead costs such as labor, fuel and vehicle
costs to complete the cycle of delivery.
Brokers and freight forwarders facilitate carrier and customer

synchronization. To achieve this objective, the carriers coordinate pickup
and delivery times to match or consolidate different shipper freight into
movements so that economy of scale and distance can be achieved.
Government
The Government always desires a stable and efficient transportation

environment so that there is a positive and direct impact of transportation
on economic success.
Internet
Internet is used to share real-time information with customers and

suppliers. The Internet now provides the vital communication links
between the transactional participants (shipper-carrier-consignee). The
real-time tracking of packages and shipments replaces the old system of
phones and faxes. In the past, truckers would need to call in regularly to
update their location. It is also used for items such as freight matching
(things going to similar locations), and purchases of items such as fuel,
equipment parts and supplies.
Public
Public is concerned with transportation accessibility, expenses, and

standards for security, safety and the environment. The public creates
transportation demands by purchasing goods.
! !47
Activity F
• What role do agents play in transportation of goods?

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2.5 Transportation Infrastructure
Transport is vital to the well-functioning of economic activities and a key to

ensuring social well-being and cohesion of populations. Transport ensures
everyday mobility of people and is crucial to the production and distribution
of goods. Adequate infrastructure is a fundamental precondition for
transport systems.
Transportation infrastructure refers to the framework that supports our

transport system. It consists of rights-of-way, vehicles, and carriers
operating within five basic modes. A mode identifies basic transportation
method or form:
• Rail
• Road
• Air
• Water (Sea/Inland)
• Pipeline
• Ropeways
Transport is vital to the well functioning of economic activities and a key to

ensuring social well-being and cohesion of populations. Transport ensures
everyday mobility of people and is crucial to the production and distribution
of goods. Adequate infrastructure is a fundamental precondition for
transport systems. In their endeavor to facilitate transport, however,
decision-makers in governments and international organizations face
difficult challenges. These include the existence of physical barriers or
hindrances, such as insufficient or inadequate transport infrastructures,
bottlenecks and missing links, as well as lack of funds to remove them.
Solving these problems is not an easy task. It requires action on the part
of the governments concerned and actions that are coordinated with other
governments at international level.
! !48
A key element in the benefits supplied by transport infrastructure in any

form is connectivity, which in turn provides growth and distributional
effects. Connectivity improves information flow, reduces time in travel, and
reduces overall transaction costs. Within a social context, adequate
infrastructure provides for general prosperity and health. At a general
level, these elements within themselves can serve economic efficiency, less
consumption of resources and a more sustainable society. Modern urban
systems are dependent on transport infrastructure networks to make their
economic and social systems function effectively.
1. Rail Transportation
Rail transport is literally the strategic sector that offers a broad possibility
for the integration of transport in sustainable development. Railway
development has always played an important part among major regional
economic cooperation projects, especially over the past decade, in
particular due to freight transport safety, due to the superiority of rail
transport in terms of pollution, but mostly due to transport costs against
road or sea transport. The railway infrastructure plays the role of a catalyst
for an increased regional integration, but also in supporting trade and
foreign investments. In developing or expanding their projects, major
companies and logistics operators seek a reliable railway infrastructure and
especially a railway network that provides access to sea ports.
Transport infrastructure development has been the main focus of all major
projects of economic cooperation in Europe and Asia. This was mainly due
to freight transport safety, the fact that railway transport is eco-friendly,
but especially due to the fact that, from the point of view of the transport
costs, compared to land-maritime transport, railway transport is much
more efficient. Transited by major international transport corridors, east to
west and north to south, the Black Sea area stands in the middle of all
routes linking Europe and Asia. Being aware of these advantages, all the
countries plan to make the most of their situation. On another note, the
international financial institutions make massive investments in the
infrastructure projects developed in Europe and Asia.
As companies seek to diversify their supply chains, and with environmental

concerns playing an increasingly important role in business decision-
making, many are seeing rail logistics as an attractive alternative to
traditional solutions. Rail transport is particularly useful for the movement
! !49
of large or heavy loads. In many countries, higher weights are permitted

on rail, but not on road.
!
Figure 2.3: Rail System Configuration
! !50
Key Advantages of Rail Logistics include:
• Especially suited for large quantities of volume and weight
• Economic transportation over long distances
• Railway is the safest form of transport. The chances of accidents and

breakdown of railways are minimum as compared to other modes of
transport. Moreover, the traffic can be protected from the exposure to
sun, rain, snow etc.
• It is a quick and more regular form of transport because it helps in the

transportation of goods with speed and certainty
• Environmentally friendly
Activity G
•In short, what is the importance of rail infrastructure in the integration of

transport?
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Roll-on Roll-off (RORO) Service
Roll-on/Roll-off (RORO or ro-ro) ships are vessels designed to carry

wheeled cargo, such as cars, trucks, semi-trailer trucks, trailers, and
railroad cars (Fig. 2.4) that are driven on and off the ship on their own
wheels or using a platform vehicle, such as a self-propelled modular
transporter. This is in contrast to lift-on/lift-off (LoLo) vessels, which use a
crane to load and unload cargo.
! !51
!
Figure 2.4: Rail RORO
RORO vessels have either built-in or shore-based ramps that allow the
cargo to be efficiently rolled on and off the vessel when in port (Fig. 2.5).
While smaller ferries that operate across rivers and other short distances
often have built-in ramps, the term RORO is generally reserved for large
oceangoing vessels. The ramps and doors may be located in stern, bow or
sides, or any combination thereof.
!
Figure 2.5: Sea RORO
! !52
Benefits of RORO services:
1. RORO services save precious fuel for the nation.

2. Speed of RORO train is fast enough as compared to movement by road.
3. Terminal time of loading/unloading is just 15 to 20 minutes in RORO.
4. Better turnaround of trucks.
5. No risk of accidents
6. No wear and tear of trucks.
7. Less pollution as trucks are not plying on the roads.
8. Tariff is competitive to sustain the market forces.
9. No hassle of octroi, toll, etc.
10.No detentions at terminals.
11.Less paperwork.
Konkan Railways’ novel experiment with ‘Roll-on Roll-off’ of trucks over

BRN wagons has been a resounding success. In this arrangement, trucks
are loaded through a ramp provided at the dead-end of a loop on BRN
wagons which have been suitably modified for through passage of trucks
over them. Before loading over the BRNs, the trucks are weighed and
passed under a height gauge (maximum height – 3.4 metres above road
level) to ensure that they conform to the maximum moving dimensions for
safe passage. The driver and cleaner of the truck travel along, sleeping in
their truck cabin.
Reefer Services
Refrigerated shipping container for transporting perishables, having its own

stand-alone (self-powered) cooling system. Also called reefer.
A refrigerated container or reefer is an inter-modal container (shipping

container) used in inter-modal freight transport that is refrigerated for the
transportation of temperature sensitive cargo.
While a reefer will have an integral refrigeration unit, they rely on external
power, from electrical power points (“reefer points”) at a land based site, a
container ship (Fig. 2.7) or on quay. When being transported over the road
on a trailer or over rail wagon, they can be powered from diesel powered
generators (“gen sets”) which attach to the container whilst on road
journeys. Refrigerated containers are capable of controlling temperature
ranging from –65°C up to 40°C.
! !53
Some reefers are equipped with a water cooling system, which can be used
if the reefer is stored below deck on a vessel without adequate ventilation
to remove the heat generated.
!
Figure 2.6: Road Reefer
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Figure 2.7: Container Ship Reefer
! !54
Activity H
•What is the usefulness of reefer vehicles?

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Effect of Transportation Infrastructure on Economic Growth in

India
The transportation would be a key facilitator to sustainable economic

growth is rarely questioned. In India, in particular, transportation has been
noted to be a critical infrastructure required for economic growth. A well-
oiled transportation infrastructure expands the productive capacity of a
nation, both by increasing the mobilization of available resources, and by
enhancing the productivity of those resources.
The support for this assertion is straightforward and there are many ways
we can justify it.
First, transportation infrastructure can enter in the production process as

direct input and in many cases as an unpaid factor of production. Second,
transportation infrastructure may make other existing inputs more
productive. For instance, a well-designed road allows goods to be
transported to market in less time and hence, reducing the transportation
cost in the production process. Third, transport infrastructure can act as
magnet of regional economic growth by attracting resources from other
regions, which is called agglomeration.
Transport infrastructure accounts now for a major share of energy

consumption in India, especially for petroleum products and the
consequent development in that sector. However, the link between
transport infrastructure growths causing economic growths appears to be
relatively weak in a country like India. Still, since substantial economic
expansion is expected in India over the next two decades, building of
transport infrastructure to cause or facilitate it should at least be modest.
But there are other drivers of the transport sector. The recent high growth
! !55
in India is resulting not only from the country’s rapid economic growth in a
feedback mode, but also due to population expansion and changing
economic lifestyles.
The reverse is now becoming increasingly visible; for instance, economic

expansion in India is causing notable growth of roads and railways. While
the former approach is called as demand driven (economic expansion
causing the transport sector to grow), the latter is called as supply driven
(expanding transport facilities help the economy to grow). Such nexus
suggests that economic growth and transport infrastructure may perhaps
be jointly determined to help in the formulation of appropriate policies,
because economic growth is closely related to transport as higher economic
growth requires added transport infrastructure.
Transport access is complementary to other services such as health and

education. Studies in rural India show the effect of infrastructure
investments on economic growth and poverty. The results from these
studies consistently show the importance of road investments in promoting
economic growth and poverty reduction. In India, public investment in
rural roads was found to have had the largest positive impact on
agricultural growth.
Growth of transport sector post globalization has well exceeded what was
achieved over 40 prior years. Still, the level attained so far is quite low
when compared with international norms. Rather importantly, in India one
has noticed a gradual transition from rail-dominated transport to a road-
dominated one. Besides, the contribution of transport sector to GDP, as
expected, has been rising. It rose from 3.8% in 1980-81 to 4.6% in
1990-91 and then to 5.5% in 2000-01 grossing 6.7% of the annual growth
rate in 2008-09 and estimated to be 8.0% in 2010-2011.
! !56
Table 2.1: Contribution of the Transport Infrastructure to GDP in India in

%age
Year X1 X2 X3 X4 X5
1980-81 0.28 2.42 0.79 0.31 3.8

1985-86 0.61 2.59 0.66 0.34 4.2
1990-91 0.97 2.71 0.64 0.27 4.6
1995-96 1.48 3.01 0.71 0.28 5.5
2000-01 1.48 3.15 0.69 0.22 5.5
2008-2009 6.7
2010-2011 Estimated 8.0
to be
Source: National Accounts Statistics of India, EPW Research Foundation

Mumbai.
Note: X1: Rail contribution to GDP; X2: Road contribution to GDP; X3:
Water contribution to GDP; X4: Air contribution to GDP; X5: Total transport
infrastructure contribution to GDP.
Activity I
•How can transport infrastructure help economic growth in India?

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Dedicated Freight Corridors
A Dedicated Freight Corridor (DFC) can be described as a network of

railway lines “dedicated” for the movement of freight trains. Such DFCs are
separate from the passenger railway networks to ensure uninterrupted
movement of the freight trains. Railway tracks under DFC are often
provided with a higher voltage overhead power line than that of normal
passenger railway networks, so the freight trains can attain higher speeds.
India has one of the largest transport sectors. The railway network
connecting the four metropolitan cities of Delhi, Mumbai, Chennai and
Kolkata is known as the “Golden Quadrilateral” of The Indian Railways. The
hypothetical diagonals of this Golden Quadrilateral connect Delhi-Chennai
and Mumbai-Howrah. The total route length of the Golden Quadrilateral
and its diagonals add up to 10,122 km and is responsible for generating
more than 55% of the total revenue of the Indian Freight Railways. Though
covering 16% of the routes in India, these corridors are “High Density
Corridors” carrying 52% passengers and 58% freight.
A corridor project that will enable the Railways run faster, longer and
heavier goods trains along dedicated tracks is planned by the Indian
Railways in an ambitious $4 billion (Rs. 25,000 crore) programme inviting
the private sector to build and develop multimodal logistics parks along the
proposed eastern and western dedicated freight corridors. The first phase
of this plan involves the construction of two DFCs, the Western DFC and
the Eastern DFC. The Eastern DFC will start from Ludhiana in Punjab
passing through the States of Haryana, Uttar Pradesh, Bihar and finally
ending in Dankuni, West Bengal. The Western Corridor will start from Dadri
to Mumbai and pass through the States of Delhi, Haryana, Rajasthan,
Gujarat and Maharashtra. The two corridors are estimated to span a route
length of 3300 kilometers and expected to be completed by 2017. The
basic objective of the logistics projects is to enhance the volume of rail
freight in the overall transport chain of the country with complete solutions
to help companies reduce both the cost and time of transporting goods.
Activity J
•What is the purpose of DFCs?

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! !58
2. Road Transportation
The network of roadways of a country is as essential as the arterial system

to the human body. The roads in a big way facilitate advancement in the
economy of a country and they simultaneously facilitate communication. In
the matter of surface transport, they are almost equal to the railways
which connect other parts of the country through its large railway network
system. These two transports are not parallel but interdependent.
Road transport is one of the most promising and potent means for rapid
industrialization and agricultural advancement. It plays an important role in
the economy of the country and is particularly suitable for short and
medium distance. It provides the basic infrastructure for bringing the
majority of the people who are living in far-off villages into the mainstream
of life by connecting them with the rest of the country.
While railways occupy the predominant position in the transport network in

the country, the role of road transport has steadily been increasing. With
the spread of green revolution in the country and industrial growth and
opening up of new areas, the road transport has assumed greater
importance as the growing demands for supply of inputs like fertilizers,
seeds etc. as well as the transport of agricultural produce to markets have
to be met largely by road transport.
Full Truckload
Full Truckload (FTL) shipping is the movement of large amounts of

homogenous cargo. Generally, FTL carriers will contract an entire trailer
load to a single customer. The cargo usually remains on a single vehicle
from the point of origin to the destination.
Less-than-Truckload
Companies providing less-than-truckload (LTL) services can range from

specialized services developed for this particular need and parcel services.
They often combine the loads and shipping requirements of several
different companies on their trucks, which makes it more cost-effective
than running an entire truck for one small load. It allows the carrier to
distribute costs among several different businesses. However, a less-than-
truckload shipment may take longer to be delivered than a full shipment
! !59
because it does not follow a direct route from the shipper to the
destination.
Activity K
•How does road transport help in the development of the country?

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Road Infrastructure in India
India has an extensive road network and provides service to millions of

people every day, thus road transport is one of the important ingredients
for the social and economic development of the country. India has the third
largest road network in the world stretching 3.32 million kilometers in
length. According to the World Bank, national highways in India constitute
a length of close to 70,748 km, which is a mere two per cent of the road
network, but carry about 40 per cent of the total road traffic in India.
The significance of transportation is relative to the economy and the

population of a country. India being the world’s second fastest growing
economy and being the second largest populated, transportation plays a
crucial role in its economic development and sustainable growth.
Road transport has emerged as the dominant segment in India’s

transportation sector with a share of 4.5% in India’s GDP in 2005-06. Over
the last six years (2000-01 to 2005-06), the annual average growth in
road transport sector GDP at 9.5% was much higher than the overall GDP
growth of 6.5%. Robust growth in road transport has been attained despite
significant barriers to inter-State freight and passenger movement
compared to inland waterways, railways and air which do not face rigorous
en-route checks/barriers.
! !60
Driver Relay Model
In this model on single route, there are multiple drivers handling one truck
or vehicle. A driver never drives a particular vehicle for more than a day.
The driver is able to return his family on the same day itself within 24
hours. (May be driving the return truck, not sure though.) This improves
the quality of life of drivers and also the moral of driver remains good. If
we compare this to other logistics companies, drivers generally spend 25 to
30 days away from family driving single vehicle. This reduces the
efficiency.
Case Study
“Logistics firm Rivigo to treble truck fleet to 3,000 units, banks on driver
relay system”.
The firm, which has a fleet of 800 trucks, claims that based on its
innovative ‘drivers relay system’, truck loads are delivered to Chennai from
DELHI in two days instead of conventional eight days.
He said the company is eyeing to occupy the top slot in logistics market as
its innovative relay model for drivers has not only facilitated their return to
home the same day but ensured the truck kept on moving, resulting in a
faster and efficient delivery of goods.
By drivers relay, the company made sure drivers got back home on the
same day (or within 24 hours) and thereby, saved 50-70 per cent of the
turnaround time on long haul routes.
Deepak Garg, the Founder, further said to tap the opportunities in the
sector, Rivigo plans to ramp up current network of 41 trucking pit-stops
and a similar number of processing centres to over 200 across the country
over the next 12 months.
! !61
3. Air Transportation
The newest but least utilized mode of transport is air freight. Its significant
advantage lies in the speed with which a shipment can be transported. A
coast-to-coast shipment via air requires only a few hours contrasted to
days with other modes of transportation. One prohibitive aspect of air
transport is the high cost. However, this can be traded off for high speed,
which allows other elements of logistical design, such as warehousing or
inventory, to be reduced or eliminated. The air cargo industry plays a
critical role as it is involved from the procurement cycle to the delivery of
the finished product overseas. Liberal and open sky policies are great
catalysts and can trigger unconstrained growth capability, which is
important for any developing economy.
UDAAN
Ministry of Civil Aviation, GOI, has come up with a regional connectivity

scheme “Ude Desh ka Aam Naagrik (UDAN)”. This scheme aims to make air
travel accessible and affordable to the middle class. The UDAN scheme is
the key factor in the National Civil Aviation Policy 2016 of the Central
Government.
Deloitte India partner, Peeyush Naidu, who is part of the team working with
the Ministry on UDAN, says that, besides looking at some of these
demands, the scheme also needs to expand to include freight by
identifying suitable business models at some point. Regional connectivity
can be expanded to include freight, move cargo in defined period of times
to either domestic hub airports or through AFSs (air freight stations), which
can be co-existing with multimodal logistics parks, CFSs (container freight
stations) and so on.
Increasing Importance of Air Freight
Air cargo offers clients the benefits of secure handling, speed and
geographic and temporal flexibility but, with per kilogram costs that
average six times those of ocean container freight, is relatively expensive.
That high cost is compensated by reduced inventory and warehousing
costs. Air cargo service has become increasingly more integrated and
ground-linked, characterized by door-to-door service from shipper to
customer, as opposed to airport to airport. That advantage has allowed
! !62
integrated express handlers to offer time-definite service and to reduce

door-to-door delivery times.
Two major changes have taken place over recent years in many
manufacturing industries and it is due to these changes that air freight is
becoming a popular choice for transporting products internationally. The
reason for this increase is:
• The growing volume of technology-based products. These products are

becoming lighter and smaller while their value is becoming greater
justifying the expense of air freight.
• The second is the rapidly increasing trend in many industries towards

"just-in-time" (JIT) inventories. JIT is most effective where the goods in
question can be moved by air. The benefits of JIT ordering are:
❖ Substantial reduction in capital requirements

❖ A substantial reduction in stockholding
Primary Reasons for The Growth in Air Cargo
• Deregulation and liberalization of the air cargo industry.

• Global interdependence helped by world trade agreements.
• International production and sales of goods and services.
• New inventory management concepts such as “JIT” and “ZERO” stocks.
• New air-eligible commodities. The vast development of high value and
limited time-consumable commodities
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Figure 2.8: Air Cargo Transportation
! !63
Air Express Services (Courier)
Air express service has been valued by a significant segment of the express
cargo market to the point that integrated express now accounts for an
estimated 11% of the international air cargo market. In the United States,
air express actually accounts for over 70% of all air cargo shipments,
despite its premium cost, and the average weight of each shipment has
now risen to approach six pounds. FedEx, UPS, and DHL are the largest
integrated air express companies with operations in over 200 countries
each and 952,000 employees, collectively. They own or operate 677, 577,
and 420 aircraft, respectively, placing each among the largest airlines in
the world and they serve over 300 airports internationally.
The express industry has enabled the widespread adoption of just-in-time

practices by many businesses, which results in saving countless dollars in
inventory and logistical costs.
With time-definite international transactions, production flexibility and

speed characterizing much of the new economy, it is nearly certain that air
express cargo will play an increasingly vital role in the global economy. No
other means of transportation is better equipped to meet the economic
realities of the new era where global sourcing and selling, and just-in-time
logistics, require that producers receive and ship smaller quantities more
frequently, quickly and reliably over long distances.
Air express services help to improve the competitiveness of almost all

aspects of companies' operations, including sales, logistics and inventory
management, production and customer support. By expanding the size of
the market that can be served, aviation acts as a spur to innovation,
increases sales and profits, allows more scope to exploit economies of scale
and enhances competition. Business in sectors such as technology,
financial services, pharmaceuticals or business services increasingly require
high speed delivery services to ensure they can respond to customers'
needs.
! !64
Types of Goods Shipped by Air and the Industries Dependent upon

Air Cargo
Air transport is critical to the movement of goods in national and global

supply and distribution chains. From the beginning, air transport
specialized in high value-to-weight products, perishable goods, emergency
deliveries for unanticipated shortages, and products requiring the security
of increased attention. High value-to-weight ratios imply a relatively light
transportation cost burden and high inventory costs if goods are long in
transit. Highly perishable goods incur a significant decrease in product
value with any delay. The absence of critical components of complex supply
or distribution chains means significant assets would lie idle if the
components are not delivered in a timely manner
The Role of Air Cargo in Fostering Economic Development
Air cargo service has been a tremendous enabler for economic

development. This is because air freight and integrated air express are
critical to time-based competition –the frontier challenge for the world’s
most-advanced firms. Air freight has also facilitated specialization and
allowed the well-developed countries – their producers and consumers – to
reap the benefits of ever-closer matches between demand and supply. This
is due not just to the speed of air transport but to the geographic reach it
allows which enlarges effective market areas to the point that increasingly
small product niches reach the threshold of feasible production. At the
same time, air freight allows large pools of, especially Asian, labor to
connect with the product needs of wealthy Western European, North
American, and Northeast Asian markets. Using traditional ocean
transportation, exporters (and their employees and suppliers) in most
developing countries are at a considerable shipping time disadvantage to
these markets compared to domestic producers. Air cargo, combined with
the institutional mechanisms that allow the transfer of production
knowledge, goes a long way towards leveling the temporal playing field for
developing country producers. Air cargo potentially allows developing
country producers 24- to 48-hour access to these markets, compared to
the typical 30 days shipping time using traditional ocean transport.
! !65
An Assessment of Indian Air Cargo Industry
The Air Cargo industry in the Indian market has seen unprecedented
growth in the last decade. This significant growth over the last few years is
expected to continue over the next decade. International cargo traffic is
concentrated on the three key international gateway airports — Mumbai,
Delhi, and Chennai. With the development of supporting infrastructure in
the new Greenfield airports, Bangalore and Hyderabad will also experience
higher traffic rates. Although international air cargo traffic is much higher
than the domestic traffic, the latter offers greater potential for Indian
investors, since regulations prevent foreign airlines from competing in the
domestic air cargo market.
Transshipment throughput at Indian airports is assumed to grow at a much

higher rate than what it is now based on a number of factors.
Transshipment cargo constitutes as high as 60-70% of total volumes
handled by some of leading airports tends to be negligible for Indian
airports. A significant potential lies for the Indian airports to become
transshipment hub. Given its geographic location, India is well placed to
capitalize on this opportunity. While neighboring countries of India,
particularly Bangladesh and Sri Lanka, have sizeable international trade
with Europe and US, they have very limited direct connectivity to US and
Europe. On an average, the air freight traffic growth has been significantly
higher than the gross domestic product (GDP) growth rate and this trend
has been rising over the years. This is the result of increasing use of aerial
mode to transport freight, particularly perishables and time-sensitive
products, relaxation of foreign direct investment (FDI) limits, and open-sky
policies of the government.
Many interesting trends are taking place like the construction of an air
cargo hub in tier-II city of Nagpur in Maharashtra, rise in budget airlines
and cargo carriers with the relaxation in regulations. The cost of air-freight
is expected to drop in the coming years which will open up new economic
opportunities in India’s second tier cities which are now being added to the
air network. There are plans by many airlines to create full-fledged cargo
operations and it is expected that these cargo carriers will also move to
tier-II and tier-III cities. Even logistics companies are planning to acquire
their own aircrafts. All these augur well for aviation logistics and as the
demand for air cargo continue to grow steadily, it will attract many more
new players facilitating faster growth.
! !66
Domestic air freight market in India was at 568 metric tons in 2007-08
amounting to a total of Rs. 20,149 million. The market is likely to grow at a
rate of 12.9% in next 5 years and reach a figure of 1043 metric tons by
2012-13. At current realization level, this will amount to Rs. 36,986 million
by 2012-13.
Key players in the Domestic sector are Jet Airways (38% market share),
Indian Airlines (27% market share) and Blue Dart (17% market share). Jet
Airways also leads in value share at 38%, followed by Blue Dart at 26%
and Indian airlines at 22%. Mumbai and Delhi are the busiest ports with
Mumbai – Delhi being the most important sector.
The International air freight market in India was at 1146 metric tons of
which about 55 metric tons gets into interline movement within India. It is
estimated that the growth in the international sector will continue in the
coming years at an estimated growth rate of around 12.8% on a year-to-
year basis over the next five years.
Key players in the International sector are Singapore Airlines (12% market
share), Lufthansa (9% market share), Emirates (7% market share), Air
India (7% market share) and British Airways (7% market share).
Activity L
•What are the advantages of air transportation?

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Drone Deliveries
Delivery drones are logistical devices that carry materials from a retail
outlet to their consumer’s location. The main purpose is to deliver a
product or material towards the intended target location. A delivery drone
provides a mechanical assistance to clients who are unable to carry heavy
objects. Delivery drones are used by retail outlets and logistics companies
around the world.
! !67
The main delivery drone users are logistics companies and retail outlets.
These companies heavily rely on commodity transfer from one place to
another. Using a set of delivery drones is very helpful to keep a continuous
logistic operation. One example is a product delivery service to the
intended consumer to their residents.
Today, there are drones that are big enough to challenge the size of cargo
planes. On the other hand, there are delivery drone types that are as small
as the size of your palm that carry smaller objects. Regardless of the size
or type, delivery drones are helpful for companies and retail outlets to
maintain market productivity. Adoption of drones within businesses is
poised to take off over the next five years. Companies around the globe
are working on solutions and services to leverage the technology’s
capabilities, and that’s especially true for delivery companies, which are
looking for ways to meet consumer demand for fast and cheap fulfillment
services.
Drones can be used to cut down the cost of shipments and potentially
attract customers. Deutsche Bank expects delivery automation to be the
greatest cost-reduction opportunity for
 
e-commerce giant Amazon, lowering the cost of last-mile shipping by 80%.
The advantages of offering drone delivery are too large to ignore, which
likely means that the development, testing and full deployment of these
types of services will accelerate.
Pros of Delivery Drones
1. Deliver products: Obviously, delivery drones are mainly used for

delivering commodities or objects. These are programmed devices that
deliver drone from their headquarters to a designated area. The most
visible delivery drones are copter drones from retail shops. Large
delivery drones are operated in transport companies with bulk materials
to transfer.
2. Improves time management: Delivery drones allow human

counterparts to focus on other important delivery procedures. This is
because this device delivers faster due to its accurate locating
programme. Delivery drones has lesser error margin when locating the
exact targeted area.
! !68
3. Conserves energy: Delivery drones helps workers to conserve effort

while delivering commodities. The mechanical device increases
workforce activity to accomplish more tasks. Exhaustion risk is
minimized because there are devices that can replace human activities.
4. Saves time: Delivery drone makes an additional manpower to any

institution that it serves. It carries objects and transports them to other
locations through a remote controlled system. Workers will have more
time to attend other important delivery operations at the workplace.
5. Promote safety: Drones prevents accidents because they are

physically delivering the commodity to consumers. Human delivery
personnel are often exposed to hazardous environments. When using
drones, delivery personnel will no longer have to risk their lives from
accidents.
6. Accuracy: Delivery drones are more efficient when delivering products

to the right recipient. They have a higher accuracy rate on delivering
materials to the right recipient than a human. Incidents of wrong
recipients can significantly lessen.
Cons of Delivery Drones
1. Expensive device: Delivery drones are still expensive because they are
just introduced in the market. Only a few large companies use delivery
drones to improve their logistics operations. The average drone cost per
piece ranges between $50 for small and $500 for large drone.
2. Battery defects: Drones can easily drain their battery with just a few
minutes. Delivery drones easily runs their battery out while delivering
the products to a target location.  
If delivering fails, it can generate complaints from consumers in the
market.
3. Require technical familiarity: Operating delivery drone provides a

challenging task. Operators must have to read the manual of the device
and learn the procedures. It takes time and effort before successfully
operating the delivery drone.
! !69
4. Defective drone: There are delivery drones that show malfunctioning

systems months after purchasing the device. This is caused by a factory
defect that was not detected by the maintenance personnel at work.
Defective drones can disrupt delivery services.
5. Privacy breach: Delivery drones use cameras while delivering the

materials to target markets or locations. The cameras constantly record
the actual location, property, and the person without their consent while
receiving the object. Corrupt drone users may exploit recorded
information of their consumers.
6. Easily stolen: Drones are suspended independently into the

atmosphere. Anyone can take the drone away while disconnecting its
power supply. Once stolen, companies will no longer have the authority
to control their properties.
!
Figure 2.9: Drone Deliveries
Amazon, for example, made more than five billion deliveries to Prime
customers in 2017, and a conservative estimate of the company’s shipping
costs is at the $20 billion mark for last year. Commercial drones can travel
at up to 100 mph and deliver goods under 5 lbs (2.3 kgs).
! !70
Activity M
•How can drones deliver customer satisfaction?

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Glossary of Freight Terms
Air Freight Forwarder: An air freight forwarder provides pickup and

delivery service under its own tariff, consolidates shipments into larger
units, prepares shipping documentation and tenders shipments to the
airlines. Air freight forwarders do not generally operate their own aircraft
and may therefore be called "indirect air carriers." Because the air freight
forwarder tenders the shipment, the airlines consider the forwarder to be
the shipper.
Air way Bill: An airway bill is a shipping document airlines use. Similar to
a bill of lading, the airway bill is a contract between the shipper and airline
that states the terms and conditions of transportation. The airway bill also
contains shipping instructions, product descriptions, and transportation
charges.
Articles of Extraordinary Value: Carriers are not liable for "documents,

coin money, or articles of extraordinary value" unless the items are
specifically rated in published classifications or tariffs. Exceptions may be
made by special agreement. If an agreement is made, the stipulated value
of the articles must be endorsed on the bill of lading. Articles may include
precious stones, jewels and currency. Many tariffs include restrictions on
goods with values in excess of a specified amount.
! !71
Bill of Lading (BOL or B/L): A bill of lading is a binding contract that

serves three main purposes:
1. a receipt for the goods delivered to the transportation provider for

shipment;
2. a definition or description of the goods; and
3. evidence of title to the relative goods, if "negotiable".
Bonded Carrier: A transportation provider by US Customs to carry

Customs-controlled merchandise between Customs points.
Break Bulk: To separate parts of a load into individual shipments for

routing to different destinations.
Break Bulk: Terminal Consolidation and distribution center. A terminal in

the freight system that unloads and consolidates shipments received from
its smaller terminals and from other break bulks. This terminal may have
its own city operation.
Broker: A broker is an independent contractor paid to arrange motor

carrier transportation. A broker may work on the carrier’s or shipper's
behalf.
Cartage Agent: A carrier who performs pickup or delivery.
• Cartage agents use their own paperwork while transporting the

shipment.
• Does not track the shipment while it is in the cartage agent's possession.
• A shipment to a cartage agent for delivery, the shipment is considered to

be "delivered" in freight's tracking tool.
Claim Cargo: A "Cargo Claim" is a demand made on a transportation

company for payment for goods allegedly lost or damaged while the
shipment was in the transportation provider's possession. Pursuant to the
National Motor Freight Classification (NMFC) Uniform Bill of Lading, all
cargo claims must be filed within 9 months.
! !72
Consignee: The person or place where a shipment will be transferred for

the last time (destination); the individual or organization to which the
goods are addressed.
Consignor: The consignor, in a contract of carriage, is the person sending

a shipment to be delivered whether by land, sea or air. Some carriers, such
as national postal entities, use the term "sender" or "shipper" but in the
event of a legal dispute the proper and technical term "consignor" will
generally be used.
Delivery Receipt: Document a consignee or its agent dates and signs at

delivery, stating the condition of the goods at delivery. The driver takes the
signed delivery receipt to the terminal for retention. The customer retains
the remaining copy.
Dispatch: The act of sending a driver on his/her assigned route with

instructions and required shipping papers. Freight maintains contact with
drivers throughout the day by phone, pager, radio, satellite communication
or cellular phone.
Hazardous Material: Hazardous materials are defined by the US

Department of Transportation in accordance with the Federal Hazardous
Material Law. A substance or material may be designated as hazardous if
the transportation of the material in a particular amount and form poses an
unreasonable risk to health and safety or property.
Hazardous Material May Include: an explosive, radioactive material,

etiologic agent, flammable or combustible liquid or solid, poison, oxidizing
or corrosive material, and compressed gas.
Linehaul: Movement of goods between cities or between freight terminals,

particularly between origin terminal and destination terminal (excluding
pickup and delivery service).
Manifest: A shipping document used by Customs personnel reviewing a

particular transport vehicle's intended trip that summarizes all bills of
lading that have been issued by the carrier or its representative for that
particular shipment. For example, a cargo manifest might be used for
shipments.
! !73
Terminal: Freight building and grounds where shipments are prepared for
local delivery or transportation to other terminals.
Shipper's Agent: A Shipper's Agent is not a carrier, freight forwarder, or

broker. Shipper's agents generally arrange for truckload or container load
shipment transportation. Shipper's agents commonly provide services
related to warehousing or loading and unloading.
Shipping Documents: Papers accompanying a shipment as it moves

through the YRC Freight system, including bills of lading (PDF), packing
slips (PDF), Customs paperwork, manifests and shipment bills.
Shortage: The number of units received is less than the quantity shown
on shipping documents. The outstanding units may be delivered later.
Tariff: A Tariff is a document setting forth applicable rules, rates and

charges to move goods. A tariff sets forth a contract for the shipper, the
consignee and the carrier. Since January 1, 1996, motor carriers are not
required to publish tariffs. However, in accordance with federal law, tariffs
must be provided to a shipper on request.
Third-party: A party other than the shipper or consignee that is ultimately

responsible for paying the shipment charges.
UN Number: An internationally accepted 4-digit number used to identify

hazardous material.
4. Water Transportation
Inland Water Transport (IWT) mode is widely recognized as an

environment-friendly and cost-effective mode of transport. As per RITES
Report of 2014 on “Integrated National Waterways Transportation Grid
(INWTG)”, 1 litre of fuel moves 24 tonne-km on road, 95 tonne-km on rail
and 215 tonne-km on IWT. The comparative inter modal costs are given
below:
! !74
Mode Pre-tax Freight   Post-service Tax Freight  

(Rs. per tonne Km) (Rs. per tonne km)
Railways 1.36 1.41
Highways 2.50 2.58
IWT 1.06 1.06
The significant cost saving shows that the promotion of Inland Water
Transport (IWT) is expected to have a positive impact on reduction in
overall logistics cost.
The three National Waterways (NWs), viz., Ganga-Bhagirathi-Hooghly river

system (NW-1), River Brahmaputra (NW-2) and West Coast Canal (NW-3)
have been developed with targeted depth, fixed and floating terminals with
mechanized facilities for cargo loading, unloading and navigational aids.
Vessels are plying on these waterways. India’s waterways will see a
dramatic transformation within the next few years. On the anvil are 111
waterways as national waterways for navigation. The government has
decided to take up 30 of these waterways for development in the next
three years. In fact, because these waterways could also find linkages with
the ports of India, the Shipping Ministry hopes to connect the hinterland
using these waterways as well, in addition to the roads and rail that most
people are familiar with.
Comparison between IWT, Rail and Road
Parameters IWT Rail Road

Energy efficiency: 1 horespower (HP) 4,000 500 150
can move what weight of cargo (kg)?
Fuel efficiency: 1 litre of fuel can move 105 85 24

how much freight (tonne-km)
Inter-modal comparative operating 1.6 1.41 2.58
costs (`/tonne-km)*
Equivalent single unit carrying capacity 1 barge 15 rail wagons 60  

trucks
Air pollution Low Medium High
! !75
Land acquisition Low High High
Capital required Low High High
*Inclusive of taxes
Note: The information is for indicative comparison only.
Source: IWAI, KPMG in India Analysis.
IWT is an energy and fuel efficient mode of transport with relatively low
operating costs and less negative effects on the environment.
Greening the Inland Waterway Transport, Why Exactly?
The purpose of greening the inland waterway transport sector is that the
environment and the economy could go hand-in-hand. The emissions will
be an increasingly important economic factor and more and more
contracting authorities will ask for environmentally friendly transport. This
applies not only for the inland waterway transport, but for the whole
transport chain. As a result of this, there arises a strong need to an
overview of the emission problems and possible solutions.
Sea Transport
Sea transportation is very important as about 80% of all the world's

international trade is carried out through sea. Compared to transportation
by air and land, the transportation of heavy and bulky goods is more
convenient by sea. Although transportation of bulky goods through big
ships can mean several days of journeying time, it is still preferred as the
goods transported will reach in good condition. Sea freight is the most
economic form of transportation by which goods are moved between
countries in the export process. What is more, the use of containerization
for packing and carrying goods has greatly increased the volumes of cargo
moved by sea, the speed of transit and the safety of the cargo in question.
The following factors should be taken into account when considering the
transit times for goods being carried by sea. These are:
! !76
• The frequency of sailing

• The actual sailing time between the port of loading and the port of
discharge
If the sailing is a direct sailing or a transshipment sailing; that is to say will

the vessel sail directly to the port of discharge or will the cargo be placed
on a second vessel and then delivered to a final port of discharge.
Is the sailing an inducement sailing, the vessel will only call the port of
loading or discharge if there is sufficient cargo to load or discharge.
! !77
Types of Ships Operating in International Trade
A visit to any harbour around the world will highlight the many different
types of ships that one finds plying international waters. The most common
types of ships operating in international waters are given below:
• Cellular or multipurpose ships that are built to carry containerized cargo

and also break bulk cargoes.
• Conventional break bulk ships that carry only break bulk, non-
containerized cargo.
• "Cellular or Multi purpose" vessels are largely replacing break bulk

vessels.
• Most cellular vessels are able to accommodate break bulk/non-

containerized cargo on the upper most stack of the vessel.
• Ro-Ro ships that are multipurpose, with the addition of a stern ramp, to
the quayside, by which cargoes are received and dispatched.
• “Reefer vessels" - are vessels dedicated to carrying refrigerated cargoes
• Lo-Lo vessels have their own gantry or crane on board. These vessels
can load and discharge their own cargoes.
Activity N
•Why water transportation considered the most preferred transportation

for export goods?
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Shipping Industry in India
Shipping is the lifeline of a growing economy like India blessed with an

extensive coastline with more than 14,000 kms of inland waterways.
Approximately, 95% of the country's trade by volume (68% in terms of
value) moves through sea. Clarkson's Research Service reports that India
currently ranks 22nd in terms of growth of world tonnage when compared
to the principal maritime countries of the world. Moreover, shipping is also
an important earner of foreign exchange. According to a study conducted
by the National Council of Applied Economic Research (NCAER), shipping as
a single industry is one of the largest contributors to the foreign exchange
pool of the country. The Indian shipping industry plays a vital role in the
energy and national security of the country. The issue of energy security is
of paramount importance considering the fact that India is greatly
dependent on the import of energy resources such as coal, crude oil and
natural gas.
The shipping sector has witnessed significant cyclicality in the last decade
with a surge in freight demand in the middle of the decade slowing down
dramatically owing to a global recession towards the end. With the sector
completely open to foreign investment, there have been significant
improvements in shipping capacity available to Indian manufacturers and
traders as well as operational and scale efficiencies. Today, India is firmly
placed within the global liner network connecting Indian importers and
exporters to the remotest parts of the world. The average capacity and
parcel size of a vessel calling Indian ports has trebled since the beginning
of the decade and there have been significant improvements in turnaround
time and similar measures of operational efficiency. There has been
significant investment made in the sector both by Indian shipping
companies and international organizations alike. Challenges, however,
remain both on the physical and operational front as well as on the policy
front. Indian shipping is not able to achieve its full potential restricted by
limited draft availability in most ports, sub-optimal distribution of port
capacity across the coastline, limited road and rail evacuation capabilities
and restrictive legislative infrastructure in terms of tax and other policies.
! !79
Sea Freight Terms
Alongside: A phrase referring to the side of a ship. Goods to be delivered

"alongside" are to be placed on the dock or lighter within reach of the
transport ship's tackle so that they can be loaded aboard the ship. Goods
are delivered to the port of embarkation, but without loading fees.
Bonded Warehouse: The Customs Service authorizes bonded warehouses

for storage or manufacture of goods on which payment of duties is
deferred until the goods enter the Customs Territory. The goods are not
subject to duties if reshipped to foreign points.
Commercial Invoice: The commercial invoice is a bill for the goods from
the seller to the buyer. These invoices are often used by governments to
determine the true value of goods for the assessment of Customs duties
and are also used to prepare consular documentation. Governments using
the commercial invoice to control imports often specify its form, content,
number of copies, language to be used, and other characteristics.
Cost and Freight (C&F): Cost and Freight (CFR) to a named overseas
port of import. Under this term, the seller quotes a price for the goods that
includes the cost of transportation to the named point of debarkation. The
cost of insurance is left to the buyer's account. (Typically used for ocean
shipments only. CPT, or carriage paid to, is a term used for shipment by
modes other than water.) Also, a method of import valuation that includes
insurance and freight charges with the merchandise values.
Cost, Insurance and Freight (CIF): Cost, insurance, and freight (CIF) to
a named overseas port of import. Under this term, the seller quotes a price
for the goods (including insurance), all transportation, and miscellaneous
charges to the point of debarkation for the vessel. (Typically used for ocean
shipments only.)
Demurrage: Excess time taken for loading or unloading a vessel, thus

causing delay of scheduled departure. Demurrage refers only to situations
in which the charter or shipper, rather than the vessel's operator, is at
fault.
! !80
Duty: A tax imposed on imports by the Customs authority of a country.

Duties are generally based on the value of the goods (ad valorem duties),
some other factors such as weight or quantity (specific duties), or a
combination of value and other factors (compound duties).
Return to Top
FCL or CY: Full Container Load, also known as CY. CY is the abbreviation of
Container Yard. When the term CY to CY, it means full container load all the
way from origin to destination.
Free Alongside Ship: Free Alongside Ship, FAS, at a named port of

export. Under FAS, the seller quotes a price for the goods that includes
charges for delivery of the goods alongside a vessel at the port of
departure. The seller handles the cost of unloading and wharfage, loading,
ocean transportation, and insurance are left to the buyer. FAS is also a
method of export and import valuation.
Gateway: In the context of travel activities, gateway refers to a major

airport or seaport. Internationally, gateway can also mean the port where
Customs clearance takes place.
Letter of Credit: A financial document issued by a bank at the request of

the consignee guaranteeing payment to the shipper for cargo if certain
terms and conditions are fulfilled. Normally, it contains a brief description
of the goods, documents required, a shipping date, and an expiration date
after which payment will no longer be made.
Wharfage: A charge assessed by a pier or dock owner for handling

incoming or outgoing cargo.
River Freight: In many countries around the world, from North America to
Asia and from Europe to Africa, river transportation is extremely important
and these countries could not survive without river transportation. To some
extent, river transportation is dealt with in a similar way to sea freight and
pretty much any type of cargo can be transported along some of the larger
rivers in the world. Other rivers may have width and depth problems,
requiring the cargoes to be transported overland instead.
! !81
Coastal Shipping and Inland Waterways of India
India's 7,500 kms coastline and over 14,000 kms of navigable waterways
make it an ideal geography to effect transportation by coastal shipping and
inland waterways movement. Coastal shipping and inland waterways are
two modes that are cost-efficient and environment friendly but are
currently rendered unattractive due to a relatively restrictive policy regime
and market dynamics. Coastal shipping requires very simple infrastructure,
unlike the ocean-going vessels, with provision for smooth transfer of cargo
between coastal ships and ocean-going ships. Most major ports are ill-
equipped as far as providing infrastructure to coastal shipping vessels is
concerned. Ocean-going vessels and coastal shipping vessels are treated
on par and ports do not differentiate them in terms of port charges which
are not conducive to the incubation of an industry in its infancy.
5. Pipeline Transportation
Pipeline transport is the transportation of goods through a pipe. Most

commonly, liquids and gases are sent, but pneumatic tubes using
compressed air can also transport solid capsules.
As for gases and liquids, any chemically stable substance can be sent
through a pipeline. Therefore, sewage, slurry, water, or even beer pipelines
exist; but arguably the most valuable are those transporting crude
petroleum and refined petroleum product including fuels: oil, natural gas
(gas grid), and biofuels.
! !82
6. Ropeways
A ropeway is a form of naval lifting device used to transport light stores

and equipment across rivers or ravines. It comprises a jackstay, slung
between two sheers or gyns, one at either end, from which is suspended a
block and tackle, that is free to travel along the rope and hauled back and
forth by inhauls (ropes attached to the pulley from which the block and
tackle are suspended).
Freight Terminals: A freight terminal is an industrial area where cargo is

loaded and unloaded. These terminals are typically located at seaport
ports, rail yards, and airports. Terminals are the central hubs for domestic
and international transport, where cargo can be consolidated and
transferred to locations around the world.
A cargo airline uses a freight terminal to load and unload the cargo onto
airplanes. This type of airline specializes in sending large packages and
uses airplanes that are larger than familiar passenger planes. Most cargo
plans have large cargo holes at the rear of the aircraft that are used for
loading and unloading packages. A cargo airline is often used by the
military to transport heavy equipment and construction material.
At railroad terminals, special freight cars are loaded onto trains so that
goods can be transported across large areas. Many railroad terminals are
located at seaports, where freight cars are loaded onto trains from ships.
! !83
These freight cars hold many bulk materials including stone, steel, and
wood. The automobile industry relies on freight terminals to ship cars and
trucks. These terminals are located near assembly plants so manufacturers
can send newly assembled cars around the world.
Modal Classification: Cost Structure for Each Transportation Mode
Rail
• High fixed costs (land, tracks)
• Low variable costs (operating costs, e.g., labor, fuel)
• Slow, but inexpensive way to transport heavy freight that doesn’t require
special handling, long distances
Road
• Low fixed costs (government builds, maintains highways)
• Medium-high variable costs (operating costs, e.g., labor, fuel)
• Most accessible mode (more highways than railroads, waterways,

pipelines); best for transporting medium to high value products short to
moderate distances
Water
• Moderate fixed costs (ships and freight handling equipment)
• Low variable costs (operating costs, e.g., labor, fuel)
• Very slow, but inexpensive way to transport large, heavy freight over
long distances (e.g., oceans, rivers, inland waterways, lakes)
! !84
Air
• Low fixed costs (aircraft and freight handling equipment)
• Highest variable costs (e.g., labor, fuel, maintenance)
• Very fast; used for transporting high value and/or high perishability
product over short to medium distances
Pipeline
• Highest fixed costs (right-of-way and construction costs of equipment)
• Lowest variable costs (no significant labor or fuel costs)
• Slow, but dependable (e.g., no weather, traffic disruptions); no flexibility

with regard to types of products that can be transported – must be liquid
(e.g., petroleum)
Table 1.a
Operating Characteristics Rail Road Water Air Pipe
Speed 3 2 4 1 5
Availability 2 1 4 3 5
Dependability 3 2 4 5 1
Capability 2 3 1 4 5
Flexibility 3 1 4 2 5
Composite 13 9 17 15 21
1 = best, 5 = worst
Activity O
• Which mode of transport is most effective for inland transportation and

why?
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2.6 Transportation Service
Transportation service can be improved by combining modes. Prior to

deregulation, government policy limited carriers to operating in a single
mode. Such restrictive ownership sought to promote competition between
modes and limit the potential for monopoly practices. Following
deregulation carriers were free to develop integrated modal services in
efforts to more efficiently and effectively meet the needs of customers.
Traditional Carriers: The most basic carrier type is a transportation firm

that provides service utilizing only one of the five basic transport modes.
Focus on a single operational mode permits a carrier to become highly
specialized.
Although single mode operators are able to offer extremely efficient

transport, such specialization creates difficulties for a shipper who desires
intermodal transport solutions because it requires negotiation and business
planning with multiple carriers. Airlines are an example of a single mode
carrier for both freight and passenger service that traditionally limits
service from airport to airport. Since deregulation, most carriers are
developing services that facilitate multimodal integration.
Package Service: Over the past several decades, a serious problem

existed in the availability of small shipment transportation. It was difficult
for common carriers to provide reasonably priced small shipment service
because of overhead cost associated with terminal and line-haul
operations. This overhead forced motor carriers to implement a minimum
charge. The minimum applies to all shipments regardless of shipment size
or distance. As a result of the minimum charge and lack of alternatives, an
opportunity existed for companies offering specialized service to enter the
small shipment or package service market.
Package services represent an important part of logistics, and the influence

of carriers in this segment is increasing because of their size and
intermodal capabilities. The advent of e-commerce and the need for
consumer-direct last-mile delivery have significantly increased demand for
package delivery services. While package services are expanding, the
services required do not fall neatly into the traditional modal classification
scheme. Packages are regularly transported by using the line-haul services
! !86
of rail, motor, and air. Package service provides both regular and premium
services.
2.7 Transport Department Administration
While transport managers administer many different activities, they are

fundamentally responsible for: (1) operations management, (2) freight
consolidation, (3) rate negotiation, (4) freight control, (5) auditing and
claims, and (6) logistical integration.
1. Operations Management: In large-scale organizations, traffic

operations management involves a wide variety of administrative
responsibilities. From an operational perspective, key elements of
transportation management are equipment scheduling, load planning,
routing, and carrier administration.
2. Freight Consolidation: Freight costs are directly related to size of

shipment and length of haul places a premium upon freight
consolidation. From an operational viewpoint, freight consolidation
techniques can be grouped as reactive and proactive. Each type of
consolidation is important to achieve transportation efficiency.
3. Rate Negotiation: For any given shipment, it is the responsibility of

the traffic department to obtain the lowest possible rate consistent with
service requirements. The prevailing price for each transport alternative
– rail, air, motor, pipeline, water, and so on – is found by reference to
tariffs.
4. Freight Control: Other important responsibilities of transportation

management are tracing and expediting. Tracing is a procedure to locate
lost or late shipments. Expediting involves the shipper notifying a carrier
that it needs to have a specific shipment move through the carrier's
system as quickly as possible and with no delays.
5. Auditing and Claim Administration: When transportation service or

charges are not performed as promised, shippers can make claims for
restitution. Claims are typically classified as loss and damage or
overcharge/undercharge. Auditing freight bills is an important function
of the traffic department. The purpose of auditing is to ensure billing
accuracy.
! !87
6. Logistical Integration: For any given operating period, traffic

management is expected to provide the required transportation services
at budgeted cost. It is also traffic management's responsibility to search
for alternative ways to deploy transportation to reduce total logistics
cost.
Activity P
•What are the main functions of a transport manager?

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2.8 SUMMARY
Major international gateway and corridor infrastructures such as ports,

airports and key rail routes are crucially important to the exports and
imports of all the products and resources of modern-day economies. These
infrastructures will become even more important in the future. Good
transport infrastructure underpins economic growth. Surface transportation
system serves as the backbone of our country’s economy. Transportation
highway systems are increasingly becoming a key issue among numerous
national, State, and local policymakers. Aviation and maritime services will
carry most of the long distance traffic, with ground handling likely to
remain heavily concentrated at the major international gateway airports
and ports. Much of this infrastructure will require improved capacity to
handle volumes two or three times current levels. Improved funding and
financing arrangements will be needed in many countries, given their
current deficit and debt levels and other expected demands on budget
resources. Air freight could triple in 20 years; and port handing of maritime
containers worldwide could quadruple by 2030. Quality infrastructure is a
key pillar of international competitiveness. It is trade-enhancing –
especially for exports – and has positive impacts on economic growth.
! !89
1. What modes of transportation are best suited for large, low-value

shipments? Why?
2. Explain how the company can use a network to reduce transportation

costs while replenishing inventories more frequently.
3. Discuss key drivers that may be used to tailor road transportation.
4. What is the importance of transport infrastructure for growth in India?
5. Explain how the company can use a network to reduce transportation

costs.
6. Which industry, according to you, would benefit the most with

Transportation Management System? Why?
7. Explain the RORO system.
8. Explain at least two strategies that a firm can use to overcome the
challenges related with the air transportation infrastructure.
9. In comparison to the Air, Rail and Road transport, how is the Inland
Waterways Transport advantageous?
10.What is freight bill?
11.What is a 'Bill of Lading?
! !90
1. The objective of TMS is to __________.

(i) Eliminating inefficiencies in the system
(ii) Streamlining the transportation process
(iii) Coordinating with all parties of service providers
(iv) Optimisation of the physical movement of goods
(a) (i), (ii) and (iii)
(b) (i), (iii) and (iv)
(c) (ii), (iii) and (iv)
(d) All of the above
2. Which of the following is not a part of the SCM?

(a) Supplier
(b) Manufacturer
(c) Information flow
(d) Competitor
3. A 3PL firm performs activities like __________.

(i) Security
(ii) Transport
(iii) Product Development
(iv) HRD
(b) (i), (ii) and (iv)
(c) (i), (iii) and (iv)
4. The analytical data collected in the supply chain process can be used to
devise sales strategies, reduce costs and manage inventories.
(a) True
(b) False
5. Logistics is a part of SCM involved with the forward and reverse flow of
_________.
(a) Goods and services
(b) Costs and inventories
! !91
Answers:
1.(d), 2. (d), 3. (c), 4. (a), 5. (a)
! !92
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !93
TRANSPORTATION OPERATIONS
Chapter 3
Transportation Operations
Objectives
• An overview of transportation economics and pricing
• The working of transport administration
• Green Logistics and its implications
• The concept, role and importance of Documentation
Structure
3.1 Transportation Economics and Pricing
3.2 Environmental Logistics (Green Logistics)
3.3 Transport Administration
3.4 Documentation
3.5 Summary
! !94
Introduction
Fundamentally, the role of transportation and logistics management is

simple: get the right product to the right place at the right time and at the
lowest cost. Competition in terms of transportation and logistics depends
on speed and intelligence – making the best decisions, quickly turning
decisions into action and monitoring the operation every step of the way to
deliver the superior service customers expect. Achieving this objective is
no small feat in today’s complex global environment. Companies are under
intense pressure now more than ever to streamline their operations and
overcome unprecedented economic, environmental and industry challenges
while still satisfying the ongoing expectations of a rapidly evolving
customer base.
Confronted with these and many other challenges, how can organizations
strategically streamline their transportation and logistics processes to
maximize supply chain efficiencies, customer satisfaction and profit
margins?
3.1 Transportation Economics and Pricing
Economics and pricing are concerned with factors and characteristics that
drive cost. To develop effective logistics strategy, it is necessary to
understand such factors and characteristics. Successful negotiation
requires a full understanding of transportation economics. An overview of
transportation economics and pricing builds upon four topics: (1) the
factors that drive transport costs, (2) the cost structures or classifications,
(3) carrier pricing strategy, and (4) transportation rates and ratings.
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3.1.1 Factors that Drive Transport Costs (Economic Drivers)
Transportation costs are driven by seven factors. While not direct

components of transport tariffs, each factor influences rates. The factors
are: (1) distance, (2) weight, (3) density, (4) stowability, (5) handling, (6)
liability, and (7) market.
1. Distance: Genetic distance, geographic proximity, and economic

variables are strongly correlated. Distance, Modal Choice and Transport
Cost. Different transportation modes have different cost functions
according to the serviced distance. Distance is a major influence on
transportation cost since it directly contributes to variable expense, such
as labor, fuel, and maintenance. Figure 3.1 illustrates the general
relationship between distance and transportation cost. Different
transportation modes have different cost functions according to the
serviced distance. Road, rail and maritime transport have respectively a
C1, C2 and C3 cost functions. While road has a lower cost function for
short distances, its cost function climbs faster than rail and maritime
cost functions. At a distance D1, it becomes more profitable to use rail
transport than road transport while from a distance D2, maritime
transport becomes more advantageous.
Activity A
• How does distance affect cost among modes of transport?

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Figure 3.1: Generalized Relationships between Distance and
Transportation Cost
2. Weight: The second factor is load weight. Transport cost per unit of
weight decreases as load volume increases. Fixed costs of pickup and
delivery as well as administrative costs get spread over additional
volumes. Smaller loads must be consolidated into larger loads.
This relationship, illustrated in Figure 3.2, indicates that transport cost per
unit of weight decreases as load size increases.
Activity B
• How can you achieve the economy of scale in transportation?

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Figure 3.2: Generalized Relationships between Weight and
Transportation Cost
3. Density: A third factor is product density. Transportation cost per unit

declines as product density increases. In terms of weight and space, an
individual vehicle is constrained more by space than by weight. Once
the vehicle is full, it is not possible to increase the amount carried even
if the product is lightweight. As with other logistics activities, scale
economies exist for most transportation movements. Higher density
products allow fixed costs to be spread across additional weight, as a
result the products are assessed at a lower transport cost per unit.
Attempts are made to increase product density so that more can be
loaded in a vehicle to utilize its capacity.
Figure 3.3 illustrates the relationship of declining transportation cost per

unit of weight as product density increases. In general, traffic managers
seek to improve product density so that trailer cubic capacity can be fully
utilized.
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Activity C
• What is the correlation between density and transportation cost?

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Figure 3.3: Generalized Relationships between Density and

Transportation Cost/Pound
4. Stowability: Refers to product dimensions and impact of the same on

vehicle utilization. Odd sizes and shapes as well as excessive weights
and lengths do not stow well and typically waste space. Though density
and stowability are similar, products may have same density that stow
differently. Items with regular shapes are easier to stow than odd
shaped items. While the steel blocks and rods have the same density,
rods are more difficult to stow because of their length and shape.
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Activity D
• How can one achieve the optimum stowability while transporting goods?
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5. Handling: Special handling equipments may be required for loading or

unloading trucks, trains, or ships and the unitization/palletization affects
the handling cost.
6. Liability: Product characteristics such as susceptibility to damage,

perishability, susceptibility to theft and susceptibility to explosion affect
the risks and hence claims.
7. Market: Back-haul, i.e., vehicle returning back to the point of origin

with load. Dead head to be avoided because empty returns incur labor,
fuel, and maintenance costs. Thus, design of logistics system must add
back-haul movement wherever possible.
3.1.2 Cost Structure
The second dimension of transport economic and pricing concerns the

criteria used to allocate cost. Transport costs are a monetary measure of
what the transport provider must pay to produce transportation services.
They come as fixed (infrastructure) and variable (operating) costs,
depending on a variety of conditions related to geography, infrastructure,
administrative barriers, energy, and on how passengers and freight are
carried. Three major components, related to transactions, shipments and
the friction of distance, impact on transport costs. Transportation costs are
classified into a number of categories. 
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i. Variable Costs: Variable costs or direct costs are expenses that change
in direct proportion to the activity of a business. Costs that change in a
predictable, direct manner in relation to some level of activity are
labeled variable costs. Variable costs include direct carrier costs
associated with movement of each load. For example, fuel, travel time
and crash risk are variable vehicle costs because they increase directly
with vehicle mileage. These expenses are generally measured as a cost
per mile or per unit of weight. Typical variable cost components include
labor, fuel, and maintenance.
ii. Fixed Costs: It is important to realize that fixed costs are fixed only
within a certain range of activity or over a certain period of time. If
enough time passes, all costs become variable.
Fixed costs are expenses whose total does not change in proportion to
the activity of a business. (Indirect costs may be fixed or variable.) Fixed
costs are associated with fixed inputs. Fixed costs can be further
subdivided for many transport operations into “Standing Costs” (i.e.,
vehicle operating costs which do not vary with vehicle usage but are
specific or traceable to particular vehicles) and “Administrative
Overheads” (i.e., general fixed costs that cannot be directly attributed to
particular vehicles or services).
Depreciation, insurance, and residential parking are considered fixed,

because vehicle owners pay the same, regardless of how much a vehicle
is used.
iii. Joint Costs: A joint cost occurs when the production of one good
inevitably results in the production of another good in some fixed
proportion. For example, consider a rail line running only from point A to
point B. The movement of a train from A to B will result in a return
movement from B to A. Since the trip from A to B inevitably results in
the costs of the return trip, joint costs arise.
iv. Common Costs: Common costs arise when the facilities used to
produce one transport service are also used to produce other transport
services (e.g., when track or terminals used to produce freight services
are also used for passenger services).
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Activity E
• What are the major differences between: (a) fixed costs and variable
costs and (b) joint costs and common costs?
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3.1.3 Carrier Pricing Strategies
When setting rates to charge shippers, carriers typically follow one or a

combination of two strategies. Although it is possible to employ a single
strategy, the combination approach considers trade-offs between cost of
service incurred by the carrier and value of service to the shipper.
a. Cost-of-Service Strategy: Carrier estimates cost of providing service

then adds on a percent profit margin. Commonly used for pricing
transport of low value goods or in highly competitive situations.
b. Value-of-Service Pricing: Price is based on value as perceived by the

shipper rather than the carrier. Commonly used when services are sold
in niche markets.
c. Combination Pricing Strategy: Price is set at a value between cost-

of-service minimum and value-of-service maximum. Most common
pricing strategy.
d. Net-Rate pricing: Is a simplified pricing format. Established discounts

and accessorial charges are rolled into one all-inclusive price tailored for
individual customer needs. The net-rate pricing approach does away
with the complex and administratively burdensome discount pricing
structure that has become common practice since deregulation.
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Activity F
• Which among the four pricing strategies are most simple to calculate?
Why?
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3.1.4 Rates and Rating
The rate is the price to move a product per hundred weight between two
locations (also known as tariffs) or per mile in TL. Rates may include
minimum charges and surcharge (e.g., to cover fuel cost risk).
(i) Class Rate: The intent of the class rate system is to simplify the
process for pricing freight with inherently different freight
characteristics. Rather than have a unique price for each and every
commodity, articles with similar freight characteristics are assigned to
common freight ‘classes’. The logic is, the lower the class the lower the
price. The principle factors used in the freight classification process are:
• Cost of service to the carrier

• Value of service to the shipper
• Competition
• Value of article
• Methods of packing and protecting the article
• Risk
• Dimensions and weight
In the simplest terms, low-value freight that is easy to handle, unlikely to

damage and dense will receive lower class ratings than expensive, light,
bulky freight which is highly susceptible to damage. In addition to the class
rating assigned to an article, carrier pricing is driven by shipment weight as
well. The rule is the higher the weight, the lower the cost per pound. This
is merely the simple economic principle of economies of scale.
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(ii)Classification: This work involves determining appropriate

classifications for various items or commodities by reference to
published classification guides. In addition to simple comparisons,
classification also includes the study of the transportation characteristics
of items or commodities which are new or not usually shipped in
commercial channels. These may be compared with freight items or
commodities which have been classified to determine the appropriate
classification by analogy.
Classification may include the development of narrative and exhibit

material and related information to request new classifications or
classification adjustments; it may also include the preparation of material
concerning classification matters in cases to be presented before
representatives of the carriers, regulatory bodies, and the courts.
Products are also assigned classifications on the basis of the quantity

shipped. Less-than-truckload (LTL) shipments of identical products will
have higher ratings than truckload (TL) shipments.
Activity G
• How does packaging affect the ratings given while classifying the
products?
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(iii)Rate Determination: This work involves the determination of the

appropriate, legally applicable, and most economical rates and routes
for the movement of domestic and foreign freight via any or all modes
of transportation. These determinations are made in accordance with
published classifications, tariffs, and tariff routings. However, factors
such as the following are considered in selecting the appropriate rates
and routes:
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Suitability of specific routes (including those not specified in tariffs);

weather, physical, and seasonal characteristics; availability of appropriate
terminal facilities; availability of carriers including carrier operating
authorities and handling equipment required; availability and application of
transit privileges including substitution of tonnage and out-of-line or back
hauls; agreements and propriety of using various modes of transportation
singly or in combination; the selection of junction or interchange points;
the consolidation of shipments; numerous alternative origin and
destination points; the documentation of shipments including governmental
requirements, State, Federal, and foreign; miscellaneous and accessorial
service (sorting, packing, pre-cooling, heating, storage, loading and
unloading, blocking and bracing, cartage, demurrage, diversion, drayage,
dunnage, free time, switching, lighterage and lighterage limits, port
charges, diversion and re-consignment, towage, wharfage, etc.).
Rating may also include the development of narrative and exhibit material
and related information to be used by others request and negotiate new or
revised rates; it may also include the preparation of material concerning
rate matters in cases to be presented before representatives of the
carriers, regulatory bodies, and the courts. The steps in the rating process
are also followed in the pre-audit and post-audit of freight bills since the
purpose is to determine appropriateness of the classification, rates, routes,
and the actions of the carriers.
Activity H
• Why are minimum and surcharges paid over and above the variable
rates?
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(iv)Commodity Rates: The global economy and its production systems

are highly integrated, interdependent and linked through commodity
chains. Value Chain (also known as commodity chain) is a functionally
integrated network of production, trade and service activities that
covers all the stages in a supply chain, from the transformation of raw
materials, through intermediate manufacturing stages, to the delivery of
a finished good to a market.
Value chains enable a sequencing of inputs and outputs between a range

of suppliers and customers, mainly from a producer and buyer-driven
standpoint. They also offer adaptability to changing conditions, namely
an adjustment of production to adapt to changes in price, quantity and
even product specification. This means that value chains are constantly
upgraded to fit technological, costs and market changes.
(v)Exception Rates: Some carriers will offer exception ratings when the
characteristics of a commodity varies from the characteristics of the
same commodity in a different region. This allows carriers to offer
discounts to shippers which operate large volumes of shipments, or if
there is increased competition.
A limited service rate is utilized when a shipper agrees to perform

selected services typically performed by the carrier, such as trailer
loading, in exchange for a discount. A common example is a shipper
load and count rate, where the shipper takes responsibility for loading
and counting the cases. Not only does this remove the responsibility
for loading the shipment from the carrier, but it also implies that the
carrier, once the trailer is sealed, is not responsible for guaranteeing
case count. Another example of limited service is a released value
rate, which limits carrier liability in case of loss or damage. Normally,
the carrier is responsible for full product value if loss or damage occurs
in transit. The quoted rate must include adequate insurance to cover
the risk. Often it is more effective for manufacturers of high-value
product to self-insure to realize the lowest possible rate. Limited
service is used when shippers have confidence in the carrier’s
capability. Cost can be reduced by eliminating duplication of effort or
responsibility.
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Under aggregate tender and limited service rates as well as other

innovative exception rates, the basic economic justification is the
reduction of carrier cost and subsequent sharing of benefits based on
shipper/carrier cooperation.
Activity I
• When is the function of a value chain between supplier and the

customer?
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Freight-all-Kind Rate: Shipping industry term for a carrier's tariff

classification for various kinds of goods that are pooled and shipped
together at one freight rate. Consolidated shipments are generally
classified as FAK.
Joint Rate: Rate which applies for carriage over the lines of two or more
carriers and which is published as single amount (air cargo).
Local Rate: Charge which applies to carriage over the lines of a single
carrier (air cargo).
Proportional Rate: Rate which is used in combination with other rates to

establish a through rate.
Activity J
• FAK Rate; Local Rate; Joint Rate; Proportional Rate: Mention when each
of them are applicable.
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Transit Services: Cargo is not always in transit. During various parts of

the process, it is stacked up in warehouses awaiting successive intermodal
legs of transit, or laid away pending orders from owners as to where they
want it to sent. Transit Services permit a shipment to be stopped at an
intermediate point between initial origin and destination for unloading,
storage, and/or processing. The shipment is then reloaded for delivery to
the destination.
Activity K
• Describe the process of diversion and reconsignment of a shipment.

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Split Delivery: A method by which a larger quantity is ordered on a

purchase order to secure a lower price, but delivery is divided into smaller
quantities and spread out over several dates to control inventory
investment, save storage space, etc. or when delivery is desired when
portions of a shipment need to be delivered to different destinations.
In addition to basic transportation, truck and rail carriers offer a wide

variety of special or accessorial services. Table 3.1 provides a list of
frequently utilized ancillary services.
Table 3.1
COD: Collect payment on delivery
Change COD: Change COD recipient
Inside Delivery: Delivery product inside the building

Marking or tagging: Mark or tag a product as it is transported
Notify before delivery: Make appointment prior to delivery
Reconsignment of delivery: Redirect shipment to a new destination while in

transit
Redeliver: Attempt second delivery
Residential delivery: Deliver at residence without a truck dock
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Sorting and segregating: Sort commodity prior to delivery
Storage: Store commodity prior to delivery
3.2 Environmental Logistics (Green Logistics)
3.2.1 Green Logistics
LSPs have started to green their operations in order to help their

customers to be better prepared for predictable and future green demand
from both market and government legislations. One of the strongest
r e a s o n s t o i m p l e m e n t g r e e n i n i t i a t i ve s wa s i n c r e a s e d f i r m ’s
competitiveness.
Green logistics describes all attempts to measure and minimize the

ecological impact of logistics activities. This includes all activities of the
forward and reverse flows of products, information and services between
the point of origin and the point of consumption. It is the aim to create a
sustainable company value using a balance of economic and environmental
efficiency. Green logistics have its origin in the mid 1980s and was a
concept to characterize logistics systems and approaches that use
advanced technology and equipment to minimize environmental damage
during operations.
3.2.2 Main principles of Green Logistics. (Case Study. FIAT Group)
Increase in low-emission transport. For both inbound and outbound

logistics transportation, Fiat Group aims to use vehicles that meet the
strictest environmental standards and, thereby, guarantee low emission
levels.
Use of intermodal solutions. The Group promotes alternative solutions to

road transportation by continuously exploring other feasible modes of
transport (sea, rail, etc.) in accordance with the geographic location of
component and material suppliers and the distribution network for finished
products.
Optimization of transport capacity. Fiat Group is committed to continuously

developing solutions to achieve the best utilization of transport capacity.
Several technical and organizational changes have been adopted for both
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transportation routes and the optimized use/configuration of transport

volume.
Reduced use of packaging and protective materials. Reduction of packaging

and protective materials is an essential lever in reducing the environmental
impact of logistics processes. The engineering and standardization of
containers, including the adoption of a lightweight design and reusable
packaging materials, enables the use of raw material to be minimized,
waste reduced and transport capacity optimized, thereby resulting in lower
CO2 emissions.
3.2.3 Benefits and Cost Minimization
There is a significant amount of potential cost savings in almost any

dynamic logistics network. Frequent or continuous optimization is therefore
a necessity. Taking ecological sustainability into consideration when making
efficiency decisions can lead to the achievement of both goals at once:
more efficient logistics and fewer emissions. Furthermore logistics and
supply chain managers are well able to reduce emissions within their
domain at relatively high costs. A comprehensive approach must consider
these costs in comparison to alternative emission reduction measures in
areas such as manufacturing or electricity generation.
Many governments also offer attractive incentives to businesses who

commit to reducing their carbon emissions. These days, green technologies
are being looked at more favourably than ever, not just because they
reduce a company’s carbon footprint, but because they also improve the
bottom line.
Fuel
As unstable as fuel prices are these days, the need for fuel is one of the
biggest guessing games that the logistics industry faces when planning for
the future. Many logistics companies are making the move to Hybrid
electric vehicles (HEVs). However, this is out of the budget of many for the
time being.
That doesn’t mean there’s nothing a logistics company can do to cut down
on fuel, though. For example, changing to fuel-efficient tyres can shave up
to 10% off fuel costs, and training drivers to cut down on idling time can
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reduce consumption of petrol by up to 20%. By becoming less reliant on

fuel, logistics companies can reduce the impact that fuel price fluctuations
have on their bottom line.
Tax Reduction incentives
Most governments internationally have answered the call for a reduction in

greenhouse gases by offering businesses within their economies attractive
incentives for reducing their carbon footprint.
It is important for supply chain managers to keep an eye out for these
incentives and grab the opportunity while it’s available. Investing in
renewable energy, for example, will cut down on operating costs in the long
run, with the government tax incentives thrown in as a bonus.
The Green Marketing Edge
Investing in green technology is a matter of pride with many companies,

and is positively leveraged for marketing purposes. It is now almost
expected for businesses to be taking part in initiatives that help to preserve
the environment, and so those companies who do, tend to get a great deal
of positive attention and ultimately a better name in their industry.
Case Study: DHL Go Green Solutions
• DHL Global Forwarding solutions provide a reliable way of accounting for

and managing your supply chain CO2 emissions, with best in-class
carbon reporting and all-inclusive carbon offsetting services.
• DHL Global Forwarding has developed a carbon reporting methodology

with precision and reliability in mind. Over a number of years, our
experience in carbon reporting has provided us with the expertise to
produce accurate CO2 calculations for our customers.
• By considering each individual shipment, actual operational data (mode,

fleet, age, trade lane, weight/volume, actual distance travelled) and
credible sources for emission factors, DHL is able to give the best-in-
class CO2 calculation.
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• Their methodology follows the principles of the Greenhouse Gas Protocol

and the World Economic Forum (WEF) Guideline for Consignment level
Carbon Report
• They will create a carbon report that provides you with the confidence to
design your own carbon reduction strategy.
How Can Logistics Companies Be Environmentally Friendly?
There are many ways for a company to reduce their ecological impact.
• Eco-friendly packaging material: By using reusable materials that

could be returned after the transport is performed, the company can
actually save money. A good example of this is using strong and sturdy
pallets, to ensure a long-term use;
• Packing items more efficiently: Packing the items in a way that more
can fit in a single box;
• Giving back to the environment: Many companies engage in eco-

campaigns to balance the impact of their services. For example, planting
trees to outweigh the amount of CO2 produced;
• Load Optimization: One example of load optimization can be to send a

truck only when it is fully loaded;
• Route Optimization: Cutting down travel costs, time or distance. By

choosing the best route, is it possible to save fuel and, consequently,
reduce the amount of CO2 emissions;
• Choosing the eco-friendliest transportation method available:

Surprisingly, air freight is the transportation method that causes the
most harm to the environment. Thus, whenever possible, it is important
to choose more ecological options, like rail or road transportation.
Activity L
• What are the main principles of ‘Green Logistics’?

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3.3 Transport Administration
3.3.1 Operations Management
The operation of transportation determines the efficiency of moving

products. The progress in techniques and management principles improves
the moving load, delivery speed, service quality, operation costs, the usage
of facilities and energy saving. Transportation takes a crucial part in the
manipulation of logistic. Reviewing the current condition, a strong system
needs a clear frame of logistics and a proper transport implements and
techniques to link the producing procedures.
Equipment Scheduling and Yard Management: Companies have made

significant investments in systems and technologies to track transportation
assets, however, few realize that transportation delays often take place not
on the road, but while the assets are still in the yards at distribution
centers (DCs), warehouses, and manufacturing plants. As all goods often
go through multiple yards throughout the life cycle, any inefficiencies or
errors in the yard are amplified as the effects propagate through the supply
chain network.
Some common yard management related challenges include lengthy gate

check-in processes, multiple or redundant moves, time-consuming yard
checks, delays, excessive detention/demurrage charges, unproductive
administrative time due to ineffective communications, and the general
lack of actionable information. Delays can mean production downtime for
manufacturing operations, product spoilage if handling perishable goods,
lost opportunities caused by stock-out for retailers, or credibility issues
with carriers and customers. On the other hand, all of these problems can
be attributed to the fundamental issue of lack of accurate, real-time
information (i.e., visibility) about the yard operations.
Yard management can be described in a framework covering the following

main processes:
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Resource planning – decisions on capacity, labor and equipment

requirements and yard zoning.
Task scheduling – dock appointment, management for inbound and

outbound shipments, and trailer move optimization based on custom
criteria.
Yard process execution – check in/out trailers and tractors, and park
trailers at staging areas or move to dock doors for loading/unloading.
Event monitoring – for security control and generating alert and

notifications.
Asset tracking and management – records of asset inventory,

movements, and history.
Performance management – analytics on equipment and facility

utilization, labor productivity, and resource time.
The key yard management metrics commonly considered include such

performance measures as driver, equipment (trailers and yard trucks), and
facility (including parking spaces and dock doors) utilizations, which
contribute to the overall productivity of these resources.
Load Planning
Load planning encapsulates the various ways of loading a consignment,

whether to have pallets, whether single units. There can be a mix of
various units – pallets + single units + barrels etc. Also there might be
different kind of requirements of certain consignment like refrigeration,
liquid holding; all these can be planned to be transported even in a single
vehicle. Load planning has a great impact on the cost of transportation for
the client, for the transporter it has an impact on the transit time. Load
Planning would control the transfer of freight around the country. It would
make sure goods are moved in the most efficient way, taking into account
schedules, costs, and health and safety.
Load Planning would involve road haulage or other businesses maintaining

own fleet of vehicles, such as retail chains.
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Load Planning would involve:
• deciding how many vehicles will be needed to deliver each shipment of

goods
• working out how much it will cost to make each delivery
• planning the safest way to load and unload goods
• monitoring each delivery as it makes its journey
• reviewing load plans with clients
• making back-up plans to cover changes in circumstances.
Software packages will help with some of these tasks, for example, to
match the size of loads with the vehicles needed to move them etc.
Routing and Advanced Shipment Notification (ASN)
An advance ship notice or advance shipping notice (ASN) is a notification of

pending deliveries, similar to a packing list. It is usually sent in an
electronic format and is a common EDI (Electronic Data Interchange)
document. The ASN can be used to list the contents of a shipment of goods
as well as additional information relating to the shipment, such as order
information, product description, physical characteristics, and types of
packaging, markings, carrier information, and configuration of goods within
the transportation equipment. The ASN enables the sender to describe the
contents and configuration of a shipment in various levels of detail and
provides an ordered flexibility to convey information. The goal of the ASN
is to provide information to the destination's receiving operations well in
advance of delivery. This tends to impact the logistics stream in three
areas: cost, accuracy, and flexibility.
Movement Administration
Fleet management is the function that oversees, coordinates and facilitates

various transport and transport related activities such as the management
of vehicle fleets used in the transportation of cargo.
Effective fleet management aims at reducing and minimizing overall costs

through maximum, cost-effective utilization of resources such as vehicles,
fuel, spare parts, etc.
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The administration and financial management of fleet is very organizational

specific. It largely depends on organisational policies. At a glance, some
vehicles are restricted to specific projects, others are utilized to serve all
projects, some are strictly organizational driver driven and others self-staff
driven and coordinated based on administration policies. The fleet
manager’s function is also very much dependent on organizational policies
and structures.
The location of the vehicle management function within organizations’

structures varies from organization to organization. The management may
be located within administration, transport function or have an independent
fleet manager.
Vehicles are expensive but critical to an organizations' operation. They

facilitate the movement of cargo. Vehicle management is also one of the
aspects of supply management that can be easily abused if not properly
managed. If properly managed, this aspect would ensure:
• availability of vehicles as and when required;

• cost efficiency;
• programme or response continuity;
• staff safety;
• safety on the roads;
• vehicle safety;
• vehicle security; and
• performance management.
Activity M
•What are the administrative duties of fleet manager?

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3.3.2 Freight Consolidation
Freight costs are directly related to size of shipment and the length of haul
places a premium upon freight consolidation. Traffic management is the
business function responsible for achieving freight consolidation. Cargo
consolidation is a service provided by a freight forwarder in which several
smaller shipments are assembled and shipped together to avail of better
freight rates and security of cargo. Also called assembly service, cargo
consolidation, or freight consolidation.
Building complete truckloads is a transportation best practice that nurtures

efficiencies and economies in the best of times and the worst of times.
Converting less-than-truckload (LTL) shipments to full truckloads (TL) helps

companies optimize and reduce transportation costs, rationalize asset
utilization, and provide better service to end customers. Fluctuating
demand, variable capacity, and speed-to-market requirements often
challenge shippers to find economies of scale by consolidating freight.
Pooling similar shipments together can help mediate these volatilities.
Fundamentally, consolidation drives simplicity and consistency. Companies

often leverage this balance to underpin business process improvements
that have far-reaching impact elsewhere in the supply chain. By merging
shipments and delivering more frequent truckload volumes, shippers can
increase turns and reduce inventory. This flexibility drives just-in-time,
continuous flow strategies — from production to sale — allowing businesses
to pull product at each pooling point and more efficiently match supply to
demand.
Why drive alone when you can take mass transportation? The same theory
applies to businesses sourcing transportation. Why have two trucks deliver
half-full when one can carry the entire load?
Consolidating freight is a simple way for shippers to net considerable cost

savings by finding a shared network that meets their transportation
requirements. Collaborative warehousing is the wave of the future as
shippers and consignees look to reduce inventories. The same holds true
for collaborative transportation. Load consolidation saves money in two
direct ways: it improves TL (truckload) utilization, resulting in lower costs
! !117
per shipment; and it converts LTL shipments into less expensive TL

shipments.
Beyond economy, working in a consolidation-minded transportation

network allows companies to tap into a greater pool of carriers, which is
critical when capacity ebbs and flows. Temperature-controlled
transportation is expensive and a robust national refrigerated LTL network
does not exist to support broad coverage. Gathering critical mass among a
local group of like companies serves a similar purpose. Finding peer and
third-party partners that can execute consolidation programs demands
willingness to collaborate and explore a common good. Smaller and
sometimes competing companies can work together to be more
competitive within a broader space.
Successful pooling or consolidation requires a higher level of customer,

manufacturer, and carrier communication than single shipments from one
manufacturer to a customer. Joint understanding of order lead times,
required delivery dates, specific customer requirements, and EDI
transactions is a must.
End customers are welcome beneficiaries, too. Holding vendors in

compliance to specific transportation requirements, be it a preference for
TL shipments or specific carriers, helps them meet their own inventory
replenishment needs. Consolidation offers a customer service advantage by
increasing the number and frequency of collective shipments to specific
customers or regions of the country. Buyers are equally engaged in
supporting their vendors' delivery needs. A small consolidation client
reaching out to a customer to see if it could realign delivery schedules and
seize an opportunity to consolidate freight and reduce costs is not
surprising anymore. Retailers know there is value in consolidation. From a
scheduling perspective, TL is more reliable than LTL. As with other logistics
fundamentals, embracing load consolidation as a best practice invites other
opportunities to affect change—sometimes to the point of breaking out
shipments even farther downstream to reap economies of scale.
Whether businesses are scaling supply to demand or balancing growth or

reduction options against available resources in a shared transportation
network, consolidation programs tap the collective whole to optimize the
individual parts. Be it shared pain or shared gain, businesses are finding
greater strength in numbers.
! !118
Activity N
•How does consolidation offer an advantage to the end customer?

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Activity O
• What is consolidation and how does a pooled delivery add value to

consolidation?
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Activity P
• How can pooling arrangements between competitors achieve logistical

efficiency?
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3.3.3 Negotiation
For any given shipment, it is the responsibility of the logistics department

to obtain the lowest possible rate consistent with service required. A RFQ
(Request for Quote) is a formal document, presented to a group of carriers,
requesting them to bid for the freight business. The advantage of this
approach is that the negotiating manager knows all the participants are
speaking the same language, so to speak. In the document, it is spelt out
about information of the company, its products, the volumes and
expectations. A bid completion date is specified, by which the carriers must
return the completed bid. Upon receipt of the completed bid, the offerings
are analyzed and decisions made.
The key principle of carrier rate negotiation is: volume is king, but
profitability is queen. A shipper with enormous volumes, can negotiate
from a position of strength.
3.3.4 Control: Fleet Management Systems
In recent times, to address problems in fleet management and the ever

expanding need to monitor usage of vehicles, commercial organizations
have designed automated control systems and other approaches to vehicle
management. Simple management systems can be designed in-house for
internal use to provide a good analysis of the vehicles and driver
performance. Recent research found that any break from driving reduces
risk in the hour following the break, but off-duty breaks produced the
largest reduction. This study also showed that when non-driving activities
(both work- and rest-related) were introduced during the driver's shift –
creating a break from the driving task – these breaks significantly reduced
the risk of being involved in a safety critical event during the 1-hour
window after the break. The benefits of breaks from driving ranged from a
30% to 50% reduction in risk with the greatest benefit occurring for off-
duty (non-working) breaks.
! !120
Vehicle management systems are also structured in a way that enables the
capturing of information on various aspects of fleet usage, maintenance
and operations. For example:
• distances travelled;
• destinations reached;
• distance travelled by vehicle showing official and private mileage;
• fuel consumption;
• repair and maintenance per vehicle;
• rate of consumption of spare parts; and
• servicing planned and completed.
The reports can be produced on a weekly, monthly or bi-monthly basis,

depending on the needs of the organization. Weekly reports may comprise
a summary weekly re-fuelling by vehicle – which may highlight any
exceptions to targets set per vehicle, whereas monthly reports may
comprise:
• summary re-fuelling by vehicle and average fuel consumption;

• summary mileage per vehicle;
• repairs or maintenance; and
• any accidents.
Activity Q
• How did the regulation on Hours of Service bring about a change in the
working conditions of the truck driver?
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3.3.5 Claim Administration and Auditing
Freight payment, billing and claims management allows shippers to audit

and pay freight bills for their shipments by uncoupling the operational
nature of shipping orders from the commercial process.
A claim is a charge made against a carrier for loss, damage, delay, or

overcharge. A claim is a demand in writing for a specific amount of money
that contains sufficient information to identify the shipment received by the
originating carrier, delivering carrier, or carrier on whose line the alleged
loss, damage, or delay occurred within the time limits specified in the
contract. A claim may be filed by the shipper, consignee, or the owner of
the goods.
In reference to freight bills, the term audit is used to determine the

accuracy of freight bills. Determining the correct transportation charges
due the carrier; auditing involves checking the freight bill for errors, correct
rate, and weight. Freight bills are automatically matched against bill of
lading details and audited based on user-defined percentage and/or
amount tolerances. Freight bills within tolerance are approved and
automatically interfaced to any Accounts Payables system for payment and
cost allocation.
Activity R
• When does a shipper make a claim against the carrier?

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Activity S
• What is the purpose of auditing freight bills?

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! !122
3.4 Documentation
3.4.1 Bill of Lading
Bill of lading is a required document to move a freight shipment. The bill of

lading (BOL) works as a receipt of freight services, a contract between a
freight carrier and shipper and a document of title. The bill of lading is a
legally binding document providing the driver and the carrier all the details
needed to process the freight shipment and invoice it correctly. (Figure 4).
When a customer books a shipment, the bill of lading is automatically

generated based on the shipment details entered during the quoting and
booking process. The bill of lading should be provided to the carrier on
pickup and will be delivered to the consignee on delivery.
What is in a Bill of Lading?
• Shipper's and receiver's/consignee’s names and complete addresses.
• PO or special account numbers used between businesses for order

tracking.
• Special instructions for the carrier to ensure prompt delivery.
• The date of the shipment.
• The number of shipping units.
• Type of packaging, including cartons, pallets, skids and drums.
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!
Figure 4: Bill of Lading
! !124
• A note if commodity is a Department of Transportation hazardous

material. Special rules and requirements apply when you are shipping
hazardous materials.
• A description of the items being shipped, include the material of

manufacture and common name.
• The freight classification for the items being shipped.
• The exact weight of the shipment. If multiple commodities are being

shipped, then the weight of each commodity is listed separately.
• The declared value of the goods being shipped.
3.4.2 Freight Bill
It is a bill rendered by a carrier to a consignee of freight and containing an

identifying description of the freight. The manifest provides details about
the items in each order, including the weight, volume, and quantity, the
name of the shipper, and the point of origin of the shipment.
The freight bill may be either prepaid or collect. A prepaid bill means that
transport cost is paid by the shipper prior to performance, whereas a
collect shipment shifts payment responsibility to the consignee.
3.4.3 Shipment Manifest
A shipping manifest is the details of shipment. A complete manifest shows

the contents, where the shipment came from and where it is going. A
shipping manifest can also include who signed for the package at drop off.
This can be very helpful if a dispute arises over when and if a package was
actually delivered. In addition to weight, volume, and quantity, it can
specify:
• The length, width, and height of each shipping unit

• Records for individual SKU numbers, including the weight, volume, and
freight class
• Hazardous material information
• Product qualifiers, such as commodity codes
! !125
3.5 Summary
Motor transport units may be used in direct support of tactical operations

or in intermodal operations. Truck companies function through various
types and methods of hauling while supporting movement requests created
by the supported units. Efficient use of resources is identified as of
importance to best practice as growing concern mounts over fuel cost and
availability. Investing in green technology is a matter of pride with many
companies, and is positively leveraged for marketing purposes. It is now
almost expected for businesses to be taking part in initiatives that help to
preserve the environment, and so those companies who do, tend to get a
great deal of positive attention and ultimately a better name in their
industry. Freight strategy and industry practices are well focused to meet
currently understood demands of freight system efficiency. However, future
best practice planning will need to include a stronger emphasis on risk
management planning to cope with possible disruptions to reliability of
transport systems in times of shortages and price increase scenarios.
The challenge to organizations and the freight industry is to incorporate the

intent of relevant strategy into efficient operational systems aided by good
management. As transport systems often have source and destinations in
different regions, communication and alignment of strategy between
regions becomes equally important.
! !126
1. What is meant by Distribution Network?
2. Briefly explain the critical factors that drive Transportation costs.
3. Describe the difference between a rate and a rating. How do they relate
to classification?
4. What is the purpose of freight classification?
5. What is the basic concept of multi-vendor consolidation?
6. Compare reactive and proactive consolidation.
7. What is the role of the freight bill and the bill of lading in a
transportation transaction?
8. Write a short note on shipment manifest.
! !127
1. Cargo refers to __________.

(i) Goods carried by air, road, rail and sea
(ii) It is not always in transit
(iii) It is transported for commercial gain
(iv) Goods which are nor accepted by the Consignee
(a) (i), (ii) and (iv)
(c) (ii), (iii) and (iv)
2. Transportation costs are driven by __________.

(a) Distance, weight, handling and market
(b) Customers
(c) Buyers
(d) Sellers
3. Expenses that do not change in proportion to the activity are

__________.
(a) Fixed costs
(b) Join costs
(c) Variable costs
(d) Common costs
4. Minimising the ecological imbalance in logistic activities is known as

_________ logistics.
(a) Red
(b) Yellow
(c) Green
(d) Blue
5. Fleet management is a function which involves managing the staff

related to logistical activities.
(a) True
(b) False
! !128
6. Marketing logistics involves getting the right product to the right

customer in the right place at the right time. Which one of the following
is not included in this process?
(a) Implementing the plan for the flow of goods and services
(b) Planning the physical flow of goods and services
(c) Controlling the physical flow of goods, services, and information
(d) Gathering customer's ideas for new products
Answers: 1.(d), 2. (a), 3. (a), 4. (c), 5. (b), 6. (d)
! !129
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !130
OPERATIONAL INTEGRATION
Chapter 4
Operational Integration
Objectives
• The integrated supply chain and its framework.
• The objectives of integration
• The integration enterprise and its functions and obstacles
• The SCOR Model and sales and operational Planning (S&OP)
• The processes and planning considerations of supply chain
Structure
4.1 Integrated Supply Chain Creates Value
4.2 The Integrated Supply Chain Framework
4.3 Objectives of Integration
4.4 Integrated Enterprise
4.5 Supply Chain Processes
4.6 Sales and Operational Planning (S&OP)
4.7 Supply Chain Planning Considerations
4.8 Summary
! !131
Introduction
Business strategy involves leveraging the core competencies of the

organization to achieve a defined high-level goal or objective. It also
includes the analytic and decision-making process surrounding what to
offer (e.g., products and services), when to offer (timing, business cycles,
etc), and where to offer (e.g., markets and segments) as a competitive
plan.
The reason for having value integration is to establish how you work with
your supply chain partners, including suppliers, distributors, customers,
and even your customers’ customers. As the marketplace becomes more
competitive, it is critical to reinforce existing relationships and work
together. And for all these reasons, a well executed value integration
results in value creation for the organization.
4.1 Integrated Supply Chain Creates Value
A truly integrated supply chain does more than reducing costs. It also
creates value for the company, its supply chain partners, and its
shareholders. The foundation of integration is information sharing.
Coordination is the next dimension. Then comes the organizational linkages
that enable sharing of risks, costs, and gains. There has been a drastic
increase in the pressure on organizations to find new ways to create and
deliver value to customers through SCM and marketing initiatives. The goal
of SCM and marketing integration is to create unique competitive
advantages by linking together customer values with a more effective flow
of products. The flow must always be refined and create customer value
proposition in a constantly changing market.
Integration of SCM and marketing decisions should be a prime concern for

firms. Supply chain actions should always be aligned with the business
strategy of the firm and include upstream (i.e., order processing) and
downstream (i.e., demand management and customer service) activities in
order to facilitate the integration of the supply chain.
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Following are the major drivers for SCM and marketing integration:
• Increased needs and requirements of the customers;

• Globalization of world economy;
• Increased competition, leading to higher thrust to lower prices;
• Standardized products and services; and
• Shorter product life cycles.
In today’s business environment, customer retention has become very

difficult in the face of fluctuating market demand. Expectations of
consumers about quality, innovation, prices, 24 × 7 services, etc., also
have increased manifold. It is necessary that organizations think again
about how front-end marketing should work alongside back-end operations
of supply chain and how marketing data should flow from the marketing
department to these departments and back for enhancing customer value
proposition. For products with short product life cycles, such as fashion
apparel, electronic gadgets, personal computers and automobiles, effective
integration of SCM (including production, inventory and logistics) and
marketing is very important. Increased level of competition and shorter
product life cycles make the link between SCM and marketing more critical.
In manufacturing and assembly, relevancy is achieved by integrating

specific components into products to increase functionality desired by a
specific customer. The customer’s take-away in terms of relevancy is a
unique product/service bundle.
The simultaneous achievement of economic value, market value, and

relevancy value requires total integration of the overall business process
and is known as the integrative management value proposition, as
illustrated in Table 4.1
! !133
Table 4.1: Integrative Management Value Proposition

Economic Value Market Value Relevancy Value
• Lowest total cost • Attractive assortment • Customization
• Eonomy-of-scale • Economy-of-scope • Segmental diversity

efficiency  effectiveness
• Product/Service
• Product/service • Product/service positioning 
creation  presentation
Supply Chain Strategy
Procurement/ Market/Distribution
Manufacturing Strategy
Strategy
Activity A
• What are the benefits/values delivered to the customer on account of

integrated management?
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4.2 The Integrated Supply Chain Framework
Value results from the synergy among firms constituting a supply chain as
a result of five critical flows: information, product, service, financial, and
knowledge. It is imperative that every company specifically define the
functional responsibility of all departments within each of their
organizations. Integrating activities both within and beyond organizational
boundaries has become and will continue to be a major challenge for
supply chain executives. Integration efforts now extend beyond traditional
product-process design and functional integration to focus on extra-
organizational links with customers and suppliers. The object is to produce
"supply chain-enhanced" products and services. This eliminates any doubt
as to which department has responsibility for addressing any issues that
arise.
! !134
Supply chain integration focuses on two key issues – alignment and linkage
– both inside an organization and across organizations.
1. Alignment refers to common vision, goals, purposes and objectives

across organizations, functions and processes in the supply chain.
Alignment ensures that there is consistency in the direction and
objectives as these plans and decisions are made.
2. Linkage refers to the communication and sharing of information needed

for planning and decision-making, and the interaction of people involved
in planning and decision-making. Linkage ensures that the information
necessary for decision-making is available, and that different functions
and entities in the supply chain are working with the same data as
decisions are made.
Supply chain integration (Figure 4.1) calls for every organization and
individual involved in the process to understand that they can all benefit
from their efforts. The supply chain is a multi-organizational team that
should be working together. Although the buyer has the most to gain, the
supplier’s and the transportation company’s observations can often lead to
improvement in the manner the supply chain functions. An integrated
supply chain should benefit all participants. Logistics is the primary conduit
of product and service flow within a supply chain arrangement.
The integrated supply chain brings together loosely linked groups of

independent businesses that buy and sell inventory to each other to a
managerially coordinated initiative to increase market impact, overall
efficiency, continuous improvement, and competitiveness. For example,
many individual firms simultaneously participate in multiple and
competitive supply chains in multiple arrangements which may confront
loyalty issues related to confidentiality and potential conflict of interest.
! !135
!
Figure 4.1: Supply Chain Integration
Activity B
• What do you understand by integration of supply chain?
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4.3 Objectives of Integration
To achieve logistical integration within a supply chain context, six

operational objectives must be simultaneously achieved: (1) rapid
responsiveness, (2) minimum variance, (3) minimum inventory, (4)
movement consolidation, (5) quality improvement, and (6) life cycle
support. The relative importance of each is directly related to a firm’s
logistical strategy.
4.3.1 Rapid Responsiveness
Rapid response is concerned with a firm's ability to satisfy customer service

requirements in a timely manner. Information technology has increased the
capability to postpone logistical operations to the latest possible time and
then accomplish rapid delivery of required inventory. The result is
! !136
elimination of excessive inventories traditionally stocked in anticipation of

customer requirements. Rapid response capability shifts operational
emphasis from an anticipatory posture based on forecasting and inventory
stocking to responding to customer requirements on a shipment-to-
shipment basis. Because inventory is typically not moved in a time-based
system until customer requirements are known and performance is
committed, little tolerance exists for operational deficiencies.
Activity C
• How can a timely response satisfy a customer’s requirement?

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4.3.2 Cross-functional Coordination
It is widely agreed that task interdependence is the catalyst for

interdepartmental integration. In simpler terms, customer satisfaction is
dependent on the output of more than one worker, or one functional area.
Numerous empirical studies suggest that collaborative cross-functional
integration is positively associated with performance.
Collaborative interdepartmental integration involves predominantly

informal processes based on trust, mutual respect and information sharing,
the joint ownership of decisions, and collective responsibility for outcomes.
In short, collaborative integration is how well departments work together
when their jobs require them to do so. Thus, collaboration between
departments is often needed to ensure delivery of high quality services to
customers.
Collaborative behavior is based on co-operation (willingness), rather than

on compliance (requirement). Its success is contingent upon the ability of
individuals from interdependent departments to build meaningful
relationships. The fundamental challenge for managers focusing on
improving customer service in the supply chain is to gain a better
understanding of the antecedents and consequences of cross-functional
collaboration.
! !137
Evaluation and reward systems are mechanisms that a firm can use to
stimulate or foster cooperation between functional areas. Adequate
incentives can bring together disparate individuals to achieve common
goals. Thus, firms whose evaluation and reward systems recognize
cooperation and teamwork may experience higher levels of marketing/
logistics cross-functional collaboration and more effective marketing/
logistics inter-departmental relations.
Cross-functional integration is also important because it affects cycle time

reduction, perceptions of customer value and customer service. Therefore,
it is also anticipated that cross-functional collaboration and effective
interdepartmental relations will be associated with better distribution
service performance.
!
Figure 4.2: Cross Functional Integration
Activity D
• Name 3-4 advantages of cross-functional integration.

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! !138
4.3.3 Minimum Variance
Variance is any unexpected event that disrupts system performance.

Variance may result from any aspect of logistical operations. Delays in
expected time of customer order receipt, an unexpected disruption in
manufacturing, goods arriving damaged at a customer's location, or
delivery to an incorrect location – all result in a time disruption in
operations that must be resolved. Potential reduction of variance' relates to
both internal and external operations. Operating areas of a logistical
system are subject to potential variance. The traditional solution to
accommodating variance was to establish safety stock inventory or use
high-cost premium transportation. Such practices, given their expense and
associated risk, have been replaced by using information technology to
achieve positive logistics control. To the extent that variances are
minimized, logistical productivity improves as a result of economical
operations. Thus, a basic objective of overall logistical performance is to
minimize variance.
Activity E
• How can a company minimize variance?

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! !139
4.3.4 Minimum Inventory
The objective of minimum variance involves asset commitment and relative

turn velocity. Total commitment is the financial value of inventory deployed
throughout the logistical system. Turn velocity involves the rate of
inventory usage over time. High turn rates, coupled with inventory
availability, means that assets devoted to inventory are being effectively
utilized. The objective is to reduce inventory deployment to the lowest level
consistent with customer service goals to achieve the lowest overall total
logistics cost. Concepts like zero inventories have been increasing as
managers seek to reduce inventory deployment. The reality of
reengineering a system is that operational defects do not become apparent
until inventories are reduced to their lowest possible level. While the goal
of eliminating all inventories is attractive, it is important to remember that
inventory can and does facilitate some important benefits in a logistical
system. Inventories can provide improved return on investment when they
result in economies of scale in manufacturing or procurement. The
objective is to reduce and manage inventory to the lowest possible level
while simultaneously achieving desired operating objectives. To achieve the
objective of minimum inventory, the logistical system design must control
commitment and turn velocity for the entire firm, not merely for each
business location.
Activity F
• What do you understand by asset commitment and turn velocity?

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! !140
4.3.5 Movement Consolidation
One of the most significant logistical costs is transportation. Transportation

cost is directly related to the type of product, size of shipment, and
distance. Many logistical systems that feature premium service depend on
high-speed, small-shipment transportation. Premium transportation is
typically high cost. To reduce transportation cost, it is desirable to achieve
movement consolidation. As a general rule, the larger the overall shipment
and the longer the distance it is transported, the lower the transportation
cost per unit. This requires innovative programs to group small shipments
for consolidated movement. Such programs must be facilitated by working
arrangements that transcend the overall supply chain.
Activity G
• How can consolidation reduce transportation cost?

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4.3.6 Quality Improvement
A fifth logistical objective is to seek continuous quality improvement. Total

quality management (TQM) has become a major commitment throughout
all facets of industry. Overall commitment to TQM is one of the major
forces contributing to the logistical renaissance. If a product becomes
defective or if service promises are not kept, little, if any, value is added by
the logistics. Logistical costs, once expended, cannot be reversed. In fact,
when quality fails, the logistical performance typically needs to be reversed
and then repeated. Logistics itself must perform to demanding quality
standards. The management challenge of achieving zero defect logistical
performance is magnified by the fact that logistical operations typically
must be performed across a vast geographical area at all times of the day
and night. The quality challenge is magnified by the fact that most
logistical work is performed out of a supervisor's vision. Reworking a
customer's order as a result of incorrect shipment or in-transit damage is
far more costly than performing it right the first time. Logistics is a prime
part of developing and maintaining continuous TQM improvement.
! !141
Activity H
• How can companies adhere to TQM?

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4.3.7 Life Cycle Support
The final logistical design objective is life cycle support. Few items are sold
without some guarantee that the product will perform as advertised over a
specified period. In some situations, the normal value-added inventory flow
toward customers must be reversed. Product recall is a critical competency
resulting from increasingly rigid quality standards, product expiration
dating and responsibility for hazardous consequences. Return logistics
requirements also result from the increasing number of laws prohibiting
disposal and encouraging recycling of beverage containers and packaging
materials.
The most significant aspect of reverse logistical operations is the need for
maximum control when a potential health liability exists (i.e., a
contaminated product). In this sense, a recall program is similar to a
strategy of maximum customer service that must be executed regardless
of cost. The operational requirements of reverse logistics range from lowest
total cost, such as returning bottles for recycling, to maximum
performance solutions for critical recalls. The important point is that sound
logistical strategy cannot be formulated without careful review of reverse
logistical requirements.
Some products, such as copying equipment, derive their primary profit

from selling supplies and providing aftermarket service. The importance of
service support logistics varies directly with the product and buyer. For
firms marketing consumer durables or industrial equipment, the
commitment to life cycle support constitutes a versatile and demanding
operational requirement as well as one of the largest costs of logistical
operations. The life cycle support capabilities of a logistical system must be
carefully designed. As noted earlier, reverse logistical competency, as a
result of worldwide attention to environmental concerns, requires the
! !142
capacity to recycle ingredients and packaging materials. Life cycle support,

in modern terms, means cradle-to-cradle logistical support.
Activity I
• How did Johnson and Johnson undertake reverse logistics successfully?

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4.4 Integrated Enterprise
The supply chain of a manufacturing enterprise is a worldwide network of

suppliers, factories, warehouses, distribution centers and retailers through
which raw materials are acquired, transformed and delivered to customers.
In order to optimize performance, supply chain functions within the
organization must operate in a coordinated manner. But the dynamics of
the enterprise and the market make this difficult: bank rates change
overnight, political situations change, materials do not arrive on time,
production facilities fail, workers are ill, customers change or cancel orders,
etc. causing deviations from plan. In some cases, these events may be
dealt with locally, i.e., they lie within the scope of a supply chain function.
In other cases, the problem cannot be "locally contained" and modifications
across many functions are required.
4.4.1 Obstacles to Supply Chain Integration
A number of factors can impede external process integration along the

supply chain, causing information distortion, longer cycle times, stock-outs,
and bullwhip effect, resulting in higher overall cost and reduced customer
service capabilities.
! !143
Silo Mentality
In many instances, firms have not considered the impact of their actions on
the supply chain and its long-term competitiveness and profitability. Silo
mentality manifests itself in the form of using cheaper suppliers, paying
little attention to the needs of customers, and assigning few resources to
new products and service design. Eventually, these firms will create quality,
cost, delivery timing, and other customer service problems that are
detrimental to the supply chain. Cachon (2005), in his paper, describes silo
mentality as the most significant obstacle to overcome in supply chain
management of most companies.
Internally, the silo effect can also be present among departments. The
transportation manager for instance, may be trying to minimize total
annual transportation costs while inadvertently causing safety stocks to be
higher, shortages to occur, and customer service levels to deteriorate. To
overcome the silo mentality, the firm must strive to align supply chain
goals and the goals and incentives of the firm. Functional decisions must
be made while considering the impact on the entire firm’s profit and those
of the supply chain. Performance reviews of managers must include their
ability to integrate processes internally and externally and to meet the
overall supply chain goals.
i. Organizational boundaries: There are two kinds of boundaries in any

organization intra- and inter-organizational boundaries. These
boundaries should be removed for successful supply chain integration.
For successful supply chain integration, intra-and inter-organizational

boundaries should be removed.
Inter-organizational boundaries: Overcoming the company boundaries

and working closely with suppliers and customers (i.e., functional, business
process, information/ materials flows, and information/communication
technology integration).
Intra-organizational boundaries: Integration between different

discipline and functions, such as manufacturing, distribution, marketing,
accounting, information, and engineering is essential.
! !144
Each of these organizations has an operational responsibility, which is

reflected in its functional goals. The traditional belief was that functional
excellence would automatically equate to superior performance. In
integrated process management, it matters little how much is spent to
perform a specific function as long as process performance goals are
achieved at the lowest total cost expenditure. Successful integration of
processes requires that managers look beyond their functional boundaries
to achieve cross-functional integration. This may or may not require
organizational change. Regardless, successful process integration requires
significant traditional management behavioral modification.
Activity J
• How does a silo mentality affect process integration?

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ii. Lack of supply chain visibility: In order to make flexible decisions in

daily operations in terms of supply chain visibility, information and
events in the supply chain must be visible and have to be analyzed.
Coordinated performance rating systems enable a company to
implement a supply chain strategy and consistently improve
performance management. Advanced information technologies and
concepts (e.g., track and trace, mobile computing, business intelligence
and analytics) are important for providing information in real time and
processing it to be used as a basis for the decision-making process.
Lack of information visibility along the supply chain is a common supply

chain process integration problem. In a 2002 survey, two-thirds of
manufacturers had not yet successfully synchronized their supply chain
operations with those of their trading partners (Cachon and Fisher,
2000). Additionally, two-thirds of the respondents said they used
different supply chain management applications than their partners,
which prevented access to valuable external data, resulting in limited
information visibility.
! !145
In the absence of supply chain visibility, trading partners have to carve

out data from their ERP (enterprise resource planning) or legacy systems
and then send it to one another where it then has to be uploaded to
other systems prior to the data being shared and evaluated, the time lost
can mean lost end customers and higher costs through the supply chain
membership.
iii. Lack of trust: Successful process integration between partners requires

trust, as with silo mentality and lack of information visibility, trust is
seen as the major stumbling block in supply chain management. Trust
occurs over time between supply chain partners, as each participant
earns trust while it builds its reputations among the other businesses.
Even though this sounds impossible, relationships employing trust result

in win-win for the participants. Spalding Holding collaborates with Wal-
Mart, resulting in win-win for both companies. Wal-Mart gives Spalding
its forecast and point-of-sale data, which allows Spalding to keep its
inventory levels down and serve Wal-Mart’s needs better. As a result,
Wal-Mart stocks out of Spalding goods less frequently and it now has a
better understanding of Spalding’s capacity and cost (Wisner et al.,
2006).
Unfortunately, company practices and human nature will not change

overnight. Until parties understand that it is in their own best interest to
trust each other and share information, supply chain management
success will be an uphill battle.
Activity K
• What is the importance of information sharing in process integration?

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! !146
iv. Lack of knowledge: Companies have been moving toward

collaboration and process integration for years, and it is just recently
that technology has caught up with this vision, allowing the process
integration across an extended supply chain. In a survey of 122
executives practicing supply chain management, 43% said lack of core
supply chain management skills and knowledge was the greatest
obstacle within their own organizations, and 54% echoed this opinion
for their trading partners. Getting the network of firms to work together
successfully, though, requires managers to use subtle persuasion and
education to get their own firm and their trading partners to do the right
things.
The cultural, trust, and process knowledge differences in firms are such
that firms successfully managing their supply chain must spend
significant amount of time influencing and increasing the capabilities of
themselves and their partners. Change and information sharing can be
threatening to people; they may fear for their job security, particularly if
outsourcing accompanies integration. Additionally, as firms construct
their supply chain information infrastructure, they may find themselves
with multiple ERP systems, a mainframe manufacturing application, and
a desktop analysis and design software that all need to be integrated
both internally and externally. Thus, firms must realize that the people to
be using the system must be involved earlier on, in terms of purchase
decision, the implementation process, and in training. For all
organizations, successful supply chain management requires a regiment
of ongoing training. When education and training are curtailed,
innovation cannot occur, and innovation fuels supply chain
competitiveness (Wisner et al, 2006).
v. Activities causing the bullwhip effect: Logistics practitioners and

academics have long been aware of the "bullwhip" phenomenon in
supply chains. As demand for a product filters back up the chain from
the consumer toward the original source of the component raw
materials, that demand becomes more and more erratic and swings in
larger and large cycles. These swings in demand often create excess
capacity, excess inventories, as well as poor customer service in the
supply chain.
! !147
Activity L
• What is the main cause of the bullwhip effect?

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4.4.2 Collaboration Extends the Enterprise
For the emerging discipline of supply chain management, senior leaders

embraced the challenges and opportunities of end-to-end integration by
adopting the supply chain business model. Within that model, three
important characteristics emerged:
1. The decade witnessed a head-on attempt to close the "Great Divide."

Supply chain integration was positioned and extended to include
customers and suppliers.
2. The concept of supply chain collaboration sparked an unprecedented

level of integration that extended beyond traditional enterprise
boundaries.
3. Supply chain alignment became a global concept extending across

geographically separated customer and suppliers.
Integration across the total supply chain began to achieve the end-to-end
efficiencies that many had anticipated. There were also some unintended,
but positive, consequences. For one thing, increased connectivity allowed
suppliers to become involved in new product innovation. Moreover,
companies that gained more end-to-end visibility began to tap expertise
that previously had been excluded from activities that affected consumers.
The result was not only greater supply chain efficiency but also major
increases in effectiveness and customer relevancy.
As the decade unfolded, technologies that supported enterprise extension

enabled senior leaders to develop new business models to guide supply
chain integration. The earlier focus on cooperation and coordination was
expanded to include collaboration.
! !148
Companies that collaborate for successful supply chain execution have

three characteristics in common. First, they acknowledge their dependency.
Second, they are willing to share strategic information. And third, they
acknowledge and comply with cross-organizational leadership.
In many ways, the conceptual framework of the supply chain business

model developed faster than did its implementation. Many companies tried
to leapfrog the technology challenge by adopting enterprise resource
planning (ERP) systems. Their goal was to achieve integrated financials and
end-to-end operating systems that would be capable of guiding supply
chain globalization. Most got the financials they were after; few achieved
end-to-end operational integration.
Activity M
• What were the changes brought about by collaboration in supply chain

integration?
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4.5 Supply Chain Processes
Successful supply chain management requires a change from managing

individual functions to managing a set of integrated processes. In many
leading corporations, management has concluded that they cannot
optimize product flows without first implementing a process approach to
the business. The value of having standard business processes in place is
that managers from organizations across the supply chain can use a
common language and can link up their companies' processes with those of
the other supply chain members.
! !149
The eight key supply chain management processes identified by members

of The Global Supply Chain Forum are:
1. Customer relationship management.

2. Customer service management.
3. Demand management.
4. Order fulfillment.
5. Manufacturing flow management.
6. Supplier relationship management.
7. Product development and commercialization.
8. Returns management.
1. Customer Relationship Management. The CRM process provides the

structure for how relationships with customers are developed and
maintained. Allows companies to prioritize their marketing focus on
different customer groups according to each group’s long-term value to
the company or supply chain.
2. Customer Service Management. The customer service management

process represents the company's face to the customer. Presents a
multi-company, unified response system to the customer whenever
complaints, concerns, questions, or comments are voiced.
3. Demand Management. Demand management is the process that

balances customer requirements with supply chain capabilities. Seeks to
align supply and demand throughout the supply chain by anticipating
customer requirements at each level and create demand-related plans
of action prior to actual customer purchasing behavior.
4. Order Fulfillment. This supply chain process encompasses all activities

necessary to define customer requirements, design a network, and
enable a firm to meet customer requests while minimizing the total
delivered cost. The objective is to develop a seamless system from the
supplier to the firm, and then on to the various customer segments.
5. Manufacturing Flow Management. Manufacturing flow management

includes all activities necessary to obtain, implement, and manage
manufacturing flexibility in the supply chain and to move products
through the production process.
! !150
6. Supplier Relationship Management. Closely related to the

manufacturing flow management process and contains several
characteristics that parallel the customer relationship management
process.
7. Product Development and Commercialization. This supply chain

management process provides the structure for working with customers
and suppliers to develop products and bring them to market. Includes
the group activities that facilitates the joint development and marketing
of new offerings among a group of supply chain partner firms.
8. Returns Management. Enables firms to manage volumes of returned

product efficiently, while minimizing returns-related costs and
maximizing the value of the returned assets to the firms in the supply
chain.
Each of the eight supply chain management processes has both strategic
and operational elements - that is, a strategic element in which the firm
establishes and strategically manages the process and an operational
element in which the firm executes the process. The strategic elements
should be led by a management team comprised of representatives from
multiple functions including marketing and sales, finance, production,
purchasing, logistics, and research and development. This team is
responsible for developing the procedures at the strategic level and seeing
that they are implemented. The strategic team also identifies how the
external partners will be integrated into the supply chain. The operational
component of each process, where the day-to-day activities take place, is
executed by the managers within each functional area.
4.5.1 Supply Chain Visibility
Supply chain visibility (SCV) is the ability of parts, components or products

in transit to be tracked from the manufacturer to their final destination.
The goal of SCV is to improve and strengthen the supply chain by making
data readily available to all stakeholders, including the customer. SCV
technology promotes quick response to change by allowing privileged users
to take action and reshape demand or redirect supply.
! !151
4.5.2 Simultaneous Resource Consideration
If planning system visibility highlights resource status and availability, the

second planning system requirement is the need to simultaneously
consider supply chain demand, capacity, material requirements, and
constraints. Supply chain design must consider customer demand for
product quantity, delivery timing, and location. While some of these
customer requirements may be negotiable, logistics must execute to the
agreed-to requirements and standards.
The constraints to meeting customer requirements are materials,

production, storage, and transportation capacity, which represent the
physical limitations of processes and facilities. Traditional planning methods
have typically considered these capacity constraints in a sequential
manner. For example, an initial plan is made that operates within
production constraints. The initial plan is then adjusted to reflect material
and sourcing constraints. This second plan is then revised to consider
storage and transportation constraints. While the processes and sequences
may be different, sequential decision-making results in suboptimal and
inferior planning and capacity utilization.
Achieving desired supply chain performance requires simultaneous

consideration of relevant requirements and capacity constraints to identify
trade-offs where increased functional costs, such as in manufacturing or
storage, might lead to lower total system cost. A planning system needs to
quantitatively evaluate the trade-offs and identify alternatives to enhance
overall performance.
Activity N
• What are the constraints faced by companies while meeting customer

requirements and how can they circumvent them?
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! !152
4.5.3 Resource Utilization
Logistics and supply chain management decisions influence many

enterprise resources, including production, distribution facilities and
equipment, transportation equipment, and inventories. These resources
consume a substantial proportion of a typical firm’s fixed and working
assets. Functional management must focus on resource utilization within
its scope of responsibility. For example, production management is focused
on minimizing plant and equipment resources required for manufacturing.
The typical result is long production runs requiring minimum setups and
changeovers. However, longer production runs invariably result in more
finished inventory, as substantial quantities are manufactured in
anticipation of projected demand. Excess inventory increases working
capital requirements and space requirements. Extended production runs
also require longer-term and more accurate forecasts.
Activity O
• How can incorrect resource utilization lead to a firm’s increased inventory

and losses thereby?
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4.6 Sales and Operational Planning (S&OP)
Sales and Operations Planning ties together your operational plan with your
strategic business plan, providing a holistic view of demand, supply, and
finance so that you can literally plan to profit. Sales & Operations Planning
provides a holistic framework for balancing demand with supply and
incorporates key financial measures to ensure the operational plan is
aligned with the strategic plan to produce the best possible business
results.
With multiple "what if" scenarios on both demand and supply, the best plan
to meet the customer service and financial goals can be identified,
responded more quickly to the changing landscape of demand, and
ensured the S&OP process remains strong throughout the business.
! !153
Designed for manufacturers and distributors, Sales & Operations Planning

works with conventional ERP and supply chain planning systems to deliver
information and process support to create a consensus plan among:
• Senior executives
• Demand planning managers
• Production managers
Finally, supply chain operations develop materials, manufacturing, and

logistics plans that can meet customer demands within the operating
constraints of the firm and its supply chain partners.
Conflicts in Sales and Operations Planning
In most organizations, supply chain planning—the administration of supply-

facing and demand-facing activities to minimize mismatches and thus
create and capture value—is a cross-functional effort. In most cases, this
means that each functional area, such as sales, marketing, finance, and
operations, tends to specialize in its own portion of the planning activities.
Such specialization is notorious for generating conflicts over differing
expectations, preferences, and priorities with respect to how the matching
of demand and supply should be accomplished. (Figure 4.3).
The reconciliation of these conflicts is generally referred to as coordination.

Coordination in the operations management literatures generally assumes
some agreement in the assessment of the firm’s environment and on the
options available for an organizational response: the challenge centers on
the details of the organizational response. But supply chain planning
requires something more: cross-functional collaboration to assess the state
of the supply chain and the needs of the organization and then to
determine an approach for creating and sustaining value based on that
collaborative assessment. In other words, beyond coordination,
organizations must define the problem, ascertain the options available for
dealing with the problem, and create an agreeable solution with
collaboration across differentiated functions.
! !154
Table. 4.3
Manufacturing: Marketing Logistics and New Product
Distribution: Development
“Sales are highly “There’s a new “We will require “I can guarantee
ove-rstated, we promotion we exc-essive that this new
will figure out need to do next overtime and air product will fly out
what to decrease “ week.” freight to of the warehouse
accomplish what is
being asked of us.”
Customer Supply Demand Sales: Finance

planning Planning
“We will need to “Our high forecast “I will place multi- “Working capital is
rapidly expand our accuracy error is ple orders to make too high; We need
manufacturing not my fault — I sure my customer to reduce
capacity to achieve just enter what does not get inventory by
the plan.” sales tells me.” shorted.” 20%.”
Activity P
• Write a brief note on Sales and Operations Planning.

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While S&OP has significant information technology considerations, it is not

just an information technology application. It is a combination of
information systems, with significant elements of financial, marketing, and
supply chain planning elements, integrated with organizational processes,
responsibility, and accountability to develop consensus and execute
collaborative plans. Thus, an effective S&OP requires a blending of process
and technology with organizational collaboration. Figure 4.4 illustrates the
S&OP process developed from the firm’s internal and partner resource
constraints.
! !155
!
Figure 4.3: S&OP Process
! !156
Activity Q
• Why is it important to plan in an S&OP process?

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Activity R
• Why do conflicts arise in spite of firm’s employing the S&OP process?

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4.6.1 Supply Chain Planning Applications
Supply chain planning is increasing in frequency and scope. Such

applications are evolving to consider a broader range of activities and
resources within the scope of supply chain planning. There are, however,
some applications common for most supply chain environments. These
include demand planning, production planning, and logistics planning.
1. Demand Planning
Demand planning and forecasting is a business process that involves

predicting future demand for products and services and aligning production
and distribution capabilities accordingly. It involves a number of different
business functions and requires the sharing of timely data, accurate
processing of this data and agreement on joint business plans along the
supply chain.
! !157
The process consists of three parts:
a. Demand forecasting: The creation of a projection for unconstrained

demand for a product or service over time.
b. Demand planning: The development of a forecast that reflects known

constraints and any possible associated impacts that may occur as a
result of external events, capacity (either production or logistics)
or changing priorities.
c. Demand management: Influencing demand via the addition (or

cancellation) of activity, the increasing or reduction of price, or the
rationing or allocation of stock.
Increased Investment in Forecasting
Greater competition, more frequent new product launches and shorter

product life cycles have made forecasting increasingly complex.
Organizations themselves have also become more complex in the past
decade, and many now operate in a greater number of locations, business
units and markets. Unprecedented levels of economic uncertainty, which
have affected buying patterns and historical data, have added to this
complexity. Research highlights that the need to improve service levels and
reduce stockholding are the two biggest drivers to investment of resources
in the forecasting and demand planning process.
Key Demand Planning Challenges
According to research, there are three main obstacles facing the industry in
the area of forecast accuracy performance, as follows:
• Poor communication, for example, the late communication of changes in

promotional mechanics
• Insufficient internal collaboration and inadequate processes to manage

business and customer requirements
• A knowledge gap caused by issues such as a lack of a recognized

forecasting tool or process, promotional complexity and data integrity
! !158
Collaboration is Key
A lack of collaboration with trading partners is seen as a key frustration for

suppliers in the demand planning process. It indicates that despite efforts
to share information, this is not common practice across the industry, and
is not sufficient on its own.
The Way Forward
Flexibility in responsiveness and the robustness of integrated business

planning are important factors in delivering real-time, demand-led supply
chains, but companies need to take a more systematic approach to
demand planning and forecasting. There is a need to strive for deeper
collaborative supply chain practices, both within organizations and with
trading partners. As such, developing collaborative supply chain practices
will drive business capability, optimize service levels, reduce wastage and
maximize on-shelf availability.
Activity S
• What is the importance of forecasting in a demand management?

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2. Production Planning
The goal of production planning is to help you produce your products more
efficiently. Supply and demand plans need to be transformed into feasible
and meaningful production and purchasing plans and schedules. The
production planning process determines when a specific production order
needs to be produced and on which production line. It also takes into
account the availability of resources and components. Purchasing/
production orders are generated in time to decrease supply costs without
endangering the production process.
! !159
An effective production planning process supports the management and

synchronization of master production schedules, material and capacity
requirements, tactical maintenance needs, personnel resources as well as
the scheduling/ sequencing of jobs through the factory floor in order to
achieve business objectives (meet customer orders, contain/reduce cost)
within the supply chain constraints. It is one of the most critical processes
for controlling costs and achieving efficiency.
Although there has been a definite trend toward make-to-order (MTO) and
assemble-to-order (ATO) manufacturing, such response-based practices
are not always possible because of production technology, capacity,
resource constraints, or customer requirements. The limitations occur in
the form of facility, equipment, and labor availability.
Production planning identifies the items that should be produced in

anticipation of need to remain within production constraints and yet
minimize inventory.
Activity T
• What constraints are likely to be met by the production planning

department while executing a customer order?
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3. Logistics Planning
To ensure that the supply chain is operating as efficient as possible and

generating the highest level of customer satisfaction at the lowest cost,
companies have adopted logistical planning and associated technology.
Logistical planning has three levels of activities that different parts of the
company will focus on: strategic, tactical and operational.
• Strategic: At this level, company management will be looking to high

level strategic decisions concerning the whole organization, such as the
size and location of manufacturing sites, partnerships with suppliers,
products to be manufactured and sales markets.
! !160
• Tactical: Tactical decisions focus on adopting measures that will produce

cost benefits such as using industry best practices, developing a
purchasing strategy with favored suppliers, working with logistics
companies to develop cost-effective transportation and developing
warehouse strategies to reduce the cost of storing inventory.
• Operational: Decisions at this level are made each day in businesses

that affect how the products move along the supply chain. Operational
decisions involve making schedule changes to production, purchasing
agreements with suppliers, taking orders from customers and moving
products in the warehouse.
Logistics planning integrates overall movement demand, vehicle

availability, and relevant movement cost into a common decision support
system that seeks to minimize overall freight expense. The analysis
suggests ways that freight can be shifted among carriers or consolidated to
achieve scale economies. It also facilitates information sharing with carriers
and other service providers to enable better asset utilization.
The increasingly strong focus on improved asset utilization in conjunction

with improved information management and decision analysis capabilities
and techniques has brought comprehensive planning systems to reality.
Effective planning requires a combination of information systems to provide
the data and managers to make decisions.
Activity U
• What is the kind of coordination that takes place between the logistics
department and its channel partners while devising a logistical plan?
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! !161
4.6.2 Advanced Planning and Scheduling (APS) System
Advanced planning and scheduling (APS) refers to a manufacturing

management process by which raw materials and production capacity are
optimally allocated to meet demand. APS is especially well suited to
environments where simpler planning methods cannot adequately address
complex trade-offs between competing priorities. Production scheduling is
intrinsically very difficult due to the (approximately) factorial dependence
of the size of the solution space on the number of items/products to be
manufactured. Temporal considerations include movement timing and
scheduling. (Figure 4.5).
!
Figure 4.5: Advance Planning and Scheduling Overview
APS uses, Finite Scheduling, a process that assumes a fixed maximum

capacity. It sequences jobs according to actual constraints the company
faces. It creates more realistic forecasts than infinite scheduling methods.
Improves the accuracy of the production process. Performs multiple data
passes to optimize plans and schedules.
APS is a new revolutionary step in enterprise and inter-enterprise planning.

It is revolutionary, due to the technology and because APS utilizes planning
and scheduling techniques that consider a wide range of constraints to
produce an optimized plan:
! !162
• Material availability
• Machine and labour capacity
• Customer service level requirements (due dates)
• Inventory safety stock levels
• Cost
• Distribution requirements
• Sequencing for set-up efficiency
APS System Components
Demand Planning and Forecasting
Both statistical and time-series mathematics are used in this solution to

calculate a forecast based on sales history. A demand forecast is
unconstrained because it considers only what customers want and not what
can be produced. Based on the information from the forecast, it is possible
to create more demand through promotions in periods where the demand
is less than maximum production.
Ideally, demand management works collaboratively and interactively both

internally across the firm’s functional components and externally with
supply chain partners to develop a common and consistent forecast for
each time period, location, and item. The forecast must also incorporate
feedback from customers to integrate the influence of combined demand
generation activities such as advertising and promotion.
Resource Management
The resource management component defines and coordinates supply

chain system resources and constraints. Since APS systems use the
resource and constraint information to evaluate the trade-offs associated
with supply chain decisions, information accuracy and integrity are critical
to provide optimal decisions and enhance planning system credibility.
Obviously, incorrect planning decisions not only sub-optimize supply chain
performance but also severely reduce management credibility in the
planning system itself. In addition to the requirements definition developed
by the demand management module, APS requires four other types of
information: product and customer definitions, resource definitions and
costs, system limitations, and planning objective.
! !163
The product and customer definitions provide constants regarding the

firm’s products and customers to support the planning process. The
product definitions provide the product descriptions and physical
characteristics, such as weight and cube, standard costs, and bill of
material. The customer definitions provide the ship-to location and
distribution assignments, along with special service requirements. The
combination of both defines what is being manufactured, what is being
distributed, where it is being delivered, and the performance cycles
involved in distribution.
The resource definitions specify the physical resources used to accomplish

supply chain activities such as manufacturing, storage, and movement
capacities. The resources include manufacturing equipment and process
rates, storage facilities, and transportation equipment and availability. In
addition to defining the existence of specific resources, the database must
include the performance characteristics and costs associated with resource
usage.
System limitations define major supply chain activity constraints. These

include the capacity limitations associated with production, storage, and
movement. Production capacity defines how much product can be produced
within a specific time period and what are the trade-offs associated with
making various mixes of products. Storage capacity defines the amount of
product that can be stored in a specific facility. Movement capacity defines
the volume of product that can be transported between facilities or to
customers within a given time frame.
The planning function defines criteria for developing a solution. Typical

objective functions include minimizing total cost or any of its
subcomponents, meeting all customer requirements, or minimizing the
number of instances when capacity is exceeded.
This combination of demand management and resource management

information provides the basis for the APS evaluation of alternative supply
chain strategies. The module includes the databases to store the
definitions, resources, constraints, and objectives as well as the processes
to validate and maintain it. Users are finding that one of the major
challenges to effective supply chain planning systems is the ability to
develop and maintain accurate and consistent data.
! !164
The resource optimization module is the computational engine or “black

box” of the supply chain planning system. Using the requirements from the
demand management module and the definitions, resources, limitations,
and objectives from the resource management module, resource
optimization uses a combination of mathematical programming and
heuristics to determine how to most effectively meet customer
requirements while optimizing resource utilization. In effect, the resource
optimization module evaluates multiple planning alternatives and
systematically computes the trade-offs to identify the best alternatives
until a near-optimal result is achieved. The resource optimization module
also determines when requirements cannot be met and which resources
are the most constraining on supply chain performance. The resource
optimization module results are supply chain plans projected into future
time periods that minimize overall costs while attempting to operate within
major resource constraints. The plan specifies which products should be
produced when and determines movement and storage requirements
across the supply chain.
The resource allocation module specifies the resource assignments and

communicates them to the ERP system to initiate appropriate transactions.
The results include requirements for procurement, production, storage, and
transport. The specific requests can be communicated to the ERP system in
the form of transactions or instructions to complete a specific activity. Each
transaction includes detailed instructions regarding type of supply chain
activity, suppliers, customer, products involved, and required timing, along
with a list of relevant products and quantities. The resource allocation
module also provides information regarding when product is available to
promise (ATP) or capable to promise (CTP).
ATP is used to designate that even though actual inventory is not currently
available, it will be available for shipment or promise at a specific date in
the future. CTP is used to designate when requested product can be
promised for future delivery. ATP and CTP can dramatically enhance supply
chain performance and effectiveness by allowing commitments against
future production and capacity. The result is more rapid commitments to
customers, fewer customer surprises, and enhanced resource utilization.
! !165
Activity V
• What are the APS Systems components? Write 2-3 lines on each of their
functions.
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Supply Chain Planning Benefits
There are three broad benefits that accrue from planning system
utilization. These are responsiveness to changes, comprehensive
perspective, and resource utilization.
First, logistics and supply chain managers have used extended lead times
and schedule freezes to plan for future supply chain activity. For example,
production would be scheduled three to four weeks into the future and
then frozen to minimize uncertainty and allow for effective resource
utilization. Long lead times and freeze periods were necessary since the
planning process was complex and required substantial analyzes. While this
approach reduced uncertainty, it also substantially reduced flexibility and
responsiveness. Today’s customer requires more responsiveness to market
needs, and demand for lower inventory levels rules out long cycle times.
Marketplace and firm changes can be quickly made in the demand
management and resource management modules, allowing for the
planning process to use the most current and accurate information. The
requirements optimization module then solves the allocation, allowing daily
and single week planning cycles rather than multiple weeks or months.
Supply chain planning thus results in a process that can be much more
responsive to marketplace or firm changes.
Second, effective supply chain management requires planning and

coordination across firm functions and between supply chain partners. The
process must consider the trade-offs associated with shifting activities and
resources across functions and organizations. Such a comprehensive
perspective increases planning process complexity substantially. The
complexity follows from the number of organizations, facilities, products,
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and assets that must be considered when coordinating activities and

resources across an entire supply chain. Supply chain planning systems
offer the capability to consider the extended supply chain and make the
appropriate trade-offs to achieve optimal performance.
Third, supply chain planning typically results in substantial performance

improvements. While more comprehensive planning and reduced
uncertainty usually result in improved customer service, another major
planning system benefit is enhanced resource utilization. More effective
and responsive planning allows a more level assignment of resources for
existing sourcing, production, storage, and transportation capacity. The
result is that existing capacity is used more effectively.
Activity W
• How can managers respond to changes in demand for an effective supply

chain management?
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4.7 Supply Chain Planning Considerations
Supply chain planning can take a comprehensive and dynamic perspective

of the entire supply chain and focus on reducing the supply chain asset
requirements as demanded by financial markets. Prior to the actual
implementation, there are many considerations for supply chain planning
system adoption. The major considerations are: (1) integrated versus bolt-
on application, (2) data integrity, and (3) application education.
1. Technically, there are three options for acquiring and implementing

planning applications. The first is development using internal firm
resources. Options two and three are to use a supply chain planning
application that is integrated with the firm’s ERP system or one from a
third-party that bolts on to the firm’s ERP system.
2. Data integrity is a second major consideration for supply chain

planning system implementation. Planning systems rely on absolute
data integrity for effective decision- making. Missing and inaccurate
data can dramatically impact decision reliability and stability. For
example, missing or inaccurate cube can result in a transportation
planning system making a recommendation to overload a transportation
vehicle. Overloading transportation vehicles or storage facilities cause
management and planners to question the integrity of the entire
planning system and process.
3. Education regarding supply chain execution and planning systems has

usually focused on the mechanics to initiate the transactions. So, the
user would be trained in data or parameter entry where the system
would provide quick feedback regarding the acceptability of the entry.
For example, changing the requirements or forecast for one item in a
time period may shift production schedules for related items on the
other side of the world. Understanding planning system dynamics is
critical to successful application. Such understanding requires thorough
knowledge of APS system mechanics and system interactions. Although
such knowledge can be initiated through training, it must be refined and
extended through education and experience.
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Planning system education must focus on the characteristics and

relationships between supply chain management activities and processes
both internal and external to the firm. The education process must be
much broader than existing training approaches. Planning system
experience can be developed by using job shadowing experience and
simulations. The shadowing environment provides actual on-the-job
experience in a real-time environment. The simulated environment
provides a laboratory where inexperienced planners can see or observe the
results of their planning environment at low risk to the firm. The
combination of these two educational experiences provides a solid
foundation for implementing successful supply chain planning applications.
Activity X
• Why is it necessary for the user to be educated and trained in the

planning systems for implementing successfully the supply chain
applications?
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4.8 Summary
By analyzing the definition of integrated logistic support, it was possible to

identify the necessary conditions for an integrated logistics model. From
these necessary conditions, a model of the management functions and
technical activities was constructed to suggest the purpose and place of all
logistics functions to work in an integrated way towards the goal of the
organization. The chapter suggested that logistics engineering and
business logistics are both required in the organization and that it is of vital
importance that these functions are executed in unison.
The time has come to accept integrated logistic support as the only
definition for total logistics involving both management and technical
activities. In order to be competitive, management needs to closely
integrate all functions of the organization. Logistics in itself has no
purpose. Logistics supporting an organization in an integrated way provides
an impetus to achieving the goal, MAKING MONEY.
Cross-functional collaboration and effective interdepartmental relations are

influenced by the organization’s evaluation and reward system, and that
cross-functional collaboration and effective inter-departmental relations are
positively associated with distribution service performance.
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4.9 self assessment Questions
1. How can SCM create a competitive advantage to an organization?
2. What is considered as value in an integrated supply chain process?
3. Why is supply chain integration considered a challenge to implement?
4. What do you understand by a “Supply Chain Network”?
5. What are the limitations that need to be overcome for successful

integration?
6. How does lack of visibility affect the supply chain process?
7. Why does trust play such an important part between supply chain
partners?
8. How do reward systems serve as barriers to enterprise integration?
9. What creates power in the context of supply chain collaboration?
10.What is the process that aligns raw material and production to meet
demand?
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1. Points mentioned below are examples of __________.

(i) Customer satisfaction
(ii) Coordination of workers
(iii) Information sharing
(iv) Trust
(a) Independent decisions
(b) Increased output
(c) Faster deliveries
(d) Collaborative integration
2. Minimum inventory can be achieved only by __________.

(i) Effective utilisation of budgets
(ii) Minimising operational defects
(iii) Increasing production capacity
(iv) Availability of inventory as per demand
(a) (i), (iii) and (iv)
(b) (i), (ii) and (iii)
(c) (i), (ii) and (iv)
3. Organisations should think not only of integrated marketing but also of

__________.
(a) Profits
(b) Increase in production
(c) Enhancing customer value
(d) Competition
4. An integrated SCM creates value for __________, __________ and

__________.
(a) Competitors
(b) Customers
(c) Stakeholders
(d) Channel Partners
5. Customer satisfaction relies heavily on how fast you can respond to his
demands.
(a) True
(b) False
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6. Zero defects in manufacturing

(a) is an unobtainable and misleading ideal
(b) is the goal of TQM
(c) is readily achievable in all areas
(d) is a relevant goal only in electronic assembly
7. ”Quality is conformance to specifications”-This definition of quality is

from point of view of
(a) Customer
(b) Manufacturer
(c) Quality Circle Forum
(d) TQM
8. Quality is both quantitative and

(a) Supportive
(b) Qualitative
(c) Measurable
(d) Conclusive
9. Which one of the following is not a typical question dealt with by an

operations manager?
(a) How much capacity will be needed in the months ahead?
(b) What is a satisfactory location for a new facility?
(c) Which products/services should be offered?
(d) All are typical of operations decisions.
Answers: 1. (d), 2. (c), 3. (c), 4. (ii), (iii) and (iv), 5. (a) 6. (b), 7. (b),
8. (b), 9. (d) 
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !174
GLOBAL STRATEGIC POSITIONING
Chapter 5
Global Strategic Positioning
Objectives
• The factors for making global supply chain integration effective.
• The identification of risks while securing the supply chain
• The rationale and challenges related to sourcing from low-cost countries.
Structure
5.1 Global Supply Chain Integration
5.2 Supply Chain Security
5.3 Global Sourcing
5.4 Summary
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Introduction
In a global and competitive environment, supply chain relationships and

processes must be continuously integrated and aligned with strategy. The
objective should be to improve the efficiency and effectiveness of supply
chains to create value for final consumers. Global Supply Chain
Management (GSCM) focuses on planning and forecasting, purchasing,
product assembly, moving, storing, and keeping track of a product as it
flows around the world from suppliers and producers to distributors to
retailers and on to you and other consumers.
GSCM makes it possible to build and deliver products better, faster, and
cheaper. Supply chain managers have a tremendous impact on the success
of an organization. These managers are engaged in every facet of the
business process – planning, purchasing, production, transportation,
storage and distribution, customer service, and more! In short, these
managers are the "glue" that connects the different parts of the
organization. Their performance helps organizations control expenses,
boost sales, and optimize profits.
5.1 Global Supply Chain Integration
Global integration goes beyond worldwide presence to provide the visibility

and control needed to respond rapidly to global market dynamics and
achieve the highest level of operating efficiency and cost-effectiveness.
(Figure 5.1).
Whereas an effective logistics system is important for domestic supply

chain integration, it is absolutely essential for successful global
manufacturing and marketing. Domestic logistics focuses on performing
value-added services to support supply chain integration in a somewhat
controllable environment.
Global logistics must accommodate operations in a variety of different

national, political, and economic settings while also dealing with increased
uncertainties associated with the distance, demand, diversity, and
documentation of international commerce. Like traditional, supply chain
management, the underlying factors behind the trend are reducing the
costs of procurement and decreasing the risks related to purchasing
activities. The big difference is that global supply chain management
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involves a company's worldwide interests and suppliers rather than simply

a local or national orientation. Because global supply chain management
usually involves a plethora of countries, it also usually comes with a
plethora of new difficulties that need to be dealt with appropriately. One
that companies need to consider is the overall costs. While local labor costs
may be significantly lower, companies must also focus on the costs of
space, tariffs, and other expenses related to doing business overseas.
Additionally, companies need to factor in the exchange rate.
In the past, an enterprise could survive by operating with a unique North

American, European, or Pacific Rim (China, India, Hong Kong, Japan,
Korea, Singapore, and Taiwan) business strategy. While regionalization
remains viable for some firms, those which desire to grow and prosper are
facing the challenges of globalization. Strategic business initiatives must
change as a firm and its supply chain become progressively more global.
The migration from a fragmented, multi-vendor environment to a single
supply chain partner has significantly enhanced global execution and
visibility, resulting in lower operating costs, faster time-to-market and
reduced risk for the client.
!
Figure 5.1: Global Supply Chain Integration
The effects of a company seeking globalization are far reaching. Managing

the “supply chain” becomes a key focus as international operations must
be able to source equivalent supplies anywhere in the world. Motwani et al.
(1998) believe that global supply chain management “allows corporations
to take advantage of diversity in the international environment by
recognizing and exploiting regional differences’’. Business information,
including order details, inventory levels, directives and product changes,
must be communicated to the people who need it, when they need it,
wherever they are. A good example of a global attitude is at Ford Motor
! !177
Company. Their “global car” concept consists of a basic engineering design,

accompanied by regional variations to suit local tastes.
5.1.1 Global Economy and Logistics
International trade is becoming a bigger part of the world's economic

activity. Supply chains success is closely linked to the appropriate use of
transportation. Supply chain also use responsive transportation to
centralize inventories and operate with fewer facilities. To understand the
transportation in a supply chain, it is important to consider the perspective
of all parties involved. A carrier makes investment decisions regarding the
transportation equipment (locomotives, trucks, airplanes, etc.) and in some
cases infrastructure (rail) and then makes operating decisions to try to
maximize the return from these assets.
A shipper, in contrast, uses transportation to minimize the total cost

(transportation, inventory, information, sourcing and facility) while
providing an appropriate level of responsiveness to the customer.
Supply chain use a combination of various modes like air, package carriers,
trucks, rails, water, pipelines and Intermodal for the transportation
purpose. Logistics firms operate with considerable specialized knowledge
on the movement of goods, the use of information, and the organization of
supply chains, all of which are particularly complex in the case of
international shipments. The logistics industry also plays a pivotal role in
the contemporary global economy by enabling cross-border coordination of
production and making possible the seamless flow of commodities globally.
In terms of complexity global operations, in contrast to domestic, are

characterized by increased uncertainty and decreased ability to control.
Uncertainty results from greater distances, longer lead times, and
decreased market knowledge.
These unique challenges complicate development of an efficient and

effective global supply chain strategy. Fortunately, there are forces that
both drive and facilitate globalization and necessitate borderless logistics
operations. 
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Activity A
• Why global operations are considered complex in supply chain

integration?
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5.1.2 International Operations: Local Presence
The second stage of international development is characterized by

establishment of operations within a foreign country. Internal operations
include combinations of marketing, sales, production, and logistics.
Establishment of local facilities and operations serves to increase market
awareness and sensitivity. This is often referred to as gaining local
presence. At the outset of a local presence strategy, foreign operations
typically use parent company management and personnel, and practice
home country values, procedures, and operations.
While firms and supply chains are trying to increase product velocity in the
supply chain to lower cost by reducing product storage time and damage,
the transit times and border delays characteristic of global logistics
constrain product velocity. Extended transit times and exposures in-transit
increases the product risk for intentional or unintentional damage as well
as reducing velocity and ultimate flexibility. However, over time, business
units operating within a foreign market area will adopt local business
practices.
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Activity B
• What are the complexities involved for a company which is doing its
business overseas?
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5.1.3 Globalization: The Stateless Enterprise
These are enterprises that effectively make decisions with little regard to
national boundaries. In these, even though historically they have a country
foundation, a high percentage of its sales, ownership and assets are
outside the country of origin, e.g., ABB Switzerland, ICI Britain, Nestle
Switzerland, Phillips Netherlands, etc.
Managers are able to identify and evaluate alternative strategies and have
the authority for implementation. Search for alternative materials, logistics
service providers, manufacturing plants, warehouses, customer alliances,
etc. There is a need to develop and implement flexible systems and
procedures. Product sourcing and marketing decisions can be made across
a wide range of geographical alternatives. Systems and procedures are
designed to meet individual country requirements and are aggregated as
necessary to share knowledge and for financial reporting. It is actually
through the levels of global integration that the global logistics
perspectives vary.
The Stateless Enterprise contrasts sharply to operations guided by either

an export/import or international perspective.
Activity C
• Write a short note on a ‘Stateless enterprise’.

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5.1.4 Managing the Global Supply Chain
With increased globalization and offshore sourcing, global supply chain

management is becoming an important issue for many businesses. Like
traditional supply chain management, the underlying factors behind the
trend are reducing the costs of procurement and decreasing the risks
related to purchasing activities. The big difference is that global supply
chain management involves a company's worldwide interests and suppliers
rather than simply a local or national orientation.
Because global supply chain management usually involves a plethora of

countries, it also usually comes with a plethora of new difficulties that need
to be dealt with appropriately. One that companies need to consider is the
overall costs. While local labor costs may be significantly lower, companies
must also focus on the costs of space, tariffs, and other expenses related
to doing business overseas. Additionally, companies need to factor in the
exchange rate. Obviously, companies must do their research and give
serious consideration to all of these different elements as part of their
global supply management approach. Time is another big issue that should
be addressed when dealing with global supply chain management. The
productivity of the overseas employees and the extended shipping times
can either positively or negatively affect the company's lead time, but
either way these times need to be figured into the overall procurement
plan. Other factors can also come into play here as well. For example, the
weather conditions on one side of the world often vary greatly from those
on the other and can impact production and shipping dramatically. Also,
customs clearance time and other governmental red tape can add further
delays that need to be planned for and figured into the big picture. Besides
contemplating these issues, a business attempting to manage its global
supply chain must also ask itself a number of other serious questions. First,
the company needs to make decisions about its overall outsourcing plan.
For whatever reason, businesses may desire to keep some aspects of
supply chain closer to home. However, these reasons are not quite as
important as other countries advance technologically. For example, some
parts of India have now become centers for high-tech outsourced services
which may once have been done in-house only out of necessity. Not only
are provided to companies by highly qualified, overseas workers, but they
are being done at a fraction of the price they could be done in the United
States or any other Western country. Another issue that must be
incorporated into a global supply chain management strategy is supplier
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selection. Comparing vendor bids from within the company's parent-

country can be difficult enough but comparing bids from an array of global
suppliers can be even more complex. How to make these choices is one of
the first decisions companies must make, and it should be a decision firmly
based on research. Too often companies jump on the lowest price instead
of taking the time to factor in all of the other elements, including those
related to money and time which were discussed above. Additionally,
companies must make decisions about the number of suppliers to use.
Fewer supplies may be easier to manage but could also lead to potential
problems if one vendor is unable to deliver as expected or if one vendor
tries to leverage its supply power to obtain price concessions. Finally,
companies who choose to ship their manufacturing overseas may have to
face some additional considerations as well. Questions regarding the
number of plants that are needed, as well as the locations for those plants
can pose difficult logistical problems for companies. However, it often helps
to examine these issues in terms of the global supply chain. For example, if
a business uses a number of vendors around Bangalore, India than it may
make sense to locate the manufacturing plant that would utilize those
supplies in or around Bangalore as well. Not only will this provide lower
employee costs, but overall shipping and tariff expenses should also be
reduced. This would then save the company’s money.
Activity D
• What are the challenges faced by companies in a global supply chain

management?
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Transportation
The procurement and distribution of goods has been significantly influenced

by the globalization and liberalization of markets. With the advent of trade
liberalization and the emergence of economies such as Brazil, Russia, and
India, global supply chains within many industries have and continue to
change drastically. Distribution and supply networks must be reconfigured
and re-optimized as a result of mergers and acquisitions taking place in
this new economic environment.
Transportation plays a central role in global supply chain operations,

moving inbound materials from supply sites to manufacturing facilities,
repositioning inventory among different plants and distribution centers, and
delivering finished products to customers. Benefits that should result from
world-class operations at the points of supply, production, and customer
locations will never be realized without the accompaniment of excellent
transportation planning and execution. Having inventory positioned and
available for delivery is not enough if it cannot be cost effectively delivered
when and where needed.
To remain competitive on a truly global stage, companies are looking for

new partners that can generate savings in operating costs and they are
finding them in Asia, notably. This practice, sometimes called "offshoring"
or "global sourcing" often results in trading savings in operating cost for
increases in transportation, inventory and handling costs. Companies are
also increasingly focusing on their core competencies, be it the
manufacturing or assembly of goods (e.g., the auto industry) or the design
and marketing of products (e.g., Nike). Those core competencies seldom
include the supply and distribution of goods, and these activities are
therefore increasingly outsourced to third-party organizations that
specialize in logistics, namely 3PLs.
Activity E
• What do you understand by the terms “offshoring” and “global sourcing”?

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Operational Considerations
Operations and Supply Chain services focus on helping customers develop

integrated operations by identifying and quantifying improvements to
enable strategic change necessary to achieve competitive advantage and
value for the organization from suppliers to the customer.
There are a number of unique operational considerations in a global

environment. First, international operations typically require multiple
languages for both product and documentation. A technical product such as
a computer or a calculator must have local features such as keyboard
characters and language on both the product itself and related manuals.
From a logistics perspective, language differences dramatically increase
complexity since a product is limited to a specific country once it is
language customized.
Although English is the general language of commerce, some countries

require that transportation and customs documentation be provided in the
local language. This increases the time and effort for international
operations since complex documents must be translated prior to shipment.
These communication and documentation difficulties can be somewhat
overcome through standardized electronic transactions.
The second operational difference in global commerce is unique national

accommodations such as performance features, power supply
characteristics, and safety requirements. While they may not be
substantial, the small differences between country requirements may
significantly increase required SKUs and subsequent inventory levels.
The third operating difference is the sheer amount of documentation

required for international operations. While domestic operations can
generally be completed using only an invoice and bill of lading,
international operations require substantial documentation regarding order
contents, transportation, financing, and government control.
The fourth operating difference is the high incidence of countertrade and

duty drawback found in some international situations. While most
established firms prefer cash transactions, countertrade is important.
Countertrade, in essence, is when a seller agrees to take or purchase
products from the buyer as part of a sales agreement.
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Activity F
• What are the limitations encountered in international operations?

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Systems Integration
Global Supply Chain Integration is, above all, about integrating data feeds
to provide a holistic view of the system performance. The choice of a
centralized or distributed SC infrastructure should not be driven by
technology but rather by real business needs.
Operational integration requires the ability to route orders and manage

inventory requirements electronically throughout the world. Development
of supportive technology integration represents substantial capital
investment.
Alliances
A final difference in international operations is the extended role of third-

party alliances. While alliances with carriers and specialized service
suppliers are important in domestic operations, they are essential in
international commerce. Without alliances, it would be necessary for an
enterprise operating internationally to maintain contacts with retailers,
wholesalers, manufacturers, suppliers, and service providers throughout
the world. International alliances offer market access and expertise and
reduce the inherent risk in global operations. The number of alternatives
and the complexity of the globalization require increased use of alliances.
Globalization is an evolving frontier that is increasingly demanding supply
chain integration. As the international businesses develops, the demand for
logistical competency increases due to longer supply chains, less certainty,
and more documentation. While the forces of change push toward
borderless operations, supply chain management still confronts market,
financial, and channel barriers. The barriers are exemplified by distance,
demand, diversity, and documentation. The challenge is to position an
! !185
enterprise to take advantage of the benefits of global marketing and

manufacturing by developing world-spanning logistical competency.
Activity G
• What is the importance of system integration especially in international

alliances?
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5.2 Supply Chain Security
While globalization, extended supply chains, and supplier consolidation

offer many benefits in efficiency and effectiveness, they can also make
supply chains more brittle and can increase risks of supply chain
disruption. Historic and recent events have proven the need to identify and
mitigate such risks. The March 2011 Tohoku earthquake and subsequent
tsunami in Japan showed how one event can disrupt many elements of
global supply chains, including supply, distribution, and communications. In
extreme cases, a single event at one location can severely damage an
enterprise or even cause it to leave an industry.
Effective supply chain risk management (SCRM) is essential to a successful

business. It is also a competence and capability many enterprises have yet
to develop. In some areas, both problems and practices are well defined.
In others, problems are defined, but practices are developing. In still other
areas, both the definition of the problems and the practices needed to
address them are developing. In sum, SCRM is an evolving field.
Approaches for identifying, evaluating, treating, and monitoring supply

chain security will differ across individual enterprises depending on their
industry, the nature of their extended supply chains, and their tolerance for
risk (or risk appetite). Therefore, rather than prescribing a specific
approach to SCRM, there are guidelines and possible approaches an
organization may wish to consider, including examples of tools other
organizations have used. Specific enterprises will adapt the concepts to fit
! !186
their unique characteristics and expand the depth and breadth of the
processes to meet the requirements of their organizations.
Enterprises may inadvertently overlook internal risks. These may include

those posed by a rogue employee, as well as those posed by inadequate
policies, strategies, or organizational structures. The external environment
in which an enterprise, and its suppliers, must work will also pose differing
risks. For example, some suppliers will face meteorological risks, while
others, because of their distance, may have greater transportation risks.
Mapping its supply chain can help an enterprise identify the risks it faces
and how best to prioritize and address them. To prioritize and address
risks, firms will need to identify criteria for determining what may pose a
risk to its operations. One potential starting point is the supply chains for
the products most affecting firm’s profitability.
Once a firm understands how to identify risks, it may undertake risk

identification and assessment, which includes risk identification, risk
analysis, and risk evaluation. Risk identification may entail using a list of
common risks including external risks such as natural disasters, accidents,
sabotage, or labor uncertainty; supplier risks such as production problems,
financial issues, or subcontractor problems; distribution risks such as cargo
damage, warehouse inadequacies, or supply pipeline constrictions; and
internal risks such as personnel availability or facility unavailability. Such
process will also involve prioritizing risks by the threat (as measured by
likelihood and consequence) they can pose to a firm’s operations.
Once a firm has identified and prioritized the risks that it faces, it can
devise risk treatment plans. This includes measures to protect the supply
chain from risks, plans to respond to events that these risks may cause,
and plans to continue operations in the face of disruptions and fully
recovering from them. This may also involve determining ways to measure
risks and the effectiveness of plans to limit them or to respond to
disruptions. Enterprises must also undertake continual communication and
consultation as well as monitoring and review throughout this process.
Monitoring and review entails not only evaluating the effects of risk
treatment but also maintaining the plan and responding to changes in
suppliers, processes, and regulation affecting elements of the supply chain.
It also entails continually identifying opportunities for improvement.
! !187
!
Figure 5.2: Supply Chain Risk Mitigation
Activity H
• How essential is it for organizations to secure their supply chains?

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5.2.1 Security Solution Design
The design of sustainable logistic systems not just depends on policies of

transport and logistics service providers, but also crucially on decisions
made by shippers and manufacturers (local versus global, product
modularity, reuse of materials and components, item and package
integrity) as well as by authorities’ and governmental regulations. The
increasing awareness of society (i.e., the final consumer) on the wide
range of activities and operations behind product and services can lead
consumers toward more responsible and sustainable choices, with crucial
impacts and effects on the sustainability of the whole supply chain.
Currently, the integration of the transport and logistics processes of supply

chain participants is limited by the complexity of current systems
technologies, the lack of communications and information standards, high
costs, conflicting regulatory requirements, incompatible business
processes, and outdated business practices.
Improvements in information and computing technologies, via

simplification and standardization, business practice revisions and business
process harmonization will allow stakeholders in the transport and logistics
domain to more cost-effectively integrate their operations, manage the
complexities of their supply networks, and improve asset utilization and
lower social and environmental impacts. In addition, through better
understanding of how these networks are used (through better data
analytics), additional improvements in efficiency and operations should be
achievable. Deploy innovative security technologies such as next
generation scanning technology, container security devices, and tracking
and tracing technologies in less-disruptive ways, results in minimum
disturbance of supply chain processes and minimum impact trade
transaction costs.
There is a continuous need within logistics to evaluate areas for

improvement and identify vulnerabilities before they are exposed. Analysis
of health and safety and regulatory compliance is an ongoing duty of care
to ensure a safe environment for both employees and suppliers operating
across the supply chain. IP based technologies such as video surveillance
and access control offer vital support in proactively monitoring staff
handling of goods and containers, while also ensuring site or perimeter
access granted only to those with the necessary credentials.
! !189
!
Figure 5.3: Security Solution and Design
5.3 Global Sourcing
Several factors have made crafting a supply chain and sourcing strategy a
central focus for firms, including rapid changes in demand for products and
services, the globalization of the economy, and the availability of advanced
planning and communication tools for coordinating the activities of supply
chain participants.
Majority of companies today strive to harness the potential of global

sourcing in reducing cost. Hence, it is commonly found that global sourcing
initiatives and programs form an integral part of the strategic sourcing plan
and procurement strategy of many multinational companies.
Common examples of globally sourced products or services include: labor-

intensive manufactured products produced using low-cost Chinese labor,
call centers staffed with low-cost English speaking workers in the
Philippines and India, and IT work performed by low-cost programmers in
India and Eastern Europe. While these examples are examples of low-cost
country sourcing, global sourcing is not limited to low-cost countries.
! !190
5.3.1 Low-cost Country Sourcing (LCCS)
Low-cost country sourcing (LCCS) is procurement strategy in which a

company sources materials from countries with lower labor and production
costs in order to cut operating expenses.
Low-cost country sourcing has grown significantly, especially in the current

economic scenario of intense competition and spiraling raw material costs
in the manufacturing sector. Great value can be realized from a strategic
plan to source products and services from these countries by using global
sourcing services. Countries which offer a low-cost environment and are
considered to be ideal for sourcing opportunities are China, South East Asia
(especially Vietnam and Thailand) India, Brazil and Turkey. Implementing
programs in these economically emerging regions has helped companies
across the world grow their revenues.
Although cost savings remains the top reason for companies to focus on
emerging markets and LCCR, the other reason is the competitive edge,
which these companies can enjoy. They can successfully carve substantial
markets for themselves by offering the products in the local markets as
well.
Activity I
• How does sourcing from suppliers of low-cost countries help in global

competitiveness?
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5.3.2 Low-cost Country Sourcing (LCCS) – Challenges
In the current economic climate of spiraling costs and intense competition

in almost every market segment, the question facing procurement
executives is not whether to source goods and/or services from low-cost
countries, but what to source, how much of it, and when to start. To start
with, companies should consider what their core competences are, and
consider the risk of, e.g., supply interruptions, cost variations stemming
from currency fluctuations, and issues related to intellectual property.
While the advantages of low-cost sourcing might entice worldwide

companies, only experienced procurement professionals can warn you
about potential pitfalls and the obstacles that might prevent them from
achieving the desired benefits. Major risks when sourcing in low-cost
countries are unreliability of quality and delivery. The increased
globalization of supply chains and the prevalent use of subcontract
manufacturing and offshore sourcing can potentially lengthen lead times
and hence lead to a loss of competitiveness.
Apart from the hunt for capable suppliers, a number of cultural and political
differences might keep companies away from establishing contacts in the
country they choose. Language remains a major issue and is accompanied
by the problems related to norms, standards and specifications which you
want to convey to the supplier. Labor quality, business license limitations,
project management challenges and technical capabilities in the supply
base also play an important role in determining LCC sourcing success.
Although legislations in most of these countries are evolving rapidly to
protect copyrights and patents, companies will need to be warned about
IPR (International Property Rights) risks when you are choosing vendors in
any of these nations.
Activity J
• What are the risks involved in low-cost country sourcing?

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5.3.3 Sourcing Guidelines
A manufacturing company should consider opportunities to improve

efficiency at home and not only consider the offshore alternative in
isolation. Furthermore, products should always be designed so that
production costs can be minimized.
It is also important to separate the offshore decision from the outsourcing

question. As Preston (2004) argues, to go offshore does not automatically
mean outsourcing. When planning for a change, managers should separate
the “what” question from the “how” question. For some companies, it could
be better to run the factory by themselves in the foreign country. The
economics of different alternatives must therefore be assessed and core
activities identified.
To balance the risks in different countries, the authors suggest a portfolio

approach where a large number of criteria are considered; maturity and
stability of the nation’s infrastructure, political characteristics, size of the
domestic market and local demand, currency risk, climate and weather
patterns, language skills, management training, and cultural
characteristics. Furthermore, long-term trends that may affect the criteria
should be considered.
Furthermore, there is a need for further understanding of supply chain cost

trade-offs between cost and flexibility. ‘An understanding of the relative
levels of premium transportation costs required to sustain supply-chain
agility and inventory levels in the face of disruptions is an important
research requirement.’ (Blackhurst et al., 2005).
Building trust in relationships appears to be an important requirement for

successful global sourcing. This is also discussed by Spekman and Davis
(2004), who argue that the key to managing risk effectively in a supply
chain is trust building between supply chain members. For example,
mitigating risk through increased visibility requires that the supply chain
members are willing to share information. Trust is needed for this.
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Lee and Wolfe (2003) suggest six risk mitigation strategies:
1. Comprehensive tracking and monitoring
2. Total supply chain network visibility
3. Flexible sourcing strategies (i.e., single sourcing is perhaps not always

good)
4. Balanced inventory management (a buffer can sometimes be good – JIT

not always the solution)
5. Product and process design (e.g., postponement)
6. Demand based management (e.g., Dell sells only what is available)
These models provide a comprehensive list of factors to consider when

companies source their products or services globally and help us
understand the concept of global sourcing.
Activity K
• What are the difficulties faced by companies who source products

globally?
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5.4 Summary
Global operations are becoming more of the norm for logistics and supply
chain executives. Decisions regarding global sourcing and marketing
require more complex trade-off analyses than traditionally required for
domestic logistics. Both the quantitative and qualitative factors are more
complex. While transportation, inventory, and warehousing costs are very
substantial for global operations, other cost components, including taxes,
tariffs, duties, documentation, and import restrictions, can also have a
substantial impact on true total cost. However, in addition to the
quantitative considerations, international operations introduce a number of
other variables that are much more difficult to quantify. Many of these
variables relate directly to logistics operations. The major qualitative
considerations include relationship management, infrastructure
consistency, production and transit reliability, and security. With increased
global marketing and manufacturing operations, logistics management
needs to be more involved in developing and implementing global
strategies.
1. What are the primary factors of an effective global supply chain

integration?
2. Discuss the logistics operational considerations for operating in a global

environment.
3. What is the importance of a supply chain in a global economy?
4. How do companies establish a local presence in a foreign country?
5. Discuss the rationale and challenges related to sourcing from low-cost

countries.
6. What is the “portfolio approach” as a guideline for sourcing?
7. How can risks be identified while securing the supply chain?
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1. Points mentioned below are examples of __________.

(i) Third party alliances
(ii) Maintain contacts with wholesalers, manufacturers, suppliers
and service providers
(iii) Inventory management
(iv) Integration of data
(a) Global transportation
(b) Domestic operations
(c) Global sourcing
(d) Global supply chain integration
2. Global supply chain involves __________.

(a) Quick response to global markets
(b) Dealing with uncertainties in local markets
(c) Integration of SC partners
(d) Managing overall costs diligently
3. Activities in the SC Risk Management can be categorised into

__________.
(i) Risk certification
(ii) Risk analysis
(iii) Risk evaluation
(iv) External risks
(a) (ii), (iii) and (iv)
(b) (i), (ii) and (iii)
(c) All of the above
(d) None of the above
4. Countries in which low-cost environment for sourcing are offered are in

__________.
(a) Europe
(b) Africa
(c) Far East
(d) Asia
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5. SC operations are far more complex in a domestic market than in a

global market.
(a) True
(b) False
Answers: 1.(d), 2. (a), (b) and (c), 3. (c), 4. (d), 5. (b) They are more
complex in a global market
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
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Chapter 6
Network Integration
Objectives
• The integration of Supply chain network.
• The various functions and activities required for successful

implementation of supply chain management systems.
• The importance of each functions in network integration.
Structure
6.1 Enterprise Facility Network

6.2 Location Decisions
6.3 Local Facilities
6.4 Warehouse Requirements
6.5 Total Cost Integration
6.6 Transportation Economics
6.7 Inventory Economics
6.8 Total Network Cost
6.9 Cost Minimization
6.10 Impact of GST on Logistic Companies
6.11 Threshold Service
6.12 Service Sensitivity Analysis
6.13 Inventory Model of Immediate and Delayed Delivery
6.14 Summary
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Introduction
The supply chain is a network of suppliers, factories, warehouses,

distribution centers and retailers through which raw materials are acquired,
transformed and delivered to the customer. Supply chain management is
the strategic, tactical and operational level decision-making that optimises
supply chain performance. The strategic level defines the supply chain
network, i.e., selection of suppliers, transportation routes, manufacturing
facilities, production levels, warehouses, etc. The tactical level plans and
schedules the supply chain to meet actual demand. The operational level
executes plans. Tactical and operational level decision-making functions are
distributed across the supply chain.
In order to optimise performance, supply chain functions must operate in

an integrated manner. But the dynamics of the enterprise and the market
make this difficult; materials do not arrive on time, production facilities fail,
workers are ill, customers change or cancel orders, etc. causing deviations
from plan. In some cases, these events may be dealt with locally, i.e., they
lie within the scope of a function. In other cases, the problem cannot be
"locally contained"; modifications across many functions are required.
Consequently, the supply chain management system must coordinate the
revision of plans/schedules across supply chain functions.
To exploit flexibility, an enterprise needs to achieve a high level of logistical

process integration. Integration is required at two operating levels. First,
the operating areas of logistics must be integrated across a network of
facilities supportive of market distribution, manufacturing, and
procurement requirements. Such network integration is essential if a firm
is using logistical competency to gain competitive advantage. Second,
integration must extend beyond a single firm by supporting relationships
across the supply chain.
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6.1 Enterprise Facility Network
The geographic placement of production facilities, stocking points, and

sourcing points is the natural first step in creating a supply chain. The
location of facilities involves a commitment of resources to a long-term
plan. Once the size, number, and location of these are determined, so are
the possible paths by which the product flows through to the final
customer. These decisions are of great significance to a firm since they
represent the basic strategy for accessing customer markets, and will have
a considerable impact on revenue, cost, and level of service. These
decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content,
distribution costs, production limitations, etc. Although location decisions
are primarily strategic, they also have implications on an operational level.
6.2 Location Decisions
In a discrete facility location problem, the selection of the sites where new
facilities are to be established is restricted to a finite set of available
candidate locations. It refers to choosing the locations for distribution
centers, warehouses, and production facilities to facilitate logistical
effectiveness and efficiency. The major factors influencing decisions are
markets and resource availability; most facilities are located near one or
the other. Labor and transport services are two other key factors in facility
location. Also, advantages in technology and communications have had
considerable influence on locational decisions in recent years.
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6.3 Local Facilities
Facility location has a long-term impact on the supply chain and must be
part of the firm’s strategy. Companies can locate anywhere in the world
due to increased globalization, technology infrastructure, transportation,
communications, and open markets. Location still matters as clusters in
many industries show that innovation and competition are geographically
concentrated.
Customers fell that unless a supplier maintained inventory within the local
market area it would be difficult, if not impossible, to provide consistent
delivery. This perception, commonly referred to as the local presence
paradigm, resulted in inventories being maintained in a numerous local
markets. Some firms went so far as to have full-line inventory warehouses
located near all major sales markets.
It is always difficult to break tradition which became a part of successful

economic strategy. However, in 70-80 years, economic aspects and the
risks connected with the concept of local presence, have been subjected
radical revision. To it have pushed two large technological changes. First,
thanks to development and expansion of a complex of transport services
reliability and predictability of delivery have much more increased. Delivery
of cargoes within days from the warehouses placed on distance of
800-1000 miles from destination became usual practice. As a rule, the less
than distributive warehouses serve the certain market, the less stocks it is
required for maintenance of a basic level of service.
Secondly, new information technology has reduced time necessary for

revealing and transfer of inquiries of consumers. New technologies have
opened popular economic possibilities for the organization of continuous
control over movement of vehicles and by that have allowed to adjust
reliable and exact information interchange about deliveries.
Thus, and modern ways of transportation, both information technology,

and principles of economic storekeeping simultaneously induce to
reduction, instead of to increase in number of the distributive warehouses
used for service of consumers in this or that geographical area. That fact
that similar structure of logistical capacities contradicts the settled dogmas
about presence in the local market, often disturbs to acceptance of the
most effective logistical decisions. In many cases, conviction of consumers
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that quality of service is guaranteed only by presence in the market, still

pushes to decentralization of stocks.
Activity A
• What is the importance of transportation in relevance to location of

plants and warehouses?
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6.4 Warehouse Requirements
When it comes to choosing the right warehouse management system

(WMS) for your business, it is important to understand your warehouse
needs and the benefits of having an integrated WMS before starting the
selection process.
Warehouse efficiency is a critical success factor to effectively managing

your supply chain and achieving peak performance. Implementation of the
latest technologies can significantly improve warehouse operations,
employee productivity and customer satisfaction. By installing the right
system and realigning how your warehouse interacts with your employees,
customers, and vendors, you can streamline your warehouse operations
while achieving a high return on investment.
It allows your company to benefit from increased inventory handling

accuracy and reduced carrying costs associated with obsolete and slow-
moving stock. Because of specialized materials handling and inventory
process requirements, warehouses typically specialize in performing either
supply or demand facing services. Warehouses committed to supporting
manufacturing are typically located close to the factories they support; in
contrast, warehouses dedicated to marketing distribution are typically
strategically located throughout the geographical market area serviced.
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The availability of new technologies and increased market demands are

driving rapid change in many industries as well as trends such as rising
customer expectations, increased competitive pressure, and dropping
margins. Introducing new or improved automation management
technology to your warehouse can be a powerful tool for increasing
competitiveness in a challenging market.
Activity B
• What are the functions of a warehouse in the logistical systems?
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6.4.1 Procurement Drivers
Procurement, also known as purchasing, is the process of acquiring raw

materials, components, products, services, and other resources necessary
either for the production processes themselves or for the support of
production processes. Procurement processes ensure that supplies are
available in the right place, in the right quantity, and at the right time.
Procurement drivers center on using warehouses to help purchase

materials and components at the lowest total cost. Sophisticated
purchasing executives have long realized that the combination of purchase
price, quantity discount, payment terms, and logistical performance is
required to achieve lowest delivered cost. In an effort to develop and
support improved working relationships, most firms have reduced the
number of suppliers they do business with. The logic is to develop a limited
number of relationships with suppliers who can be operationally integrated
into a firm's supply chain. The goals of relationship buying are to eliminate
waste, duplication, and unplanned redundancy. In an effort to improve
overall operating efficiency, life cycle considerations have become
prominent in purchase decisions. This relational dynamic of working with
limited suppliers is based on a cradle-to-grave philosophy. The relationship
is positioned to focus on all aspects of life cycle spanning from new product
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development to reclamation and disposal of unused materials and unsold

product inventory.
Such a life cycle focus is the result of distinct buying practices that directly
impact the nature and functionality of supply faced warehousing. Value-
added services related to procurement are increasingly being de-bundled
from the purchase price. Such de-bundling facilitates functional absorption
and spin-off between manufacturers and their suppliers. There is also a
trend toward more response-based business strategies which is redefining
expectations concerning supplier support and participation in the value-
added process. The result is new structural relationships, such as tier one
suppliers and lead facilitators.
Finally, the seasonality of selected supplies, opportunities to purchase at

reduced prices, and the need to rapidly accommodate manufacturing
spikes continue to make selected warehousing of materials a sound
business decision.
Activity C
• Describe the role of a Procurement Manager.
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6.4.2 Manufacturing Drivers
There are two types of warehouses in the manufacturing process:

production-and sales-focused warehouses. Semi-finished products are
stored in production-oriented warehouses. These warehouses are created,
in particular, as a result of insufficient synchronization between successive
production processes. Finished parts or component groups are located in
sales-focused production warehouses. Such warehouses are created as the
result of strategic production decisions concerning whether and to what
extent parts for order-related, finished products should be produced and
temporarily stored before an order is received.
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In addition, the different types of warehouses fulfill different functions.

Manufacturing-focused warehouses perform a balancing, sorting and
security function. Sales-focused warehouses fulfill a flexibility, delivery-
time-reducing and substitution function. If you run a manufacturing
business, an on-site central warehouse can make use of existing land and
put your production facility close to your inventory and distribution center,
removing the need to transport goods from one to the other. A single
warehouse can represent major savings, especially if you choose a location
where land or existing warehouse space is inexpensive and one that is
central to your customers for faster and easier shipping.
The primary determinant of the warehousing required to support

manufacturing is the specific production strategy being implemented. The
extent of demand faced warehousing can be directly linked to the support
requirements of each manufacturing strategy. In a general sense, MTO
(make to order) manufacturing strategies require supply facing
warehousing support but little, if any, demand facing storage. Conversely,
MTP (make to plan) manufacturing strategies, which focus resources to
achieve maximum manufacturing economy of scale, require substantial
demand facing warehouse capacity.
Activity D
• What are the advantages of having a warehouse at the point of

manufacture?
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6.4.3 Market Distribution Drivers
Market support warehouses create value by providing inventory

assortments to wholesalers and retailers. A warehouse located
geographically close to customers seeks to minimize inbound
transportation cost by maximizing consolidation and length of haul from
manufacturing plants followed by relatively short outbound movement to
final destination customers, faster throughput and more workflow agility in
their warehouses, and they are able to satisfy customer demands while
lowering logistics costs. The geographic size of a market area served from
a support warehouse depends on the desired service speed, size of average
order, and cost per unit of local delivery. A large number of market
distribution warehouses are operated as public or contract facilities by
third-party logistics service providers. Regardless of who operates the
warehouse, the facility exists to provide inventory assortment and
replenishment to customers. A warehouse is justified if it offers a way to
achieve a competitive service or cost advantage.
6.4.4 Rapid Replenishment
Market distribution warehouses have traditionally provided assortment of

products from varied manufacturers and various suppliers for retailers. A
retail store typically does not have sufficient demand to order inventory in
large quantities directly from wholesalers or manufacturers. A typical retail
replenishment order is placed with a wholesaler who sells a variety of
different manufacturer products.
Market support warehouses are common in the food and mass

merchandise industries. The modern food distribution warehouse usually is
located geographically near the retail stores it services. From this central
warehouse, consolidated product assortments can rapidly replenish retail
inventories because of the close geographical proximity. Large retail stores
may receive multiple truckloads from the warehouse on a daily basis.
Location of the warehouse within the market served is justified as the least
cost way to rapidly replenish an assortment of inventory to either an end
customer or a retailer.
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Activity E
• Why are warehouse sometimes located near the place of markets?

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Market-based ATO
Assemble-to-order is a manufacturing strategy where parts and sub-

assemblies are produced-to-stock, while the final assembly of products is
delayed until customer orders have been received. This strategy allows
manufacturers to achieve a high degree of product variety and quick
product delivery while keeping low inventories. Companies also deploy a
strategy known as forward inventory deployment, which ensures that the
SKUs (stock keeping units) that account for the majority of sales revenue
are closest to key market demand points to minimize order turnaround
time which is an important competitive advantage. In other words, if 80+
% of the sales revenue is derived from a small subset of SKUs, then
position these SKUs closest to their demand points so that customers can
be serviced as quickly as possible.
Because of the highly competitive market, performance measures such as

order service level and fill rate have become the most critical performance
measures of assemble-to-order systems, and therefore, almost all research
efforts in studying assemble-to-order systems have somehow focused on
the effects of system parameters on order fulfillment.
An increasing amount of ATO operations are performed in market-

positioned warehouses as contrasted to centralized manufacturing
locations. Assembly in close proximity to major markets allows the benefits
of postponement while avoiding the high cost and time related to long-
distance direct shipment.
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Activity F
• What do you understand by forward inventory deployment?

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6.5 Total Cost Integration
Economic forces such as transportation and inventory determine a firm's

most appropriate network of warehouse facilities. This discussion identifies
cost trade-offs related to transportation and inventory followed by
integration to identify the least total cost facility network.
6.6 Transportation Economics
Transport economics is a branch of economics founded in 1959 by

American economist John R. Meyer that deals with the allocation of
resources within the transport sector. The key to achieving economical
transportation is summarized in two basic principles.
1. Quantity principle is that individual shipments should be as large as the

carrier can legally transport in vehicle.
2. Tapering principle is that large shipments should be transported

distances as long as possible.
Both these principles serve to spread the fixed cost related to

transportation over as many pounds and as many miles as possible.
Economies of transportation consolidation may justify establishment of a
single warehouse or may be achieved across a network of warehouses.
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Activity G
• Explain the quantity principle and tapering principle.
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6.6.1 Warehouse Justification
Though keeping inventory at any stage of the supply chain has well-known
costs, inventory and the warehouses that maintain stocks serve many
necessary purposes. Finished goods inventory ensures that customer
demand is met, regardless of market uncertainty and volatility in today’s
competitive environment. The same can be said for raw materials
warehouses that ensure that inputs are readily available for manufacturing.
Whether warehouses are truly necessary is becoming an issue of debate.
Information technologies and just-in-time delivery systems are reducing
the necessity of maintaining vast amounts of inventory. Fewer warehouses
must be utilized under these considerations, lessening the “evil”, costly
nature of their existence.
Economic benefits of warehousing occur when overall logistics costs are

reduced. For example, if adding a warehouse in a logistical system reduces
overall transportation cost by an amount greater than required investment
and operational cost, then total cost will be reduced. When total cost
reductions are achievable, the warehouse is economically justified. Five
basic economic benefits are: (1) consolidation and break bulk, (2)
assortment, (3) postponement, (4) stockpiling, and (5) reverse logistics.
Warehouse service can provide benefits through enhanced revenue

generation. When a warehouse is primarily justified on service, the
supporting rationale is that sales can be increased, in part, by such
logistical performance. It is typically difficult to quantify service return-on-
investment because it is difficult to measure. For example, establishing a
warehouse to service a specific market may increase cost but should also
increase market sales, revenue, and potentially gross margin. Warehouses
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can provide service as a result of spot stocking, full line stocking, product
support, and market presence.
The basic economic principle justifying establishment of a warehouse is

also transportation consolidation. Manufacturers typically sell products over
a broad geographical market area. The customer often perceives that
warehouses located close to their operations, having market presence, will
be more responsive to their needs. As a result, it is expected that nearby
warehouses will increase sales and gain market share as customers in the
vicinity choose the close, responsive warehouse operator. There is also the
promotional value of having a presence within a market.
Activity H
• Why would a warehouse be described as a “necessary evil”?

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6.6.2 Allocating Costs in a Collaborative Transportation

Procurement Network
Due to increased pressure to operate more efficiently and satisfy ever

increasing demand from customers for better service, companies are
forced to realize that suppliers, consumers, and even competitors can be
potential collaborative partners. Thus, many companies employ
collaborative practices such as group purchasing and capacity and
information sharing in order to reduce system-wide inefficiencies and cut
operational costs. Especially, recent developments in communications
technology enable companies to consider a range of opportunities that
become possible by collaborating with others.
In a traditional truckload logistics market, the shipper submits its freight

requests to several carriers and negotiates terms with them. These
requests consist of multiple lanes to be serviced. A lane corresponds to a
shipment delivery from the origin to the destination with a full truckload.
On the other hand, a carrier collects the freight requests from several
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shippers and offers prices based on its existing lane network and the lanes
it is anticipating to get by the time of service.
The shipper procures the transportation service from the carrier that offers
the lowest price for the shipper’s freight request. A key aspect that affects
the carrier’s operational cost is asset repositioning. Asset repositioning,
equivalently deadheading, is an empty truck movement from a delivery
location to a pickup location. Carriers often have to reposition their assets
to satisfy the demands of different shippers. Asset repositioning decreases
the capacity utilization of the carrier, which results in an increase in
operational costs.
Total transportation cost (Figure 6.1) will also initially decline as

warehouses are added to the logistical network. In actual operations, a
consolidation location can be a warehouse or a cross-dock facility offering
transportation break bulk. It is not necessary to stock inventory in a
warehouse to achieve the lowest transportation cost. The reduction in
transport cost results from consolidated volume shipments to the break
bulk location, coupled with short haul small shipments to final destination.
!
Figure 6.1: Transportation Cost as a Function of the Number of
Warehouse Locations
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If facilities are expanded beyond the maximum consolidation point, total

cost will increase, because the inbound volume capable of being
consolidated to each facility decreases. The increased frequency of smaller
inbound shipments results in a higher cost per hundredweight for
shipments into the facility. In other words, as the frequency of small
inbound shipments increases, total transportation cost increases.
6.7 Inventory Economics
Inventory refers to the stock of materials of any kind stored for future use,
mainly in the production process. Semi-finished goods, which are awaiting
use in the next process, or finished goods, which are waiting for sale, are
also included in this broad category. But these are practically idle
resources. Thus, inventories are materials/resources of any kind having
some economic value, either awaiting conversion or use in future.
Inventory is a key determinant of profitability. Inventory velocity turns

assets into profits. The faster inventory turns, the greater the profitability.
Inventory is the key issue to supply chain management success.
Customers demand that their orders be shipped complete, accurate and on
time. That means having the right inventory at the right place at the right
time. Excess of inventory within the pipeline increases the overall working
capital requirements of the pipeline and places a large cost burden on the
agents of the chain. The levels of inventory need to be reduced throughout
the logistics pipeline, which will lead to an effective operation.
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Role and Importance of Inventory
Inventory is critical to supply chain management because it directly

impacts both cost and service. Certain amount of inventory is inevitably
required somewhere in the chain to provide adequate service to the end
customer, as demand is mostly uncertain and it takes time to produce and
transport product. Inventory typically generates an incremental cost of
20% to 40% per year for the company. Increasing supply chain inventories
typically increases customer service and consequently revenue, but it
comes at a higher cost.
Management of inventory is a powerful driver of financial performance.

Improper management of inventory leads to slow growth and pressure on
profitability. Thus, companies aim at improving the efficiency of inventory
cycle. This helps the firm from locking up of capital, which can be invested
elsewhere, and improve financial performance and create competitive
advantage in delivering goods at lower prices.
Today, inventory investment is viewed as a supply chain cost driver rather

than a material asset. Hence, a lean supply chain operating on material
requirement planning (MRP), distribution requirement planning (DRP), or
Just-in-time (JIT) system are preferred to ensure maximum inventory
turns (ratio of sales to average inventory), reduction of cost on inventory
investments, and enhancement of the bottom line and return on
investments.
Reasons for Carrying Inventories
Inventory management is an area which has strategic importance in

logistics operation and thus impacts the efficiency and effectiveness of the
overall supply chain system. In order to get over the uncertainties in
demand and supply, goods need to be kept in stock. This is because the
cycle of production and consumption never matches. However, higher
inventory levels will affect the bottom line of the company. It is important
to strike a balance between the two extreme goals of lower cost and higher
levels of customer service, as it is a high risk and high impact area.
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Inventory level in a logistical system directly relates to the location

network. The framework for planning inventory deployment is the
performance cycle. Although one element of the performance cycle is
transportation, which provides spatial closure, the key driver of inventory
economics is time. The forward deployment of inventory in a logistical
system potentially improves service response time. Such deployment also
increases overall system inventory, resulting in greater cost and risk.
Inventory consists of:

• Base stock
• Safety stock
• In-transit stock
6.7.1 Base Stock
As it relates to inventory control, base stock is the minimum inventory that

must be maintained in order for a business to operate with maximum
efficiency. Sometimes known as normal stock, the idea is to keep the
inventory as small as possible, thus reducing storage expenses and also
tax liability. At the same time, keeping the base stock within reason
requires creating an ordering schedule that ensures that essential stock,
such as raw materials and replacement parts for operating machinery,
always arrive before those resources are completely exhausted. Doing so
means there is no interruption in production due to a lack of stock, and no
profits lost because something essential was not on hand when required.
One of the most important concepts in maintaining a proper base stock is

known as usage. In this setting, usage is simply understanding how quickly
a business operation consumes a given stock item. The idea is to maintain
enough on hand to meet that need, but also to reorder that item so that
new units are received just before they are needed.
6.7.2 Safety Stock
It is a stock that is kept on hand as a buffer in the event of an expected

problem with supply or an increase in demand. Companies use supplies of
safety stock to reduce the risk that they will sell out and not have stock
available for customers who want to buy it. Calculating the amount of stock
to keep in the form of reserve inventory is a delicate balance because
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companies do not want to keep unused stock on hand, but they also do not
want to run short.
With a well-organized inventory system, companies know approximately

what the demand levels are like under normal circumstances, and they
know about the lead time required to get new supplies in. When stock falls
below a certain level, an order can be sent out to refill it. By the time the
order arrives, the stocks are usually critically low and the new stock bumps
the levels back up to ensure that enough will be available.
Activity I
• Why are safety stocks or buffer stocks necessary?

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6.7.3 In-transit Inventory
In-transit inventory generally refers to the goods that have not yet made it
from one company to another. This wholesale-to-retail transaction can
sometimes take a significant amount of time to occur, especially when it
involves the shipping of a large quantity of goods overseas from a
manufacturer to either a wholesale supplier or directly to a retailer.
Transit inventory can sometimes create accounting and inventory

conundrums for companies that fail to effectively track items being shipped
from one location to another. Often referred to as "inventory in transit,"
these goods are typically the goods being sold from one company to
another, many times from a wholesaler to a retailer who will then resell the
items.
Technically, goods in transit belong to the party holding legal ownership.

Ownership depends on the F.O.B. terms. Goods sold F.O.B. destination do
not belong to the purchaser until they arrive at their final destination.
Goods sold F.O.B. shipping point become property of the purchaser once
shipped by the seller. (Figure 6.2).
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Therefore, when determining the amount of inventory owned at year end,

goods in transit must be considered in light of the F.O.B. terms. In the case
of F.O.B. shipping point, for instance, a buyer would need to include as
inventory the goods that are being transported but not yet received.
!
Figure 6.2
Activity J
• What is a transit stock?

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Another inventory-related problem area pertains to goods on consignment.

Consigned goods describe products that are in the physical custody of one
party, but actually belong to another party. Thus, the party holding physical
possession is not the legal owner. The person with physical possession is
known as the consignee. The consignee is responsible for taking care of the
goods and trying to sell them to an end customer.
The consignor is the party holding legal ownership/title to the consigned
goods. Consigned goods should be included in the inventory of the
consignor. (Figure 6.3).
!
Figure 6.3
Consignments arise when the owner desires to place inventory in the

hands of a sales agent, but the sales agent does not want to pay for those
goods unless resold to an end customer. For example, auto parts
manufacturers produce many types of parts that are very specialized and
expensive. A retail auto parts store may not be able to afford to stock
every variety. In addition, there is the real risk of ending up with numerous
obsolete units. But, the manufacturer desperately needs these units in the
retail channel. As a result, the parts manufacturer may consign their
inventory to auto parts retailers.
Conceptually, it is fairly simple to understand the accounting for consigned

goods. Practically, there is a significant record keeping challenge. When
examining a company's inventory on hand, special care must be taken to
identify both goods consigned out to others (which are to be included in
inventory) and goods consigned in (which are not to be included in
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inventory). When the consignee sells consigned goods to an end-user, the

consignee would keep a portion of the sales price, and remit the balance to
the consignor. All of this activity requires an accounting system capable of
identifying consigned units, tracking their movement, and knowing when
they are actually sold.
Activity K
• What could be the issues related to consigned goods?
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6.7.4 Average Inventory Cost Minimization
A calculation comparing the value or number of a particular good or set of

goods during two or more specified time periods. Average inventory is the
median value of an inventory throughout a certain time period. A basic
calculation for average inventory would be:
In this example, the current inventory, $10,000, is added to a previous

inventory — for example, the inventory on the same day of the previous
year, such as $8,000 — and divided by the two balance points, for an
average of $9,000 (($10,000 + $8,000)/2 = $9,000).
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6.8 Total Network Cost
The logistics network decision is usually modeled as a trade-off between

transportation and fixed warehousing costs. When there are few
warehouses in the network, fixed warehousing costs are low, but
transportation costs are high. As you add warehouses to the network, the
fixed costs increase, but the transportation costs are reduced due to two
factors. First, adding warehouses generally decreases the number of miles
traveled because the total distance a unit is shipped, from the supplier to
the warehouse and then to the customer, gets closer to a straight-line. In
addition, the most expensive portion of that journey is often from the
warehouse to the customer as those are usually less-than-truckload
shipments. The average distance of this leg of the journey is reduced when
there are more warehouses in the network.
6.8.1 ABC Analysis
ABC Analysis allows inventory/purchasing managers to segregate and

manage the overall inventory/suppliers into three major groups. This
allows different inventory/supplier management techniques to be applied to
different segments of the inventory/suppliers in order to increase revenue
and decrease costs. In terms of a Pareto Analysis, it separated the critical
few from the trivial many. (Figure 6.5).
"A" Category items generally represent approximately 15%-20% of an

overall inventory by item, but represent 80% of value of an inventory. By
paying close attention in real-time to the optimization of these items in
inventory, a great positive impact is possible with minimal increase in
inventory management costs.
"B" Category items represent 30%-35% of inventory items by item type,

and about 15% of the value. These items can generally be managed
through period inventory and should be managed with a formal inventory
system.
"C" Category items represent 50% of actual items but only 5% of the
inventory value. Most organizations can afford a relatively relaxed
inventory process surrounding these items (Figure 6.4).
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!
Figure 6.4
6.8.2 Economic Order Quantity Model (EOQ)
Economic order quantity (EOQ) is that size of the order which gives
maximum economy in purchasing any material and ultimately contributes
towards maintaining the materials at the optimum level and at the
minimum cost.
In other words, the economic order quantity (EOQ) is the amount of

inventory to be ordered at one time for purposes of minimizing annual
inventory cost.
The quantity to order at a given time must be determined by

balancing two factors: (1) the cost of possessing or carrying materials
and (2) the cost of acquiring or ordering materials. Purchasing larger
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quantities may decrease the unit cost of acquisition, but this saving may
not be more than offset by the cost of carrying materials in stock for a
longer period of time. (Figure 6.5).
!
Figure 6.5
2*A*Cp
! Ch
Where, A = Demand for the year
Cp = Cost to place a single order
Ch = Cost to hold one unit inventory for a year
TRC = Total Relevant Cost
Variables
C = Carrying cost per unit per year
Q = Quantity of each order
F = Fixed cost per order
D = Demand in units per year
Example: John runs a mail-order business for gym equipment. Annual

demand for the equipment is 16,000. The annual holding cost per unit is
$2.50 and the cost to place an order is $50.
Calculate economic order quantity (EOQ).
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Calculation:
2*16,000*$50
=800 units perorder
! $2.50
Activity L
• A company is determining its frequency of orders for Product A. The

annual carrying cost per unit is $10 and the cost per order is $15. The
company expects to sell 600 units of Product A each year. Find the EOQ.
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6.9 Cost Minimization
Just as a physical replication of a geographical area illustrates elevations,

depressions and contours of land surface, an economic map can highlight
logistical cost differentials. Generally, peak costs for labor and essential
services occur in large metropolitan areas. However, because of demand
concentration, least total logistics cost resulting from transportation and
inventory consolidation benefits is often minimized in metropolitan areas. A
strategy of least total cost seeks a logistical system network with the
lowest fixed and variable costs. The cost of transport is the payment for
shipment between two geographical locations and the expenses related to
maintaining in-transit inventory. Logistical systems should utilize
transportation that minimizes total system cost. This may mean that the
least expensive method of transportation may not result in the lowest total
cost of logistics.
A system design to achieve least total cost is driven purely by cost-to-cost

trade-offs. The level of customer service that is associated with a least cost
logistical design results from safety stock policies and the locational
proximity of warehouses to customers. The overall level of customer
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service associated with any given least total cost system design is referred
to as the threshold service level.
Poor logistics planning and decision making can result in excessive

expenditures, missed delivery deadlines and damaged goods. This is why
optimizing operational efficiency and reducing logistics costs are so
important. In fact, they should be among the top priorities for any business
that does a lot of shipping and hopes to remain financially viable.
Given today’s high customer demands and a fluctuating global business

climate, companies have to rely on smart logistics management practices.
Activity M
• What are the main reasons of escalation of transportation costs?

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What Constitutes Logistics and Supply Chain Costs?
Although the understanding of logistics costs differs between companies,

they generally include transportation, labor, storage and administrative
costs. Inventory carrying and transportation also contribute to the bulk of
these expenses.
Of course, logistics costs will largely depend on the nature of the goods.
The process is quite different for perishable and imperishable goods.
When it comes to logistics cost management, it’s important to remember

that efficient performance and timely delivery are as vital as reducing
logistics costs. You shouldn’t sacrifice the former for the sake of the latter.
In short, you must consider both cost and performance, and balance them
against each other.
Managing logistics and supply chain costs is particularly important for

companies engaged in international trade. This is because these costs
account for 5% to 50% of the total landed cost of the product, which
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includes the purchase price, freight, insurance, warehousing, customs

duties, and other costs.
Ways of Reducing Logistics Costs and Supply Chain Costs
Consolidated Shipments
It goes without saying that shipping goods in FCL (full container loads) is
preferable to LCL (less than a container load); it’s safer and more cost-
effective. Also, your goods are loaded according to your specifications in a
space that is not shared with other vendor goods. Otherwise, you may
experience customs delays through no fault of your own.
This being said, there are circumstances when LCL is the preferred and
more economical option. Namely, for transporting a relatively small freight,
a good way to reduce logistics costs is by consolidating shipments. This
involves a combination of several smaller shipments from multiple
suppliers sharing the same destination into one consolidated shipment.
Additionally, logistics providers constantly importing less than a full load

from a certain country can partner up with another similar importer and
combine their shipments as a more cost effective solution.
Cargo insurance
Logistics planning and cost saving strategies won’t mean much if you don’t
insure your cargo properly. The insurance should fully cover the value of
your products to prevent unpleasant surprises.
Using a single, integrated platform
Supply chain operations should always be integrated into a single platform,

accessible to all involved parties. This way, you’re avoiding duplication of
activities across operations. Such duplicated efforts are time consuming,
impair your efficiency, and leave room for error.
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Outsourcing
Over 2/3 of businesses choose to outsource at least a portion of their

supply chain operations, mostly transportation and storage. The reasons
behind outsourcing mostly include cost reduction, increased efficiency, and
the convenience of entrusting important aspects of your work to more
efficient and skilled professionals.
To avoid misunderstandings and excessive costs, it’s in the best interest of

both the client and the logistics provider to agree on the most important
issues. This includes the frequency and size of shipments, specifics
regarding packaging, product handling, temperature control requirements,
etc.
Supply Chain Visibility
Maintaining visibility of your supply chain can improve planning and

expense control through better management of your safety stock. Namely,
to reduce the risk of product deficits, supply chain managers maintain a
certain level of extra stock. It is a way to counteract uncertainties in the
supply & demand process, and maintain proper service levels.
Although there is no way to predict or prevent disruptions in the logistics

process, proper supply chain visibility can give managers an insight into
such issues. Using real-time dashboards that refresh data automatically
provides supply chain managers and financial executives with the most
current and relevant information.
This way, they can react quickly and find alternate routes of supply or
distribution if the need arises. This also reduces the need for large safety
stocks and contributes to better cost control.
Optimized Use of Resources
Insufficient use of company assets, such as underutilized fleet vehicles,

facilities or inventory, directly affects your revenue. By optimizing the
utilization of your assets, including their status (owned or leased), you can
greatly improve your business efficiency.
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This can be done through rearrangement of the delivery schedules in order

to keep the entire fleet of vehicles active throughout the day, as opposed
to peak use of the entire fleet in the morning and idleness for the rest of
the day.
Also, companies experiencing high business peaks at specific times of the

year can rent additional warehouse space when needed. There’s no need to
own a huge warehouse that remains underutilized for the majority of the
year.
Timely Planning
The well-timed planning of operations such as production schedule,

shipping routes, and transit time (from pick-up to delivery) is imperative.
Hasty, last-minute choices and decisions will likely result in delays and
missed deadlines, reflecting badly on both the company image and
finances.
Smart planning should also take into account international holidays as

factors in shipping schedules and delivery times.
Activity N
• When the overall intention is to minimise costs; when are high service
costs justified?
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6.10 Impact of GST On Logistic Companies
Goods and Services Tax (GST), promises to integrate India’s multi-layered

indirect tax system into a single unified one, unshackling India from its
bureaucratic web and improving the ease of doing business.
Logistics companies in India have evolved over the years from being mere
first-party logistics providers (1PL) to second-party logistics providers
(2PL) to integrated fourth-party logistics providers (4PL) by providing a
complete package of logistics services, including transportation,
warehousing, pool distribution, management consulting, logistics
optimization, etc. and complementing them with advanced supply chain
facilities.
6.10.1 General Notes
The proposed goods and services tax (GST) will help companies reduce
logistics cost by redesigning their supply chains with four key structural
changes
India becomes one big market, there will be fewer and larger warehouses.
GST will result in larger trucks on road while the overall number of vehicles
will go down. The new tax will result in greater adoption of a hub-and-
spoke model in segments such as warehousing, cold chain, container
freight stations and inland container depots.
GST will also bring in scale to logistics companies as there will be a lot of
savings, stoppage of wastage and lower delays.
The above changes will lead to greater economies of scale for transport
operators and lead to more companies outsourcing their logistics
operations.
For manufacturers, the goods and services tax (GST) has now replaced the
multiple state VATs and the need to have a hub across all states will cease
to exist. This will allow firms to redesign supply chains and centralize hub
operations to take advantage of scale economies. It will also allow firms to
employ efficient practices such as bulk-breaking and cross-docking from a
central location.
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6.10.2 Advantages of GST on Logistic Companies
Cost/Time Saving:
Bigger warehouses and end market driven logistics planning is likely to

result in meaningful costs savings over time. On account of entry taxes and
heavy paper work at state check posts, there is an additional 5-7 hours
added to the transit time for inter-state transport of goods. Abolishment of
entry tax and easier tax compliance procedures is likely result in easier
movement of goods across the country.
With GST when all check posts are gone, a truck that departs from Kashmir
to Chennai will reach on time. Goods will be delivered on time.
Predictability levels post GST will significantly improve. For Example if you
are moving goods by air, the price differential between air and road is
nearly one-eighth. Once logistics manager sees that he can manage his
inventory in a manner where it gets more predictable by road, people will
switch more volume by road.
Forward Integration:
As these companies gather scale, that will enable them to offer services at
lower costs. As a result, companies for whom transportation is not a core
part of their business will increasingly outsource their logistics operations
to third party logistics (3PL) and fourth party logistics (4PL) service
providers.
Single Rate
Standard tax rates will allow corporations to move away from the practice
of building a warehouse in different states to adhere to each state’s tax
code. A big packaged consumer goods company could thus make do with
one large mother warehouse at critical points in the country and employ
logistics companies to manage distribution and supply chains.
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6.11 Threshold Service
A threshold service is the minimum number of people needed for a service

to be worthwhile. In geography, a threshold population is the minimum
number of people necessary before a particular good or service can be
provided in an area. The concept is equivalent to the "range" in central
place theory and retailing, which delineates the market area of a central
place for a particular good or service, and is dependent on the spatial
distribution of population and the willingness of consumers to travel a
given distance to purchase particular goods or services. The theory then
relied on two concepts: threshold and range.
1. Threshold is the minimum market (population or income) needed to

bring about the selling of a particular good or service and the
willingness of consumers to travel a given distance to purchase
particular goods or services
2. Range is the maximum distance consumers are prepared to travel to

acquire goods – at some point the cost or inconvenience will outweigh
the need for the good.
6.12 Service Sensitivity Analysis
Sensitivity analysis is very useful when attempting to determine the impact

the actual outcome of a particular variable will have if it differs from what
was previously assumed. By creating a given set of scenarios, the analyst
can determine how changes in one variable(s) will impact the target
variable.
The threshold service resulting from the least total cost logistical design
provides a basis for sensitivity analysis. The basic service capabilities of a
network can be increased or decreased by variation in number of
warehouses, change in one or more performance cycles to increase speed
or consistency of operations, and/or change in safety stock policy.
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6.12.1 Locational Modification
The location of a warehouse is generally one of the most important and

strategic decision in the optimization of logistic systems. Warehouse
location is a long-term decision and is influenced by many quantitative and
qualitative factors. Among the main criteria taken into account are costs,
labor characteristics, infrastructure, and markets. Sub-criterias are the
hierarchical structure of the problem, like tax incentives and tax structures,
availability of labor force, quality and reliability of modes of transportation,
and proximity to customers (Figure 6.7). The conventional approaches to
warehouse location selection problem tend to be less effective in dealing
with the imprecise or vague nature of the linguistic assessment. Under
many situations, the values of the qualitative criteria are often imprecisely
defined for the decision-makers.
The problem of serving the given set of customers from the chosen
warehouses is considered. The objective is to minimize the sum of fixed
charges for establishing the warehouses and transportation costs
corresponding to the supply of demands.
!
Figure 6.6
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Chopra and Meindl note that an increase in the number of facilities tends to
increase total supply chain inventory costs due to the need to increase
total system-wide safety stock in order to meet customer service level
expectations. Conversely, a reduction in the number of facilities that hold
safety stock permits a reduction in total safety stock cost as a result of the
risk-pooling benefits from aggregating safety stock in fewer locations.
Aggregation of safety stock at fewer location is not necessarily required to

gain risk-pooling benefits. That is, it is possible to increase the number of
supply facilities without a corresponding increase in safety stock cost, even
while maintaining a prescribed cycle service level at each facility. As we
later discuss, these risk-pooling benefits arise from splitting customer
demands among facilities and mixing multiple customer demands within a
facility.
Because safety stock costs represent a non-trivial component of overall

facility-related costs, recent literature has recognized the need to account
for safety stock costs when making facility location decisions.
Logistics managers are often asked to estimate the inventory impact of

adding or deleting warehouses.
This relationship between uncertainty and required inventory is called the

portfolio effect.
The portfolio effect can be estimated using the square root rule. The
square root rule, originally proposed by “Maister”, suggests that the safety
stock increase as a result of adding a warehouse is equal to the ratio of the
square root of the number of locations in the newly prepared network
divided by the square root of the number of existing location.
For example, assume that a manager wants to estimate the inventory

impact of shifting from a one- to a two-warehouse network. In effect, the
network is being doubled. For reasons discussed earlier, demand variability
will be increased. Using the square root rule, the firm's aggregate safety
stock (SS2) for a two-warehouse system can be estimated as:
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NI
×SSK
• SSl =! 1
• Nl = 2
• Nk = 1
2 × SSK
• SSl =! 1
• SSl = 1.41 x SSK
• So you need 1.41 the safety stock for two warehouses vs. one.
Example: Let’s say you want to go from 3 warehouses to 4 and you

currently have a safety stock of 1000. What is your new safety stock level?
4
× 1000
SSl = ! 3
SSl = 1155
Activity O
• What is the ‘portfolio effect’?
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Table 6.1: Inventory Impact of Modified Warehouse Network
Network Locations Safety Stock Level
1 97
2 141
3 173
4 200
5 224
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Finally, the square root rule requires that demand for each warehouse
approximate a normal distribution. While the appropriateness of these
assumptions must be reviewed, the square root rule is a useful way to
estimate the inventory impact of adding or deleting warehouses to a
logistical network.
6.12.2 Measuring Performance
The primary objectives of warehouses include providing the right product,

at the right place, right time, and damage free at a competitive cost.
Fundamental to achieving and sustaining these objectives is measuring
performance. The most common warehouse performance measures include
handling productivity, space utilization, accuracy, damage, service, cost,
and inventory. Handling productivity is often measured in “units or lines”
picked per hour or total handling cost per “unit”. Space utilization is
evaluated based on the percentage of total space available for storage,
percentage of useable storage space actually used for storage, and storage
cost per unit of product.
Accuracy includes measures of location and record accuracy, the

percentage of items picked correctly, and the percentage of orders picked
correctly. Damage measurements include the percentage of items picked
that are undamaged when received by the customer and the percentage of
orders picked without damaged merchandise. Service measures include fill
rate which is based on the number of orders that were filled completely.
Cycle time is also a critical measure to determine service and efficiency.

Dock-to-stock cycle time is a critical measure of how long it takes to make
material available following receipt. Order cycle time measures the elapsed
time from order receipt until order shipment. Order cycle time may also
include transportation to measure the total elapsed time until the customer
receives the product. Cost and inventory performance measurements
include total distribution center cost per unit handled, distribution center
cost as a percentage of sales, and inventory turnover.
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6.12.3 Impact of Increasing Order Frequency of Safety Stock
In the continuous review setting, to increase order frequency, the order

quantity must be reduced. This will increase ordering costs and reduce
inventory costs. Since safety stock in this setting depends on variability in
lead time demand and increasing frequency of orders has no impact on
lead time, increasing frequency of orders in this setting has no impact on
the chances that stock out will occur in an order cycle. It does however
increase the number of order cycles in a fixed period, e.g., a year and so to
ensure the same fill rate that is needed to carry more safety stock if
frequency is increased.
In the periodic review setting, it also reduces inventory if safety stock is

ignored. It is less clear what impact increasing frequency has on safety
stock. In the periodic review setting, the risk of stocking out in an order
cycle depends on the variability of demand in a period determined by the
sum of the time between orders and the lead time. So, increasing the
frequency of orders reduces the time between orders and so reduces the
variability of this demand. So, increasing the frequency of orders reduces
the chances that stock-out occurs in an order cycle if we hold safety stock
constant. On the other hand, increasing the frequency of orders means we
face this reduced risk more often. The final impact of increasing frequency
will depend on the balance between these two factors.
6.13 Inventory Model of Immediate and Delayed Delivery
Consider the long run, profit maximizing strategy of a distributor that holds
a good (good 1) in inventory for immediate delivery and that offers a
second good (good 2) for delayed delivery. When the two goods are
substitutes, an out-of-stock situation for good 1 will cause some consumers
(“walkers”) to seek the good elsewhere, other consumers (“waiters”) to
accept a rain check for later delivery of good 1, and others still
(“switchers”) to place an order for good 2. It is shown that a profit
maximizing strategy may entail setting a price for the delayed delivery
item so as to encourage switching behavior. The rationale is that the
distributor can hold a smaller inventory, thereby incurring lower holding
costs, because out-of-stock situations are less costly than they would be
without some consumers being willing to switch.
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6.14 Summary
It is essential to create a map of organizational or supply chain wide

initiatives and compare them with the organization’s goals, performance
measures, and resources. By its nature, ISCM (Integrated SCM)
implementation will lead to a multiplicity of programs springing up across
the supply chain. This, together with the array of other change programs
that might exist among stakeholder groups, provides a recipe for confusion
and potential failure.
The integration map is a mechanism for identifying the array of change

initiatives and programs ongoing within an organization or the existing
supply chain, as well as for revealing conflicting time, resource priorities,
and change goals that have not been addressed. The map proves useful in
helping to decide which projects to launch first and which may need to be
jettisoned. Since concurrent conflicting initiatives often lead to confusion,
action taken to integrate initiatives is essential if the ISCM implementation
is to be successful.
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1. How can a supply chain network be established?
2. How are location decisions taken?
3. What justification of logic can be presented to support the placement of

a warehouse in a logistical system?
4. Why do transportation costs decrease as the number of warehouses in a

system increases?
5. In your words, what is the locational impact of inventory?
6. Why is it important to have the right inventory at the right place at the
right time?
7. What is the importance of WMS in warehouse efficiency?
8. Describe the concept of “relationship with suppliers” in a company’s

supply chain.
9. In what way, WMS support manufacturing?
10.What is the support provided by WMS to wholesalers and retailers?
11.What is meant by the level of threshold service?
12.What are the economic benefits of warehousing?
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NETWORK INTEGRATION
1. A SCM is a network of __________.

(i) Suppliers
(ii) Distribution centers
(iii) Retailers
(iv) Warehouses
(c) All of the above
(d) None of the above
2. An important role the inventory plays is to increase the amount of

demand that can be satisfied by __________.
(i) Increasing the quantity of production
(ii) Having products ready and available when the customer wants
it
(iii) Having a minimum amount of stocks to save on costs
(iv) Keeping a proper records of storage and stocks
3. Choosing the right warehousing management system efficiency is a

critical success factor to __________.
(a) Achieving a high return of investment
(b) Sales and marketing
(c) Employee productivity
(d) Customer satisfaction
4. A __________ service is the minimum number of __________ needed

for a service to be worthwhile.
(a) Customer, Service
(b) Threshold, People
(c) Wholesale, Retail
(d) Warehouse, Stocks
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NETWORK INTEGRATION
5. A stock that is kept on hand as a buffer in the event of an expected

problem with supply or an increase in demand is called Inventory.
(a) True
(b) False
Answers: 1. (c), 2. (d), 3. (a), 4. (b), 5. (b). Is called a ‘safety’ stock.
! !239
NETWORK INTEGRATION
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
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LOGISTICS DESIGN AND OPERATIONAL PLANNING
Chapter 7
Logistics Design And Operational Planning
Objectives
• The elements of the systems approach

• The definition and purposes of a feasibility study
• The process of data collection and analysis
• The recommendations and implementation of plan
• The methods and techniques used for data analysis
Structure
7.1 Elements of the Systems Approach
7.2 Definition/Purpose of a Feasibility Study
7.3 Data Collection and Analysis. Big Data: Use and Inclusion of Big Data
Analytics
7.4 Cloud Based Logistics Management
7.5 Internet of Things (IoT)
7.6 Recommendations and Implementation
7.7 Decision Analysis Methods and Techniques
7.8 Summary
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Introduction
Logistics management plays a significant role in the success of any

company’s operations and has a direct impact on its bottom line. More
importantly, logistics processes play a big part in customer satisfaction,
which is more important than low product costs. Logistics professionals
should think of themselves as a customer-facing portion of the company
and strive every day to add value for their customers.
This chapter introduces a systems approach to supply chain re-engineering

which is aimed at addressing the challenges which the evolving business
environment brings with it. The adoption of approaches such as that
outlined in this chapter helps to ensure that robust supply chains are
designed and implemented in practice. This facilitates an integrated
approach, with involvement of all key stakeholders throughout the design
process.
In addition, the potential benefits associated with emerging electronic

commerce technologies provide the potential to simultaneously improve
customer service levels and to reduce supply chain costs. These factors
have sharpened the focus on the need for improvements in all aspects of
supply chain performance.
7.1 Elements of the Systems Approach
Many managers initially thought that simply implementing a Supply Chain

Management (SCM) system would be enough to keep their inventories
stocked with the raw materials needed to keep production flowing
smoothly. However, implementation of these systems and software has
helped most of those managers to realize how unrealistic their initial
expectations were. The system itself can easily become overwhelmed by all
of the variables involved in supplier-buyer relationships, which is why
managers need to take additional steps to ensure that their SCM system
stays on top of the situations.
Any finite system will have a boundary and anything outside that boundary
can be regarded as the environment. An important aspect of the study of
systems involves examining the interaction between systems and their
environments. Indeed, the way in which a system interacts with its
environment will largely determine the usefulness or degree of success of
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the system. If the supply chain under consideration is regarded as the

system, then the environment is the business environment in which that
supply chain operates. The business strategy of firms is concerned with the
interaction between supply chain companies and their business
environment (Porter, 1980). Essentially, the strategy formulation process
defines the nature of this interaction.
Inputs ! Supply Chain Environment ! Outputs

!
Figure 7.1: Supply Chain as a System
The supply chain system could be regarded as shown in Figure 7.1. The
interaction of the system with its environment is represented by the
system inputs and outputs. In practice, supply chain systems can be
broken down into subsystems. This aids understanding of the operation of
the system and facilitates systems analysis. Each of the subsystems should
display the characteristics of a system; each subsystem will have inputs,
outputs and a boundary. When considering a company’s internal supply
chain, the subsystems can be regarded as the company’s business
processes (e.g., designing, buying, making, moving, and selling). These
business processes are multidisciplinary activities that cross traditional
functional department boundaries. When considering a supply chain which
comprises several companies, the subsystems can be regarded as the
individual companies or the business processes which cross company
boundaries. Traditionally, efforts at improving supply chain or
organizational effectiveness have focused on making changes within the
subsystems. This often resulted in optimal subsystems but sub-optimal
total systems.
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7.1.1 Systems Process
The systems approach to analyze supply chains and improving their

performance involves the application of logical, structured methods rather
than relying on making limited improvements in particular areas of the
system. The system offers direction on how to address this process in an
organized manner, and to develop a solution logically.
Customer and competitor attitude keeps varying and also the market
demands, costs and service needs. Naturally, questions arise about
warehouses; their numbers and locations; about striking a balance
between inventory and service in each warehouse; material handling and
routing of vehicles etc.
Such questions are normally considered difficult to answer as the data to

assimilate is difficult. This intricacy is due to a large number of factors
influencing logistics total cost and the range of alternate solutions. The
extensive nature of the data is due to a large amount of information
required to evaluate logistics substitutes.
A general process applicable to most logistics design and analysis

situations is divided into three phases: (1) problem definition and planning,
(2) data collection and analysis, and (3) recommendations and
implementation. Figure 7.2 shows the generalized process flow.
!
Figure 7.2: Generalized Planning System Illustrating Major Phases of
Work
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Activity A
• Why do processes have to be systematic in a supply chain?

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7.1.2 Guidelines on Good Practice
Every supply chain is unique. It has unique products, processes, people

and a lot more besides. Hence, there is no universal solution which can be
applied which will automatically result in a supply chain achieving its
optimum competitive potential. The methodology helps to identify the most
suitable solution for a particular supply chain but there are approaches
which appear to exist in the majority of world-class companies
(Schonberger, 1986).
These approaches include employee involvement, total quality

management, JIT, (total) preventive maintenance and a philosophy of
continuous improvement. The key is not to blindly copy the approaches
used by successful companies but to learn from their experiences.
Education and training of project team members plays an important role in
this.
7.1.3 Tools and Techniques
A potential problem when analyzing supply chain organization and

operations is that there are few (if any) established analytical tools which
can be employed. The lack of such tools can result in practitioners failing to
apply a methodical, scientific approach and instead relying purely on
experience, intuition and iteration. However, there are many techniques in
use in other fields which are relevant to supply chain analysis. Such
approaches include financial analysis, strategic planning techniques (e.g.,
SWOT analysis, the Porter model), Pareto analysis, systems analysis
techniques (e.g., input/output analysis, flowcharting), and process
mapping. These techniques can be used to support various stages of the
methodology with many being particularly useful at the analysis stage.
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In addition, computer-based tools, which assist in the application of the

techniques, are also available. Many of these tools are useful in managing
the data collected during the supply chain audit. Useful tools include
spreadsheets, databases, visual interactive simulation and project planning
software.
7.2 Definition/Purpose of a Feasibility Study
A feasibility study is defined as an evaluation or analysis of the potential

impact of a proposed project or program. First stage of logistics system
design and planning provides the foundation for the entire project. A
thorough and well-documented problem definition and plan are essential to
all that follows.
7.2.1 Feasibility Assessment in Logistic Operation
The decision to implement any new project or program must be based on a

thorough analysis of the current logistic operation. In addition, the impact
of implementation of the proposed project/program on the future operation
of the system must be evaluated. Such an analysis would be critical in
making a final decision on whether to progress and how that progression
should occur beginning with a feasibility study with a comprehensive
evaluation of the current logistics situation. Objective being to understand
the environment, process, and performance characteristics of the current
system and to determine modifications, if any, which might be necessary.
The activities include situational analysis, supporting logic development,
and cost/benefit estimation.
Activity B
• If observed that changes do have to take place in a company’s logistical

process, what steps are necessary to implement the change?
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1. Situational Analysis
The purpose of the situational analysis is to provide senior management

with the best possible understanding of the strengths and weaknesses of
the existing logistics capabilities for both current and future environment.
Situational analysis is the performance of measures and characteristics
that describe the current logistics environment through:
Activity C
• Why is situational analysis undertaken?
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a. Internal review: Internal review is necessary to develop a clear

understanding of existing logistics processes with respect to its stated
objectives and its capabilities to meet those objectives. It profiles
historical performance, data availability, strategies, operation and
tactical policies and practices. All major resources such as workforce,
equipment, facilities, relationships and information are examined. The
comprehensive review is undertaken to justify logistics system redesign
or refinement to be implemented if necessary. Assessment is to consider
the process (physical and information flows through the value-added
chain), decisions (logic and criteria currently used for value chain
management), and key measures for each major logistics activity. These
measurements focus on the KPI’s (key performance indicators) and the
firm’s ability to measure them.
Activity D
• What is the difference between an internal review and an assessment?

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b. Market Assessment and Competitive Evaluation: The objective is to

document and formalize customer perceptions and desires with regard
to the changes in the firm’s logistical capabilities. It is the review of
knowing the trends and service demands required by customers by
interviewing them and through fresh customer surveys. The assessment
focuses on the external relationships with the suppliers, customers
(wholesalers and retailers) and final consumers. The assessment not
only considers trends in requirements and processes but also the
enterprise and the competitor’s capabilities.
c. Technology Assessment: Focuses on the application and capabilities

of the current key logistics technology systems of transportation,
storage, material handling, packaging, information processing, the firm’s
capabilities and the potential for applying new technologies. The
objective of the assessment is to identify advancements that can
provide effective trade-offs with other logistics resources such as
transportation and inventory.
Activity E
• Why is technology assessed from time to time?

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2. Supporting Logic Assessment and Development
The logical findings of the internal review, external assessment and

technology study are to be integrated into the system. A supporting logic
development builds on this comprehensive review in three ways:
i. Potential opportunities for improvement can be determined by using

logistics principles such as tapering principle, principle of inventory
aggregation and total landed cost principle. The resulting benefits or
costs should be clearly identified.
ii. The deliverables of this evaluation process include classification of

planning and evaluation issues prioritized into primary and secondary
categories across short- and long-range planning horizons.
iii. The process of developing supporting logic should include clear

statements of potential redesign alternatives such as:
• Definition of current procedures and systems Identification of the most

likely system design alternatives based on leading industry and
competitive practices
• Suggestion of innovative approaches based on new theory and

technologies.
The alternatives along with being practical should also challenge the
existing practices. A recommended procedure requires the manager
responsible for evaluating the logistical strategy and to develop it with
potential benefits by underlining the most attractive strategy alternatives.
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3. Cost-Benefit Ratio
The final feasibility assessment is a preplanning estimate of the potential

benefits versus the cost of performing a logistics analysis and
implementing the recommendation. Benefits should be categorized in
terms of:
a. Service improvements – Increase loyalty of existing customers to

attract business.
b. Cost reduction – Cost reduction benefits may be observed in two

forms:
• First, reduction in financial or managerial resources required to operate

the existing system, for e.g., reduction in capital deployed for inventory
and other distribution related assets.
• Second, cost reductions in the form of out-of-pocket or variable

expenses.
c. Cost prevention – Cost prevention reduces involvement in programs

and operations experiencing cost increases. Any cost prevention
justification is based on an estimate and is vulnerable to some error, for
e.g., many material handling and information technology upgrades are
partially justified and will depend on how convincing the supporting logic
is, how believable estimated benefits are, and whether estimated
benefits offer sufficient return on investment to justify organizational
and operational change.
These potential benefits must be balanced against the out-of-pocket cost

required to complete the process.
Activity F
• Will cost prevention always benefit the redesigning of the logistics

system? Why?
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7.2.2 Project Planning Initiatives
Logistics system complexity requires that any effort to identify and

evaluate strategic or tactical alternatives must be planned thoroughly to
provide a sound basis for change. Project planning involves five specific
items:
a. Statement of objectives: The statement of objectives refers to jotting

down the cost and service expectations for the logistics systems
revisions. It is essential that they be stated specifically and in terms of
measurable factors. For example desired delivery of 98% of all orders
within 48 hours after the order is placed, minimal customer shipments
from secondary distribution centers, back orders held for a maximum of
five days, etc.
b. Statement of constraints: On the basis of the situational analysis, the

senior management will hesitate to make any modifications or changes
in the current systems as there are large financial investments in
existing production facilities. The statement of constraints defines
specific organizational elements, buildings, systems, procedures, and/or
practices to be retained from the existing logistical system.
c. Measurement standards: Such standards direct the project by

identifying the cost structures and performance penalties and by
providing a means to assess success. Management must stipulate
guidelines for each category as a prerequisite to formulation of a plan.
Measurement standards should include definitions of how cost
components such as transportation are calculated and also relevant
customer service measures and method of calculation must also be
included.
d. Analysis procedures: Once the project objectives and constraints are

defined, planning must identify alternative solution techniques and
select the best approach. Selection of an analysis technique must
consider the information necessary to evaluate the project issues and
options.
e. Project work plan: On the basis of feasibility assessment, objectives,

constraints and analysis technique, a project work plan must be
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determined and the resources and time required for completion

identified.
Activity G
• What are the service levels that the management will always try to
achieve?
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Activity H
• What could be some of the revisions or changes undertaken in the

system while planning a new project?
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Activity I
• What is the importance of measuring standards in system development?

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7.3 Data Collection and Analysis. Big data: Use and

inclusion of big data analytics
Once the feasibility assessment and project plan are completed, the next
activity focuses on data collection and analysis. This includes activities to
define assumptions, collect data, and analyze alternatives.
Assumptions and Data Collection
This activity builds on the feasibility assessment and project plan to

develop detailed planning assumptions and identify data collection
requirements. Specific tasks are as follows:
a. Define the analysis approach and techniques: The most common

techniques are analytical approach, simulation and optimization. The
analytical approach uses standard numerical methods, such as those
available through spreadsheets, to evaluate each logistics alternative. A
simulation or replication approach can be likened to a “wind tunnel” for
testing logistics alternatives. Simulation is used extensively when major
doubts remain. Optimization uses linear or mathematical programming
to evaluate alternatives and selects the best one. Because of its
powerful capabilities, optimization is used extensively for evaluating
logistics network alternatives such as the number and location of the
distribution centers.
Activity J
• What is the technique used while considering an increase in the number

of warehouses?
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b. Define and review assumptions: Assumptions definition and review

are based on situation analysis, project objectives, and constraints and
measurements standards. For planning purposes, the assumption
defines the key operating characteristics, variables and economies of
current and alternative systems. Assumptions normally fall into three
categories:
i. Business assumptions define the characteristics of the general

environment including relevant market, consumer, and product trends
and competitive actions, within which an alternative logistics plan must
operate. They are generally outside the ability of the firm to change.
ii. Management assumptions define the physical and economic

characteristics of the current or alternative logistics environment and
are generally within the firm’s ability to change or refine. Typical
assumptions include a definition of alternative distribution facilities,
transport modes, logistics processes and fixed and variable costs.
iii. Analysis assumptions define the constraints and limitations that must be
included to fit the problem to the analysis technique. These assumptions
frequently concern problem size, degree of analysis detail and solution
methodology.
Activity K
• What are the three types of assumptions? Elaborate on any one.

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7.3.1 Use and Inclusion of Big Data
Today, supply chains are highly supported by advanced networking

technologies – sensors, tags, tracks and other smart devices, which are
gathering data on real-time basis which provides end-to-end demand and
supply visibility. Supply chain managers need to process a large amount of
data to make decisions that may help reduce costs and increase the
product availability to the customers.
A BDA (Big Data Analytics) capability is a technologically enabled ability

which can help process large volume, high velocity and several varieties of
data to extract meaningful and useful insights; hereby enabling the
organizations to gain competitive advantage. The effectiveness of decision
making in supply chains often hinges upon the quality of the data
processed via organizational infrastructure, which enable the supply chain
managers to quickly acquire, process and analyze data.
Big Data Analytics can be applied to a range of diverse data sources to

create effective predictions of future demand. Such synchronous and
asynchronous data sources include inter-organizational historic data,
regional and national economic data, industry specific data, demographic
and target market-specific data. We can, therefore, consider that a
‘demand network’ that utilises multiple areas of emergent big data
applications would be able to effectively predict and articulate future
demand. The massive deployment of connected devices such as trucks,
mobile devices, RFID readers, webcams and sensor networks adds huge
volume of autonomous data sources. Devices such as these continuously
generate data streams without human intervention, increasing the velocity
of data aggregation and processing. Data stems from camera images,
video and surveillance footage, blog entries, forum discussions and e-
commerce catalogs contribute to higher variety of data types.
Activity L
• How can Big Data (BD) help in acquiring new customers?
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7.3.2 Big Data can Achieve Digital Transformation of the Supply

Chain Business across the Following Areas
1. Operational Excellence
Operational excellence is maximum output at minimum cost. Therefore,

capacity planning, route planning and monitoring for different supply
chains is crucial but ability to respond to bottlenecks in real-time is what
brings the difference. But the data is too big for the existing ERP and SCM
systems to manage. With millions of transactions happening every day and
multiple data sources, both internal and external is even complicating
further for Supply Chain companies. Big Data Application can manage
transactions of high volume, velocity and variety to provide automated
reporting, pattern identification to point out risks and opportunities and
avenues to cut-down cost.
2. Route Optimization for Fleet Management Solutions
The importance of utilizing big data in the logistics industry has

accelerated, since vast amounts of data is being generated from
telematics, barcode scanners, RFID readers, software systems managing
operations and positioning system devices on vehicles and in mobile
phones. Customers want to track where their package/order is
(simultaneously), expect it to be delivered promptly and they do not
hesitate to share any comments or complaints. So, the data we generate –
product reviews, social media comments, likes, blogs and online comments
– are also reshaping this traditionally fragmented industry.
Because of these reasons, logistics started to position itself to put big data
to better and efficient use.
3. Last Mile Delivery for LSPs and 3PLS
A number of companies, especially in the fast-moving consumer goods

industry and in e-commerce, have realized that they need to challenge
traditional last-mile delivery solutions in light of recent advances in data
analytics and technology. Some enterprises are leveraging their existing
data sources. They are using transactional records, delivery data from
individual routes, high-resolution telemetry and movement data on the
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level of individual vehicles to develop a more precise picture of their last-

mile logistics operations.
Similarly, publicly available data sources are becoming increasingly

relevant for the optimal design and planning of last-mile delivery systems
and processes. These data sources provide insights into the operational
and commercial environment – from road infrastructure characteristics to
traffic and congestion dynamics to socio-demographic profiles of the
customer base.
4. Distribution Network Planning and Optimization for 3PL and

Distribution Companies
Operational efficiency is maximum output at minimum cost. Therefore,

capacity planning, route planning and monitoring for different supply
chains is crucial but ability to respond to bottlenecks in real-time is what
brings the difference. Supply chain companies can make deliveries keeping
fuel consumption, mileage, engine conditions, emissions, driver’s behaviour
and speeding habits in check while executing multiple drops and collections
that can be personalized or rescheduled at any point in the day.
Big Data Application will execute Dynamic Route Optimization after with
data received from fleet telematics, customer mobile App and other
sources about roadblocks or breakdowns. With a Big Data Powered Route
Optimization tool, companies can manage thousands of reschedules per
second to achieve less environment impact and better customer service all
within budget.
5. Customer Experience
Big Data combined information of customer’s complaints, requests,

appreciations and other interactions from island-like conventional CRM and
combine it with publicly available sentiments on news, annual reports and
social media to identify patterns that can point out potential attrition in the
customer. The Big Data Applications can further be programmed to
automatically trigger loyalty programs.
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To measure and tune supply chain performance, customer feedback

provides valuable insights. The traditional CRM is focused on case
management and customer surveys. However, the customers now are
discussing the brand, services and products on social networks and
discussion forums. Big Data techniques now are analysing unbiased
customer sentiments from the huge text, audio, video data, etc. can
identify correlations between various parameters and can be broken down
by location, action and time.
6. Business Strategy
Logistics providers manage a massive flow of goods, and at the same time,
create vast data sets. For millions of shipments every day, origin and
destination, size, weight, content and location are all tracked across global
delivery networks. Businesses that segregate operations cannot fully
harness the potential of cross-functional platforms. But aggregating all
data into a single, multi department system, a company’s analytics
capabilities grows exponentially. Since supply chain businesses are
comprised of multiple branches, a centralized unit should connect each
branch for a holistic understanding.
Executives should clearly outline goals for revenue, sourcing and P2P
development that makes sense for each team individually, as well as
establish goals that work in concert with one another to achieve the
overarching company mission. Executives must identify top business
priorities to pull the necessary data. Once these are established, executives
can concentrate on how to leverage organized data. It is tempting for
executives to pull the reports for all processes and streamline all at once
when the data becomes available. Businesses must first prioritize goals and
efforts in order to optimize their data. Executives should concentrate on
the top-line items before moving on to additional analysis in order to best
understand the data and forecasts.
Department-specific jargons make it difficult for organizations to leverage

data, which impedes accurate analytics. By keeping all data terminology
uniform across business platforms, information can be processed and
understood more easily which will result in faster and more efficient
decision making. Diagnosing sourcing issues correctly is much easier with
organized and accurate data to quickly visualize and draw insight. Big Data
can give a business clear snapshot of expenses and ROI. To optimize
! !258
existing data, it is important to identify the sourcing inefficiencies and

rectify to ensure maximum profits.
The purpose of data analytics is to prescribe an actionable insight to the

decision-maker. Executives must be prepared to act upon the data’s results
once available in order to capitalize on the opportunities presented.
Without action on the part of the decision-maker, data remains just
that….data.
!
Figure 7.3: Big Data Analytics
Activity M
• How does Big Data help in last-mile deliveries?

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Case Studies
1. Delta Airlines
All airlines know a top concern for passengers is lost baggage, particularly
when they are on a flight that is delayed and missed connections involved.
Delta looked further into their data and created a solution that would
remove the uncertainty of where a passenger’s bag might be. Customers
can now snap a photo of their baggage tag using the “Track My Bag”
feature on the Delta app and then keep tabs on their luggage as it makes
its way to the final destination. Even if a bag does not make it on the
intended flight, passengers save time tracking it down. Finding a new way
to put big data to use for the benefit of their passengers put Delta out front
in a competitive market.
2. Healthcare Singapore
In the health care industry, Big Data is being put to work to improve the
quality of patient treatment — and save lives. Healthcare providers in
Singapore are beginning to gather Big Data insights from analytics
platforms to transform how they manage chronic diseases.
Take diabetes, a condition that can lead to extended hospital stays, which
is both costly and puts strain on medical infrastructure. But when
Singapore healthcare providers dig into analytics to better understand each
patient’s condition, lifestyle choices, work and home environment, they can
create personalized treatment plans tailored to that person’s individual
behavior. For example, if the patient struggles to remember when to take
her medication, her specialized treatment would address that specific
problem.
Other healthcare providers are following Singapore’s lead to better manage

patient care, cost and outcomes. By making sense of the data available on
an individual patient, doctors and other providers can better understand
that person’s history, genetics and even important demographic and
cultural factors to more quickly and cost-effectively diagnose patients.
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7.4 Cloud Based Logistics Management
“Cloud” computing is a method for delivering information technology (IT)

services in which resources are retrieved from the Internet through web-
based tools and applications, as opposed to a direct connection to a server.
An example of a Cloud Computing provider is Google’s Gmail. Gmail users
can access files and applications hosted by Google via the internet from
any device.
You typically pay only for cloud services you use, helping lower your
operating costs, run your infrastructure more efficiently and scale as your
business needs change.
Netflix, for instance, leverages this potential of cloud computing to its

advantage. Due to its on-demand streaming service, it faces large surges
in server load at peak times. The move to migrate from in-house data
centers to cloud allowed the company to significantly expand its customer
base without having to invest in set-up and maintenance of costly
infrastructure.
Siri, Alexa and Google Assistant – all are cloud-based natural language
intelligent bots. These chatbots leverage the computing capabilities of the
cloud to provide personalized context-relevant customer experiences. The
next time you say, “Hey Alexa!”. Remember that there is a cloud-based AI
solution behind it. Most of the messaging and calling apps like Skype and
WhatsApp are also based on cloud infrastructure.
The “cloud” has made headlines across industries; from technology to

commodities, but nowhere can its effects be more clearly seen than within
logistics. The power of increased data, integrated communication and real-
time analytics has delivered savings multipliers beyond any previous
advancement. Cloud-based solutions are essential for getting the most
value out of your operations. With a cloud-based logistics and supply chain
management system, businesses can save time and money while gaining a
holistic view of their entire operations.
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1. Real-time Pricing
Quickly understanding the price associated with every logistics element of

your supply chain allows you to control your costs with finesse. Pricing
elements within transportation and warehousing can fluctuate based on
any number of factors: weather, market conditions or demand.
With so much volatility, on-the-fly adjustments can make or break

margins. Costs in the supply chain are quickly compounded down the value
stream making even a slight savings through real-time pricing an
enormous advantage.
2. Real-time Inventory
The inventory you have on hand is your most direct means of controlling
for risks and optimizing costs. Real-time inventory management allows you
to maximizing your ability to respond to demand fluctuations while holding
onto your buffer against emergencies. Data flow from the cloud gives you
infinitely more precise control over your inventory levels.
3. Eliminate Multiple WMS (Warehousing Management Systems)

and TMS (Transport Management Systems)
TMS and WMS systems are instrumental to expediting procurement and

shipping, however, multiple systems in the hands of multiple users can
produce a huge number of different transportation options, with only one
of them bearing the true lowest cost. A busy warehouse may need to add
temporary workers during certain seasons. The cloud can accommodate
more log-ins without adding unnecessary terminals or additional software
packages.
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You can also add users from multiple locations. Some companies use
freelance office workers, marketing or sales people to supplement their
workforce. With cloud based systems, you can add additional workers
easily onto the system. They can access the database through their home
computers, tablets or smartphones. All you need is a web connection. It is
an easy way to get everyone working from the same data, and keeping
your systems up-to-date no matter who accesses them.
The cloud’s ability to coordinate information with a specific solution can

prevent any delays that might be caused by miscommunication or missed
savings that might come from complicated data.
4. Equipment and Utilization Patterns
From how equipment is utilized to the most frequent freight movement,

cloud-based software systems help discover patterns and utilize them to
better capitalize on abundance or eliminate wasteful excess.
5. Accurate Merge in Transit Model
When trying to coordinate the union of a number of components from

several suppliers, possibly from all over the world, synchronizing processes
is paramount to efficiency.
Within certain situations, having processes synchronized down to the hour

might be required. Logistics solutions that allow for real-time monitoring
through the cloud, makes accurate models of merge in transit possible for
the first time.
A process that was previously too complex to accurately estimate can now
be forecasted and monitored through a real-time, online dashboard.
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6. Office Resource Flexibility
Cloud-integrated logistics not only provides more data in real time, but also
makes it accessible to your entire team, regardless of location or time.
Universal accessibility makes processes that require round-the-clock
oversight far more easily handled.
Logistics managers can observe processes in real-time from remote

locations and allow immediate resource deployment in case response is
needed.
Logistics optimization and management remains a formidably complex

task, but the cloud continues to make the art infinitely more user-friendly
and efficient.
Increased data delivered in real time makes it possible to exercise extreme
control over critical processes while increasing the flexibility with which it is
implemented.
7. Security is Excellent
One concern that many business owners have when they consider cloud
computing is the security level. Cloud computing works off of shared
servers, and companies often worry that their data may be compromised
or somehow less secure when it is kept off-site than when it is housed on
hard drives within their four walls. If you require your systems to be on-
site, you can still gain many benefits from an on-premises cloud. If you
choose to have a cloud hosting vendor, you can expect to see some of the
strictest security protocols available in place to ward off viruses and
hackers intent on damaging or stealing data. You cannot “accidentally”
access anyone else’s data on the cloud. So, your company’s information is
secure. Cloud computing is secure computing.
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!
Figure 7.4: Cloud ERP Logistics and Distribution Planning
Activity N
• How does cloud based technology help in warehouse management?

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7.5 Internet of Things (IoT)
The Internet of Things (IoT) is a computing concept that describes the idea
of everyday physical objects being connected to the internet and being able
to identify themselves to other devices. The term is closely identified with
RFID as the method of communication, although it also may include other
sensor technologies, wireless technologies or QR codes.
The unpredictable nature of fuel costs, rising labor rates, increased traffic
and a changing regulatory environment, continue to make operations
challenging. Whether by air, ground or sea, transportation and logistics are
essential components to many enterprises’ productivity, and access to real-
time data is critical.
With the right IoT solution in place, enterprises can connect all devices
across a centralized cloud network, and capture and share their mission-
critical data, allowing them to gain real-time visibility of their operations.
Though these types of solutions have already helped transportation and
logistics businesses make improvements over the years, leveraging them
with enabling technologies like the IoT can deliver even more asset
intelligence, leading to more informed decisions.
Activity O
• In what way has the internet helped in logistics business?

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7.6 RECOMMENDATIONS and IMPLEMENTATIONS
The next stage is to operationalize planning and design efforts by making

specific recommendations to the management and developing plans to
implement in the system.
Recommendations
Alternative and sensitivity analysis results are reviewed to determine

recommendations to management. There are four steps in this part of the
phase namely:
1. Identify the Best: Alternative Performance characteristics and

conditions for each alternative must be compared to identify two or
three best options. The decision tree analysis should identify the best
alternative, i.e., the one that meets the desired service objectives at the
minimum total cost.
2. Evaluate Costs and Benefits: A Cost Benefit analysis compares the

alternatives for a base period and then projects comparative operations
across a particular planning horizon. Potential benefits such as cost
reduction, service improvement and cost prevention are identified and
quantified. In other words, when evaluating the potential of a particular
logistical strategy, an analysis comparing present cost and service
capabilities with projected conditions must be completed for each
alternative.
3. Develop a Risk Appraisal: Availability of increasing alternatives

demands tools that can extract value from each alternative. Risk related
to adoption of a selected alternative can be quantified using sensitivity
analysis. For example, assumptions can be varied and the resulting
influence on system performance for each alternative can be
determined. Risks related to, e.g., system changeover may encounter
unanticipated delays. A series of contingency plans could be tested to
prevent delays and determine their negative impacts.
4. Develop Presentation The final step in this procedure is a

presentation to the management and submission of a report that
identifies specific operating and strategic changes, provides qualitative
reasons for suggesting these changes and then quantitatively justifies
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the changes in terms of service, expenses, asset utilization or

productivity improvements.
Activity P
• What is the risk involved in implementing an alternative?

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Implementation
The actual plan or design implementation is the final process activity. An

adequate implementation procedure is the only means to obtain a tangible
return from the planning process. This broadly includes four phases:
1. Define Implementation Plan: The implementation plan has to be

defined in terms of the individual events, their sequence and their
dependencies. The planning process may initially develop at a macro
level. But it must ultimately be refined to provide individual assignment
responsibility and accountability. Plan dependencies identify the
interrelationships between events and thus define the completion
sequence.
2. Schedule Implementation: The implementation plan is scheduled

based on the assignments identified in the previous stage. The schedule
must allow adequate time for acquiring facilities and equipment,
negotiating agreements, developing procedures and training.
3. Define Acceptance Criteria: The criteria for evaluating the success of

the plan are then developed. The Acceptance Criteria should focus on
service improvements, cost reduction, improved asset utilization and
enhanced quality. Although the acceptance criteria may focus on the
area/function which was the main focus for the plan, it should also take
a broad perspective that focuses on total logistics system performance
rather than the performance of an individual function.
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4. Implement: The final task is actual implementation of the plan or

design. Implementation must include adequate controls to ensure that
performance occurs on schedule and that acceptance criteria are
carefully monitored.
Activity Q
• What is the criteria for ensuring the success of the implementation plan?
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7.7 Decision Analysis Methods and Techniques
High performance logistics requires regular comprehensive analysis of

supply chain tactics and strategies. Regular freight lane analysis is
necessary to respond to rate changes and balance of freight flows; tactical
inventory analyses, to identify items with excess inventory and to
determine the appropriate inventory target levels; and location analysis,
now often termed supply chain planning, to perform the strategic
evaluation of supply chain alternatives such as sourcing, plant location,
warehouse location, and market service areas, increasingly important to
optimize flows for global supply chains. Dynamic simulation is used to
investigate the dynamics of multiple stage inventories such as among
suppliers, plants, and distribution centers, and tactical transportation
analysis assists in truck routing and scheduling. For each of these types of
decisions, the following sections describe the specific questions, alternative
analytical techniques, and typical data requirements.
7.7.1 Design Decisions
Designing a supply chain network involves billions of options and numerous

decisions. And, each of these decisions will impact service levels,
profitability and competitive advantage. To ensure an optimal design, it is
critical that key business data from ERP and business insights are included.
By combining real world knowledge with data, it is possible to model
numerous scenarios and optimize designs to expose total delivered cost by
the customer and product to meet company’s strategic requirements.
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A business manager’s ultimate responsibility over these critical

infrastructure decisions is an extensive experience in supply chain design
with best of breed optimization technology to ensure that the plan will lead
to the best infrastructure decisions.
Global operations also increase supply chain design alternative complexity

and the importance of an accurate assessment of supply chain trade-offs.
Therefore, the importance of regular supply chain design analysis has
increased very much.
A robust infrastructure plan must take into account all of the business
requirements for years to come. To optimize the plan, total supply chain
cost, customer service and strategic business initiatives are to be
considered. Through this process, the optimal infrastructure plan to
support the business operations including critical decisions related to plant,
warehouse and distribution center locations and utilization will be
determined. Some of the management questions that are raised are:
• What is the capacity that should be available at each of these locations?
• What are the transportation modes and lanes that should be used to
move product through your network?
• Which customers should be served from each facility and by which modes
of transportation?
• When is expansion of capacity needed and where and how it should

occur?
• When merging business or operations across subsidiaries, which facilities

should be used and at what levels, and which ones should be closed?
• How many warehouses should the firm use?
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Activity R
• What are the constituents of infrastructure planning?

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7.7.2 Development and Design
With increasing globalization and easier access to alternative products in

today's markets, the importance of product design to generating demand is
more significant than ever. In addition, as supply, and therefore
competition, among companies for the limited market demand increases
and as pricing and other marketing elements become less distinguishing
factors, product design likewise plays a different role by providing
attractive features to generate demand. In this context, demand
generation is used to define how attractive a product design is in terms of
creating demand.
In other words, it is the ability of a product's design to generate demand

by satisfying customer expectations. But product design affects not only
demand generation but also manufacturing processes, cost, quality, and
lead time. The product design affects the associated supply chain and its
requirements directly, including manufacturing, transportation, quality,
quantity, production schedule, material selection, production technologies,
production policies, regulations, and laws. Broadly, the success of the
supply chain depends on the product design and the capabilities of the
supply chain, but the reverse is also true: the success of the product
depends on the supply chain that produces it.
The supply chain is designed around a set of trade-offs, such as fixed

versus variable costs, and transportation versus inventory costs. When
developing supply chain design, companies cannot focus solely on the
mathematical optimal. Instead, firms need to evaluate the “Range of
Indifference” — the set of alternative designs that have similar cost and
service performance but different levels of risk. By evaluating this range of
alternatives, companies can understand the concentration of risk in
activities that are more vulnerable to major swings (e.g., energy and
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transportation costs) versus costs that are more likely to change in a slow,
sustained manner (e.g., labor costs). Figure 7.3 illustrates the scope of
a typical supply chain design.
Figure 7.3: Scope of Typical Supply Chain Design
Activity S
• What is the importance of product design in generating demand?

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7.7.3 Location Decisions
Location decisions are a basic determinant of profitability in international

logistics. Decisions on where to manufacture, to assemble, to store, to
transship and to consolidate can make the difference between profit and
loss. Because of international differences in basic factor costs and because
of exchange rate movements, location decisions are very important. Also,
these decisions involve substantial involvement in fixed assets in the form
of facilities and equipment. Location decisions, therefore, can have a
continuing impact over time on the company’s financial and competitive
position. As movement towards global manufacturing increases,
organizations should consider location decisions through total cost analysis
which includes activity related costs such as manufacturing, transportation
and handling as well as inventory holding costs, tariffs, and taxes.
Firms often must find the location for a new facility. Usually, this decision
follows a process of system analysis and design, wherein a determination is
made of how many facilities the firm should be operating. A growing firm
may decide that it needs a new warehouse to serve a certain region.
Several layers of analyses would be performed, each with a finer focus.
After a region was selected, then a city within the region would be chosen.
Criteria to this point would include markets, availability and wage rates of
labor, tax rates, climate, and transportation. Within that chosen city,
various sites would be examined, taking into account such factors as land-
use controls, street traffic capability, and room for expansion, soil stability,
water- and sewer-line capacity, police and fire protection, and proximity to
rail tracks. Some firms serve contracting or shrinking, markets. They must
decide which production or distribution facilities to choose, and the closure
must be scheduled in a way that reduces adverse impact upon the firm’s
overall operations.
Activity T
• Why so much of an importance is given to a location of a warehouse?

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Mathematical Programming
Mathematical programming is a theoretical tool of management science

and economics in which management operations are described by
mathematical equations that can be manipulated for a variety of purposes.
If the basic descriptions involved take the form of linear algebraic
equations, the technique is described as linear programming. If more
complex forms are required, the term non-linear programming is applied.
Mathematical programming is used in planning production schedules, in
transportation, in military logistics, and in calculating economic growth, by
inserting assumed values for the variables in the equations and solving for
the unknowns. Computers are widely used in obtaining solutions. The
model determines on an aggregate flow basis where the warehouses
should be, where the stocking points should be, how big the warehouses
should be and what kinds of transportation options should be implemented.
Simulation Techniques
Supply chain simulation efforts mainly focus on the improvement of the

performance in term of responsiveness, complexity, and inventory control.
A simulation model of a logistics network is developed to investigate the
impact of the variables associated with production schedules, customer
demand, and transportation delays. It often incorporates a geographic map
of the physical relationships among plants, terminals, warehouses, and
customers. It is suggested that all these should be modeled separately and
then integrated with the underlying logistics network.
A second location analysis method is static simulation. To do this, it is

important to first establish and prioritize which variables will present the
key factors in the analysis. These variables could be inventory costs,
transportation costs, required service levels, ordering costs, labor
availability, etc. The model of the new redesigned process has to contribute
to simplification, minimization and automation of steps, and efficiency
optimization through using new information technology.
After creation of the simulation model of the business process, these

options have to be compared and the model that best supports the
organization’s strategic plans related with the distribution process has to be
chosen.
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An expanded use of static simulation involves a heuristic computation

procedure to assist in the selection of warehouses. In this capacity, the
static simulator can be programmed to evaluate and quantify various
combinations of warehouses from a potential list of locations provided
during problem specification. When utilized to help identify the best
logistics network, the typical heuristic procedure includes all possible
warehouse locations in the initial simulation. Customer destinations are
assigned to the best warehouse based on the lowest total logistics cost.
Given the design objective, the simulation choses the best from the
maximum number of potential locations. The deletion procedure eliminates
the most costly warehouse from the remaining in-system facilities on a
marginal cost basis. The demand previously serviced by the eliminated
warehouse is then reassigned to the next-lowest-cost supply point, and the
quantification procedure is repeated.
Activity U
• What is the importance of the simulation analysis?

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CASE STUDY
Industry Insight: Simulate Before you Restructure
Before launching a supply chain restructuring, Tesco Ltd., Great Britain's

leading food retailer, used a state-of-the-art simulation tool to determine
whether to revamp its frozen foods distribution network. This computer
simulation validated corporate plans to restructure the network and build a
separate facility specifically for frozen foods storage.
Eight of Tesco's British distribution centers carry a mixture of ambient

(general grocery and non-food items), chilled, and frozen products. Two
years ago, Tesco executives began weighing the idea of creating a stand-
alone warehouse strictly for frozen food items, which account for about
10% of the company's grocery store sales. The rationale was that a
separate facility would allow the retailer to expand its range of frozen food
products and gain operational efficiencies. Before they approached the
company's board of directors with the plan, Tesco's distribution executives
decided to simulate the plan's impact on distribution with a computer
model. They selected IBM's software simulation tool, The Supply Chain
Analyzer. Because it can depict different hypothetical situations, the
software gives, companies a way to see the physical, financial, and
informational impact of supply chain restructuring on a distribution
network.
It took, IBM consultants, six weeks to set up and run the computer model
with Tesco's help. Joe Galloway, Tesco's divisional director of supply chain
information technology, reports that much of that time was spent gathering
a year's worth of detail-laden data about its distribution center operations
to input into the model. "We were looking for data on the actual orders that
went through our supply chain by (product) line and by store," he says.
Once the data were fed into the application, it corroborated the soundness
of the model.
When Tesco executives ran the same data through the computer model to
simulate a restructured supply chain with a dedicated frozen food facility,
the results supported their assumptions. The model indicated that the food
retailer could achieve distribution savings in the range of 2% to 5%,
depending on the actual mix of frozen food products stored in the
dedicated facility. Transportation costs would drop because Tesco could
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eliminate trips between distribution centers and make more direct store
deliveries. In addition to consolidating outbound trips, Tesco also
determined that it could realize some savings on the inbound haul because
it would only have to move products from suppliers to a single point rather
than to two or three warehouses.
Inventory carrying costs would decline. If all of the frozen food supplies
were stored in a dedicated facility, the model showed Tesco could actually
reduce its stock holdings or even expand its mix of frozen food products
and increase store sales in this category. Tesco also would eliminate the
need to construct more facilities in the future. Moving frozen foods out of
the distribution centers would free up warehousing space for the expansion
of chilled products. The simulation also indicated that the company might
benefit by trying some alternative approaches.
Finally, the simulation gave Tesco some insights into its current operation
that allowed it to make an immediate, money-saving change. The company
discovered that it could cut back deliveries of certain slow-moving items to
once a week and still maintain adequate stock for its stores. Although
computer simulation helped persuade the board to approve the
restructuring plan, it had another benefit as well. The simulation gave
Tesco's logistics managers a deeper insight into their own supply chain's
operation.
Location Analysis Data Requirements
In a discrete facility location problem, the selection of the sites where new
facilities are to be established is restricted to a finite set of available
candidate locations. The primary location analysis data requirements are
definitions of markets, products, network, customer demand,
transportation rates, and variable and fixed costs.
Market Definition: The market analysis section of a business plan illustrate

the industry and market knowledge including its current size and historic
growth rate as well as other trends and characteristics (e.g., life cycle
stage, projected growth rate) list the major customer groups within the
industry. The demand for each customer is assigned to one of the market
areas.
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Dimensions of market analysis
• Market size (current and future)

• Market Trend
• Market growth rate
• Market profitability
• Industry cost structure
• Distribution channels
• Key success factors
• Key success details
The goal of a market analysis is to determine the attractiveness of a

market, both now and in the future. Organizations evaluate the future
attractiveness of a market by gaining an understanding of evolving
opportunities and threats as they relate to that organization's own
strengths and weaknesses.
Organizations use the finding to guide the investment decisions they make
to advance their success. The findings of a market analysis may motivate
an organization to change various aspects of its investment strategy.
Affected areas may include inventory levels, a workforce expansion/
contraction, facility expansion, purchases of capital equipment, and
promotional activities.
Product Definition: Every product is designed in a particular way —

product analysis enables to understand the important materials,
processing, economic and aesthetic decisions which are required before
any product can be manufactured. An understanding of these decisions can
help in designing and making for ourselves. Individual items, especially
those with similar distribution characteristics, production sites, and channel
arrangements, are grouped or aggregated to simplify the analysis.
Network Definition: Network definition specifies the prime responsibility

of logistical management since a firm’s facilities and structure is used to
provide products and materials to the customers. Logistics facilities
typically include manufacturing plants, warehouses, cross-dock operations,
and retail stores.
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Determining how many of each type of facility are needed, their geographic
locations, and the work to be performed at each is an important part of
network analysis. In certain situations, some of the facility operations may
be outsourced to service specialists. Regardless of who does the actual
work, all facilities must be managed as an integral part of a firm’s logistical
network. Network analysis, not only determines the number and location of
all types of facilities required to perform logistics work, but also determines
what inventory and how much to stock at each facility and where to assign
customer orders for shipment. The network of facilities including
information and transportation forms a structure from which logistical
operations such as processing of customer orders, maintaining inventory
and material handling performed. The analysis must consider geographical
variations. In context of global logistics, issues relating to network design
become increasingly more complex.
Activity V
• What constitutes a ‘market’ and a ‘network’ in a supply chain?

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Transportation Rates: Inbound and outbound transportation rates are a

major data requirement for location analyses. Rates must be provided for
shipments between existing and potential distribution channel members
and markets. In addition, rates must be developed for each shipment size
and for each transportation link between distribution centers and markets.
It is common for supply chain analysis to require in excess of a million
individual rates. Because of the large number, rates are commonly
developed using regressions or are retrieved from diskettes provided by
most carriers.
Variable and Fixed Costs: The final location analysis data requirements
are the variable and fixed costs associated with operating distribution
facilities. Involves such decisions as:
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1. Which products should be inventoried at a warehouse and how the

warehouse fits into overall customer service, inventory, and
transportation strategies of the company.
2. Raises questions about ownership alternatives (public? leased? owned?),

about the degree of material handling mechanization to be employed,
about the size of the facility, and so on.
3. Raises questions about balancing the advantages of nearness to

customers against nearness to plants from a transportation viewpoint,
with due consideration of regional labor and tax differentials and of less
tangible “market presence” considerations.
4. Raises such questions as the proper assignment of customers to

warehouses, the proper use of cross-docking and plant direct supply,
and the proper pattern of inbound supply.
These questions in turn raise still other questions. For instance, in a

situation where there are multiple sources for some products, how much of
each product should be produced by each plant or vendor (different
sources have different landed costs at customers and warehouses)? As
these issues are clearly interdependent, they should be dealt with
simultaneously, if possible. Ignoring some of the interactions or dealing
with issues sequentially instead of simultaneously can yield misleading
conclusions and result in poor managerial decisions.
Variable cost includes expenses related to labor, energy, utilities, and

materials. In general, variable expenses are a function of throughput. Fixed
costs include expenses related to facilities, equipment, and supervisory
management. Within a relevant distribution facility operating range, fixed
costs remain relatively constant. While variable and fixed cost differences
by geography are typically not substantial, there are minor locational
considerations, which should be included to ensure analysis accuracy. The
major differences result from locational peculiarities in wage rates, energy
cost, land values, and taxes.
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Activity W
• What are the differences between variable and fixed costs? Are
transportation costs fixed or variable?
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7.7.4 Inventory Decisions
Inventory optimization is the science of calculating inventory targets. Its

goal is to help meet desired service goals at the lowest total inventory cost
possible. Inventory analysis decisions focus on determining the inventory
management parameters to meet desired service levels with minimum
investment. To drive high levels of customer service at the lowest cost,
inventory optimization provides time-phased inventory targets across all
items and locations. The targets can be output in unit quantity, reorder
points, periods of supply, or financial inventory investments.
This analysis can be designed to refine inventory parameters on a periodic

or daily basis. Daily refinements make parameters more sensitive to
environmental changes such as demand levels or performance cycle
length.
7.7.5 Transportation Decisions
Transportation analyses focus on routing and scheduling of transportation

equipment to improve vehicle and driver utilization while meeting customer
service requirements. Transportation decisions can be characterized as
strategic or tactical. On the strategic level, long-term decisions are made.
These are related to the supply chain design including modes of integration
and are determined by long-term decisions like location, production
capacity, inventory and transportation. Thus, strategic routing decisions
identify fixed transport routes that may be used for months or years.
On the tactical level, medium-term decisions are made for transport

planning with the very short-term decisions taken day-to-day or weekly
basis.
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The objective of transportation analysis is to minimize the combination of

vehicles, hours, and miles required to deliver product.
Transportation Analysis Techniques
Routing and scheduling analyses are particularly important for firms

completing partial load delivery activities such as package or beverage
distribution. The techniques can be classified as heuristic approaches,
exact approaches, interactive approaches, and combination approaches.
Heuristic approaches are “an aid to learning, discovery, or problem-

solving by experimental and especially trial-and-error methods” or “relating
to exploratory problem-solving techniques that utilize self-educating
techniques (as the evaluation of feedback) to improve performance.”
Exact, or optimal, approaches model consists of an objective function

and a set of constraints expressed in the form of a system of equations or
inequalities using mathematical (linear) programming to identify the best
routes.
Interactive approaches utilize a combination of simulation, cost

calculator, or graphics capability to support an interactive decision process.
The decision-maker identifies the alternatives for evaluation and then
determines and plots the routes and calculates the performance
characteristics in terms of time and cost.
Combinations of the three approaches have proven very effective. The

two criteria important when evaluating alternative solution approaches are
generalizability and accuracy.
Generalizability is the ability to efficiently incorporate extensions for special

situations, such as pickups and deliveries, multiple depots, time windows,
vehicle capacities, and legal driving times, in an actual setting.
Accuracy determines the level and credibility in the possible savings as a

result of decreased vehicle operating expense, better customer service,
and improved fleet productivity.
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Transportation Analysis Data Requirements
Transportation analysis requires three types of data: network, demand, and

operating characteristics.
Network analysis represents a network as a set of nodes interconnected

with a set of links. Network outlines all possible routes and is the main
support of any transportation system. By carrying out traffic modelling and
analysis, the following aspects are key:
• Capturing data efficiently

• Facility to interpret the data
• Ability to disseminate that information into meaningful language
Traffic simulation models are used to evaluate the impacts of changes in

traffic volumes and transportation network characteristics (capacity, signal
timing, etc.) on traffic flow patterns (vehicle speeds, acceleration, and
delay).
Traffic simulation models are the best strategies that affect traffic flow, and
can provide a relatively accurate assessment of impacts. The use of global
positioning satellites (GPS) has also facilitated determination of network
locations and possible routes with directions for locating addresses
mentioned on the packages.
Demand data defines periodic customer pickup and delivery requirements.

For strategic or long-term analysis, data is assimilated in terms of average
periodic pickups or deliveries of each customer. Routes are then created on
the basis of the average demand with allowances made for delays or
changes in schedules during extremely high-demand periods.
Operating characteristics define all information regarding vehicle

operations such as the number of vehicles, vehicle limitations, driver
constraints, and operating costs.
Through the use of tactical or strategic transportation analysis, many firms

involved in day-to-day transportation operations have been able to reduce
transportation costs by 10% to 15%. The analysis will become increasingly
important to make effective routing, scheduling, and take consolidation
decisions.
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Activity X
• What do you understand by “network” and “routes” in transportation?

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Freight by Lane Analysis
Freight by lane analysis is based on geographic zones. (Figure 7.4). Freight

Lane Analysis define and view your rates, empty miles, total miles, revenue
miles, and loaded miles, billed miles, and movement miles by lane, over
any time period you choose. The objective when developing Freight Lane
Analysis is to craft a series of loads that combine to generate the necessary
revenue which creates a profit at the completion of each freight lane run.
Freight lanes attempt to coordinate movement between points by moving

combinations of material and finished product between suppliers,
manufacturers, and customers.
When developing a freight lane, it is important to take this imbalance into

consideration. But because a freight lane is imbalanced to some degree, it
does not mean is not worth developing. There are always going to be
freight areas where the inbound freight far exceeds the outbound freight,
meaning there will be more trucks than freight in an area. In a well-
designed freight lane, this imbalance is taken into consideration. It might
be necessary to depart a low freight area empty and head to a location
which has better paying freight, or it might make sense to take that cheap
load to generate cash flow to increase your total revenue on the trip. This
is all decided by doing a Freight Lane Development Analysis.
Triangular freight lanes attempt to coordinate movement between three

points by moving combinations of material and finished product between
manufacturers, distributors and customers.
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!
Figure 7.4: Freight Lane Analysis
7.7.6 Inventory Analysis
In supply chain, ABC analysis is an inventory categorization method which

consists in dividing items into three categories, A, B and C: A being the
most valuable items, C being the least valuable ones.
Inventory optimization is critical in order to keep costs under control within

the supply chain. Yet, in order to get the most from management efforts, it
is efficient to focus on items that costs most to the business.
The ABC approach states that, when reviewing inventory, a company

should rate items from A to C, basing its ratings on the following rules:
• A-items are goods whose annual consumption value is the highest. The
top 70-80% of the annual consumption value of the company typically
accounts for only 10-20% of total inventory items.
• C-items are, on the contrary, items with the lowest consumption value.
The lower 5% of the annual consumption value typically accounts for
50% of total inventory items.
• B-items are the interclass items, with a medium consumption value.

Those 15-25% of annual consumption value typically accounts for 30%
of total inventory items.
! !285
7.8 Summary
This chapter provides a comprehensive review of the logistics planning

process, decisions, and techniques. It is designed to guide the logistics
manager through the overall process of situation analysis, alternative
identification, data collection, quantitative evaluation, and development of
viable recommendations.
The methodology, which is generic enough for most logistics problem-

solving, includes three phases: problem definition and planning, data
collection and analysis, and recommendations and implementation. The
problem definition and planning phase is concerned with the feasibility
assessment and project planning. Feasibility assessment includes situation
analysis, supporting logic development, and cost-benefit estimation.
Project planning requires statements of objectives and constraints,

measurement standard definition, analysis technique specification, and
project work plan development. The data collection and analysis phase
develops assumptions, collects data, and completes the quantitative and
qualitative analyses. Assumptions development and data collection include
tasks to define the analysis approach, formalize assumptions, identify data
sources, and collect data. The analysis step involves definition of analysis
questions, completion of validation and baseline analyses, and completion
of alternative and sensitivity analyses. The recommendations and
implementation phase develops the final plan. The recommendation
development step includes identification and evaluation of the best
alternatives. The implementation step defines a recommended course of
action, schedules development, defines acceptance criteria, and schedules
final implementation.
Ad hoc tactical analyses such as freight lane balancing and ABC inventory
analysis must be completed regularly to respond to changes in
transportation rates, flows, and product demands. Regular supply chain
planning and location analysis is becoming increasingly critical to respond
to changes in global material availability, market demands, and production
resource availability. More tactical tools such as dynamic simulation and
routing and scheduling algorithms can be used to investigate and evaluate
inventory and transportation alternatives. The importance of such
comprehensive planning and analysis methods and tools is growing due to
the possible alternatives to and complexity of global supply chains. 
! !286
1. Explain the concept of a system in a supply chain.
2. Why is a feasibility assessment done before a proposed project?
3. What could be the constraints experienced by the management before

undertaking a new project?
4. How can Big Data help SCM Managers to best of their ability?
5. In what way can a cloud based technology help control it’s

transportation costs?
6. What is the role of sensitivity analysis in systems design and analysis?
7. Why is it important to develop supporting logic to guide the logistical

planning process?
8. In view of distribution network design, discuss the interrelationship that

exists between number of warehouses and:
(a) Delivery lead time
(b) Transportation cost
(c) Warehouse facility cost
9. What is the key objective in freight lane analysis?
10.What is the main advantage of the typical optimization technique in

comparison to simulation?
11.At what point in the typical analysis does the technique give way to the
managerial review and evaluation process?
12.Compare and contrast strategic and tactical transportation decisions.
! !287
1. Every SC system can be broken down into a subsystem which can be

further divided into an internal process such as __________
(i) Designing
(ii) Buying
(iii) Selling
(iv) Informing
(c) (i), (ii) and (iv)
2. Points mentioned below are examples of SWOT analysis:

(a) Strengths, weaknesses, opportunities, threats
(b) Strengths, weariness, opportunities, threats
(c) Strengths, weaknesses, obscenities, threats
(d) Systems, warehouses, operations, techniques
3. Big Data can manage transactions based on __________.

(i) High volume, velocity and variety
(ii) Create effective predictions of future demand
(iii) Avenues which can cut down costs
(iv) Risks and opportunities
4. Logistic companies are using transactional records, delivery data from

individual routes, high-resolution telemetry and movement data on the
level of individual vehicles to develop a more precise picture of their
__________ logistics operations.
(a) Customer service
(b) Warehouse
(c) Last mile
(d) Transportation
! !288
5. You cannot “accidentally” access anyone else’s data on the cloud. So,
your company’s information is secure. Cloud computing is secure
computing.
(a) True
(b) False
Answers: 1. (a), 2. (a), 3. (d), 4. (c), 5. (a)
! !289
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !290

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Logistics and Distribution

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

Chapter Chapter Name Page

1 Introduction to Logistics 4-34

2 Transportation Infrastructure 35-93

3 Transportation Operations 94-130

4 Operational Integration 131-174

5 Global Strategic Positioning 175-198

6 Network Integration 199-240

7 Logistics Design and Operational Planning 241-290

8 Logistics Outsourcing and Best Practices 291-315

10 Packaging, Material Handling and Storage Systems 351-393

11 Cold Chain Management 394-431

12 Relationship Development and Management 432-462

After going through the chapter, students should be able to understand:

• The concept and definitions of Logistics

• The system life cycle and functions of Logistics

• The customer value chain and supply chain synchronization

1.1 Introduction and Concept

1.2 Logistics Definition

1.3 Scope of Logistics

1.4 Logistics in the System Life Cycle

1.5 Customer Value Chain

1.6 Logistics Functions

1.7 Supply Chain Synchronization

1.9 Self Assessment Questions

1.10 Multiple Choice Questions

1.1 Introduction and Concept

In a world which increasingly relies on the division of labor and

Logistics Management is the part of supply chain management that

So, it can be seen that transportation, warehousing, information systems

The concepts of logistics are:

1. The actual work of logistics is supportive in nature. Logistical support is

2. The concept of logistics is based on a total system view of the multitude

In the course of changing socio-economic and ecological conditions, the

1.2 Logistics Definition

“Logistics is that part of Supply Chain Management (SCM) that plans,

So what does the definition mean?

5. To meet customers’ requirements – this means logistics strategies

•What is the objective of logistics management?

1.3 Scope of Logistics

It is of critical importance to the organization how it delivers products and

This speed and reliability in distribution of products and services contribute

Supplier ! Manufacturer ! Resellers ! Customer