Distribution MGMT 706 v1

Distribution Management
Sub Code - 706
Developed by
Prof. Ashish Hathi
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 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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1st Edition, January 2020

PREFACE
Preface
Dear Students,
You have aspired to pursue an education in management and are looking

forward to developing your career path. My best wishes are with you and
I'm excited to be a part of that journey through the medium of this book.
In the 80s/90s, distribution management was in its initial stage and looking
at India’s static infrastructure development picture, it was looked like
everyone was going to have to live with it. Logistics were perhaps not
heard about. But not anymore. Today, it's an integral part of sales &
marketing.
Today, the best sales and marketing strategies need critical support from
distribution management and logistics management to either maintain the
margin and profitability or remain competitive by ensuring an efficient
customer delivery service. In fact, distribution management and logistics
management play this dual role. These concepts (distribution and logistics
management) later evolved extensively as part of Supply Chain
Management (SCM).
However, this function needs a deep understanding of investment-driven

technology to drive customer efficiency, improving the speed of responses
and reducing the cost as well! This is especially changing consumer buying
behaviour (from brick & mortar to online, from kirana stores to mall and so
forth) due to digitalization around them. More than infrastructure
development, momentum has compelled the organization to roll the
sleeves and utilize it as an opportunity. Introduction of the Goods & Service
Tax (GST) has made it possible to trade across the country and
internationally with a single tax vis-a-vis the product category. It has
forced international organizations to look at India as a possible hub and
therefore investment inflows have grown tremendously.
I have endeavoured to provide you with an idea about newer ways of

warehousing, transportation, and distribution management. Wherever
possible, I have included sections to cover online marketing and innovative
technologies helping the organization in making this function efficient and
effective. It was a conscious effort to keep it simple, brief but at the same
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PREFACE
time, I have included various aspects, albeit briefly, to give you a complete
perspective.
I highly recommend everyone to acquire more knowledge about

distribution, logistics and supply chain management by engaging with
various logistics organizations' websites, blogs and articles, and technology
solution service providers websites/blogs. Those keen to get more
structured knowledge may refer to any one of the following books;
(a) Logistics Management: A Systems Integration of

Physical Distribution Management and Materials
Management by Donald J. Bowersox
(b) Logistics and Supply Chain Management by Martin Cristopher
(c) Physical Distribution Management

Logistical Approach by Dr. K. Khanna
Distribution and logistics management is an integral part of successful

marketing and therefore, must remain in your conscious consideration.
Wishing you all the very best and successful completion of the Distance
Learning Program.
Ashish Hathi
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CONTENTS
Contents
Chapter Page
Chapter Name
No. No.
1 Introduction To Logistics Functions 6-39

2 Physical Distribution Process (Distribution Budgets) 40-67
Activities Costs Planning And Control
3 68-88
(Use Of Ratios/Distribution Function Audit)
4 Systems In Distribution Management 89-108

5 Warehouse Management 109-155
6 Inventory Control And Management 156-216
7 Transportation 217-266
8 Operations Research Techniques In Transportation 267-297
9 Multilevel Marketing And Direct Distribution 298-308
10 A Few Case Studies In Distribution 309-323
11 Logistics For Retail 324-344
12 Use Of Technologies In Logistics 345-359
13 Packaging Rules In The Context Of Distribution 360-370
14 The Implications Of GST On Distribution Management 371-378
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INTRODUCTION TO LOGISTICS FUNCTIONS
Chapter 1
Introduction To Logistics Functions
Objectives
After reading this chapter, you will be able to:
• Understand the meaning and definition of the term “Distribution

Management”, “Logistics” and “Supply Chain Management”.
• Understand and appreciate the scope and impact of Logistics and

Distribution.
• Understand what is distribution mission.
• Understand what is distribution strategy.
Structure:
1.1 Introduction
1.2 Overview of Logistics Management
1.3 Distribution Mission
1.4 Distribution Strategy
1.5 Brief Overview of Logistics Function in the Online World
1.6 Summary
1.7 Self Assessment Questions
1.8 Multiple Choice Questions
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1.1 INTRODUCTION
Definition:
Distribution Management can be defined as that arm or wing of

management which serves as a link between Procurement/Purchase,
Manufacturing, Marketing/Sales, and Finance, proper functioning of which
synergizes the effects of all the activities, and absence of which cannot
only reduce efficiencies but can lead to chaos in the organization, cost
escalation and customer dissatisfaction.
Every manufacturing organization have two core needs linked with their
logistics management – (1) Getting desired raw materials to manufacture
their finished goods and (2) Providing consumer with ready-to-use goods.
Raw material suppliers are responsible for supplying the goods to the point
of your manufacturing point. However, it needs to be stored in a secured
manner (warehouse) by you. Later, your finished goods, when ready, needs
to be stored (warehouse), supplied to your distribution channel partners
(transportation). Same is applicable to services, slightly in a different
manner.
Any goods or services will have a basic set of sources from which the raw
materials, ingredients, packaging materials, components–in short all inputs
are obtained. These suppliers who may be called the immediate proximate
sources, may in turn have another set of suppliers for their inputs. The
organization which is being observed for the study would then process/
manufacture some products or services which would then be marketed.
Depending upon the market that is being serviced, the organization will
harness the services of intermediaries who would ensure efficient
distribution of the products and services across the market that the
organization targets.
Organizations may have a direct say in the choice of outlets that are going
to sell the products or at times (as in the case of many fast-moving
consumer convenience products) they may not be able to have a say in the
choice of outlets, because the market forces of demand and supply may
influence the choice of such customer servicing centers.
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This spread or range of market from the source to the ultimate point of
consumption is known as the Supply Chain.
You would observe that in the ultimate analysis the spread of the supply
chain is from inception to ultimate consumption which if observed
philosophically would imply from mother nature (because ultimately every
resource comes from nature) to nature again (because ultimately every
item/being gets back to nature in its elemental forms), but for any
organization the supply chain is that portion of this long chain which covers
its source of supply to its ultimate consumer.
Thus, if we are to map the supply chain of a refrigerator, we may observe

that the manufacturer has a factory where the refrigerators are made.
For manufacturing refrigerators, the organization may be buying

compressors from another compressor manufacturer. The refrigerator unit
may be buying copper pipes from another manufacturer who manufactures
copper pipes. The refrigerator unit may be buying the refrigerant gas from
some unit who manufactures such refrigerants.
Thus, we can see that the refrigerator, manufacturing organization has

several suppliers who in turn may have another set of suppliers. For
example, the compressor manufacturer may be manufacturing the
compressor shell for which he may be sourcing steel sheets from a steel
sheet supplier. He may also buy electric wires from another source.
Thus, when we start linking these suppliers and their suppliers, the chain
keeps on extending backwards.
Similarly, the refrigerator manufacturer may also decide to bypass the

distributor and sell the refrigerators directly to dealers, who may sell to
customers.
There may also be the possibility that the manufacturer decides to open its
own shop where the product may be displayed for customers to buy from.
Thus, we find that when we look at the front end of the supply chain, there
can be several variations of the same.
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Again, the customer after buying the refrigerator and using it for some
time may decide to sell it off to someone else who is interested in a
secondhand refrigerator.
The refrigerator after several years of use may lose its refrigerator
properties, when the used refrigerator may get sold to a scrap dealer, who
in turn may sell the dismantled parts as scrap material.
While this entire chain is so long, for the purpose of control and
management any organization would concentrate on that part of the chain
that affects its immediate business.
Thus in the above case, the refrigerator manufacturer will concentrate on

the chain which would start from the compressor supplier, copper tube
supplier, refrigerant gas supplier and all such other suppliers, at the back
end, and at the front end, till the retailer/dealer from where the customer/
buyer picks up the refrigerator. Thus even in case the refrigerator
manufacturer sells the refrigerators to a distributor, who in turn sells to a
retailer, the refrigerator manufacturer would still bring the retailer in his
ambit of control because the retailer who may not be buying directly from
him, still does have a very important influence on the market standing of
his refrigerator brand, and hence his marketing activity is very critical for
him and needs control and supervision.
Depending upon the nature of the product and its marketing spread, the
size of the chain can vary.
However, one aspect of the chain needs to be noted. And that is,
irrespective of which product is being studied, the chain has a tendency of
converging from a widespread array of sources to some manufacturing/
processing/assembling units, and then the chain spreads itself out, as it
starts its distribution activities. This spread is normally at an exponential
rate as more and more markets are covered.
Across the supply chain, four utilities are created and delivered, viz., Time
utility, Place utility (also called Spatial), Form utility, and
Possession utility.
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One more example is worth mentioning here. Any bearing manufacturer

needs steel tubes of different sizes to make various nature of bearings. In
traditional days, bearing manufacturer used to order number of tubes
required, and supplier used to send them and dump them in the warehouse
of bearing manufacturer. Bearing manufacturer needed to get required
numbers of steel pipes, near their ring cutting machine. Multiple tubes got
sliced to generate rings. Visualize it like a honeycomb. Worker needed to
put, each steel tube manually in this hole of the ring cutter. Logistics
management brought in better aspect in transportation and storing. But
supply chain management looked at integrating backend processes. Under
this, metal stand was manufactured, which aligned with the bearing
manufacturing machines tube slots. Suppliers were asked to send rods duly
mounted in this stand. Thus, supplier started delivering metal stands with
mounted steel tubes in it. When needed, this stand is delivered near
manufacturing units. Workers just needed to match machine end with
metal stand end. Machines started sucking each steel tube inside. Manual
intervention minimized; productivity increased. But this benefited only the
manufacturer. Minor mechanical automation, at their end, also helped them
to fill metal stands faster without manual intervention and minimized
damages during transportation. Thus, even they benefitted. Thus, Supply
chain looks at bringing value by eliminating or innovating different ways to
doing same task, which benefits both parties. This is attended by the
supply chain specialist from the farthest end of raw material supplies till
the other farthest end which delivers goods to the consumer. Logistics
management looks at best and optimal ways to transport and deliver
goods.
Also across the chain, there are certain critical activities whose control and
monitoring are essential to an efficient and effective management of the
supply chain. They are Transportation, Warehousing, Inventory and
Information flow.
The ‘Supply Chain’ also takes care of distribution and logistics.

Distribution is more concerned with the allocation and supply of the
products and services from one unit to another. Thus, this function
concerns itself more with the activity of allocation and fulfillment of
indented requirements. It starts from a stage in the overall process when
the material to be distributed is there. Thus, Distribution may not involve
itself in the process of procurement beyond a certain point, the point being
the overall boundary of the distribution functions operational limit. In short,
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distribution may have more to do with ensuring finished goods are

apportioned and dispatched to different locations. Thus, this function is
often called the downstream operations.
Logistics as a function is more involved with the physical movement,

storage, information flow and such activities of the supply chain.
Logistics can be defined as the science of organizing the

distribution function.
Supply chain is driven by marketing/sales objectives, any marketer would

love to have a situation where the order for a product is in hand before the
marketer starts manufacturing the product. This ideal situation is what we
call a MTO (Made to Order) scene. Such situations are not very common.
They may be in vogue where the marketing involves large projects. For
Example – a construction of a building, infrastructure or a ship/frigate. But
even in such cases, basic materials and components must have been
manufactured before materialization of the order for the end product. Like
in the case of a construction project, steel sheets, steel rods, cement,
besides other ingredients must be available before the work starts.
You may have observed how at an Udipi restaurant, the cook fries the dosa
or masala dosa only after the customer has placed the order. Thus, while
making the end product (viz., a dosa, a masala dosa or an uttapam), the
manufacturer may be taken on hand only after the customer places a firm
order, the intermediate, viz., the paste/dough would have to be kept ready.
Compare this with another situation like a florist will start buying flowers
and making garlands, bouquets, floral stands for decorating a pandal only
after a firm order for such decoration is received in hand.
Thus, in different situations, the (MTO) Make to Order strategy gets slightly
adapted to an Assemble to Order (ATO) scenario. Like in the case of the
Udipi restaurant, the shopkeeper prepares a quantity of dough, based on a
rough estimate of what may be the estimated demand. Since the
preparation of the paste may take a bit of a long period, he cannot afford
the luxury and risk of waiting for the order to materialize and then take on
the task of making the paste.
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Whereas in the case of the florist, he need not keep with him stocks of
flowers (unless some rare species, which may have to be imported from
somewhere, not locally available) but would buy them only after receipt of
the order for floral decoration.
Here, the main differentiating point, you would observe, is how long or
complicated is the process of procuring ingredients or intermediates to
manufacture the end product to be marketed. Thus, in case the process of
manufacture is long, and customers may not have the patience to wait, the
marketer would have to move from a situation of (MTO) Make to Order to a
situation of (ATO) Assemble to Order. Let us also take a modified/changed
version of the Udipi Restaurant. If it is a stall (out of several others) at a
beach, or in an office area, or on a railway platform (where long distance
trains halt), the same dosa seller may keep some dosas fried and ready
even before firm orders are received. This is what we call a (MTS) Make to
Stock mode.
Why? Because customers in a hurry may not wait for the product to be
made and may pick up from the competing outlet where the ready-made
product is available.
So besides a lengthy manufacturing/processing time, the presence of

competition/substitutes may prompt the marketer to shift from a MTO
mode to an MTS mode.
Dell Computers you will observe uses the ATO mode because while on the
face of it, it may appear that Dell configures the PC after receiving the firm
order. It, in reality, keeps certain standards, mostly ordered sets ready and
supplies on receiving a firm order (operates at their backend on MTS
principal).
Most of our day-to-day purchase items in the consumer products segments

are manufactured much before the receipt of orders and in fact in
anticipation of orders, viz., the MTS mode.
The MTS scenario demands anticipation of the demand, which in other

words means making reasonable forecasts and manufacturing accordingly.
Thus, a manufacturer marketer, operating in consumer products markets
has mostly to adopt an MTS strategy, which means that he has to
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anticipate and forecast demand, and accordingly manufacture and stock up

products.
We have thus seen that in a typical supply chain the following situations
may prevail.
• MTO — Make to Order, which is a very ideal scenario but not possible
most of the times.
• MTS — Make to Stock, which is most common, particularly for a mass

production item, where the marketer has several competitors and the
product may have substitutes. The situation is also influenced by the
length of the procurement, processing and manufacturing time.
• ATO — Between the two lies the Assemble to Order situation, when the
manufacturer adopts an in between approach in terms of manufacturing/
processing/procuring ingredients and intermediates and assembling the
final products to customers specifications as and when orders are
received. The ATO situation opens up the doors to another very
important management possibility.
We all know that bulk manufacturing/processing can offer scope of

economies of scale, where under, per unit costs can be reduced. This can
be achieved if the entire process can be compartmentalized and so
managed that, up to a point of common ingredients, the manufacturing/
processing can be volume-driven and only thereafter the segregation into
individual different items are made.
Let me explain with an example. For tomato ketchup, the main ingredient
is tomato paste. The tomato ketchup manufacturer can procure tomatoes
in bulk during the crop season, when the price is low and process the
tomatoes into paste and store the same. Thus, he has been able to obtain
economies of scale in sourcing and processing tomato paste at a time when
tomatoes are cheapest. But he does not convert the entire lot of paste into
tomato ketchup for the consumer market. Depending upon what specific
requirements can be, he may periodically process tomato ketchup into
plain variety, chilly-garlic flavored variety, etc., and pack them into 500
gm/1000 gm bottles at different points of time based on the anticipated
variety-wise estimated demand.
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This way, he has been able to achieve the following objectives:
1. Getting most economic rates, by procuring at the height of the tomato

season, when the price was lowest, in bulk and then obtaining the best
price advantage.
2. Because he procured and processed in bulk, he could get economies of

scale.
3. By not converting the paste into finished products instantly he reduced

his investment in the finished goods inventory.
4. By processing closer to the point of consumption, he could get

maximum advantage of shelf-life of the finished goods.
5. He could make more accurate estimates of pack-wise (500 gms or 1000

gms) variant-wise (plain ketchup, chilly-garlic variety) requirements and
hence produce varieties that would be required and thus not land up
with wide variations between the SKUs produced and SKUs required.
6. In this process, you would observe the manufacturer compartmentalized

the entire tomato ketchup manufacturing exercise into two distinct
compartments.
7. The first one was procuring the tomatoes and processing the same into
paste and storing.
8. The second one was converting periodically the paste into specific
variants of tomato ketchup and packing them into units of 500 gms or
1000 gms, depending upon the various tastes and size-wise demand.
9. This process is known as Decoupling. Just like an engine is decoupled

from a train to make them individual units, the supply chain can also
have points where decoupling takes place in the process across the
supply chain.
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The point of decoupling in the above case was the time when the paste was
manufactured. Upto that point, the manufacturer went in for economies of
scale. Thus, he could resort to lean manufacturing upto that point.
By strategically decoupling from variant-wise/pack-wise manufacturing at

that point, he achieved a situation of lower blockage of funds in inventory
and also not getting stuck with variants which are not in demand.
He reserved for himself the strategic advantage and option of

manufacturing variants/pack size synchronizing with demand patterns. This
gives him the strategic agility and space to maneuver as per the market
requirements.
This process of decoupling can be applied to supply chain also. Thus, one
may move in bulk composite merchandise to certain points in the supply
chain, obtaining the advantages of economies of scale. Thereafter the
process of bulk breaking may take place, where the composite lots of
merchandise can be broken into smaller lots to cater to specific needs of
subsequent units in the supply chain. The overall aim would be to take
advantage of economies of scale to the maximum extent possible.
Supply chains often have to respond to volatility in demand. For a variety

of reasons product and technology life cycles are shortening, competitive
pressures force more frequent product changes and consumers demand
more varieties than ever before. To meet these challenges, organizations
have to achieve more and more agility to respond to both volume changes
and variety changes in a shorter time span.
This focus/requirement in agility may at times contradict with the

requirements of being “lean” in inventory strategy. The term “lean” which
is often used in “JIT” environment, basically means trying to achieve more
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with less. Having its origins in the Toyota Production system, its main
features are elimination of wastes and optimization of the uses of
resources. Obviously as a corollary in production, it would mean volume
manufacturing of relatively standard products (i.e., having low levels of
variety) and a focus on achieving efficiencies in the use of resources and
also in maximizing economies of scale.
In real market situations, the demand patterns of different SKUs can range
from highly regular and predictable to the extremely irregular and
unpredictable.
While “lean” can work best for products having a regular and high value
demand pattern, the same will not work at all in the case of products
having a high variability in demand.
Figure 1.1: The Concept of Decoupling
The lead time of replenishment will also add to the complexity, because if
the lead time is long then for products with high volatility in demand, the
management of the supply chain becomes very complicated. In such cases,
a hybrid lean/agile solution may be tried. This hybrid solution requires the
supply chain to be decoupled through holding strategic inventory in some
generic or unfinished form, with final configuration being completed quickly
once the real demand is known. This is also known as the postponement
strategy. Postponement may also be strategised in the distribution point,
by holding such products in fewer locations (in a extreme cases may be in
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a single location) and moving them to the final market or distribution point
when the demand is known. The goal of this hybrid strategy should be to
build on an agile response system on a lean platform by seeking to follow
lean principles up to the decoupling point and agile processes thereafter.
When the supply chain has to adjust to a (MTS) Make to Stock situation in
place of a (MTO) Make to Order situation, by virtue of nature of the
product, market and competition, the element of forecasting becomes very
critical.
In any forecasting, one must remember the following rules:
• Rule 1: Forecasts are always wrong. Who can predict the future? Hence,
every forecast must include both an expected value of the forecast and
also factor in a measure of forecast error.
• Rule 2: The accuracy of any forecast tends to be inversely proportional

to the period of forecast. This, in other words, means that long-term
forecasts have a larger standard deviation of errors relative to the mean
than short-term forecasts.
• Rule 3: Aggregate forecasts are usually more accurate than

disaggregate forecasts. Thus, forecasts of a composite category will be
more accurate than forecasts for individual components of the composite
category. Thus, the sales forecasts for total toothpaste in a month at a
depot, will be more accurate than forecasts of case lots of 200 gms, 150
gms, 100 gms and 50 gms., or its different variety wise – Colgate Total,
Colgate Salt, Colgate Herbal and likewise.
• Rule 4: This follows from the previous three rules, viz., further up in the
supply chain of the company, the forecasting point is, viz., the further
removed from the consumer, the forecasting point is, greater will be the
distortion, leading to more errors.
To obviate these, supply chains try to break the aggregations of demand at

different points in the chain, i.e., make forecasts decentralized. The Retail
Chain, Seven-Eleven of Japan, has a forecast based replenishment model
where under, a particular store manager makes half day cycle forecasts,
i.e., he/she has to forecast for just the day. This short forecast cycle time
allows the manager to factor in the latest situational factor. For example
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even in summer, if on a particular day, near a store, the conditions are

indicative of rain, she/he may decide to ask for less ice-cream.
Wal-Mart initiated a process of Collaborative Planning Forecasting and

Replenishment (CPFR) model, which in effect means collaborating with
upstream suppliers and business partners by sharing the downstream sales
plans and thereby truncating the end total forecast into smaller short-term
(immediate at times) forecasts. These can be the ways to circumvent the
problem of forecasting.
Importance and Scope of Distribution Management/Logistics

Function
Any marketing organization, be it purely manufacturing based, or

completely of a trading type, or a mixture of both, makes its profits
through a combination of the following activities:
SALES Rs. REVENUE
Less: Cost of Sales Rs. COGS
Gross Margins Rs. GM

Less: Selling/Distribution/Marketing costs Rs. SDMAC
Net Margins Rs. NM
If we analyze the above structure carefully, we shall find that Sales is a

function of Volume × Net Realization.
While:
Volume is dependent on Marketing Inputs, viz., Advertising, Promotions,

and Sales Efforts, Net Realization is dependent on price, taxes, and levies.
Cost of Sales is an aggregate of Cost of Production (dependent on

Prime Costs, costs of manufacturing processes) or on Costs of
Procurement (in case of Traded Items) plus all transport/ handling/
storage costs incurred up to the Point of Sale, and Selling,
Distribution, and Marketing costs are dependent on the extent,
spread, and intensity of the activities involved. In the current context of
globalization,
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When the world has become one big market,
When competition is forcing consumer prices down and down,
When to secure and retain the mind space of consumers, advertising

spends have to keep on increasing, consumers have to be constantly
indulged with promotions, costs of inputs keep on increasing either
due to costs going up, or demand for inputs increasing at a faster pace as
compared to the supply of inputs, there are the following areas which
afford some scope for reducing costs and thereby increasing
profitability.
A. Process optimization be it in manufacturing operations, i.e., better

capacity utilizations, or in procurement by better deals, linking with bulk
procurements.
B. Optimization of Transportation, by better capacity utilization, or

rather by eliminating avoidable duplication of transportation efforts,
moving more and more of materials through Bulk Loads, where per unit
transport rates would be lower than transportation by Part Loads.
C. Locating Distribution Centers in a way as to reduce the total

transportation costs by optimization of movement of finished goods up
to the end-point of the supply chain.
D. Reducing the overall Inventory in the Supply Chain by better

Inventory Plannings.
E. Improving the turnaround of Inventory by reducing the overall

transportation time and thus reducing the time of the ‘Planning Cycle’ as
well as ‘Lead Times’.
F. Efficient Distribution Management thereby reducing the need for

buffer stocks to avoid stock-out situations.
G. Increasing customer service levels by efficient order processing and

delivery times and all the above areas come under the ambit of
Distribution-cum-Logistics-cum-Supply Chain Management and
therein lies the importance and scope of this particular stream of
management subject.
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1.2 OVERVIEW OF LOGISTICS MANAGEMENT
To understand and appreciate the scope and impact of Logistics and

Distribution Management, one can with due acknowledgement to Michael
Porter, state, that Competitive Advantage derives from the value a
company creates for its customers. This value may take the form of selling
equivalent products to its customers at below competitor’s price, or
providing additional unique benefits to more than compensate/offset the
premium price. In this context, let us look at the concept of a Value Chain.
Figure 1.2: Organization’s Internal Value Chain
It is important to see how the above Value Chain identifies the specific
sources of competitive advantage and how they relate to buyer values.
First, you will observe that the Value Chain helps us to determine the role
of Logistics in profitable organizations, how it fits into the business
pipeline. You will also note that logistics represents two of the five primary
business activities that add value to a product or service, and thus
specifically lead to Competitive Advantage.
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• Inbound Logistics: Activities associated with receiving, storing, and

forwarding/issuing inputs to the manufacturing process, or to the
operating unit which has a role in transforming the inputs to some other
form to render it saleable. It also covers handling, warehousing,
inventory control, vehicle scheduling, and returns to suppliers.
• Operations: Activities associated with transforming inputs into the

finished goods, such as processing, machining, packaging, assembling,
labeling, testing, and also machine maintenance, operating facilities, etc.
• Outbound Logistics: Collecting, storing, physically distributing products

to the subsequent links in the Supply Chain. It would also involve
physical movement of goods across the chain from the manufacturing
units.
• Marketing and Sales: Providing the condition in which the customers

can buy or pick up the products, inducing and encouraging them to buy
the products, creating awareness, sustaining interest in the offerings
through advertising, promoting the products, sales force management,
channel selection/evaluation, pricing, etc.
• Service: Providing service to enhance, maintain the value of the

product, involving activities such as installation, repair, parts supply,
training operators, product adjustments. Service may also involve
attending to claims arising due to spoilage, damage to products in the
channel, particularly when products are sold through resellers.
In the above background, innovative activities within Inbound and

Outbound Logistics can create values and consequent competitive
advantages for the organization. Detecting and evaluating linkages
between the way one value activity is performed and the cost of
performance of another can lead to trade-offs and consequent competitive
advantages.
Logistics managers have an increasing role to play in the current changing

business environment, where, from a previous least cost or hard measure
priorities, in the areas of transportation and warehousing, they have to
concentrate on ways to help their companies:
21
• Improve profits,
• Increase market shares,
• Improve cash flows,
• Introduce new products,
• Ensure rapid coverage, and better customer service levels.
To enable the Logistics and Distribution set up to carry out its functions
properly, it is imperative that all logistics functions in the organization are
brought under one business unit.
Materials management, transportation, warehousing, distribution, inbound

logistics, viz., all relevant functions should be unified under an appropriate
mix of centralized management. Providing appropriate logistics service
levels require close coordination of operations with the business strategy.
Low cost logistics involve continuous trade-offs, e.g., increased
transportation spending associated with lower inventory and warehouse
costs. Good decisions in both areas are easier if a single executive is
responsible for all closely related logistics functions.
One can appreciate how functional interests can cause conflicts if one looks
at the following chart:
Logistics Business
Functional Interests
Interface Impact
1. Increased revenues through faster

Sales High
availability of new product variants
Customer
2. More customized products (models) Low
Satisfaction
3. Lesser batch size per variants, i.e.,

more varieties with lesser numbers per
variety, e.g., lesser number of sarees
per print design along with more
number of designs
4. Selling more on credit
5. Spending more on promotions
6. Discontinuing variants fast
Product 1. Extended time horizon for new product

ion introduction
22
Production
2. More standardized products High
Efficiencies
3. Larger batch sizes per variants
4. Purchases on cash
5. More time to respond to changes in

Lower
demand
6. Lesser variants
7. Higher inventory holding
Finance 1. Sales on cash purchase on credit High
Lower
Costs and
2. Controls on all costs
Investment
s
3. Reduced inventories
4. Improved profit margins by lesser

Low
discounts
Functional Interests often conflict with each other in the above context.
An integrated logistics function by working as an interface between
Manufacturing, Marketing/Sales and Finance, can reduce the areas of
conflicts and enhance better cooperation among functions and lead towards
achieving the desired corporate goals.
The Sales and marketing function will always want faster introduction of
models more varieties, lesser numbers per variety, new designs which the
market wants, but which may not be compatible with what the factory may
be producing, whereas the production may want larger runs of a variety so
that they can obtain better capacity utilization, with lesser production down
time, associated with changes in runs, and more volumes per variety, to
obtain economies. Here, one can visualize the points of conflicts.
When we look at the functional interests of the Finance department, we

observe they would always pitch for lower stock levels, maintaining low
market outstandings, stricter controls on various expenses, be those in
Sales or Production, and we can see how all the functions will have
conflicts of interests. Deeper probing will reveal that, if the forecasts and
requirements are timely, then the production departments can plan their
23
part better and reduce the gap in the cross-functional areas of dispute with
sales.
This can be further narrowed if the transportation lead time is reduced,

hubs created to cater to sudden spurts in demands, and we can now see
that the Distribution department has a crucial role to play in the matter.
Similarly, stocks across the supply chain can be controlled by the logistics
department, cost of servicing customers is also in their hands, and
reduction in delivery time to customers can impact the overall market
outstandings position, leading to a position where one can observe how
crucial a role logistics has to play in resolving these cross-functional
conflicts.
1.3 DISTRIBUTION MISSION
As with any other activity, Distribution also can set its own missions. To do
this, one follows certain procedures.
A look at the above diagram will show that in order to decide on a mission,
and plan to achieve the same, one has to follow a set of procedures.
They start with asking the question “where do we wish to be”, the answer
would be the “mission”. But one has to take stock of existing ground
realities before arriving at the “mission”, and this can be done by finding
answers to the question “where are we now”. Thus, mission can follow an
audit of the current state of distribution activities. Having framed the
“distribution mission,” one has to plan strategies (long-term) and tactics
(short-term), and these will be the answers to the question “how do we get
there”. To complete the loop, one must also set up a periodic feedback and
control procedure, and answers to questions “how do we know we have
arrived” would be the basis of such evaluation.
24
Figure 1.3: Distribution Mission
A few examples of Distribution Missions can be:
“Our products should be available in 90% of our target outlets.”
“None of our products on shop shelves should be less than 6 months away
from their date of expiry.”
“All customer orders should be serviced within 48 hours from the time of
receipt at our (C&FAs) carrying & forwarding agents.”
“Minimum fill rate of any customer order should be 90%.”
To achieve the accepted stated and targeted Distribution Mission, which

can be described as a set of goals to be achieved by the system within a
specific product/market context, a proper strategy plan has to be initiated.
25
The strategy initiative will have to start from, and will get shaped by the
following:
1. The Product
a. Is it an Industrial Product, a Consumer Product, or a Service,

even in case of a consumer product, the nature of the product in terms
of attributes such as whether it is a convenience item, a shopping item,
or a specialty item, will also impact the mission and consequent choice
of strategy, e.g., if the item is one of low involvement from the buyer’s
purchase point of view, and is of a very frequent pickup nature, the
distribution may have to emphasize more on width, whereas a product
which is picked up more on exclusivity the distribution may have to be
more selective.
b. What are the production methods involved in the manufacturing

process, viz., can the product be manufactured in stages which can be
distinctly separated, or is the product of a nature where the entire
manufacturing has to be completed at one go. Apparels can be cut into
broad pieces at a central point and finally stitched near the point of sale,
edible oil can be processed at a central point and refilled in to consumer
packs nearer to the point of sale, whereas toothpaste may have to be
packed into consumer packs at the point of primary manufacture itself.
c. Nature of the product, viz., is it solid, liquid, gaseous, hazardous, does it

require special statutory clearances. Does it require special handling
such as refrigerated transportation and storage. Delicate products such
as flowers, fish which are very perishable in nature may dictate the
Distribution Mission.
d. The stage of the product life cycle can also influence the distribution
mission. For example, if the product is at the introduction stage, the
distribution has to be extremely cautious. One cannot distribute the
product very widely in the market unless the product is continuously
tracked. In case the demand for the product does not pick up, the
manufacturer may have to reshuffle the stocks among outlets, to avoid
undue piling up of unsold inventory at retail points. But at the same
time, exercising over caution in distribution may prove
counterproductive, because if the demand quickly picks up, and the
26
marketer is not ready with backup stocks, resultant stock outs can kill
the product.
At the growth stage, the manufacturer must ensure the production is able
to cater to the growing demand. Maturity stage brings in other control
features. Inventory should be strictly controlled. Margins at this stage are
normally under pressure, so distribution costs need to be tightly
administered.
2. The Channel
The channel, the company will use to distribute the product, will also have
to be considered when defining the distribution mission. Direct or indirect
or a combination of the two will influence not only the strategies but will
also impact the gross margins at the different stages of the distribution
process.
3. Outlets
The type of outlets to be targeted, whether they are large, medium, small,
retail chains, superstores, exclusive outlets, multiproduct stores, franchisee
stores, class of stores A, B, C, panwallas, chemists, etc. will have a large
influence on the distribution strategy.
4. Customer service levels

By customer service level, one would understand what standards of order
processing times are being set, what type of order fulfillment standards are
being sought to be achieved, what will be the picking accuracy, what will be
the claim settlement procedures, what will be the take back norms. If the
organization is to set a standard of 100% order fulfillment and that too
within a very short time like one day, it would imply storage norms of a
very high order.
Based on experience, the company may revise Distribution missions as:
“Our product will be available at all retail points in the country.”
“None of our products will be more than 2 months’ old at any retail
shelf.”
“We shall deliver any customer order within 24 hours of receipt.”
27
Thus, from the Distribution Mission will flow the Distribution Strategy.
Strategies are the means whereby the objectives are to be achieved, in

other words they are the routes to the goal.
1.4 DISTRIBUTION STRATEGY
In the case of distribution strategies, one has to examine the options in

terms of cost- effectiveness. This can either mean seeking strategies:
• That will achieve the required customer services at least cost, or

alternatively
• Working within a given distribution budget attempting to maximize

services.
The basis for development of viable distribution strategies will depend on

evaluation of the customer service requirements, estimating the costs of
providing those services, and matching the same with the corporate
distribution goals.
Figure 1.4: Distribution Strategy
28
Let’s look at the various strategies individually and in depth to understand

and appreciate what they imply for a student of Distribution Management.
1. Inventory Strategy: Storage location, stocking norms, safety stocks,

replenishment policy, differential deployment such as ABC analysis
(10:20:70), VED analysis (vital, essential, desirable), stock turnaround
targets. We shall study all these in detail later on.
2. Warehousing Strategy: Number and location of stocking points/

depots, ownership vis-a-vis leased, own vis-a-vis C&FAs, outsourcing,
warehouse design and layout, material handling methods, stock
rotation, Stock returns policy, etc.
3. Transportation Strategy: Own/hired vehicles, own/outsourcing

transportation, customer pickups, vehicle utilization, routing, drop sizes,
types of vehicles, modes of transport, etc.
4. Customer Servicing Strategy: Order processing systems, order fill

system, differential customer responses, damage/claim settlement
policy, stock returns policy, order cycle time, back order policy.
To sum up, all the different aspects that impact the Distribution planning
process and which must be so set up and monitored that the primary aim
of this function, i.e., delivering on the task of rendering competitive
advantage, we can with due acknowledgement to J. Moore sum up the
entire process as under.
Starting from a strategic plan based on markets, products, distribution

channels, one gets into operational planning concerned with manufacturing
and distribution of customer service goals, and budgets followed by actual
management of the functions of inventory control traffic/transportation
manpower deployments and finally on to performance measurements
which can lead to mid-course corrections.
29
Figure 1.5: The Distribution Planning Cycle
Activity
1. As a Logistics Manager, list down your roles in a manufacturing

organization.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
30
1.5 BRIEF OVERVIEW OF LOGISTICS FUNCTION IN THE

ONLINE WORLD
Let us understand the online selling through a website or an APP. It is

explained from the consumer point of view.
Figure 1.6: Online Selling Explanation
Based on the above, let us understand, areas under logistics management.
Shopping Logistics Activities

Stage
Order Receiving order details
Getting physical goods for packing
Pasting labels and covering the parcel
Confirming pick up
Ensure pick up
Delivery Send parcel to the collection hub
31
Arrange onward transport to respective cities
Arrange transport to nearest delivery point

Schedule delivery
Arrange delivery
Obtain delivery confirmation (Recently this step is eliminated)

Return Arrange pick up
Ensure delivery at the nearest return collection point
Ensuring onwards transport to reach supplier

Receive parcel at the local return collection hub
Reach goods to the supplier

Arrange goods return confirmation
MIS Use of hardware like bar code scanner
POD scanner for real time update

Vehicle usage and tracking
Management Minimization of logistics overhead by smart approach
Deciding locations of warehouse, collection centre, distribution

centre and its set up details
Deciding whether to have own set up for goods movement or
outsource
Modes of transport
Productivity, efficiency, effectiveness and profitability
(List may not be exhaustive as it differs based on level of IT integration

and logistics approach).
Having listed what logistics management needs to do, we will limit

ourselves to understand goods movement for non-perishable item.
Fo l l o w i n g i l l u s t ra t i o n s a n d c o n t e x t u a l i d e a i s o b t a i n e d f r o m
Springernature.com, known media that helps research community and
their published report based on extensive research among 1000 online
marketers.
32
Figure 1.7: Physical Forward Movement of Goods under Online Marketing
DC – Distribution Centre
When you closely observe the above, following understanding about the
logistics management in order delivery (forward handling) can be obtained
(following points matches with numerical indicators in the above diagram);
1. Many online marketers have opened their physical stores in many cities.
In such a case, consumer can have product viewed as per his
convenience, ref nos noted, can walk into actual shop and purchase post
physical verification.
2. Supplier supplies the goods in bulk at the warehouse of online marketer,

who intern delivers the goods at the customer location. This shipment
also has logistical needs to handle deliveries across different cities. At
the warehouse or at different cities online marketer will have collection
centre, where goods from different supplier/warehouse is collected and
sorted as per the city or localities. Onward transportation is arranged.
3. Online marketers intimate the order to empaneled suppliers, who

directly drop the goods at the customer location.
33
4. Online marketers receive the order, passes it on to their nearest physical

store, who in turn, supplies it to the end consumer.
5. Click and Collect – This module is implemented by D-Mart in India.

Looking at its phenomenal success at the physical store, where people
used to come to buy from long-distance. Customers were bit aggrieved
about spending on transport and parking inconvenience faced. D-Mart
has opened very small outlets across city, known as D-Mart Ready. This
is an outlet from where customers can collect goods, ordered by them
on D-Mart portal. D-Mart Ready receives entire consignment of goods
packed for the specific customer. Click and collect concept can be
applied where collection centre is their existing physical store.
6. Click and Reserve – Variation from the above is that customer orders
and reserves specific items. Outlet reserve the goods from their normal
inventory. Customer has a choice to collect or get delivered at home.
Some nominal extra charges are applicable towards goods delivery.
We will briefly take the overview of physical return movement of goods

under online marketing.
Figure 1.8: Physical Return Movement of Goods under Online Marketing
34
When you closely observe the above, following understanding about the
logistics management in order return (return handling) can be obtained;
1. If you have understood, forward movement, above diagram explains

you return goods logistics.
2. You will observe that main supplier is not shown in this diagram. It does
not mean; they are not part of the return logistics. If customer has
sought the refund, online marketer directly pays back to the customer.
However, goods have been already purchased from the supplier, physical
goods are sent back only if found to have manufacturing defects. If
customer has ordered another product, same is supplied from the
available stock and monetary difference is settled appropriately.
In the subsequent chapter, we will understand above aspects in little more

details.
35
1.6 SUMMARY
Distribution management acts as a link to other functions of management

like Marketing/Sales, Manufacturing/Procurement/Purchase and Finance
and enables an organization to function smoothly and efficiently. In this
context, the contents of this chapter, Logistics Functions, play a very
important part of distribution management.
The concepts have been dealt with examples like activities in any
marketing organisation and what roles they (sales, volume, margins,
inputs, taxation, cost of sales and finally profitability) play in the process.
The importance of value chain and its importance in a competitive
environment, functions of logistics and the role of a Logistics Manager in
the organization. Cross-functional relationship, Distribution mission (set of
goals to be achieved by the system within a specific product/market
context), Distribution Strategy (routes to the goal achievement strategy,
warehousing strategy, transportation strategy, customer servicing strategy)
are the detailed contents of this chapter. In today’s world, it is essential to
understand physical distribution in the online marketing world. We have
understood forward distribution logistics (i.e., delivery of goods) and its
different six formats. We have also learnt about the return goods logistics
and its different formats. In essence, starting from a strategic plan based
on markets, products, distribution channels, one gets into operational
planning concerned with manufacturing and distribution, customer service
goals, and budgets followed by actual management of the functions of
inventory control traffic/ transportation manpower deployments and finally
on to performance measurements which can lead to mid-course
corrections, is the theme of this section.
36
1.7 SELF ASSESSMENT QUESTIONS
1. What is the meaning and definition of the term “Distribution

Management”?
2. Describe the scope and impact of Logistics and Distribution.
3. Explain the term “distribution mission”.
4. What is distribution strategy?
5. What is forward distribution logistics? Provide brief explanation about

different formats.
6. What is return goods logistics? Provide brief explanation about different

formats.
1.8 MULTIPLE CHOICE QUESTIONS
1. Every manufacturing organization have two core needs in their logistics

management – (i) getting desired raw materials to manufacture their
finished and (ii) ______________.
(a) Arranging manufacturing of their finished product
(b) Arranging marketing of their branded product
(c) Providing consumer with ready-to-use goods
(d) Produce environment-friendly products
2. Distribution is more concerned with the allocation and supply of the

products and services from one unit to the final retail counter. Thus, this
function is also called __________.
(a) Upstream operations
(b) Forward operations
(c) Movement operations
(d) Downstream operations
37
3. There are different distribution strategies Logistics Manager needs to

develop, which includes: (i) Inventory strategy, (ii) ________________,
(iii) Transportation strategy and (iv) Customer service strategy.
(a) Warehouse strategy
(b) Distributor strategy
(c) Product mix strategy
(d) None of the above
4. In a physical forward movement, Click and Collect format means

__________.
(a) Click order online and order collection online to online marketer
(b) Click online and collect from nearest outlet by online marketer
(c) Click online and collect cash on delivery
5. Any organization’s internal value chain has five core contributing

functions namely – (i) Inbound logistics, (ii) Operations, (iii)
__________, (iv) Marketing and Sales, and (v) Service.
(a) Logistics management
(b) Supply chain management
(c) Distribution management
(d) Outbound logistics
Ans.: 1. – (c); 2. – (d); 3. – (a); 4. – (b); 5. – (d).
38
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
39
PHYSICAL DISTRIBUTION PROCESS (DISTRIBUTION BUDGET)
Chapter 2
Physical Distribution Process
(Distribution Budget)
Objectives
• Understand the physical distribution process.
• Understand what is distribution budgets.
Structure:
2.1 Introduction: The Physical Distribution Process
2.2 Physical Distribution in the Online Market
2.3 Distribution Budget
2.4 Summary
40
2.1 INTRODUCTION: THE PHYSICAL DISTRIBUTION

PROCESS
After understanding Supply Chain Management, Logistics Management and

Distribution Management and their respective coverage and scope in this
chapter, we will see physical distribution management in detail.
Physical distribution scope is essentially covering supplies of goods from

the manufacturers to a consumer. However, there are so many products,
which are needed to manufacture one specific product, e.g., car
manufacturing needs so many parts such as engine, steering and many
more. Thus, finished product of one manufacturer (engine manufacturer)
becomes a raw material for another manufacturers. Finished product of this
manufacturer may become a final consumable product by the masses
(after collecting raw materials like engine, steering, wiper and many more,
a car manufactured becomes a finished product by a consumer also termed
as end consumer or final consumer).
To explain it better, it is divided in two distinct trade zones – (1) Business

to Business (B2B) and (2) Business to Consumer (B2C). Engine
manufacturing and selling to a car manufacturer is a B2B trade, and car
manufacturing and selling is a B2C trade.
Physical distribution for each differs. B2C may have numerous different
physical distribution patterns. We will understand basic patterns.
A typical supply chain in any organization would look somewhat as under:
41
Figure 2.1: Overview of Typical supply Chain
RM – Raw material; C&FA – Carrying & Forwarding Agent; AD – Authorized

Distributors
This figure helps you to get an overview of B2B and then B2C supply chain.
This entire book is essentially based on B2C narratives, based on which, it
is easy to understand B2B physical distribution as well.
Under B2B trade, the following aspects need to be understood;
a. One raw material producer supplies its part to Original Equipment

Manufacturer (OEM) – Steering wheel producer, who supplies his
produce to Maruti, Hyundai and M&M car manufacturers.
b. Major part of its finished goods making raw materials supplies are tied
up by OEM with his raw material producers.
c. Same raw material producers will also supply this part to distributors,
who in turn will supply it to citywide retailers. To safeguard the interest
of end consumers, they may be certified also.
42
d. These retailers mainly satisfy replacement needs – Bearing

manufacturer supplies bearings to equipment manufacturers. These
equipment are used in a plant. When bearing inside this equipment fails,
it needs immediate replacement from the nearby source. Local retailers
satisfy this replacement needs also known as ‘’After market’’.
Under B2C trade, the following aspects needs to be understood:
a. Certain finished goods are directly sold through city based authorized
distributors – car.
b. However, such goods are kept either at the state warehouses and
invoiced to AD, when needed. Post GST regime, this is not required. We
will learn about it later.
c. Other distribution pattern given is applicable as per the product

category and depth of its distribution.
The exploded view of typical supply chain in any organization would look
somewhat as under:
Figure 2.2: The Supply Chain
43
RM — Raw Material; PM — Packing Material CWH; — Central Warehouse;
C&FA — Carrying & Forwarding Agent
While in the figure the linkages have been shown as between the factory to
a central warehouse and then onwards to C&FAs and distributors, in real
life, the linkages can have various combinations such as:
• From the factory direct to a C&FA

• From the CWH to a large distributor
• From the C&FA or from the CWH or even from the factory to a large
retailer
• From the distributor to wholesaler to a retailer and so on
This chain can take various shapes and sizes depending upon:
• The nature of the product,

• The company’s distribution policy and objectives,
• The type of the market,
• The geographical spread,
• The size of the organization itself,
• Its scale of operations, as well as
• The stage of the Product Life Cycle the product is in.
For instance, in the case of an Industrial Product, the chain can bypass the
links of warehouses/distributors and make the product directly available
from the factory gate to the user/buyer.
Similarly, many institutional buyers may buy directly from the company
and not through distributors, which may also be the case with large
retailers, particularly in the present environments.
Let us have a look at the various terms one comes across in the market
such as:
44
• Super Distributor,
• Super Stockist,
• Distributors,
• Stockists,
• Wholesalers,
• Dealers,
• Key Accounts,
• Institutional buyers,
• Retailers,
• Large Retail Formats,
• Franchisees,
• Exclusive Showrooms,
• Multi Brand Outlets,
• Retail Chain, etc.
In the supply chain, at some point the ownership of the product moves/
gets transferred from the company to an outsider, which is basically the
point of sale.
Normally, this transfer of ownership takes place at the Company depot,

which can be the company warehouse or (C&FA) a Carrying and Forwarding
Agent. Up to this point, the ownership of the products vest in the
Company, and hence the C&FA is but an extended arm of the company.
Thus, the C&FA is only an agent acting on behalf of the Company, taking
care of receipts, storage, handling, issues, of the products kept in his
charge. Once the Company sells the product to the next link in the chain,
the ownership gets transferred to the buyer. From here on, they take over
the further distribution.
45
Figure 2.3: Intermediaries
Situation of Three Suppliers and Three Procurers
In the diagram shown above, figure 2.3 you will observe that the product
before it reaches the end consumer, passes through a series of
intermediaries and therein we come across all the above terms.
If we look at the role played by intermediaries in a supply chain, we shall

see that their biggest contribution is in reducing the number of
transactions.
In the diagram below, figure 2.4 if there are three manufacturers

(suppliers) of three items and there are three buyers (procurers), each of
whom wishes to buy each of the three items, there would be nine
transactions, as can be seen under “DIRECT”.
Figure 2.4: Advantage of Intermediary in Distribution System
46
If an intermediary were to be inducted, and the intermediary was to buy

from the three manufacturers and from whom the three buyers were to
procure, the number of transactions would reduce to six, as can be seen
under “THROUGH INTERMEDIARY”.
Above understanding brings us to our need to understand ‘Levels of

Distribution’, explained as follows:
Level Zero: A level zero distribution channel is the simplest. It involves a

direct sale from manufacturers to consumers with no intermediary.
Level One: A level one channel has one intermediary as the middleman
between the producer and consumer. An example is a retailer between
manufacturer and consumer.
Level Two: When thinking about levels, associate the number to the
number of intermediaries. In this case, a level two channel involves two
intermediaries between producer and consumer. An example here would be
a wholesaler selling to a retailer who then sells to the consumer.
Level Three: Here’s where an agent or broker comes in. Agents work on
behalf of companies and deal primarily with wholesalers. From here, the
wholesalers sell to retailers who then sell to consumers.
Above initial understanding also makes it essential for us to understand the

three different types of distribution. Different types of distribution are the
result of depth at which it needs to be sold, intensity of product’s purchase,
frequency of product purchase, probability of brand switch in case of your
brand’s non-availability and more.
47
There are three methods of distribution that outline how manufacturers

choose how they want their goods to be dispersed in the market.
1. Intensive Distribution: Needed for frequently used; needed to give

close proximity of product’s availability to consumers. Here, as many
outlets as possibly opened. The goal of intensive distribution is to
penetrate as much of the market as possible. Also, no specific store
related criteria or location. It may be available in general store, paan
shops in any locality, e.g., soft drink.
2. Selective Distribution: Needed for occasionally but regularly needing

items like cloths. Here, select outlet/s are opened in specific select
locations. This is often based on a particular good and its fit within a
store. Doing this allows manufacturers to pick a price point that targets
a specific market of consumer, therefore providing a more customized
shopping experience. Selective distribution caps the number of locations
in a particular area.
3. Exclusive Distribution: Limited outlets. This can mean anything from

luxury brands that are exclusive to special collections available only in
particular locations or stores. This method helps maintain a brand’s
image and product exclusivity. Some examples of companies that enact
exclusive distribution would be high-end jewellery store by TITAN,
exclusive watches by RADO.
Now, let us extend the scenario as given in Fig. 2.4, a bit further.
A large manufacturer who wishes to distribute to a large and scattered

customer base, may find supplying to numerous retailers itself a very big
task. So, the manufacturer may induct an intermediary in between the
company and its retailer base.
The main function of this inter-intermediary, if we may call him so, is to

stock the products bought from the manufacturer, and then distribute the
same to the retailers.
Thus, companies initially would appoint Stockists who would buy from the
company, and sell to retailers. They would be given a margin for these
services which would involve,
48
• Stocking up the products,

• Supplying to the retailers as per their requirements,
• Selling them either against cash or on credit,
• Servicing the outlets in terms of proper stock availability,
• Stock rotation,
• Attending to cases of complaints, be they quality related, age related,
damage related, and
• Passing on promotional benefits that the Company may extend from time
to time in other words, de facto serve as the company’s extended arm in
the market.
Over a period of time this redistribution aspect of the Stockist’s function

got more recognition, and hence companies started designating them as
Distributors just to highlight their role and importance.
While no company can limit the area to be covered/serviced by individual

Distributors, as the same would amount to Restrictive Trade Practices,
companies generally have understandings, where under, individual
Distributors service Retailers/Outlets in designated territories.
Thus in effect Distributors and Stockists are the same as far as their
market roles and relationships with companies are concerned.
In pharmaceutical companies, the term Stockist is more common, as the

trade normally follows a pattern of absolutely free/open territories,
because the products are of a nature (light in comparison to value), where
large values can be ferried across a longer distance at comparatively less
costs per unit of sale, as compared to FMCG, consumer items (heavier in
comparison to value) which cost substantially more per unit of carriage.
Since companies deliver (or arrange to deliver through transport bookings)

ordered goods to the Distributors, a minimum quantity of order may be
required as the threshold level below which it may not make economic
sense to service such orders. At the same time, the local retailers in the
markets may require servicing by some one and the company may ill afford
to neglect the market.
In such cases, the company may appoint a Super Stockist or Super

Distributor, at some vantage point, and they would service such small
Distributors, (over and above their assigned retailers) and for that the
49
company will part with an additional margin to the Super Distributor/Super

Stockist.
Wholesalers are also intermediaries in the chain, and they too buy
products from the company and sell to others, viz., retailers, but the
distinction of a wholesaler from a Distributor or Stockist is that he does
not render any follow-up service in the market.
Thus, once he sells to the retailer, he will not take over any responsibility of
stock rotation, take backs in case of minor storage damages, settle any
date expiry claims, etc.
The wholesaler works principally on bulk deals, if he gets at a reduced rate

in bulk he will lift stocks and quickly resell the same and recover his
investments. He rotates his investments.
Wholesalers play an important role in respect of those outlets who being

very small, or located outside the normal beat of Distributors, are not
covered in the regular fashion.
These outlets often come to wholesalers and lift assortment of various

products in one shopping trip. Thus, one finds wholesalers are normally
situated at particular spots which come to be known as Wholesale
markets. At times, the large wholesalers may sell in smaller bulks to
smaller wholesalers in smaller towns, where these wholesalers then resell
to retailers situated there or there around.
In rural markets where regular Distributors may find it unprofitable to

service retailers, the gap is often filled by the Wholesalers, and to that
extent they play a very important role in the re distribution arena.
Institutional buyers are customers who may be buying in large lots for
their own consumption, use by their constituents, or resale to their own
internal customers.
Thus, large hotel chains may be buying consumer products for giving to
their guests as part of the room service, hospitals may be buying items of
everyday use for their indoor patients.
50
Sometimes, the institutional buyer may be buying for resale to their

constituents like in the case of the Services’ Canteen Stores Department,
who buy in bulk for resale to the members of the Armed Forces at special
prices through their chain of Area Depots. Railways, Airlines, may also be
large purchasers and thus be institutional buyers. Companies may like to
segregate this type of business under a separate head and call it as Key
Accounts.
Dealers, Retailers, Large Retail Formats, Franchisees, Exclusive

Showrooms, Multi Brand Outlets, Retail Chain, etc. are all basically
the last link in the chain from where actual customers/users pick up their
requirements.
The names and nomenclatures denote their specific features/structures/

relationships with manufacturers.
Thus, one can see that intermediaries are required to penetrate the market
and increase the width and reach of products, which are particularly of a
mass marketing nature, such as FMCG, pharmaceuticals, mobile,
telecommunication, etc.
The decision to use intermediaries (as described above) to perform all or

part of the organization’s distribution activities require careful evaluation of
the costs and the benefits involved.
The main benefits offered by intermediaries are:
• Increased outlet coverage at lower coverage cost per outlet,

• Stock holding shared by an intermediary (but in this, one has to factor in
the credit extended by the company to the intermediary),
• Better market coverage,
• Improved market information, and
• Credit extension to retailers by the intermediary.
But at the same time, there are some costs:
• Loss of direct control,

• Dilution of central focus on the company’s product lines particularly if the
intermediary has many agencies,
• Information can be limited, selective and biased,
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• Customer service can be at risk, and

• Vulnerability to intermediary’s pressure tactics.
Hence, the organization has to do a rigorous cost-benefit analysis

on the following lines:
• Ability to meet stringent customer service requirements at a reasonable

cost,
• Reduction in the amount of capital employed in distribution,
• Flexibility of capacity,
• Increased geographical coverage,
• Lowering operating costs, both overall and in peripheral areas vis-a-vis
loss of direct control,
• Problems of establishing accountability, such as stock losses,
• Inability to respond quickly to special demands,
• Higher costs due to damage and stock losses, and
• Communication problems with the end consumers.
The distribution task has to adapt itself to the market conditions as per the
reseller market format which the organization is servicing.
We have seen above the value additions an intermediary contributes in the

supply chain. Across the supply chain, four utilities (a state of being useful,
satisfying some want) are delivered. These four utilities are Time utility,
Place utility, Form utility and Possession utility. The best way to understand
this is through an example.
Apples are a seasonal fruit. If the apples grown let us say in northern
regions in India are made available to a customer in southern India, the
supply chain has delivered a “place” utility. If the apples plucked in winter,
are refrigerated, stored and made available to a customer in May, then the
supply chain has delivered a “time” utility. If the apples are processed into
pulp, for storing, transporting and making available to consumers, then the
transformation to pulp is an example of “form” utility. Across the chain
when apples are purchased from farmers, sold to intermediaries, retailers
and ultimate consumers, ownerships are continuously changing and
“possession” utility gets delivered.
52
In order to deliver these utilities through the supply chain depending upon
the nature of the product and the spread of the market, intermediaries are
required.
Thus, one can see that intermediaries are needed to penetrate the market
and increase the width and reach of products, which are particularly of a
mass marketing nature, such as FMCG, pharmaceuticals, mobile
telecommunication, etc.
However in certain cases the task would be much simpler, where the
organization supplies direct to consumers/end-users, like in the case of
Industrial Products sold to Original Equipment Manufacturers (OEMs) or
manufacturing/user units.
Referring to the Supply Chain diagram as given at the beginning of this

chapter figure 2.1, one can observe that the basic distribution task is
characterized by a flow of finished goods between Sources and Sinks.
Sources are facilities from which freights originate such as company

plants, third-party manufacturing units, outside contractors, raw material
sources, vendor warehouses, etc.
Sinks are facilities that receive freight, like customer locations, factory
warehouse, plants, etc.
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Figure 2.5: The Process of Distribution
Source – RM — Raw Material
CWH — Central Warehouse
Sink – C&FA — Carrying and Forwarding Agents
As a continuous process of distribution, sinks often become a source for

the next sink, e.g., the warehouse may be the sink for source — Factory,
and at the same time be the source for a sink — Distributor.
This brings us to a very important issue involving movement of materials

across the chain, and that is, how much of each product should be shipped
from each source to each sink so that the gross margin contribution of
the operation is maximized or its cost is minimized.
When shipment size (against a customer order) is generally less than a

truck load (LTL), the organization may adopt a procedure where under,
material may be moved in full truck loads (FTL) from a source (let’s say a
factory) to an intermediate sink (let’s say a warehouse), and thereafter the
54
truck load of material may be broken into smaller lots (bulk breaking),
for shipment to the others in LTLs.
In case this process involves requirements of smaller lots at the

warehouse/depot levels, the shipment in FTLs can be made to an
intermediate Central Warehouse or Regional Mother depot where the
subsequent breaking into smaller LTLs can be done for the final shipment
to the warehouse.
Thus, this process of bulk breaking is also an activity that is integral to the
supply chain. Bulk Breaking may be defined as the process of
reconstituting composite large lots of merchandise into smaller lots, at any
point in the supply chain, in order to cater to specific requirements of
subsequent links in the chain.
Thus, one would observe that logistics strategy requires:
1. Reduction of overall transportation costs by moving large/bulk

shipments in FTLs over long distances to intermediate warehouses, at
low per unit rates, and from there movements in LTLs to subsequent
sinks at relatively higher per unit rates, but over shorter distances.
2. Improve Response time by locating order servicing units nearer to

purchasers so that customer orders are attended to faster, than if they
are to be serviced from a central unit.
3. By dispersing inventories across a widespread of warehouses or sinks

the vulnerability of the entire system to problems (such as fire, strike,
etc.) affecting any individual warehouse/s is reduced.
But against the above advantages, one has to weigh the disadvantages,
viz.,
1. Increase in the overall inventory, due to increased number of stocking

points, necessitating multiplicity of safety stocks, increased levels of in-
transit materials.
2. Warehousing costs moving up, because of increased requirements of

space (as the overall inventory will increase), increase in handling,
storing, dispensing costs.
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Thus, the Distribution system has to work out a trade-off as to which will
be the optimum mix of the above two elements, so that overall costs are
minimized and at the same time response time reduced.
To appreciate how inventory levels move up in the chain as an effect of

increase in demand at one point when the inventory has to be planned at
several points (we’ll call it the acceleration effect), let’s look at a case
where the chain comprises:
• A factory, which stocks 8 weeks of inventory,
• A warehouse/C&FA which stocks 12 weeks of inventory, and
• A retailer which stocks 2 weeks of inventory, from whom customers lift

their requirements.
From the above, you’ll observe that a spurt in demand of 10% at the
customer level will translate to an increased requirement of 14.84% at the
factory level if the stocking norms are to be met down the supply chain
line.
This phenomenon is known as the “Whip-lash effect.”
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2.2 Physical DISTRIBUTION in THE online market
Online market is a virtual market, without any physical brick-and-mortar

built store/s, yet selling multiple products as small as stapler pins to cars
and industrial machineries.
Increasing penetration of smartphone and net connectivity has fueled this

change. Here, despite not having a physical store, the order taken takes
the responsibility to: (1) demonstrate the goods, (2) provide information
and display, (3) supply goods, (4) arrange the delivery at the intended
place, (4) Take back the product, if not liked and (5) service the product, if
requested.
This has made it necessary for change in the physical distribution

approach.
Online Market Logistics: As online retail has grown, especially in non-

food related industries such as fashion or electronics, where goods are
shipped to customers through postal or freight networks, there has been a
need for three major functions from logistics;
a. Mega Warehouse Centres: The merchandise to be sold is stocked in

these centres. These centres may either be maintained by the online
retailer or by a third-party logistics service provider. These facilities are
generally very large and usually operate 24 hours a day and 7 days a
week. Today, many mega e-fulfillment centres also acts as collection
hubs.
b. Collection Hubs: Collection hubs or sortation centres are points where

the outgoing parcels are divided based on destinations so that they can
be sent to the parcel delivery centres.
c. Delivery Centres: The parcel delivery centre is the last stage before
the package reaches the customer. The sorted parcels arrive to these
centres and are then sent out to the customer.
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Changes in Online Market’s Distribution Approach
Online marketing players have been continuously evolving to discover

smart and customer service centric idea to ensure prompt delivery, return
and replacement, and servicing. Following few formats may be considered
for understanding.
1. Centralized Warehouse: Players like Amazon can have centralized

warehouse in a country. It stocks all items offered on their portal or an
APP. When order is received, they pack the goods, verify payment
receipt status and dispatch the goods. When goods needs to be
returned back, arrangement is made with courier service provider, who
collects the goods back, reaches it to the agreed location and online
marketer, supplies new or alternative product to the consumer.
Advantages are like genuine product supply, minimal logistic variations
to handle, better control on consumer experience. It has disadvantages
like time lag of service, limited product supplies being offered, it was
only possible to act as order aggregator. Marketers needed to procure
goods, thus higher investment for him, it was feasible where large space
is available, taxation system is friendly and online payment was possible
through bank only with its own time lag for money transfer. Online
marketer attended this by opening few warehouses across the country.
2. Multiple Distribution Centres: With phenomenal growth being

witnessed, both online marketers and producers realized the need to
collaborate and develop effective ecosystem. Under this, MDC concept
started. Online marketers need to have multiple distribution centres,
where product whose order is received is supplied from major
distributor for that area. This is collected at this distribution centres and
dispatched to consumer. Online marketers were able to add more items
for sale. However, it faced resistance from local retailer, who any which
ways facing price competition from the online marketers.
3. Retailer Distribution Centres: Now, online marketers encouraged

retailers to come forward and participate in this revolution. Affected by
their onslaught, retailers were encouraged to register. Order when
received, backend IT program checks the nearest retailer from where
this product can be picked up and delivered to the customer. Approach
was well received but demanded lot of work on IT front – Retailers to
commit stock, price, offer and consumers needed to know, whether it is
58
available, and will he get it in desired number of days. Thus, you see pin
code check in today’s online marketing portals and number of available
products.
When goods are ordered, consumer knows its availability, provider and
number of days within which he can expect to get it.
Order when placed, IT program is identified nearest point to pick up the

goods, requisition goes to backend collection logistics service provider,
collected good is delivered at the collection hub and from there dispatched
to the delivery centres. All these changes were made possible due to free
ways in which individuals can pay money online.
Online marketers can supply as many products, they could pull in

traditional merchants and artisans on their platform, could offer largest
possible range, and create smart and integrated logistics model for goods
supply and delivery, and goods return.
Perishable goods online marketers mostly use multiple distribution centres

concept, with few large warehouse and processing centres and thus to
procure goods at the cheaper rates and store them longer. Some may need
to bring cold storage in their scheme of things to support such products.
Food supply online marketers/APPs operate on tie-ups with well-known

restaurants and work out differentiated price to attract consumer. They
need to develop efficient pick-up-delivery distribution. They enroll people
with bikes and cycles to work on full/part-time and when order is received,
person in the area gets the notification to pick up the ready order and
deliver it to the consumer. Payment can be online or on delivery. Well-
known players are considering opening of decentralized kitchens in one
city, make their items and provide goods from there as well.
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• Activity
1. List down the challenges of online distribution including return goods

management.
…………………………………………………………………………………………………………………………
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2.3 DISTRIBUTION BUDGET
A Budget can be defined as a planned set of activities, translated into a

statement of revenue and expenses, having a place, time and condition
dimension.
Budgeting is basically a tool for Planning and Control.
Like any other budget, a Distribution Budget will have to consider:
• The activities required to be performed – Objectives/Targets.

• The costs/expenses required to perform those activities.
• The period of time and area to which the activities will pertain.
The activities may well start from the sales plan, which will indicate
product-wise/sku wise (SKU means stock keeping units, e.g., if Colgate is
selling white toothpaste in tubes of 50 gm, 100 gm, 200 gm, then each of
these items, viz., 50 gm pack size, 100 gm pack size, 200 gm pack size is
a SKU) planned to be sold at individual sales point.
The annual plan may also be broken into indicative month-wise

requirements.
If we look at the supply chain we will observe that the sales plan based
requirements of finished goods will aggregate at certain sales points, which
may be warehouses, C&FA points, regional depots, or may even be the
factory gate.
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Depending upon:
1. The stocking norms,
2. The lead time, and
3. The frequency of supplies, this will translate into quantities of stocks

which will require to be made available at these points at specific times,
such as beginning or during sales cycles.
Figure 2.6: Sales plan Distribution Requirements
In the figure 2.6 above one can see that the “sales plan dictated”
requirements at C&FAs 1, 2, 3 get aggregated at the Central Warehouse
which again will have to be provided by the factory A and/ or third party
unit. However the lead times between the Central Warehouse and C&FAs 1,
2, and 3 will be different, the frequencies of supplies between Central
Warehouse and the three C&FAs will also be different, which will lead to
additional planning tasks.
Distribution Requirement Planning (DRP) which can be called Demand

Management comes into play at this stage. It is a combination of sales
forecasting, order processing and sales management tasks. As a tool for
controlling inventory in the distribution system of the organization it
enables allotment of inventory of finished goods from factory through the
61
Central Warehouse to various distribution centres based on demands,

indents, safety stocks, frequencies of supplies and lead times while the
sales forecasting anticipates demand and the order processing system
enters that demand, sales management takes decisions, where necessary,
relating to that demand – for example decisions regarding:
• Product substitution,
• Product upgrade,
• Order rotation,
• Partial shipment,
• Split shipment, or
• Back ordering.
Figure 2.7: The Process of Demand Management
Thus, the sales forecasts estimated by the Sales department, and

translated into Distribution Requirements at the Factory/Central Warehouse
will get converted to Materials Requirement Planning, from which the
master production scheduling will get made.
62
The Distribution function’s budget will therefore have to factor in all these
elements and then plan the following:
1. The total transport task involved to cater to the above requirements.

This would mean how many truck loads, container loads, wagonloads of
materials would require to be moved across the chain. The movement
will involve FTLs as well as LTLs, which in turn will reflect in the costs of
per unit movement. From this, the transport expenses budget can be
prepared.
2. The Distribution department will next have to work out the warehousing
requirements involved in carrying the stocks at various storage locations
across the chain. This would cover:
• Storage space planning,

• Rate per unit of space budgeting,
• Budgeting for facilities,
• Staff requirement planning,
• Systems hardware-software planning, and
• Insurance/statutory charges.
From this, the Warehouse expenses budget can be prepared.
3. The next item which will have to be estimated will be the inventory
levels. This would involve not only the finished goods inventory but also
raw material and packing materials, work in progress, as well as
intermediaries which may have to be required. Inventory will also have
to take care of storage inventory as well as intermediates to be in
transit. Inventory levels will have consequent insurance charges, both
storage as well as in transit, costs of damage and product obsolescence,
as well as cost of capital. From this, the Inventory expenses budget can
be prepared.
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• Activity
1. List down the factors which can change the shape and size of Supply
Chain Management.
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2.4 SUMMARY
The physical distribution process in a typical organization starts with a

factory processing set- up and supply chain management depends on a
number of factors like: nature of the product, the company’s distribution
policy (like dealer, distributor, super stockists, (C&FA) carrying and
forwarding agent, wholesaler and retailer) and objectives, the type of
market, geographical spread, size of the organization, scale of operations,
stage of the product lifecycle, stocking policy (Central Warehousing and/or
Depots), etc. Distribution from manufacturer to final end consumer can
have different levels – Level 1, 2, 3, 4, with level one being more direct
and level 4 has intermediaries like C&F Agent, distributor and retailer. Also,
depending on the product you manufacture for selling, your distribution
methods should be either intense selective or exclusive. This choice
depends on the nature of product, frequency of purchase and nature of
consumers. Linked with the subject is another activity which is known as
Distribution Budget, basically a tool of planning and control. The
consideration here is the activities required to be performed – objectives/
targets, the costs/expenses required to perform those activities and the
period of time to which the activities will pertain. One other activity of the
process is Distribution Requirement Planning (a combination of sales
forecasting, order processing and sales management tasks). This chapter
deals with the above-mentioned activities at length.
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1. What is the point of sale in case of supply chain?
2. List down the names who could be called as “Intermediaries”.
3. Enumerate different levels of physical distribution and explain three

different distribution methods.
4. Bring out changes in online marketer’s physical distribution approach.
5. What do you mean by the term “Distribution Budgets”?
1. Physical distribution management is divided into two distinct trade

zones namely: (i) Business to Business and (ii)
______________.
(a) Business to distributors
(b) Business to C&FA
(c) Business to Retailers
(d) Business to Consumers
2. In physical distribution, transfer of goods ownership takes place at the

company depot, which can be the company warehouse or a carrying and
forwarding agent.
(a) True
(b) False
3. In physical distribution, there are generally 4 different levels namely

Level 0, Level 1, Level 2, Level 3 and Level 4. This numerals in the level
indicates what?
(a) Number of distribution centres
(b) Number of warehouses
(c) Number of intermediaries
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4. There are three methods of distribution that outline how manufacturers

choose how they want their goods to be dispersed in the market
namely: (i) __________, (ii) Selective distribution and (iii) Exclusive
distribution.
(a) Multi-level distribution
(b) Intensive distribution
(c) Chain type distribution
5. ___________ are points where the outgoing parcels are divided based
on destinations so that they can be sent to the parcel delivery centres.
(a) Mega warehouse centres
(b) Parcel distribution centres
(c) Collection hubs
Ans.: 1. – (d); 2. – (a); 3. – (c); 4. – (b); 5. – (c).
66
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
67
ACTIVITIES COSTS PLANNING AND CONTROL (USE OF RATIOS/DISTRIBUTION FUNCTION AUDIT)
Chapter 3
Activities Costs Planning And Control
(Use Of Ratios/Distribution Function Audit)
Objectives
• Understand what is distribution cost analysis
• Understand the importance of ratios in general and key ratios in

particular
• Understand what is distribution function audit
• Understand how to evaluate distribution functions
Structure:
3.1 Introduction
3.2 Distribution Cost Analysis
3.3 Key Ratios
3.4 Why We Need To Analyze Distribution Cost?
3.5 Distribution Function Audit
3.6 Evaluation of Distribution Functions
3.7 Summary
68
3.1 INTRODUCTION
In this chapter, we will study the ways to manage your distribution function
using financial information and keeping the distribution function healthy by
doing proper audits.
Cost of Production
Cost of production includes the cost of raw materials, cost of

manufacturing and cost of storing. Cost of raw materials includes cost of
raw material itself and cost of its acquisition, i.e., transportation,
insurance, etc. Cost of manufacturing includes the cost of inventory
management (especially raw materials) and cost of running a plant to
produce finished goods.
Selling and Distribution Cost
Selling costs are cost incurred towards securing orders, building leads,
developing order pipeline, etc.
Distribution cost are towards the cost of reaching the customers. Selling
and distribution cost are broadly under the marketing cost.
In this chapter, we will now study how to manage the distribution cost,
using financial information available with you.
Activities Costs Planning and Control
The budget having set the tasks and the expenses norms, the Distribution
department can now use the same to periodically review and control the
expenses, as well as monitor the efficiency and effectiveness of the
operation. Logistics mix finally affects the corporate profitability. As stated
earlier, the budgeting activity would have covered the following:
Transportation both on the outgoing side covering finished goods and on

the input side covering raw materials and other items needed for
manufacturing, warehouses, facilities, communication, inventories.
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Coincidently, the logistics connected with the finished goods, is in other

words, synonymous with the PLACE part of the Marketing mix and hence
very crucial.
To measure efficiency, an appropriate unit of measurement of work output

must be chosen. This unit will measure the activity level within the
distribution system, and when related to costs will provide a measure of
the efficiency.
3.2 DISTRIBUTION COST ANALYSIS
Distribution cost can be measured as a percentage of sales.
It can also be measured as a percentage of gross margin.
Yet others may like to measure it as a percentage of production costs.
Or, some may even use a combination of the three.
However, what has to be observed is that whichever ratio is selected, it

should be continuously and consistently monitored on the same basis, and
it should not give a distorted view of the system’s true performance.
One must also be practical in adopting expense as a percentage of value

like, for instance, the same can be disproportionately influenced by the
type of cargo. If one is transporting a machine costing Rs. 5 lakh from one
place to another incurring a full truck rate of Rs. 2,500, the cost as a
percentage of value will be 0.5%, whereas if one were to transport a truck
load of bananas costing Rs. 50,000 over the same route at the same truck
charges the cost will work out to 5%.
If the key ratio chosen for monitoring is total distribution cost as a

percentage of net sales, the same may be broken down into a number of
“intermediate” or “grass roots” ratios. The intermediate ratios will relate to
the elements which constitute the Distribution functions, viz.,
• Transportation
• Warehouse facilities
• Inventories
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Together they will give an internal, may be indirect measure of customer

service performance/satisfaction.
3.3 KEY RATIOS
The hierarchical nature of the control ratios depicted above facilitates

giving responsibilities for specific ratios to personnel at different levels
within the distribution function of the organization.
Each of the intermediate ratios can be built up from several constituent

grass root ratios.
Organizations can typically have intermediate ratios and corresponding

grass root ratios as under:
Figure 3.1: Key Ratios
These grass root ratios can be purely cost ratios, activity ratios, or a
combination of the two.
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1. Transportation Intermediate Ratio
While this will primarily be transportation cost as a percentage of Sales/

Gross margin/Cost of production, the grass roots ratios can be:
1.1 Transportation cost per unit of movement at different stages of the

chain such as:
• When importing raw materials to the factory,

• Moving Finished goods from the Factory to the Central Warehouse, or
• From the Central Warehouse to the C&FAs or
• From C&FAs to Distributors.
Here, you will observe that wherever the transportations are made in FTLs
the per unit costs will be substantially lower than where the transportations
are made in LTLs. The cost of transportation can be for company-owned
vehicles or for hired vehicles.
1.2 Transportation task performance, which can be ratios to determine

tonnage/km movement in days. This can be for similar distance the relative
performance of separate transporters or relative performance of the same
or different transporters over different distances.
E.g.: From Mumbai to Indore a distance of approx. 600 km
Transporter A takes 5 days for a FTL of 9 tons
Transporter B takes 4 days for a FTL of 9 tons
Then A makes 9 × (600/5) = 9 × 120 tons km per day
Whereas B makes 9 × (600/4) = 9 × 150 tons km per day or
While the transportation time for Mumbai to Indore a distance of

600 km is approx. 5 days, transportation time for a FTL from
Mumbai to Kolkata a distance of 2000 km is 20 days for the
same or another transporter for a FTL. Then transport efficiency
for Mumbai Indore is 9 × (600/5) = 9 × 120 tons km per day.
Whereas for Mumbai Kolkata is 9 × (2000/20) = 9 × 100 tons
km per day.
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1.3 Vehicle Utilization, this can be time utilization of vehicles either own,
or hired, which will give the utilization efficiency.
E.g.: A Company hires a truck on a daily basis of 10 hours, but the

utilization is only 8 hours at one centre, which will give an utilization ratio
of 80%, whereas in another centre the utilization is 9 hours giving an
utilization ratio of 90%.
The same can be applied to company owned vehicles also. Vehicle

utilization can apply to capacity utilization also. Thus, a truck which has a
capacity of 9 tons if hired on a full truck basis, but loaded with only 8 tons
will give a vehicle capacity utilization figure of 88%.
2. Warehouse Facility Intermediate Ratio
Here also while the main ratio will be warehousing cost as a percentage of
sales/gross margin/cost of production, the grass root ratios can be several.
2.1 Warehousing rental rate per cu.ft.: Similarly other costs of

warehousing such as staff cost, handling cost, insurance cost, damages in
storage, repackaging costs, etc. can be evaluated per some unit and over a
period their behavior either in isolation, or in comparison to other
warehouses in the organization can be monitored.
2.2 Warehouse cu. ft. utilization against the available space. The actual
usage against the total available space can be a very good yardstick to
measure utilization efficiency.
2.3 Percentage of orders serviced within 24 hours. Serviced within other

specified periods such as 2 to 4 days, in more than 4 days, etc.
2.4 Documentation costs such as invoicing, packing slips, preparation

costs, etc. can also be tracked and monitored through ratios.
2.5 If the warehouse uses mechanized facilities, the cost of such facilities
as a percentage of sales can indicate whether the same are cost-effective
or too costly as compared to the benefits derived.
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3. Inventory Intermediate Ratio
While in case of inventory, the prime point of focus would be the amount of
inventory held in number of days of sales, since holding inventory means
blocking that much amount of capital, improper inventory management can
also mean stock outs, which can mean loss of profits, it can also mean
stock mismatches, which in other words mean overstocking at some
points, and understocking at other points. Thus in terms of inventory, the
ratios have to take care of qualitative aspects along with the quantitative
issues. The typical grass roots ratios could be:
3.1 Inventory carrying costs. This can be in Rs. per unit of inventory of
specific items, or can be also depicted as a percentage of value of
inventory, e.g., Rs. xx per Rs. ’000 of value of inventory.
3.2 The stock turnover velocity, i.e., the number of times stock turns
around in a year which can be calculated by dividing {the annual cost of
sales (annual sales less gross margin)} by the average inventory in Rs. . If
the annual sale is Rs. 15 lakh and gross margin is Rs. 5 lakh and the
average inventory is Rs. 75 thousand, then the stock turnover velocity is
{Rs. 15 lakh less Rs. 5 lakh} /Rs. 75 k = 13.3. The higher the number the
more efficient the operation.
3.3 Other measures of performance can be the rate of stock shrinkage

which can be calculated by dividing the high level of inventory minus the
low level of inventory by the average daily cost of sales. The figure will give
the number of days it takes for the stock to shrink. The higher the number
of days it is obviously more inefficient. Stock shrinkages may also mean
shortages in stock due to pilferage/damage. In that case, the reduction
would be calculated as a percentage of stocks.
3.4 Average number of days of stock out can also be an indication of the
level of inventory management effectiveness.
3.5 Value of damages or write-offs on account of date expires, as a

percentage of sales or as a percentage of annual cost of sales will also
measure how the organization is managing its inventory.
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4. Productivity Ratio
Other than financial aspects to control, it is always advisable to monitor the

productivity. Productivity indicates efficiency and effectiveness of initiatives
taken. Thus, few productivity rations are also essential to monitor, such as;
4.1 Delivery Productivity Ratio. It calculates total number of on time

deliveries as compared to the total number of deliveries for the given
period, generally one year.
4.2 Route Potential Ratio. It calculates total tons of cargo carried per
route as compared to the total ton’s capacity per route.
4.3 Accidents ratio. It calculates total number of accidents per route per
year as compared to the total number of trips undertaken per route per
year.
4.4 Service Ratio. It calculates total number of consignments booked per

year as compared to the total number of consignments planned per year.
3.4 WHY we need to ANALYZE DISTRIBUTION COST?
We have seen how the distribution cost is monitored. We need to briefly

know why we should analyze the distribution cost. Various ways in which
the distribution costs can be analyzed are:
❖ Product or line of business – Razor or Shaving range

❖ Brand wise Milk – Cadbury, Crackle
❖ Segment wise – Mass, targeted, niche segment
❖ Individual customers or group of customers
❖ Channel of distribution – Brick and Mortar stores, online
❖ Geographical territories – Zone wise, AO wise
❖ Others – Salesman, Sales/Service, etc.
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Following are the key reasons, why we need to analyze distribution cost;
a. To determine costs of sale for different product category, brand, line of

business or segment servicing cost, etc. It helps to gauge the
profitability.
b. Fix up optimum sales volume – It is done during budgeting, wherein

objective is set to not increase distribution cost % to the total sales
revenue, beyond a specific limit. In such case, determination of sales
volume required can be a good way to fix the volume budget.
c. To control the cost itself – Analysis will draw the attention towards,
which part of the process, is impacting the cost and controlling the
same helps to control overall cost.
d. Ensure right method of cost apportionment – This analysis, may bring

out abnormality if any in allocation of common costs like utilities, rental,
etc.
e. Plan optimization – of process, required technology investment and time

required.
f. Stay competitive – Many times, marketing is helpless against

competitive price war. In such a situation, it is the ability to control the
distribution cost, gives you desired profitability, channel members and
customers’ satisfaction.
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3.5 DISTRIBUTION FUNCTION AUDIT
The budgeting exercise sets the target levels of activities. It also plans,
allots and sanctions expenses required for carrying out those targeted
activities. We have also seen above how ratios can be used to evaluate the
effectiveness of various distribution/logistics activities.
Standards
The question now arises as to against what measures of performance

should an organization compare its own performance to see the level of
efficiency achieved.
Standards can be developed by:
• Reviewing existing performances and procedures and cost accounting

techniques, which is zero based.
• Attempting to gain some competitors’ standards, or inter-company

comparisons which is also known as industry benchmarks.
• Use internal data over a period of time and select own best average
performance figures as benchmarks.
In this exercise if the below average performers are brought to the level of
the average, the new average will improve, after which repeating the
process will further improve the average. Thus, a continuous betterment of
standards can be achieved.
The Logistics function should use return on assets (ROA), or return on

investments (ROI), economic value-added, cost or operating standards,
or similar financial indicators as a measure of performance.
Functions such as transportation, warehousing, customer services, can be

best managed if they are treated as cost centres or profit centres. This also
instils entrepreneurial skills in the managers.
When applying ROI, it is important that the return is calculated on logistical

assets, i.e., those investments that can be traced to logistic functions.
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Companies use third party suppliers of logistics services as a means to

reduce high logistics asset investments. This may result in reduced
numbers of company owned vehicles, increased use of public warehouses,
outsourcing of transportation and warehousing jobs.
However, in the process of improving ROA, one should not lose focus of the
overall business strategy, which must factor in customer service levels as
well.
For example, overemphasis on reduced cost of operation may result

in drops in the market share, reduced order fulfilment rates,
customer dissatisfaction, whereby the prime objective of improved
profitability can get jeopardized. Logistics audit should provide a disciplined
approach to review the external and internal dimensions of the
organization’s operating environment as it impacts on logistics resources.
The audit process should address the issues of:
• Where the organization stands at that point of time in terms of physical

material flow,
• How the same matches with information flow – information which initiate
and support the material flow, and also
• How cost-effective the existing logistics system is.
The External environmental factors would be:
• Source market – the sources from which inputs to the manufacturing

process are procured.
• User market – where the products are going to be sold, consumed.
• Competition – whether in the source or user market, competition is a

very important and crucial factor.
• Channel – this is an important constituent of the external environment,

as the channel of distribution impacts strategy, costs, and efficiency.
Statutory and governmental factors are also important elements.
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The Internal environmental factors would be:
Product related:
• Seasonality, special promotions

• New products, modifications
• Special handlings, special packaging
• Special requirements
Distribution Pattern:
• Organization structure
• Product characteristics
• Shipment characteristics
• Purchasing characteristics
• Warehouse utilization
• Transport utilization
• Stocking requirements both for raw materials as well as finished goods
Systems:
• Purchasing system
• Production scheduling
• Data processing facility
• Warehouse facility
• Transport facility
• Material handling facility
When undertaking a logistics audit, one should ensure that too many
wrong questions are not asked, too many right questions are not asked to
the wrong people, and too many “problems” are not “solved” even
before the real problems are known.
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Distribution Audit should begin by mapping the logistics system:
• Logistics objectives should be defined in the context of the corporate and

marketing goals target levels of service and other outputs of logistics
activities should be identified.
• Communications that trigger activities and information starting from

customer order receipts should be properly documented.
• Flow chart the corresponding materials flow pattern. Mismatches

between materials and information flows should be high lighted.
• Identify the points at which performance can be measured, locate and

prioritise areas of interdependencies between the logistics function and
other functions.
To appreciate this matter, refer to the following figure 3.2 which depicts the
flow pattern of information and materials between various points.
Figure 3.2: Flow Pattern of Information & Materials
Information flow such as information about dispatch, information

about stock movements
Orders flow such as customers orders, C&FA indents to Central

Warehouse, CWH to factory
Materials flow, C&FA to customer, CWH to C&FA, factory to CWH
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For effective and efficient control, the flows should work in tandem, as
mismatches will lead to confusion and problems, of not only delays but also
points of dissonance.
The above is an example of a simple communication, information, material

flow chart. Depending upon the levels, contact points, locations,
geographical spread, nature of the products, channels being serviced, the
chart can be more extended as well as complex.
Having understood what the distribution function should be doing, we have

now to determine the extent to which the existing processes are achieving
their purposes.
The audit should, therefore, now cover:

1. Customer service perception audit,
2. Competitor audit,
3. Channels audit,
4. Materials supply audit, and
5. Finished goods distribution audit.
Of the above, the one which impacts the organization most is the finished
goods distribution, since this is the area in which the marketing strategic
objectives achievement is closely linked to the proper effectiveness of the
distribution function.
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3.6 EVALUATION OF DISTRIBUTION FUNCTIONS
An evaluation of an organization’s distribution function is particularly

needed when:
• The organization makes a significant change in its marketing strategy,

e.g., going direct vis-a-vis selling through intermediaries.
• The size of the organization changes significantly.
• New products or new businesses are added to the distribution system.
• Signs of misdistribution manifest. Signs of misdistribution which would be

the most critical, can be suspected.
• Inventories turn very slowly if, for instance, the average industry norm/
or past own performance is inventory turnaround of four times a year,
and it is observed that the rate has slowed to two times a year, it is an
indication that something is wrong.
• Poor customer service if the past experience, or industry norms indicate

a 99% customer service level, i.e., order fulfillment, with an average of 2
months’ stock, and in practice it is found that the levels are not being
met, then the situation may indicate that inventory is in wrong product,
wrong location, or both. Listening to customers at the marketplace will
give a very good idea of the perception of service, as frequent complaints
will definitely signify problems.
• Inter-warehouse shipments. Stock transfers between various locations,

viz., C&FAs, returns to central warehouse, are activities which are
counterproductive, costing extra amounts, and hence undertaken only as
an end resort. If these types of transfers are taking place on a regular
basis, indications are that the system is having some trouble.
• Premium freight charges. Incurrence of premium freight charges, i.e.,

extra charges paid to a transporter to ferry cargo fast, or on an irregular
route, are indications that the distribution function is trying to cover up
lapses either in forecasting inefficiency, or in delivery failure, by resorting
to last minute desperate actions.
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The audit will unravel what may be the underlying reasons of such
malfunctions. They may reveal areas requiring attention, sometimes
suggestions/recommendations may be made, but the remedial action will
best rest in the Distribution function itself, as they are the ones best suited
to run and hence correct the system.
Some typical audit findings and resultant questions to be raised can be:
a. Why equal volume based discounts are given to intermediary customers

such as Distributors, for deliveries to their warehouse as well to retailers
on their behalf?
b. Levels of delivery service are 1 to 2 days throughout the area, they are
also very reliable, and relationships between the delivery agents and
customers are very good. Does that mean that the service levels are too
high, at a very high cost?
c. 15% of customers account for 90% of sales. 18% of delivery points

account for 85% of sales. Is this pattern healthy? What can be the
implications?
d. Analysis reveals 12% of deliveries were at drop sizes (drop size means
the number of unit packages delivered at a point) below average drop
sizes per deliveries for that period. It also shows that in 20% of
deliveries the drop sizes translate into sales values below break- even
point of delivery costs. Should a drop size/value policy be introduced?
Should it be based on average cost per drop or break-even cost?
e. In case the organization handles both appliances, its spares, as well as

repairs, should the distribution be mixed or would separate levels of
service be desirable?
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Recordings of Audit Observations and Follow-ups on Compliance
Any distribution audit task would not be complete unless the findings are
discussed with the responsible managers, and their agreements are
obtained, noted and recorded in the audit report.
Their commitments to corrective actions, and that too within an agreed

specified period of time should also be recorded.
In case any corrective action has already been taken in the interim period,
that fact should also be duly recorded.
Compliance follow-up meetings should be agreed upon, and form part of

the regular distribution audit procedure.
• Activity
1. You have been asked to evaluate the distribution function of your

organization. List down the steps you would follow.
…………………………………………………………………………………………………………………………
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3.7 SUMMARY
Essentially, there are cost of production, and selling and distribution cost.
For our understanding, we covered why should we manage the distribution
cost. However, similar cost management exercise is undertaken for other
nature of costs.
Any department in any organization deals with budget and budgetary

control to review, control and monitor the efficiency and effectiveness of
the operation. It is true for distribution management as well. Distribution
cost can be measured as a percentage of sales. It can also be measured as
a percentage of gross margin. A number of ratios have been discussed in
this section. Whichever ratio is selected, it should be continuously and
consistently monitored on the same basis, and it should not give a
distorted view of the system’s true performance.
Distribution cost is one but to understand it better for controlling, it needs

to be analyzed differently – Product-/LOB-wise, brand-wise, segment-wise,
channel-wise and more. We must conduct distribution cost analysis as it
helps with numerous function aspects like cost control, profitability
management, cost optimization, appropriate cost apportionment and to
remain competitive.
The Next question arises as to against what measures of performance

should an organization compare its own performance to see the level of
efficiency achieved. It is about setting a standard and part of the
Distribution Function Audit. This should begin by mapping the logistics
system. Finished goods distribution is an area in which the marketing
strategic objectives achievement is closely linked to the proper
effectiveness of the distribution function. An evaluation of the
organization’s distribution function is needed for a number of reasons as
explained in the section. The audit may reveal areas requiring attention,
sometimes suggestions/recommendations may be made, but the remedial
action will best rest in the Distribution function itself, as they are the ones
best suited to run and hence correct the system. Any distribution audit task
would not be complete unless the findings are discussed with the
responsible managers, and their agreements are obtained, noted and
recorded in the audit report. Compliance follow-up meetings should be
agreed upon, and form part of the regular distribution audit procedure.
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1. What are the key types of cost and what is Distribution Cost Analysis?
2. What are the importance of ratios in general and key ratios in particular
in monitoring the performance of Distribution Management function?
3. What are the ways to analyze the distribution cost and its utility?
4. What are the criteria for evaluating Distribution functions?
1. ___________ includes the cost of raw materials, cost of manufacturing

and cost of storing.
(a) Cost of development
(b) Cost of production
(c) Cost of logistics
(d) Cost of transportation
2. Distribution cost can be measured as a __________.

(a) Percentage of transportation cost
(b) Percentage of net profit
(c) Percentage of revenue
(d) Percentage of sales
3. Warehouse Facility Intermediate Ratio will be warehousing cost as a

_________.
(a) Percentage of sales
(b) Percentage of revenue
(c) Percentage of total cost
4. __________ means the number of times stock turns around in a year.

(a) The turnover turnaround
(b) The inventory cycles
(c) The stock turnover velocity
(d) The goods selling velocity
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5. _________ should be defined in the context of the corporate and

marketing goals.
(a) Performance objectives
(b) Logistics objectives
(c) Selling objectives
Ans.: 1. – (b); 2. – (d); 3. – (a); 4. – (c); 5. – (b).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
88
SYSTEMS IN DISTRIBUTION MANAGEMENT
Chapter 4
Systems In Distribution Management
Objectives
• Understand the role and use of systems in distribution management.
• Understand different system supports.
• Understand the functions and use of Enterprise Resource Planning

(ERP).
Structure:
4.1 Introduction
4.2 System Supporting the Operations
4.3 Enterprise Resource Planning (ERP)
4.4 Enterprise Management Support System
4.5 APP Based Distribution System
4.6 Summary
4.8 MCQ Questions
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4.1 INTRODUCTION
Efficient Logistics & Distribution management leads to reduced

operational costs, improved delivery performance and increased
customer satisfaction levels. In an increasingly globalized market, LSPs
(Logistics Service Provider), also known as third-party logistics providers
(3PL) are called upon more than ever before to help customers deliver
goods around the region.
With increased complexities in logistics functions, computer and system

supports are an integral part of the distribution process.
The system support can be at two levels:
• System supporting the operation, and

• System supporting the decision process.
The main aims of any system support are:
• Cost reduction through increase in productivity,

• Improved customer service through reductions in time-lags,
• Improved decisions through more accurate input data, and
• Another important aim of the system would be to integrate the various
functions through a common database.
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4.2 SYSTEM SUPPORTING THE OPERATIONS
Initially, one-stage application software programs, such as: Bookkeeping,

Stock accounting, Payroll, and similar packages were adopted by
organizations.
While they served their limited purpose of speeding up such individual

operations and maintaining accuracies in those respective areas, the
biggest problem would be: Cross-functional integration of information,
particularly when two or more related functions, such as stock records
and sales records, or sales records and customer receivables accounts
are involved. Situations where one was computerized and the other was
manual, or the two functions ran software which were separate and not
interconnected. A lot of avoidable time loss would take place in
reconciling figures.
Organizations subsequently started employing composite systems where

cross-functional integration was sought to be achieved.
Thus, the order processing system would work in tandem with the stock
system, so that a customer order processed would simultaneously ensure
that the stock records are updated, and reflected in reduced stock
balance.
At this stage, the flow would be somewhat as under:
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However, as long as the software package was being run on hardware

obtainable at the same location either on the same computer, or
computers connected through a local area network, the issue was
functional and operative.
But when the locations of certain interconnected functions were separate,

e.g., for an operation such as:
A customer placing an order for purchase on credit at a C&FA let us say

situated at Bhiwandi, and the storekeeper has to first check whether the
customer has the available credit limit, for which he has to check the
customer’s personal ledger account, which is available at the Accounts
department, which let us say is situated at Nariman Point, the
storekeeper has to either phone up Nariman Point and obtain a balance
status, or every day the accounts department has to send to the store
keeper a status report of all customers’ balances, which the storekeeper
can refer to. With increased complexities, and need for quick, accurate
information, particularly in the wake of globalization, integrated systems
connecting operations across various functions as well as locations have
now become the order of the day. In this area, advances both in
hardwares and softwares have contributed significantly.
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Situations and issues in multi-plant, multi-warehouse, multi-channel

distribution environment:
a. No standard processes and systems in place adding to complexities.

Even if processes are well-defined, lack of integration will keep it
complex.
b. Complexity of handling fragmented market segments without clarity

about scheduling, dispatches, ordering and order finishing and
inventory control.
c. Go to market strategy in such complex situation is decided by the

third party distributor.
d. Multiple communication channel makes it complex to achieve desired

clarity.
e. Clash of objectives between different operating system and

dependency makes it not reliable.
What is thus needed is efficient Distribution Management system (DMS),

which helps you to:
a. Untangle your distribution network.

b. Support your distribution.
c. Provide single version of the real-time truth.
d. Removes need for multiple channels of communication by offering
integrated stage specific communication with relevant individuals
and escalation matrix defined.
e. Control distribution management cost.
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4.3 ENTERPRISE RESOURCE PLANNING (ERP)
ERP – Enterprise Resource Planning initiatives have contributed

enormously to this initiative.
ERP software packages, such as SAP, J.D. Edwards, Oracle, BAAN,

Peoplesoft, etc. are standard packages which address the system
integration issue very successfully.
An ERP software can ideally turn distribution management more logical

eye on distribution needed, actual distribution handled, and optimizing
the distribution load and communicating with relevant stakeholders to
ensure necessary steps by them.
ERP Discount Management solutions comprise of all various tools and

bring optimization in the magnitude of distribution operations. The
automation systems introduce paperless management of both internal
and external processes, and keep up with the demands of modern
markets.
Various tools that may include are:
- Material requirements planning.

- Distribution optimization.
- Stockout prevention.
With revolutions in data transfer and download speed (4G, 5G and so

on), it is now possible to make data available on cloud and mobile.
Following are generally key features of most ERP system:

(a) Online and offline sync
(b) Growth and scalability
(c) CRM integration
(d) Advanced workflow
(e) Advanced authorization and escalations
(f) Advanced Business Intelligence
(g) IOS and Android compatibility
(h) IoT integration
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To implement any standard ERP package, the organization prepares a

brief of the integration and information needs. The package provider
studies:
• The existing processes and procedures.
• The information and material flow patterns.
• The workloads at various points.
• The organization structure.
• The availability and preparedness of the organization’s manpower in

terms of technical capabilities.
• The existing systems in place, if there are any.
• The IT language platform in use.
• The size and capacities of hardware in place, particularly server

capacities.
• The functions, their workstations, as well as their locations.
• From which point to which point of the supply chain the ERP system
should map and connect, e.g., will it be from the factory to the C&FAs,
or from the factory to the Distributors, or extend backwards to raw
material suppliers, because it will have implication in terms of costs as
well as complexity and implementation time.
• The number of persons who will be using the package with independent
log in identifications, and then suggest its package (a few modules, or
all the modules) for implementations, along with cost estimates as well
as time required for putting the system in place operationally.
While the vendor of the system package may offer to implement the
system in the organization, the company can choose for implementation
any other party, but it would be advisable to choose an implementer who
has had previous successful implementation experience, as trying to save
on costs at this stage may prove to be very costly subsequently.
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Before the actual work of putting the system in place, the functional
heads or their representatives, the module in charges of the
implementation partner, and the IT head of the organization, have to get
together and list out in detail:
• All tasks and activities that are followed in the organization.
• The linkages between the several functions, along with the sequential
activities linkages,
• The dependence of any task in one function on another task in a

different function, e.g., “production planning” in a factory, can only
start after “sales forecasting” in sales.
• Evaluate the activities and procedures in the light of Industry Best

Practices and modify those that are not in sync.
• Estimate the type and extent of master data to be created.
• Agree on the system disciplines that will be required to be maintained,

e.g., currently the warehouse may be treating sales made up to 2nd of
the subsequent month as sales in the month, which practice in case of
the system to be successful, will need to be stopped, and record all
these in a document called the Business Blueprint, wherein, also
discuss and record a proper implementation roadmap, and the strategy
of implementation, i.e., whether in phases, or go with a big bang
approach.
At this stage, the technical appraisers should also evaluate the mode of
connectivity system to be used, e.g., (VSAT) Very Small Aperture
Terminals, (ISDN) Integrated Service Digital Networks, dedicated lines,
or normal dial-up facilities, the numbers and types of computers, their
RAM capacities, the types, numbers and capacities of servers, the types
and extents of securities to be put in place, as well as the audit
procedures.
The ERP systems when in place would enable the organization to have all
its activities within the ERP network,
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• Happening ONLINE, which in other words means, any task taking place
any – where will be in the system, and
• Have REAL-TIME DATA, because the task (transactions) taking place on

the system is being recorded as data.
Thus, implementation of an ERP system will mean access to REAL-TIME

ONLINE DATA.
At this stage of systems in the organization, the operating managers are

empowered to have at their disposal substantial amount of real time
data, which can aid them in their decision process. However, the system
is not capable of helping to decide which of several alternatives would be
the best alternative, under certain pre-set conditions.
Which brings us to the next stage of systems, viz., optimizers which can
help in selecting the best alternative through a package.
4.4 ENTERPRISE MANAGEMENT SUPPORT SYSTEM
In distribution planning, challenges relating to large-scale optimization

continue to be present, but an increasingly large share of our attention
has been focused on the need to imbed optimization techniques within a
complete system with many other capabilities needed to facilitate
successful practical application. We call a complete system of this sort a
“management support system”. We describe such a system in some
detail, with an emphasis that deliberately excludes the technical aspects
of optimization. In this way, we hope to accommodate the broadest
possible audience.
A management support system is composed of a model, supporting data

files, a solver to exercise the model, and interface facilities between
these things and the manager’s world, all integrated and organized so as
to support managerial decision-making within a prescribed domain on a
continuing basis. MSS is such a system for strategic and tactical
distribution planning problems.
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MSS provides solution of different nature as follows:

(a) Network Rationalization Issues
(b) “What-if’’ Questions
(c) Sensitivity Issues
An optimisation-based management support system generally has four

parts: (1) a modelling framework, (2) a data file structure, (3) an
optimizer, and (4) interface facilities between these and system users.
A modelling framework is a conceptual context and a menu of options

within which a variety of specific models can be tailored to represent a
variety of specific real distribution systems. A model is a careful
description of a real system and of the relationships by which, under trial
assumptions, alternative managerial choices are believed to influence
pertinent system performance measures.
A data file structure is a set of guidelines specifying, for the data

elements required by a model, how the data are to be organized and
represented in computer-readable form.
An optimizer is a computer routine for exercising a model so as to find

those particular managerial choices which, under trial assumptions, yield
the best value for a designated performance measure.
Interface facilities serve two functions – to facilitate creation and

maintenance of data files, and to facilitate communication between
distribution managers (or supporting staff) and the management support
system as a functioning whole.
From the above, one can determine the significance of MSS in the
distribution management.
Let us take an example.
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Figure 4.1: MSS in Distribution Management
The C&FA at Guwahati receives its supplies from the Central Warehouse
situated at Nagpur. Because of its being a small depot, supplies are made
once a month, as a composite truck load of all the items is sufficient to
cater to its sale requirements during that period. A truck load comprises
9 tons of cargo, which translates to approximate 600 cases of the
products.
The transit lead time from Nagpur to Guwahati is 12 days.
Materials need to be sent such that the same reaches the depot at the
beginning of the sales cycle, so that the depot does not miss out on
orders that may be coming in.
The company deals in a range of 30 SKUs of which product 1 to 12 are

produced at factory 1 and the balance are manufactured at factory 2. For
a certain month, say Guwahati requires:
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50 cases of product 1
On the 17th of the previous month, the CWH has only 56 cases of
product 6, 87 cases of product 12, 10 cases each of products 22 and 23
and nil cases of product 27.
While the supplies from factory 1 may arrive in a couple of days, factory
2 supplies may take about 6 days.
Under such circumstances, the distribution manager has the following

choices:
• Delay dispatches by 6 days, which may mean no stock of certain items

at the start of the selling cycle at the Guwahati depot.
• Send the truck with part load, which will mean higher per unit
transportation cost.
• Send materials that are available at the warehouse, but fill the truck
with materials not specifically indented, but which the depot normally
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requires and may be requiring in the next month, and send a second
truck load after receipt of the balance materials, and filling the balance
truck in a similar fashion.
Let us take another example:
The distribution problem may involve sending materials to more than one
depot, say Kolkata and Hyderabad over and above Guwahati.
Transportation lead times are 8 days to Kolkata, and 7 days to Hyderabad

from CWH at Nagpur.
Transportation lead times from Factory 1 and Factory 2 to Nagpur are 3

days and 2 days respectively.
Figure 4.2: Algorithm Support in MSS
The Production cycle time varies from product to product as well as

factory to factory. Frequencies of supplies to the depots are once a
month to Guwahati, 3 per month to Hyderabad, and 6 per month to
Kolkata.
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While normally products 1 to 12 are manufactured at factory 1, and the

balance are manufactured at factory 2, certain products can be
manufactured either at factory 1 or 2.
If the production has to be planned based on sales estimates, keeping in

view the above factors, you will realize that many alternatives may
present themselves, from which the manager has to choose the ones
that give the most optimum result, not only from the aspect of costs, but
also operational efficiency which will have a direct bearing on the
customer service level and satisfaction.
This opens up the area of optimization system packages. Standard

system packages are available in the market.
But these packages are costly, and the organization must be ready and
capable of absorbing and internalizing the system.
These systems need a tremendous amount of database to make any

impact, and hence can be implemented if suitable data warehousing
capabilities are in place.
However, many organizations, are adding on to their ERP systems,

initiatives to incorporate Supplier Relationship Management, and/or
Customer Relationship Management tools, along with intermediate
softwares which enable them to extend the boundary of the
interconnection beyond the confines of the internal area of operations.
These in effect, mean:
• Extending the ambit of real time, online transaction processing,

backwards up to suppliers, so that for e.g., the requirements can be
available on the system of the supplier as soon as production draws a
batch of raw material for production/processing, or
• Hooking up the sales/delivery/stock system of the distributor, or

retailer, so that as soon as a customer orders supply is made from their
point, the organization’s system records the same and triggers a
process of requirement noting.
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Such initiatives come with substantial costs, and the organization has to
make a proper cost- benefit evaluation and trade-off before
implementing them. The organization’s preparedness for absorbing such
technologies must also be properly considered.
Algorithm based MSS helps in above nature and similar such managerial
decision support relevant to Distribution Management.
• Activity
1. If you want to introduce and implement ERP in your organization,

what initiatives are required from yours as well as the organization’s
side?
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4.5 APP BASED DISTRIBUTION MANAGEMENT
With continuous efforts to integrate many nods of logistics and supply

chain management with IT system, the availability of IT technology and
network connectivity and finally the availability of smartphones has
triggered another revolution, greatly helping in logistics management.
Numerous powerful APPs are available, which integrates entire chain

such as order placement by the sales consultant till the goods delivered
at the consumer destination, post which invoicing status and receivables.
We will only look at what is APP based distribution management and how
it is changing the distribution at the ground level.
What is an APP?
A mobile application, also referred to as a mobile app or simply an app,

is a computer program or software application designed to run on a
mobile device such as a phone, tablet, or connected smart watch.
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An app is a type of software that allows you to perform specific tasks.

When you open an application, it runs inside the operating system of the
mobile phone until you close it. APP is supposed to be one later over your
existing system. However, due to its programming ability, it can be made
more intuitive and logical.
What is an APP Based Distribution Management?
It is one of the modules within a complete front-line Sales Automation

Platform for managing marketing, sales and distribution of goods across
geography through a highly intuitive APP, installed on all the relevant
individuals’ smartphones, with access control if needed.
An APP will cover the following sales automation areas:
Salesma Retaile Distributo Manage Management
Retailers and distributors form the part of distribution management. The

manager and the management represent the controlling authority. APP
based distribution management can help in th following ways:
Retailer: It is possible to directly place an order, even without the

physical presence of company’s salesman, check availability and offer
price, track orders, see dispatch positions, stock levels, geo fencing the
area, communicate and run schemes and promotions effectively, manage
easy-to-handle market movements and moods understanding kinds of
market surveys and finally using photo capturing feature, you may get
an idea of shelf-space occupied by your brand or organization product
mix.
Distributors: With retailers distributed across regions, the distributor

can plan efficient inventory allocation, allow primary sales order booking,
order collation, route planning, stock scheduling and more. Payment dues
and collections are well managed through the app. Salesman and HO
gets better idea about the pipeline, stock in the market, inventory at DC,
dispatch planning, schemes and promotion success, and finally receivable
and payable vis-à-vis account control (can block booking by a specific
distributor if outstanding exceeds the level).
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Manager: It helps mid-management level people to identify and analyze

the gaps, and take actions and develop actionable insights based on the
data captured. For example, Regional Sales Managers or middle
management in general can immediately revise strategy to meet daily,
weekly or monthly targets derived from actionable insights from the app.
Management: It helps higher management to track KPI and KRA levels

and have in-built business intelligence tools. The top-level management
can define KPIs and KRAs for all the stakeholders in the sales vertical of
the organization, and can use BI Tools available in the app to do so.
Besides this, as earlier discussed, higher management can have bird’s
eye view on entire market, demand, retailer performance, distributors
performance, area performance, team performance, etc.
You can either have outsourced service provider offering you above APP
or you may develop your own APP. In addition to this, there are various
s t a n d -a l o n e A P P w h i c h d o s p e c i f i c t a s k s e f f i c i e n t l y s u c h a s
documentation, truck route planning and more.
Indian start-up scene has also brought new APP based solutions and one
such needs specific mention is an APP namely PORTER. Porter is India’s
largest marketplace to manage your intracity logistics. Its distinct focus
is on providing you small and medium size vehicles to meet your
distribution needs within the same city.
PORTER offers:
a. Hassle-free truck rental: You can book mini truck online. Whenever
you need, wherever you need.
b. Transparent Pricing: Enjoy the most affordable rates in town with

our transparent pricing.
c. Real-time Tracking: Track your goods movement across the city with
our app.
d. Safe and Reliable Trucks: Superior safety ensured with our team of
verified and trained partners.
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4.6 SUMMARY
The computer and the system supports are becoming an integral part of
the distribution process because of increased complexities. The system
support can be at two levels — system supporting the operation and
system supporting the decision process. The main aims of the system
support are: (i) cost reduction through increase in productivity, (ii)
improved customer service through reduction in time-lags, (iii) improved
decisions through more accurate input data and (iv) to integrate the
various functions through a common database. Today, organizations have
started employing composite systems where cross-functional integration
was sought to be achieved. Advances in hardware and software have
contributed significantly and (ERP) Enterprise Resource Planning
initiatives have contributed enormously to the integrated systems
approach. The steps involved in implementation of ERP have been dealt
with at length in this section. Such initiatives come with substantial
costs, and the organization has to make a proper cost-benefit evaluation
a n d t ra d e - o f f b e f o r e i m p l e m e n t i n g t h e m . T h e o r g a n i z a t i o n ’s
preparedness for absorbing such technologies must also properly be
considered.
1. “The computer and system supports are an integral part of the

Distribution process.” Explain.
2. What are the main features of ERP system and list the aims of
Enterprise System Support
3. What are the functions and use of Enterprise Resource Planning

(ERP)?
4. Explain the concept of APP based distribution management.
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1. With increased complexities in logistics functions, _________ are an

integral part of the distribution process.
(a) Computer and system support
(b) Telephone and smartphones
(c) Tablets and laptops
(d) Wi-Fi and internet connectivity
2. The ________ would work in tandem with the stock system, so that a
customer order processed would simultaneously ensure that the stock
records are updated and reflected in reduced stock balance.
(a) Receivable ledger
(b) Transportation arrangement system
(c) GPS tracking system
(d) Order processing system
3. Implementation of an ERP system will mean access to _________.

(a) Real-time Onsite Data
(b) Real-time Online Data
(c) Real-time Objective Data
4. An __________ is composed of a model, supporting data files, a

solver to exercise the model, and interface facilities between these
things and the manager's world, all integrated and organized so as to
support managerial decision-making.
(a) Engaged management support system
(b) Evaluation management support system
(c) Enterprise management support system
(d) Evaluative management support system
Ans.: 1. – (a); 2. – (d); 3. – (b); 4. – (c).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
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WAREHOUSE MANAGEMENT
Chapter 5
Warehouse Management
Objectives
• Understand what is warehouse management
• Understand the role location plays in warehouse management
• Understand various dimensions and issues linked with warehouse

management
Structure:
5.1 Introduction
5.2 Understanding Warehouse Management
5.3 Warehouse Management
5.4 Warehouse Management Strategy
5.5 Locating Warehouses and Distribution Centers
5.6 Changing Face of Warehousing after GST Implementation
5.7 Summary
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5.1 INTRODUCTION
Organizations choose their warehouse locations normally as near as

possible to the points of consumption.
Similarly, they locate their factories (normally) as near as possible to the

source of raw materials.
However, the above scenario was right in an era of protected business

with limited competition. In a world where now India has become an
integral part of the global economy, where it is possible to source and
transport the goods from a different country, you sell your finished
product across the globe, warehousing management assumes different
significance.
A solid warehouse operation is at the foundation of every successful

business. It is an area that could either destroy your business or propel it
into something customers trust time and time again.
Warehousing management covers aspects like how to arrange it, best

picking and packing processes, and even choosing an effective
Warehouse and Warehouse Management System.
5.2 UNDERSTANDING WAREHOUSE MANAGEMENT
We need to first understand ‘’What is Warehousing Management?’’
Warehouse management is the science of organizing and controlling

physical goods, managing manpower and inducting technology within
your warehouse – and making sure it all runs in the most optimal way
possible.
Warehouse Management includes (It may differ from industry to

industry):
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• Arranging the warehouse

• Managing inventory
• Managing new stock coming into the facility
• Picking, packing and shipping orders
• Having and maintaining the appropriate equipment
• Tracking and improving overall warehouse performance
• Using automation tools
However, it is always better to understand warehouse management from

manual process point of view.
(a) Arranging the warehouse
In warehouse management, it is important you run warehouse operations

in such a way that you have everything in the most efficient way.
Indicative Warehouse Layout:
Planning the layout of your warehouse is centered on balancing two

things:
1. Providing enough storage space for your inventory.
2. And this still have enough working space for staff to move around and
complete their tasks.
Thus, warehouse layout design is important and must accommodate the

following areas:
(a) Receiving new stock area
(b) Unpacking/booking in new stock area
(c) Packing area
(d) Shipping station
(e) Excess/dead stocking area
(f) A warehouse office
(g) A main storage area
Using a grid system makes planning this a lot easier. Based on grid
system layout, the following suggestive layout can be considered.
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Figure 5.1: Suggestive Grid Layout of Any Warehouse
Source: Veeqo Blog
Proper grid-based layout helps the pickers to walk up and down aisles
without getting in each other’s way. And it also gives enough room to
pick items.
Labelling Areas of Any Warehouse:
Labelling refers to ability to identify, where to get the desired item in

such a large warehouse. Effective warehouse management cannot be
done without set location. Your pickers should be able to look at your
warehouse system and see exactly where any product is located. To
ensure this, stock needs to be clearly labelled.
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Using simple alphanumeric combinations makes it easier to understand

and decipher for pickers trying to reach specific location. For example,
you can start by simply including labels for specific rows, shelves and
then exact bin locations, as per the following example.
Raw Shelf Bin
A A 1
A B 3
B A 5
C C 8
This is interpreted that all your blue medium sized T-shirts will be in Row
A – Shelf A – Bin 1. It can be expanded likewise. You may add suffix like
A.1 to bring out further refinement if needed for say different brand/
variety.
For a very large area, you may need to add even specific area before raw
and if raw too is very long, then sub-section of raw with numerals can be
added after the raw column above.
So, many different alphanumeric or other ways in which warehouse

labelling is done.
(b) Managing inventory in warehouse
Subject of inventory management has two distinct aspects – (i)

Arranging locations for specific product groups and (ii) Managing
inventory volume/value. For this chapter, we will focus on arranging
locations for specific product groups. Actual inventory management is
covered separately in an exclusive chapter.
Arranging location where specific product group items can be stored

means we need to answer a question – How do you determine the exact
location each product should be stored? The answer is – Keep better
selling products closer to the packing desk.
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We all know that 60%-70% of a company’s sales tend to come from just
20% of their products, meaning you can severely reduce picker walking
time by identifying that 20% of products from past sales data in your
business; and then storing these as close to the packing desk as
possible. Tools like ABC Analysis help in determining such items. You
need to divide all on-hand inventory into three groups – A, B and C. You
can then decide that ‘C items’ will be placed closest to the packing desk,
while ‘A items’ will be farthest away.
A Items: Are of high value with low sales frequency.
B Items: Are of moderate value with moderate sales frequency.
C Items: Are of low value with high sales frequency.
Warehouse manager can then decide that ‘C items’ will be placed closest
to the packing desk, while ‘A items’ will be farthest away.
There are many other considerations which may also decide the location,
where items are stored. With mobile phone, generally you get order for
hands-free headphones. In such case, these two items need to be kept
close to each other. When some promotion is declared in which on
purchase of specific items, one other item is given free. Then this free
item should be most close to packaging guys, to avoid even dependence
of picker staff.
Rearrange is another important aspect in the warehouse management.

Most businesses are cyclical and thus, certain items (in winter woolen will
move fast) move faster and more vis-à-vis same item may not move
during certain time. Thus, it is essential to keep rescheduling and re-
arranging goods inside the warehouse. Collectively, it saves time and
money.
New Stock receiving is another challenging aspect. Improper system will

result in damage, loss and cascading effect on inventory and order non-
fulfilment.
A critical part of warehouse management is its ability to receive, unpack,

transfer for stocking and book in new inventory as efficiently as possible.
The faster this happens, the sooner that stock becomes available for
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sale. Most importantly, technology should be used to get desired

accuracy, and speed in goods handling.
(c) Picking, packing and shipping orders
These three terms collectively mean ‘”Fulfillment Strategies’’ as they

collectively help you to dispatch right product to the right consumer
using the right freight forwarding mode so as to reach the goods in right
time.
Picking:
There are four main picking methods used by warehouse managers:

1. Single order
2. Batch picking
3. Zone picking
4. Wave picking
Single order: This is the most basic picking method – typically only
used by those just starting out. Quite simply, a picker will pick one order
at a time in its entirety before moving on to the next.
Best for: Retailers just starting out who are not yet big enough to gain
the benefits of more complex picking methods.
Batch picking: The picker is assigned a batch consisting of a number of

orders, picks them all in one go and then returns to a packing desk.
The picker will then get assigned a new batch to pick. The number of
orders allocated to each batch is generally between 10 and 30. But this
really depends on the physical size of your products and average order
size.
Best for: High number of orders with single or low number of products
per order.
Not suitable: If you have a high number of products per order.
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Zone picking: This sees each picker assigned their own area (or zone)
of the warehouse with them only picking products stored in that specific
zone.
An order is passed through all areas to have any required items added to
it by pickers in that zone before being returned to a packing desk. Great
for preventing multiple pickers getting in each other’s way, but it can also
create a slight delay in shipping as each order needs to be passed around
the warehouse.
Best for: Retailers typically shipping a high volume of multiple item

orders.
Not suitable: You typically ship single or low item orders or have very few
pickers.
Wave picking: Similar to zone, but all zones pick at the same time. The
various items are picked in the according zone and are then given to a
packer who will consolidate all the separate picks for each order.
This is faster than zone, but labour costs increase due to the packer
needing to spend more time combining orders at the end before needing
to be shipped.
Best for: Retailers typically shipping a high volume of multiple item

orders and still wanting to maintain a super-fast process.
Not suitable: You typically ship single or low item orders, have very few
pickers or cost been more important than speed of dispatch.
Packaging:
It is an opportunity to make completely sure that you are sending the

right products to the right customers and in the most efficient way.
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Following things needs to be considered
Box size: More and more shipping companies are incorporating package
dimensions into their pricing – rather than it being based solely on
weight. Meaning box sizes could be having a direct impact on costs.
Packaging approach depends on your individual business needs. However,
it needs to be kept manageable and in minimal size variation. This keeps
things manageable for packers while still allowing room to minimize
courier costs.
Few other things which need attention is – (a) packaging materials

selection, (b) primary and secondary packaging, (c) ways to minimize
item damage during transit, (d) seasonal packaging, etc.
Shipping orders:
Shipping covers collecting packaged order with documents and putting it

for onward transportation. The steps under shipping under warehouse
management process are:
1. Weigh the package.
2. Print out relevant shipping label and invoice.
3. Decide where to shift, mode of transport, etc.
4. Mark the order as ‘Shipped’ on the relevant sales channel or Order

Management System.
5. Send out ‘shipping confirmation’ and ‘tracking’ emails to the customer.
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5.3 WAREHOUSE MANAGEMENT
Warehousing management in simple terms covers the following aspects:

(a) Basic warehousing adherence
(b) Fulfilment strategy
(c) Packaging and shipping
(d) Warehouse performance management
We cover each of the above one by one in the following paragraphs:
(a) Basic warehousing adherence

In previous section 5.2, what we have covered is also considered as basic
adherence needs and guidelines of any warehouse management.
(b) Fulfillment strategy

Single reason why warehouse exists is in its ability to supply finished
goods when needed. This is known as warehouse management fulfilment
strategy.
Warehouse fulfilment includes: (1) picking, (2) packaging, (3) shipping
and (4) distribution strategy.
Picking simply refers to collecting required finished product/s from the

warehouse and bringing goods at the packaging point.
These are the four picking methods available as an option.
1.1 Single Order
Here, in this basic system, finished good/s needed for one specific order
(one or many items) is collected and brought at the packaging point.
Person can either follow farthest first or closest first approach.
It is appropriate for new business before its growth stage, where order
inflow is manageable. Considering expansion plant, it would be advisable
to set up racks to suit this system.
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1.2 Batch Picking
In this system, picker is provided with multiple orders with indications

regarding quantity of each types of finished goods needed to be picked
up by him. He will collect all necessary items in requisite numbers.
Packaging team later picks required each items of the order and arranges
its packaging. In the meantime, picker will move to collect items needed
for the next batch of the order. It is appropriate for handling larger order
numbers having manageable size of the finished goods. If one of your
finished products is of very large size, then picker may not be able to
handle the entire batch in one round.
1.3 Zone Picking
In this system, specific zone stores specific finished goods and pickers
are assigned specific zones. Orders are passed to all zones and picker is
supposed to be picking goods available in their zone and deliver at the
packaging area. It is appropriate for handling large orders where
continuous inward supply is needed at the packaging point. It works only
if you have large range of finished products to choose from.
1.4 Wave Picking
In this system, picker is not assigned to the zone but assigned to collect
goods handed over to him by zone guy. Here, they move from one end to
the other end, zone guy hands him over goods pertaining to the order
request received. At the packaging counter, picker makes a batch of one
order and gives it for the packaging. It is appropriate for handling large
order dispatches per day, where speed is also essential. If speed is not
crucial but you are handling a large order dispatches, then you may
continue to use zone picking system.
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(c) Packaging and Shipping
Packaging system helps you to make sure that you are sending the right
products to the right customers and in the most efficient way.
Important element of packaging is cost of dispatch which is directly

linked to size of your box used. Shipping companies are charging you not
only for the weight but also for the volume of the cargo space you
occupy. Thus, box size is equally important. Your organization’s product
mix may have different sizes of various products. You need to however
standardize few sizes, which may accommodate most of your products.
As there is a separate chapter of packaging, it is not covered here.
Post fulfilling stage, customer’s order is taken up for shipping. Following

general steps complete your shipping;
i. Weigh the package.

ii. Print out relevant shipping label and invoice.
iii. Mark the order as ‘Shipped’ on the relevant sales channel or Order
Management System.
iv. Send out ‘shipping confirmation’ and ‘tracking’ emails to the customer.
Generally, good Order Management System have this feature built in.
(d) Warehouse Performance Management
In the entire supply chain management, warehouse management

assumes critical significance in terms of its utility and cost impact. Thus,
warehouse performance needs to be measured proactively. In general, it
includes two aspects:
1. Accuracy of fulfilling customer orders

2. Speed of fulfilling customer orders
Improvements in warehouse management have a direct result on both

overall business costs and customer satisfaction. Failing to correctly
measure warehouse performance means it is impossible to actively
improve and achieve optimal efficiency. There could be costly
weaknesses in play that you may not even know exist. Like any other
monitoring, there are key ratios that is considered for managing
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warehouse performance. In this section, four key ratios are considered

and explained as follows:
(i) Receiving efficiency performance
It measures the time it takes for your team to complete the receiving
and putting away of a newly delivered purchase order. It is a good idea
to record exact timestamps for:
- New stock being delivered

- When this stock is ready for putting away
You can then calculate the difference in time between each point and
work out an average for the month – allowing you to see how
performance is improving/slowing in this area of your warehouse
operations.
(ii) Rate of return performance
An order being returned is not always down to a problem in the

warehouse – a customer may have just had buyer’s remorse. So, the key
to getting best use out of this is to segment by reason for return. This
way, the warehouse or operations manager can start looking at exact
reasons why this KPI may be high and put into place strategies to
resolve.
You may determine several different but unique return reasons and use
the following equation to analyze each one:
Rate of return = Number of units returned/Number of units sold
(iii) Picking accuracy
Tracking and segmenting rate of return properly lets you also analyze
picking accuracy – a particularly key piece of data. To calculate picking
accuracy, use your total number of orders in a period along with data
from the rate of return KPI in the following equation:
Picking accuracy = ((Total number of orders – Incorrect item returns)

Total number of orders) × 100
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(iv) Order lead time
Order lead time (or average order processing time) is quite simply how
long it takes for a customer to receive an order. You may want to divide
this into various categories. For example, international orders, Amazon
Prime orders or orders for special or larger products. But generally, the
lower you can get order lead time, the happier your customers are going
to be – so long as it arrives in perfect condition.
Warehouse Management System
After understanding what warehouse management and its constituents

is, we can understand the concept of warehouse management system.
Warehouse Management Systems (WMS) basically take a huge chunk of

the leg work out of all the processes. It simply automates and digitizes
as much as possible and integrates pre-stage with the existing stage and
the subsequent stage.
Warehouse management system makes it much easier to:

– Keep everything organized, tracked and documented.
– Pick with as close to perfect accuracy as possible.
– Speed up your entire logistics operation.
Broadly, warehouse management system helps you with the following;
Warehouse organization: System stores exact locations for every SKU

and can direct you on the best walking route to this place in the
warehouse.
Digital barcode operations: Uses mobile scanners and barcodes to

minimize the need for paper and optimize accuracy when picking,
packing and booking in new stock.
Desired integrations: It has an integration with all necessary stores,

marketplaces, shipping partners, number of warehouses and anything
else unique to your business.
Easy-to-use system: Straightforward platform designed to be easy to

operate and learn for all current, new and temporary team members.
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All-in-one solution: Capability to handle and manage other major areas

of your retail operation – including orders, inventory and shipping.
Reporting and accountability: Track and hold a history of every action

in the warehouse and by which team member for high-level KPI reporting
and staff accountability.
We have learnt the various constituents of warehouse management and

what is warehouse management system. We can now learn warehouse
management strategy.
5.4 WAREHOUSE MANAGEMENT STRATEGY
After understanding basics of warehouse management, we will not

understand certain strategic aspects.
Warehouse management strategy follows a logic, that the movements of

materials, whether unprocessed or processed between the source and
the sink is either reduced, or is moved to the maximum extent possible
in bulk over longer distances, and in smaller lots through as small a
distance as possible, to derive the transportation cost advantage per unit
of movement.
But while the above may be the normal rules, in practice, several other
issues dictate the choice of locations.
In the case of manufacturing locations, the selection of site may

be dictated by:
• Existing facility of the organization,
• Availability of resources such as skilled labour, power, other

infrastructure,
• Government incentives, such as tax advantages, concessions,
• Scope for further expansions, as and when required,
• Does the location impart some advantages in terms of competition,
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• Does the location offer scope for improved coordination with suppliers,
• Overall cost of set-up in the location,
• Industrial climate in the area,
• Records of other industries which may have been set up in the

surroundings, and
• How lonely or crowded is the area.
In respect of warehouses, the determining factors would be:
• Primarily how close it is to the area to be serviced, This follows the

reasons as under: The materials transported in the lap between the
depot and the customer, whether it is a seller or a user, will mostly be
in comparatively smaller lots, as compared to the lots that are
transported to the depots from the preceding source. This results in the
per unit cost of transportation in this sector being several times higher,
than the earlier sector. For example an FTL between Mumbai and Pune
is capable of carrying 9 tons of cargo may be available at Rs. 4,000 for
the trip, whereas if a shipper case of the same item weighing 15 kg is
sent through regular cargo booking the freight may be Rs. 22 per case.
From this, one can observe that in the FTL transportation the cost per
kg is Rs. 0.45 per kg, in PTL, it is Rs. 1.46 per kg for transportation
across the same distance.
• Apart from the cost of transportation, locating the depot nearer to the
point of consumption imparts the edge of being able to reduce the
response time substantially.
• Since selling inter-state attracts now Goods and Service Tax (GST)
having Central GST and State GST components in it with simplified
road forms and formats to allow smooth movement (not needing now
warehouses in different states thus, now warehouse management
strategy needs to consider cost-benefit analysis to determine whether
it pays to have different warehouses in each states or have centralized
warehouse and subsequent onward movements.
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• Availability of resources and infrastructures would also influence the

choice of sites.
The term warehouse is a combination of two words “ware” and “house”,

which means that it is a place to house or store/keep wares, i.e., items/
articles for sale.
A functional warehouse should ensure that the wares stored therein are:
• In the best of condition, are easily available/locatable,
• Are properly accounted for,
• Are rotated so that the older ones are moved out first,
• Are secured/protected from losses and damages, and
• Are separately segregated between the good and bad.
All these require proper warehouse management:
• The storage space should be clean, lighted, airy, well protected from
the elements and properly secured.
• The nature of the products stored would determine the type of facility,
viz., if perishable items are stored it may require air-conditioned space,
if the cargo is frozen, it may necessitate refrigerated storage, liquid
items may require storage tanks, hazardous items may need special
storage requirements dictated by statutory sanctions.
• Security will involve not only watch and ward, but will necessitate
proper firefighting arrangements, protection from water seepages,
electricity malfunctioning, etc.
• The interests may also be protected by covering the storage risks by

insurance policies. Such policies should cover various types of risks
such as fire, theft, burglary, strike, riots and civil commotion,
earthquakes, lightning, aircraft strike, floods, storms, etc.
• Statutory requirements like appropriate licenses from authorities, if

necessary, for storage should be in place.
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Warehouses perform the following functions:
• Receipts of items,
• Storing the same properly,
• Dispatching products as per requirements,
• Preparing related documents,
• Maintaining records of transactions, and
• Any associated tasks that the warehouse activity may involve, like
depositing customers’ cheques, posting to them invoice copies, etc.
Organizations can have their own warehouses or may contract the same
out to agents like C&FAs. Whether the warehouse is company owned or
outsourced, the efficiency measurement yardsticks will have to remain in
place. For that, we have to look at the activities in detail:
Receipt of Items
Materials are sent to warehouses as per plans. The warehouse must

check that the materials received are as per the indent. The condition of
the materials must be checked and any damages, shortages, breakages
must be recorded. Sometimes, materials are received back from
customers. Such materials should be only accepted if the return has been
authorized by someone competent in the setup.
At the time of receipt itself the damaged, non-saleable goods should be

segregated and not kept with the saleable ones. This aspect has to be
very strictly enforced when materials are taken back from customers, as
they are prone to return any material lying with them.
Recording of receipts should be prompt, and accurate. Postponing

preparing of receipt records can lead to not only discrepancies, but may
result in customer orders being refused because of non-updating of
records which may show nil stocks, even when the same may physically
be present.
Just as delays in recording of receipts should be avoided, so should

recording of receipts of materials not yet physically received be strictly
barred. This is normally resorted to, at month/period ends, to show
better performance.
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Stock rotations can be properly enforced on the basis of identifying

stocks which are older than the others. With the advent of technology,
warehouses are able to track the manufacturing dates on the basis of
batch numbers, embedded in bar codes, or very recently on the basis of
radio frequency identification devices (RFID tags), but still the basic
discipline of ensuring that all materials received, conform to the
requirement of the supporting tag, remains with the receiver of
materials, and the warehouse must ensure compliance.
At the point of receipt, instances may arise of materials arriving from

some customer as return materials, which have manufacturing dates
prior to the materials at that point being kept in the godown. The
storekeeper has to ensure that these materials are kept in a manner that
they get dispatched at the very next outward movement.
Storage
Having received the materials the same has to be stored properly,

securely, and in a fashion that the operational efficiencies are maintained
at a very high level.
Stocks are liquid assets. While absence of stocks can have a very
adverse impact on the business, overstocking can lead to unnecessary
blockage of funds, as well as product obsolescence, and damages in
storage. Obsolescence and damages in storage are areas where the
storage function assumes an important role.
The Storage activity has to ensure that a proper check is made of

inventories in terms of their age and regular official intimations are sent
to authorities concerned to get them liquidated.
Proper maintenance of quality in storage has also to be taken care of.

Housekeeping, regular cleaning have to be emphasized.
To ensure proper rotation of stocks, materials have to be so kept that the

older ones are dispatched earlier than the newer ones.
Normally, storekeepers keep materials in stacked lots.
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Figure 5.2: Cartons Stalking Options
In honeycomb stacking as different from normal stacking, the cartons are

stacked in a fashion whereby the arrangement ensures an open shaft like
space is kept till the top of the stack that allows free air circulation
through the height of the stack, enhancing the quality of storage.
Separate lots ensure that the movements are made from distinct lots so
that (FIFO) First In First Out is maintained. (FIFO) First In First Out while
ideal, may at times not address the issue of stock rotation properly. Let
us take an example of a pharmaceutical company, whose medicines have
a date of manufacture and a consequent date of expiry marked on each
lot, which may be indicated by independent batch numbers. The
warehouse may have received a lot of medicines from the factory on the
23rd of May, 2004. On the 5th of June, 2004, a consignment of materials
returned by a distributor is received which contains some cases of the
same medicines, but of a batch having a manufacturing date much
earlier. If normal FIFO is observed, then the store when dispatching
materials will first send out materials from the lot received on 23rd May,
as a matter of fact they will continue to so send till that lot is exhausted
and then only start sending from the lot received from the distributor on
5th June. In this procedure, the underlying objective of following FIFO
would be defeated. Hence, the stores has to slightly modify (FIFO) First
In First Out to (OPFO) Oldest Pack First Out, to meet the objective of
sending out the older materials in terms of age, first. For this the stores
will have to track the materials on the basis of their ancestry and not
simply on the basis of their entry to the godown. This can only be done
through unique batch numbers which can have embedded in them the
date of manufacture as part of the code. However, the stores has to
ensure stacking in identifiable separate lots to facilitate removal as per
the batch numbers. Physical security will have to be ensured through
protective measures, viz., watch and ward, secured enclosures, etc. but
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losses due to fire, theft and such other eventualities will need insurance
cover. The practice is to take an overall amount of insurance cover and
then give periodical (monthly) declarations and pay premium accordingly.
Warehouse efficiency at the storage stage also implies how the available
space is utilized, i.e., capacity utilization. Storage space has a cost
implication. If the space is inadequate, then situations may arise when
materials may not get space to keep in.
Sudden arrivals beyond the space capacity available may either put
pressure on the storage leading to haphazard dumping of cargo, or in
extreme cases keeping stores outside in the open, or hiring temporary
space at an exorbitant cost.
While calculating capacity, the measurement should be made in cubic

feet, rather than square feet, because cargoes are stacked in heights and
hence square feet space is a misnomer.
Products have prescribed recommended stacking heights based on the

weights and such norms should not be exceeded. Higher heights can lead
to pressures building up on the bottom layers and crushing them. If
material receipts are beyond the available space, then stacking heights
norms are one of the first casualty. Let us take an example of a
warehouse storing cartons of soap. The dimensions of the cartons are 1
ft 6 inch long by 1 ft 3 inch wide by 1 ft height and the weight is 15 kg
gross. In such a situation, the stacking height recommended is 8 cartons
high.
A FTL which will carry 9 tons of cargo can carry about 480 cases of soap,
because the truck while capable of carrying 9 tons of cargo has space
limitation in as much as the truck has a depth of 18 ft, width of 7 feet
and is allowed to carry 7 feet high yielding a carrying space of 882 cu. ft.
and the cu. ft. dimensions of soap cases being 1.875 cu. ft. The volume
gets restricted to 480 cases, even when the tonnage capacity is
available.
With a stack height of 8 cartons, it will be evident that about 60 cases 1

ft 3 inch by 1 ft 6 inches, i.e., 112.5 square feet would be required to
stack one truck load of soap. Allowing for aisle space (free space for
people to move around) at an average 30% the area required to stack a
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truck load of soap would come to 146.25 sq. ft. in case of honeycomb
stacking the requirement may move up by another 15% , i.e., to 168 sq.
ft. On the basis of the material flow as per the sales plan, the storage
space requirement can be estimated. If the storage space available has
considerable heights, putting up a mezzanine floor at a height of 12 or
13 ft can considerably enhance the capacity of storage.
However, the problem arises because of spurts and slackening of

demands, old non-moving stocks piling up, sudden requirements to hold
stocks to cater to unexpected rush, some unforeseen event such as a
trader strike or a transporter strike because of which movement is
affected, when the space requirements temporarily increase. If such
peaks and troughs can be anticipated, the storage space can be planned,
but if they are sudden then the storage infrastructure gets strained.
Another important aspect of storage is the condition of the floor. Flooring
should not only be proper, but should be such that moisture does not
affect the cartons stored. Usually, termites are also a problem that has to
be taken care of.
Palletisation is an option which can also be extended to unitization of

stacks. In Palletisation, wooden pallets are kept for storage of cartons
above it. The pallets made of two layers of wood have an open space in
between, which can enable forklift trucks to lift pallet loads easily and
move around.
Figure 5.3: Palletisation
Palletisation would also serve the purpose of protection from moisture on

the floor, and since the stack would be clear from the floor,
contamination from termites would be less and even if contamination is
there the same would come to light.
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While in storage, stocks may have to be shifted at times. Whenever such

shiftings have to be made, proper care must be taken to maintain the
identities of the stacks, particularly from the point of view of their batch
numbers. The layout of stores should be such that the same facilitates
easy deliveries, which in other words would mean locating the fast
moving products as near to the delivery bay as possible, the medium
moving thereafter, and the slow-moving ones, at the rear.
Designing a Warehouse
While designing a distribution centre or warehouse, we should bear in

mind that we are designing a sophisticated system, the elements of
which are interdependent, and comprise:
• Land and building,

• Management and staff,
• Equipment,
• Computer and software, and
• Operating methods and procedures.
There is little point in considering any one of these elements on its own
for its cost may directly affect other costs, and, therefore prevent an
overall optimal solution. For example, an inexpensive piece of land that
results in high building costs, may be no savings at all, low equipment
cost that may result in increased staff, may not be cost-effective, and so
on.
Sometimes, so-called constraints may work in favour of designing, by

eliminating some options all together.
Typical self-evident constraints would be:
• Existing land,
• Existing buildings,
• Existing equipment that may have to be used,
• Existing system software,
• Staff or union objections on automation, and
• Government regulations on street access, space restrictions,
environmental requirements.
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In order to decide on the warehouse site, layout, structure design, the

concerned person has to gather a lot of information on various aspects of
the proposed warehouse workings, and collecting these data can be very
time-consuming simply because they may have to be sourced from very
scattered departments and individuals.
These data may vary from operation to operation. The larger the product
range, the more complex the order profile, the larger and more complex
will be the data collection work.
For instance, a warehouse dealing in say 100 or 200 line items largely
sold in lots or in a limited range of standard cartons, may have limited
data collection tasks, vis-à-vis an organization handling automobile
parts, running anywhere from 30,000 to maybe a lakh line items, of
varying shapes, sizes, weights, again selling in carton lots or individually.
If, for example, the design solution is to address a conveyor belt facility
for automated movement of materials, the data collection may have to
factor in what portion is certainly conveyable, what portion is probably
conveyable, and what portion is certainly non-conveyable.
In almost all cases, the following data needs to be collected:
• How the goods are received, in what volume,

• How they are put away and stored,
• How many line SKUs are kept in stock,
• The physical characteristics of each SKU,
• What volume of stock needs to be stored in each subgroup,
• What are typical order profiles,
• Must orders be checked and repacked,
• What will be the work content and physical volume per task,
• Must goods be so arranged that they can be directly loaded,
• What types/numbers of vehicles have to be accommodated for loading
and dispatches in the warehouse at a time, and
• What effects do certain days of the week/month or any other seasonal
factor have on the pressures, throughputs, and inventory levels.
While all these data collections and analysis may vary from situation to
situation, and business to business, there are two aspects which need to
be done in any case:
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• Product Quantity Analysis

• Product Movement Analysis
The product quantity analysis will generally show the number of pallets,
or units which have to be stored in each line. It will show how dense or
selective the storage system can be.
The product movement analysis will show the rate at which each product
line moves through the warehouse with indications of whether they move
out in cartons or pallets.
This would guide to the selection of the storage system, the choice of the
material handling system, and also the order picking system.
Split Case and Full Case Items
Products can exist in several pack types. For example, there may be
large shippers, which contain a number of cartons, each of which may
contain units in certain numbers. Thus, within large cartons, there can be
small inner cartons. When such is the case, it is important to identify the
pack sizes and types in which the goods are sold.
To compile databases of the product, movements help can be sought of

models such as ABC analysis, or Pareto’s analysis, which shows that on
an average, 80% of the movement comes from 20% of the line items,
and in spare parts this frequently becomes 90% of the movement coming
from 10% of the line items.
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Figure 5.5: Pareto’s analysis
Thus, for instance when designing an order picking system we may rank
the goods by movement rate, taking the number of picks or the number
of hits (accesses to a given line item) per day. On the other hand, for the
storage task, we may rank it by the number of cartons stored, or if we
have sufficient information, we may cube the inventory, and then rank it
by the number of cubic meters of goods to be stored, or the number of
pallets required.
Another very important issue that must be factored is to know about the
future because the distribution centre has to deal not with the past but
with the future, and hence it is very important to consult not only the
marketing and sales department, but also perhaps the procurement and
manufacturing departments. Likely growths in the number of line items
as well as growth in sales should all be reckoned. Simultaneously, the
designing must consider for how many years the warehouse should serve
at the planned level, namely if rapid growths, changes of a very
significant type are expected, then the designing should be able to take
care of the same.
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Organizations follow a system of perpetual inventory audit to check

the actual stocks tallying with the book balances. As the name denotes,
the system involves continuous checking of inventory on an ongoing
basis as against an annual stock checking at the year end. However,
selective items are checked at pre-set intervals, like all A class items
being covered at least once a year, 50% of all B class items being
covered once a year and 10% of all C class items being covered at least
once a year.
Organizations also conduct a packed stock reconciliation across the

several storing points starting from the factory, to check that all the
goods brought into the system have been accounted for.
Dispatches
This aspect of the warehouse’s activity is very critical. Not only does this
have impact on accountability of stocks, but it also has a lot to do with
customer service levels and customer satisfaction. Warehouses are
located strategically near customer points to ensure quicker responses,
lower overall costs of servicing, and improved levels of servicing.
So, servicing of customer orders have to feature in any evaluation

process. A system should be in place to record all customer orders
received at the warehouse. It is advisable to accept orders only if the
same bears the seal and signature of the customer. In extreme cases,
verbal orders may be accepted but the same should be followed up in
writing. This is required to avoid confusions and misunderstandings with
customers.
All customer orders received must be recorded, and tracked. Since many
orders may be sold on credit, the first thing to be done would be to check
the available credit limit of the customer, to decide as to whether the
order can be executed. Materials required by the customer should be
reserved, because if the items are not blocked the storekeeper may not
know how much of the stock physically present can be offered to
subsequent parties.
Dispatching efficiencies can be assessed on the basis of the period of

time in which the customer orders are executed, like what percentage is
executed on the same day, what percentage is executed after one day,
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the percentage executed within two days and so on. Customer orders
executed after prolonged periods or not executed at all must be studied
as to the reasons, viz., were they controllable in the hands of the
warehouse or were they beyond their control.
The ones not executed have also to be studied from the point of reasons
of non-execution.
Certain reasons can be:
1. Non-availability of stock,
2. Non-availability of credit limit,
3. Non-availability of blank cheques (many companies adopt a practice of

keeping blank cheques from customers crossed a/c payee, favouring
the company, duly signed, with only the date and amount spaces left
blank, to be filled in by the company after dispatch of the ordered
goods and thereafter putting into the bank as per the credit norm),
4. Non-availability of transport.
From the above, it will be evident that excepting for reason no. 2, the
others were all controllable factors.
Besides execution of the customer orders as mentioned above, the

system should also check the fill rate, which means what percentage of
the ordered items were supplied. Orders may have been executed but
only in parts which cannot be counted as a customer order serviced in
full. Customer service has to be evaluated on both these parameters.
As mentioned earlier, the transportations ex warehouses are normally for

smaller lots and to distances depending on the area being catered to.
Hence, transportation rates must be negotiated and agreed upon, along

with the accepted transportation time. Usually, certain transporters
specialize for certain routes and it would be wiser to have service level
agreements with them for those destinations.
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Efforts should be made to club as many dispatches on a route specific

way to obtain advantages of clubbed deliveries on an FTL basis
combining several customer orders. In case of local deliveries in the town
where the warehouse is situated, the carrying capacity of the vehicle and
its capacity utilization to the maximum extent possible must be factored
in, when making deliveries. Planned deliveries along certain routes on
certain days can make such delivery scheduling much more effective.
Pre-dispatches checks:
a. Ensure cheque deposit and its clearance takes place in a way that
amount is cleared before goods reach the customer. Today, you have
different payment options available like bank transfers, net-banking
through which money transfer is made very easy. Thus, customers in
urgent need of goods, can be directed to use alternative faster means
of payment. At no cost, you must have a situation, where in goods are
I the hands of your customer, without any payment in your hand.
b. Ensuring insurance cover is available to all your goods. Billing on a

certain date and actually not dispatching, and that is from the angle of
insurance cover. When the billing has been made and a dispatch
document prepared, the stocks on record would have been removed
from the stock cards. The materials while physically present, on
record are not in the godown. In case of any mishap, destroying or
damaging these stocks, the insurance underwriters may disown any
liability, and it would be quite a task to explain the matter to them.
Having examined in detail the specific functions of warehouses, we shall

now discuss certain simple exercises that can be carried out by
distribution managers to decide on the number of warehouses on the
basis of comparative cost advantages.
We have observed that the per unit transportation cost is lesser if

cargoes are transported in bulk, vis-à-vis in smaller lots. Location of
warehouses which we may term as Distribution Centres (as their main
function is to redistribute), will have to serve the following objectives:
• Quickly service customer orders, and hence be as near to the

customers as possible, to reduce the response time,
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• Have sufficient stocks to service the customer orders, which means

multiple stock points,
• Be comparatively economical in terms of warehousing costs, which

would include space costs, facilities costs, and
• Ensure overall transportation costs, which will be a combination of both

primary transportation to the Distribution Centre, in bulk, and
secondary transportation from the Distribution Centre, in small,
remains as low as possible.
This can best be described in the chart below:
Figure 5.5: Transport Warehouse – Total Cost Import
In the diagram, figure 5.4, you will observe that as the number of
Distribution Centres increase, the primary transportation graph will
initially rise, but after some time stabilize, because:
• The first distribution centre will be chosen as central to the hinterland

being covered from the factory or Central Warehouse, the next one
being taken as central to the hinterland beyond the first Distribution
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Center, the next one similarly, but ultimately the new ones may start
getting located nearer the Factory/Central Warehouse.
This will impact the total distance the cargo has to travel.
• Besides in the initial stage the material being transported will

marginally increase as the number of Distribution Centres get added
on. For example if 1,000 units are being sent to the 1st Distribution
Centre based on a sales plan and stocking requirement, when the next
Distribution Centre gets added the material requirement may not be
500 in each, but 550 in each, primarily to take care of the buffer stock
kept at each location, and hence the material required to be
transported will register a growth.
From the figure as given below, one can observe that after initial
incremental Distribution Centers being located relatively farther than the
1st Distribution Center, later on a stage may come when the additional
ones may be located at more proximate locations.
Area to be Serviced Ex Factory/Central Warehouse
Figure 5.6: DC – Distribution Center
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As with regards to secondary transportation, the more the number of

Distribution Centers would mean lesser the distance the freight has to
move in smalls, and hence the secondary transportation cost curve will
have a downward shape. But after some time, the advantage may not
accrue because the smalls will become so numerous, that advantages of
clubbing loads to obtain advantages of capacity of hired vans, may be
offset by increased customer service requirements, which would mean
part utilization of van carrying capacity, and thus shooting up costs.
Thus, the secondary freight cost curve may after some time start moving
upwards. As a result of this, the overall transportation cost curve will
take a shape as shown in the diagram, i.e., it will move downward up to
a point and thereafter show an upward movement.
In brief, selection of DC location needs understanding about factors for

and against different costs involved and through complex calculation,
best location can be determined.
Let us look at warehouses from the perspective of a company fully

owned, company managed but in a hired facility, or totally outsourced.
Warehousing activities are at three stages:
• At procurement stage, which has to take care of inputs into the

manufacturing operation. If the business is of a nature which
necessitates bulk handling of inputs like in the case of a business
handling commodities, this operation can be substantial and crucial. In
such cases, the company normally would like to manage the
warehousing operation because it is very crucial to its business. The
warehouse may, of course, either be company owned or may be hired
premises. The Key area of control would be the rate per unit of space
as the other items would have to be managed by the organization.
• It can be at the factory/manufacturing stage, involving raw material,

packing material, work in progress, as well as finished goods. Separate
warehousing for the finished goods excise cleared, and ones on which
the excise is yet to be paid, may also be required. These warehouses
can be either company run or can be outsourced. Management would
be similar to the ones as the earlier set.
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• Organizations having multiple manufacturing points, own or third party

manufacturing, often resort to a central warehouse, where materials
from the multiple manufacturing locations which have to be mixed into
composite truck loads for dispatches to distribution centers further
down the supply chain, are received, stored and redistributed. From
this stage onwards, organizations mostly outsource the warehousing
activities.
• Distribution centers or depots are the final lot of sink/source in the

supply chain, and they are the so-called depots from which the
customers are serviced. This activity is mostly outsourced.
These service providers are normally known as Carrying and Forwarding

Agents. They are different from the (C&FAs) Clearing & Forwarding
Agents, who generally handle cargoes at transport points, such as rail
heads, wharfs, or at airports.
In Chapter 2 while defining C&FAs, it was mentioned that they act as

agents of the company and ownership of products vests in the company.
The C&FAs, thus, provide the warehousing services of receiving, storing,

and dispatching materials as per the organization’s requirements, and as
per their directives, and within the laid down procedures and policies.
You can easily estimate the importance of this function, and its criticality.
An organization having a turnover of let us say Rs. 200 crore, and having
a normal stocking norm of say 60 days inventory, will be entrusting in
C&FAs at any point of time Rs. 34 crore of inventory, and if it operates
through 24 C&FAs then each C&FA may be carrying approx. Rs. 1.5 crore
of material at any point of time. Larger C&FAs may be even carrying
more.
Customer servicing is the next area of critical importance entrusted to

C&FAs. They are the last leg in the chain before ownership moves on to
an outside party. Proper servicing of a customer:
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• In respect of timeliness of order execution, order fill rate, i.e., what

percentage of ordered items are sent.
• Quality of items sent, i.e., proper stock rotation.
• Information backup, i.e., sending them information about order

processing.
• Secondary transportation efficiency.
• Adherence to procedures such as cheque deposits, maintaining the

approved credit period are all part of their function.
Hence, the choice of C&FAs is an important activity of the Distribution

Manager.
The Selection procedure may be through:
• Performance assessment of C&FAs operating in the market,
• Through advertisements,
• Even trying out absolutely new ones on the basis of their track records
or experiences in other fields, and
• Sometimes even trying out employees separating from the organization

on superannuation (regular, or early).
We shall discuss here some of the ways to determine the remuneration

package.
While generally C&FAs are only agents carrying out the carrying and
forwarding tasks on behalf of the organization, and not having ownership
of the products, there are also a variation of this arrangement, where the
agent works as a consignee agent up to the point of sale to a customer
(i.e., up to that point the goods belong to the company), but thereafter
he assumes ownership of the goods in as much as collection of the
amounts from the customer becomes the agent’s responsibility.
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Since the principal task of the C&FA is receipt, storage, and dispatch, in
terms of resource the following are required:
• Storage space of the requisite specification, quality, and quantity, this

can either be the agency’s own or hired,
• Special receiving facilities, including rail head connection if the product

is of a nature which involves bulk transportation by rail, e.g., steel
rolls, cement, etc,
• Staff for the several functions, competent and qualified to handle the
system requirement,
• Handling arrangement, for unloading, storing, shifting, and loading, on

a full-time basis or on a job basis,
• Material handling equipment, if required,
• Facilities such as computers, connectivity, backups for alternate source

of power, UPS, etc,
• Communication facilities, and
• Secondary transportation facilities, which may be for local deliveries

within the C&FA’s town limits, and for upcountry locations on a booking
basis. This, in turn, may be carried out by the C&FA by using his own
vehicles, or through hired vehicles.
Organizations either work out the remuneration package on the basis of:
• A per unit remuneration, such as Rs. 12 per case of finished goods

handled.
• As a percentage of sales value achieved through the C&FA, this is

particularly common among the pharmaceutical companies, and those
who work with the C&FAs as a consignee agent.
• Reimbursement of all fixed expenses at actuals as per the amounts

agreed, such as rentals, staff cost, depreciation or amortization of
assets specifically being used for the operation like computers, material
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handling equipment, reimbursement of variable expenses at pre-agreed

rates such as per case booking rate on upcountry dispatches, handling
of cases on a per carton basis, applied on the actual volumes handled,
and a remuneration to the vendor.
Whichever method that is decided upon, needs to be discussed and

agreed upon in writing. Negotiation skills on the part of the distribution
manager is very vital if the organization needs an optimum rate, however
the distribution manager must be careful that too much of bargaining on
the rates can at times be counter-productive as the same may be at the
cost of customer service.
Hence, in case of doubts, it is prudent to enter in to an agreement for

not a very long period, and revisit the issue after gaining some
experience of the ground realities.
In any case, reimbursement rates of a per unit base or of a percentage

of sales base have to factor in the several elements of costs to be
incurred by the service provider, as well as his remuneration – the only
advantage is that the organization just pays on the basis of sale
throughput, and because the service provider stands to increase his
earnings through increased volumes he is in a way incentivised to render
better and efficient customer service.
However, in this method, the organization stands to lose any advantage

of scale, as more is the volume the more he pays. So, organizations
negotiate these per unit rates on a telescopic basis, where under, at
certain volume halts, the per unit rate decreases, whereby the
organization gets some benefit of scale and the service provider is not
unhappy because he knows that his rise in the costs of services will only
be on a marginal variable basis, as the fixed elements would have been
more than covered at the lower volumes base.
An example of such a rate would be:
Rs. 12 per case of volume handled up to 5000 cases per month, Rs. 10
per case for volumes 5001 cases to 7500 cases per month and Rs. 8 per
case or on additional cases per month.
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Remuneration @ 2.5% of net sales value up to Rs. 25 lakh sales per

month, @ 2.25% of net sales on sales Rs. 25 lakh one to Rs. 30 lakh
sales per month and @ 2% on sales beyond that amount per month.
The word net should be incorporated as otherwise the C&FA would be

reimbursed for sales that may have come back later. The C&FA may
argue that the return is not due to his fault, and hence it may require
some persuasion on the part of the distribution manager to convince him,
failing which certain types of sales returns may have to be agreed upon
(e.g., returns due to delayed supply, or due to duplicate supply, or wrong
supply) on which the C&FA will not be reimbursed.
When the organization is not very sure of the expected volumes it may
be advisable to opt for C&FA payment terms on a reimbursement of
expenses basis, and when certain of the volumes being achieved, then
opt for a per unit basis.
Layouts
The warehouse layout should be such that activities are and can be
carried out efficiently and without any delay. Hence, the receipt bay and
the dispatch bay must be so arranged that the two activities do not
clash.
Whenever incoming materials are to be received, the warehouse should

be ready to receive the same. Unless readiness is there, the vehicle may
have to wait, causing not only delays and time loss, but may also lead to
rush related compromises in terms of receipt into improper bays and
bins, and again rearrangements later on.
In order to facilitate (FIFO) First in first out or (OPFO) Oldest pack first
out, the layout should facilitate storage in separate easily identifiable
lots, from which the stores in charge can pick properly.
While the system may flag off the oldest material on the basis of records,
the physical removal will depend on the picker’s manual action, and it is
here that most of the mistakes occur.
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In the absence of total automation like bar code readers at the point of
exit, or RFID readers, the physical check of the batch number or date of
manufacture will have to be done manually. The layout should be
conducive to such checks, like, if the stacks are flagged, then the
operation becomes smooth and relatively error free. Simple practices of
using boards with prominent markings to indicate which stack should be
cleared first may help substantially in eliminating areas of errors.
5.5 LOCATING WAREHOUSES AND DISTRIBUTION CENTERS
While planning for redistribution centers importance may have to be

given to the relative distance and time involvement in movement of
material from source to the distribution centre and from the distribution
center to the end markets. Importance would also have to be given to
the quantum of merchandise that is being moved from the source and
also to the markets from the central distribution center. This is addressed
by the concept of Center of Gravity method.
If we look at a handheld weighing scale
Figure 5.7: A Handheld Weighing Scale
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Where the fulcrum is at point C, and there are loads Wt(S) in one pan
and load Wt(M) in the other pan. If point C is at the exact center, as a
result of which the distance SC is equal to the distance MC, the scale will
balance if the loads S and M are equal. But in case the load S and M are
unequal then for the weighing scale to balance the fulcrum point C will
have to move towards the pan which has the higher weight, such that
the product of S * SC will equal the product M* MC. Thus, if the weight S
is more than M, the fulcrum will have to shift from the center C to some
point C1 closer to S, so that the product of S * SC1 = M * C1M.
Have you not observed many shoppers of vegetables often reprimanding

vegetable sellers to be correct while holding the weighing scale when
measuring?
This principle we shall now apply to determine the exact location of a

central distribution center which acts as a nodal point between several
sources and several sinks.
Let us take the example of a low H.P. generator set manufacturer-cum-

marketer.
A genset may have the following components, that may be assembled

together to make the end-product.
There would be a cast iron base frame. There would be an oil engine, a
fuel tank, a battery, a control panel, as main components which need to
be assembled to be made into a complete generator set.
The marketer may be manufacturing some of the components and

procuring some, or they may also possibly procure all the components
from different sources, to assemble them at one point. The markets may
again be scattered all across the country.
The problem now arises as to where the marketer should locate the
central redistribution point, such that the inputs from the sources and
the outputs to the markets take place, achieving an optimum balance.
Thus, the volume or quantity emanating from sources would represent

the weight to be put in the pan representing ‘S’ whereas the volume or
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quantity being sent to the markets would represent the weight to be put
in the pan representing ‘M’.
Because these two quantities/volumes are likely to be unequal ex

sources and to markets, though the overall quantities of inputs and
outputs may tally, as the markets are going to be serviced based on what
is being procured from the different supply sources, the balancing would
necessarily have to be on the arm part, which means that the point of
the fulcrum would have to be such, as to create a point of equilibrium.
To do this, we shall plot the different locations on a map, whereby their
relative positions vis-a-vis other points can be captured.
Post capturing positions of DC locations, thus if we take the relative

locations of five points A, B, C, D and E on the map, where the canvas
has been marked with a horizontal and vertical axis, we can see that
each of the point has got coordinates to pinpoint their exact locational
spots, relative to the other points, on the canvas. In the diagram (Figure
5.7) below, we can then mark the horizontal and vertical coordinates of
the five points as under:
Figure 5.8: Plotting of a Different Locations on Map
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We have indicated their respective coordinates in the order of vertical

followed by the horizontal. If we assume that points D and B are two
supply sources and points A, C, and E are three markets and we wish to
find the location of the central point which can ensure proper balancing
of the loads, the vertical and horizontal coordinates of the central point
can be found by identifying vertical common coordinate and horizontal
common coordinate: Through complex calculations, using statistical
formula, you will get one central location, which will minimize your
freight movement and thus lower transportation cost.
You may get the Central Point indicated as below:
Figure 5.10: Plottings of Revised Locations on a Map
In the entire exercise, you would have observed that the central point’s
location is influenced by the relative weightages of the sources and
markets. Thus, any source that supplies a major quantity and similarly
any market that sells major quantity would exert their individual
pressures to attract the central point towards them.
When applying this theory to a supply chain situation, apart from the
relative weight-quantity, the freight and transit time also play a critical
role.
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• Activity
1. What strategy would you follow in managing the warehouse of your

organization? Describe the salient features.
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
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5.6 CHANGING FACE OF WAREHOUSING AFTER GST

IMPLEMENTATION
In this section, we will explore how India’s warehousing industry scene is

going to change post introduction of Goods and Services Tax (GST). “GST
is like one nation-one tax and it moves away from earlier state during
which, each Indian state had their own tax structure. This created lots of
hurdle for businessmen as moving the goods was one of the biggest
nightmares they always had to face. GST is transforming the logistics
industry in a country where moving stuff around was notoriously difficult
to do. “When we moved from one state to the other, it felt like moving
from one country to another,” said Ramesh Agarwal, Chairman of New
Delhi-based Agarwal Packers and Movers.
Growth momentum in warehousing and supply chain domain
The unified tax system under GST is expected to bring change on a far
grander scale, removing distortions created by differential taxes and duty
structures imposed across India’s 29 States and 7 Union territories.
GST was implemented with effect from 1st July, 2017. GST has fast-
tracked the growth rate in logistics. GST has boosted the industry’s
annual growth rate from 12-15% to 20-22% and saw plenty of room for
a lot more modernization. Out of the Indian logistics industry’s 980
million square feet (91 million square meters) of captive, agri-based and
cold storage warehousing, 85% were old godowns and traditional
structures. This represents a huge opportunity for modern warehousing
to tap into.
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Bring more investments for growth
With 45% of India’s gross domestic product concentrated around seven

major cities, expected investment in warehousing will flow into cities like
Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai and New
Delhi. Singapore-based logistics company Ascendas-Singbridge has
signed a $600 million deal with Firstspace Realty, based in the south
Indian city of Bengaluru, to create 14 million square feet (1.3 million
square meters) of industrial warehousing space across six major Indian
cities. Canada Pension Plan Investment Board has committed to spend
$500 million in a joint venture with India’s IndoSpace. DHL Group, the
world’s largest logistics company, is investing Rs. 150 million in more
than doubling its warehousing space in the country to 7 million square
feet. Mahindra Logistics is leasing 1 million square feet of warehousing
space: Avashya CCI Logistics, the joint venture of the group that owns
AllCargo with CCI Logistics, is almost doubling warehousing space to 5.5
million square feet in the next few years. Other foreign firms putting
money in the sector include Carlyle Group, Warbug Pincus and Fairfax
India Holdings.
In the last two years alone, as Modi made GST a priority, different
investors have put $1.5 billion in the warehousing business.
Change in business model
GST is not only a tax reform, but it is also a business reform, and a lot of
businesses are now restructuring their supply chains. The advent of
organised retail and e-commerce began modernising warehouses in India
a decade ago, but most firms still rely on musty, dilapidated “godowns”.
Companies have previously based storage models on tax efficiency, but
they can now move to the much more cost efficient, demand-based hub-
and-spoke model used globally. GST has paved the way for ultra-modern
storage sites with automated conveyers, RFID-enabled tracking and IT-
enabled warehousing management systems, APP based distribution
system, implement iOT technology-based solutions like vehicle tracking
and more.
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Enable massive scale of operation
Due to GST, now it is not necessary to have godowns in every state and
UTs. You can have one single warehouse and may be few distribution
centres to reach your consumers. Warehouses will be now massive,
technology and IT enabled, with huge emphasis on automation. To give
you some perspective, we refer to few examples — JSW Steel, India’s
biggest domestic steel producer, is also mulling a plan to bring down the
number of its 20-plus warehouses across the country to five, and many
more companies; Reliance Retail, the retail unit of Reliance Industries,
which has around 100 distribution centres across the country, also plans
to “optimize some”, by reducing numbers and increasing their market
reach by increasing space, bring in technology and automation; Agarwal
Packers & Movers has carved India into five regions and is setting up one
massive warehouse in each of 5 regions identified.
5.7 SUMMARY
Warehouse management is the science of organizing and controlling

physical goods, manage manpower and induct technology within your
warehouse – and making sure it all runs in the most optimal way
possible.
Warehouse Management includes arranging the warehouse, managing

inventory, picking, packing and shipping orders.
The term warehouse is a combination of two words “ware” and “house”,

which means that it is a place to house or store/keep ware, i.e., items/
articles for sale. The important functions involved in warehouse
management are locations and cost of transportation. The movements of
materials whether processed or unprocessed between the source and
sink is either reduced or is moved to the maximum extent possible in
bulk over long distances, and in smaller lots through as small a distance
as possible, to derive the transportation cost advantage per unit of
movement. The issues involved in the process and the terms dictate the
choice of locations and transportation are the contents of this chapter
which highlights: (i) functions of warehouse, (ii) receipt of items, (iii)
storage, (iv) designing, (v) protection of the goods (wooden pallets and
palletisation), (vi) split case and full case items, (vii) dispatches, and
(viii) organizational issues (choice of agents, space, cost).
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1. What is warehouse management? Also, explain key aspects included

in warehouse management.
2. What is the function of a Warehouse?
3. Explain the role of location in Warehouse Management.
4. What are the precautions one would keep in mind while keeping the
products in store?
1. Warehouse management is the science of organizing and controlling

physical goods, managing manpower and inducting technology within
your warehouse.
(a) False
(b) True
2. Labelling in warehouse management refers to _____________ such a

large warehouse.
(a) Ability to identify, where to get the desired items in
(b) Ability to dispatch goods to the right customer from
(c) Ability to package goods in the right packages within
3. There are four main picking methods used by warehouse managers

namely single order, batch picking, ___________ and wave picking.
(a) Bin picking
(b) Rack picking
(c) Zone picking
4. FIFO is goods dispatch sequencing term in warehouse management,

whose full form is ____________.
(a) Far in Fare Out
(b) First in Far Out
(c) Fragile in Fit Out
(d) First in First Out
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5. Location of warehouse or distribution centre is a factor of godown

source load and ___________.
(a) Market load
(b) Material load
(c) Full truck load
Ans.: 1. – (b); 2. – (a); 3. – (c); 4. – (d); 5. – (a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
155
INVENTORY CONTROL AND MANAGEMENT
Chapter 6
Inventory Control and Management
Objectives
• Understand what inventory management is
• Understand scope of inventory management
• Understand inventory control procedure
• Understand the importance of geographical specialization in inventory
• Understand the meaning of decoupling
• Understand how to balance supply and demand
• Understand the meaning of buffering uncertainties
• Understand what coverage profile is
• Understand what safety stock is
• Understand the meaning of performance delays
• Understand technology support available for inventory control
• Understand inventory control in online retail marketing
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Structure:
6.1 Introduction
6.2 Understanding inventory management
6.3 Inventory control procedure
6.4 Inventory planning methods
6.5 Geographical Specialization in Inventory
6.6 Decoupling
6.7 Balancing Supply and Demand
6.8 Buffering Uncertainties
6.9 Coverage Profile
6.10 Safety Stock
6.11 Performance Cycle Delays
6.12 Indenting for Inventory
6.13 Qualitative and Quantitative Techniques
6.14 Reordering Procedures
6.15 Technology Support for Inventory Management
6.16 Inventory Management in Online Retail Business
6.17 Summary
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6.1 INTRODUCTION
Inventory is an extremely important aspect of Distribution Management.

In the introductory chapter, we discussed about the role that the
Distribution function can play in improving the overall profitability of an
organization. Inventory control plays a significant role in that.
A component of supply chain management, inventory management

supervises the flow of goods from manufacturers to warehouses and from
these facilities to point of sale. While doing so, it is the function of
inventory management to ensure that all goods are available to end
consumers as and when needed and in a manner that you do not occupy
higher than needed inventory with the self and the pipeline, you do not
carry old stock of the movable items, you do not carry stock of the non-
moving items, you have minimal of returned goods so to be
rechannelized and zero damaged goods in the warehouse and in transit.
To achieve above objectives of inventory management, structured

approach is needed. Structured approach covers three essential aspects:
Inventory Policy: It is measured at the corporate level, to identify the

money which the enterprise is willing to invest in inventory, based on an
evaluation of the physical options. Development of the policy is the
responsibility of the senior supply chain executive, for approval by the
Board.
Inventory Planning: It is measured at the product or family group level

and undertaken by Operations Planning (or similar titled group). The
Inventory Policy is used as the control function in planning.
Inventory Control: The measure of actual against planned inventory,

counted at the stock keeping unit (SKU) level and undertaken at each
location.
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Figure 6.1: Inventory Management
On one hand inventory is capital, it contributes to the engagement of

working capital, and hence to the cost of capital, then there are costs in
carrying inventory, such as carrying costs, storage costs, handling
costs, insurance costs, costs of damages in storage and transit, and to
add to all this there is also cost of obsolescence, that is either the date
expiring or inventory becoming unsaleable with age or worse still wrong
products being in stores which means holding inventory and at the
same time not being able to service customer orders.
We shall discuss a bit about the dangers of stock outs. If a customer

order is received and the store does not have stocks, then we call it an
instance of a stock out. When the material is out of stock at the depot,
the first casualty is the sale and the consequent loss of gross profit. In
the long run, repeated stock-out situations allows the consumer to try
another brand, and he may forever shift to the other brand.
Wrong inventory is another major problem which often plagues

distribution functions. In supply chains quite often one comes across
situations, when one C&FA is run out of stocks of a particular SKU,
whereas the same SKU is lying at another C&FA for quite some time, not
moving at all. These could happen due to several factors, wrong
forecasts being the primary reason.
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Since inventory has to be integrated with the logistics process to meet

service objectives, the traditional approach was to play safe and keep a
little extra inventory as buffer and ensure that the service levels are met.
But with increased competition, and margins coming under pressure,
logistics functions are approaching the issue with faster transportation
modes, better information management to reduce uncertainties, and
considering alternative sources of supply.
6.2 UNDERSTANDING INVENTORY MANAGEMENT
Inventory management is defined as a “System and processes that

identify inventory requirements, set targets, provide replenishment
technique, and report actual and projected inventory status whereby
minimize the cost linked with its storage, damage and losses”.
Inventory management is essential because:
1. Accounts for the larger cost of operations.
2. Systematic inventory management will allow you integration and

computerization.
3. Effective inventory management will minimize the planning

complexities, and managing the supply chain efficiently to keep the
cost at minimal level.
Types of Inventory
Inventory can be classified into four types which include:
a. Raw material Inventory: This includes all items purchased by an

organization for processing. For instance, flour, yeast, eggs, etc. are
all part of raw material inventory of a confectionary organization.
b. Work-in-progress Inventory: This is an intermediate stage of raw

material inventory that is yet to be finished by the plant to enter into
another stage of processing. These are materials that have been
partly processed but are yet uncompleted.
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c. Finished Goods Inventory: This is the stock of finished goods.

These could be stock of goods awaiting shipment or in the warehouse.
The level of finished goods stock is a matter of coordination between
the production and sales departments of the organization.
d. Maintenance-Repair-Operating Supplies Inventory (MRO

Goods): These are items that are used to support and maintain the
production process and its infrastructure. These goods are usually
consumed as a result of the production process but are not directly a
part of the finished product. Examples of MRO goods include oils,
lubricants, etc.
Few other types of inventory classification are as follows:
i. Transit Inventory: Transit inventories means stocks of items or

material lying with different transport modes and same is under
dispatch from one location to another. There is always some
transportation time involved in getting from one location to another
and thus these inventory is unused form.
ii. Buffer Inventory: Buffer inventory is any amount of inventory held

on hand that is over and above that currently needed to meet
demand. Additional amount of inventory is sometimes maintained to
protect against the uncertainties of supply and demand as well as
unpredictable events such as poor delivery reliability or poor quality of
a supplier’s products. These inventory cushions are often referred to
as buffer inventory.
iii. Anticipation Inventory: Several occasions compel organization to

purchase and hold inventory that is in excess of their current need in
anticipation of a possible future event. Such events may include a
price increase, a seasonal increase in demand, or even an impending
labour strike. This tactic is commonly used by retailers, who routinely
build up inventory months before the demand for their products will
be unusually high (i.e., at Diwali, Navratri, Christmas, or during winter
demand for woollen). For manufacturers, anticipation inventory allows
them to build up inventory when demand is low (also keeping workers
busy during slack times) so that when demand picks up the increased
inventory will be slowly depleted and the firm does not have to react
by increasing production time (along with the subsequent increase in
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hiring, training and other associated labour costs). Therefore, the firm
has avoided both excessive overtime due to increased demand and
hiring costs due to increased demand. It also has avoided layoff costs
associated with production cutbacks, or worse, the idling or shutting
down of facilities. This process is sometimes called “smoothing”
because it smooths the peaks and valleys in demand, allowing the
organization to maintain a constant level of output and a stable
workforce.
iv. Decoupling Inventory: Very rarely, if ever, will one see a production
facility where every machine in the process produces at exactly the
same rate. In fact, one machine may process parts several times
faster than the machines in front of or behind it. Yet, if one walks
through the plant, it may seem that all machines are running
smoothly at the same time. It also could be possible that while
passing through the plant, one notices several machines are under
repair or are undergoing some form of preventive maintenance. Even
so, this does not seem to interrupt the flow of work-in-process
through the system. The reason for this is the existence of an
inventory of parts between machines, a decoupling inventory that
serves as a shock absorber, cushioning the system against production
irregularities. As such, it “decouples” or disengages the plant’s
dependence upon the sequential requirements of the system (i.e., one
machine feeds parts to the next machine).
The more inventory a firm carries as a decoupling inventory between

the various stages in its manufacturing system (or even distribution
system), the less coordination is needed to keep the system running
smoothly. A balance can be reached that will allow the plant to run
relatively smoothly without maintaining an absurd level of inventory.
The cost of efficiency must be weighed against the cost of carrying
excess inventory so that there is an optimum balance between
inventory level and coordination within the system.
v. Cycle Inventory: The concept of economic order quantity (EOQ)

attempts to balance inventory holding or carrying costs with the costs
incurred from ordering or setting up machinery. When large quantities
are ordered or produced, inventory holding costs are increased, but
ordering/setup costs decrease. Conversely, when lot sizes decrease,
inventory holding/carrying costs decrease, but the cost of ordering/
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setup increases since more orders/setups are required to meet

demand. When the two costs are equal (holding/carrying costs and
ordering/setup costs), the total cost (the sum of the two costs) is
minimized. Cycle inventories, sometimes called lot-size inventories,
result from this process. Usually, excess material is ordered and,
consequently, held in inventory in an effort to reach this minimization
point. Hence, cycle inventory results from ordering in batches or lot
sizes rather than ordering material strictly as needed.
Scope of Inventory Management
Scope of inventory management is very wide and deep. Following points

will indicate the same:
(a) Inventory carrying cost optimization

(b) Inventory forecasting
(c) Assets management
(d) Inventory visibility
(e) Inventory valuation
(f) Physical inventory
(g) Inventory cost and forecasting
(h) Inventory management system
(i) Stock management system
(j) Space management and utilization
(k) Replenishment
(l) Managing returned and defective goods
(m) Managing non-moving goods
(n) Effective order fulfilment
(o) Process development and efficacy
(p) Technology integration
Above list is not exhaustive and same can change depending on business
you are in, scale of operation and competitive market condition.
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Functions of Inventory Management

(a) Maintain effective order fulfilment levels
(b) Make scheduling and shop loading more efficient
(c) Shorten the gap between sale and the stock replenishment
(d) Process implementation, optimization, moderation,
improvement and ensure efficacy
(e) Proper record maintenance and inventory control
(f) Maintain lower inventory carrying cost
(g) Minimize the stock-out situations
(h) Reduce cost of inventory obsolescence
(i) Be market responsive
Inventory Management Covers
a. Inventory management investment planning: Cost on account of

getting future ready, infrastructure and capabilities development.
b. Inventory cost minimization: Cost of carrying goods, cost of loss,

cost due to damages, cost of non-moving goods, cost of returned
goods and cost of obsolete goods.
c. Inventory process: Developing and implementing the process,

continuous improvements, implementation interventions, compliance
and efficacy maintenance.
d. Reporting and controls: Deciding min-max levels, report formats,

methods, frequency and control levels, control process and more.
e. Order fulfilment and reordering: Ensuring stocks at retail and

pipeline level.
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6.3 INVENTORY CONTROL PROCEDURES
We have seen that inventory management covers:
1. Operational, admin and mechanical process to keep the record of

goods available.
2. Control levels and procedures in place
3. Periodicity to review actual inventory with planned inventory and have

parameters defining when to order, how to order, how much to order,
etc.
Inventory control procedures are of two types:
1. Perpetual review
2. Periodic review
Perpetual Review
• In this, inventory numbers are viewed daily to determine the need for
its replenishment-based onset minimum-maximum numbers pre-
decided.
• This control system can be reviewed through a reorder order point pre-
decided.
• This system needs stock turnover, market dynamics ideas, efficient

system integration, responsibility assigned to ensure reorder, etc.
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Periodic Review
• It reviews the inventory status of an items at regular intervals such as

weekly or monthly.
• Time frame may be decided based on items criticality. It means very

important items get reviewed at the shorter interval vis-à-vis least
important items, which may get reviewed once in two months.
• The basic reorder point needs to be re-adjusted to consider the

interval, market demand, time for replenishment, etc.
• Based on probability that inventory level may fall below minimum stock
quantity, prior to the review period, quantities may get adjusted
accordingly for critical items.
• Process needs to be set for re-order, urgent order replenishment, etc.
However, to meet the changing demand of time, one new system namely
‘’Modified control System’’ also got developed.
Modified Control System
• It brings essential key features of both the above system in an unified

way.
• Certain classified items may get reviewed daily, others as per set
criticality and review interval decided.
• Minimum order level, criticality, periodicity and minimum-maximum

quantity, reorder quantity, regular ordering procedure, urgent ordering
process, etc. get well set.
• There are two types of MDS in practice:
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❖ Target level replenishment system – The moment you achieve

minimum inventory level, during daily review, its ordering can be
considered.
❖ Optional replenishment system – Subject to periodic review,

reordering is done only if necessary, with the understanding that
ordering of specific items will be considered optionally when
minimum inventory level is reached.
6.4 INVENTORY PLANNING METHODS
Inventory planning methods means a set system which uses information

base to coordinate requirement for inventory across multiple locations or
stages in the value-added chain.
Two inventory planning methods are prevalent as follows. However, there

are other methods also which exist and the same gets covered later in
the section.
Two prevalent inventory planning methods are:
1. Fair share allocation method
2. Distribution Requirements Planning (DRP) method
1. Fair Share Allocation Method: Organizations are most likely to have

multiple distribution points. Under this system, each distribution
facility gets equitable or fair share of available inventory from a
common source.
• Inventory planner determines quantity which can be allocated to each

DC from the inventory available with him.
• Based on existing units in stock, daily requirements and quantity to

be sent can be determined.
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Figure 6.2: Example of Fair Share Inventory Planning Method
2. Distribution Requirement Planning (DRP) Method: DRP considers

multiple distribution stages.
• It also considers Materials Requirement Planning (MRP).
• MRP controls inventory until manufacturing or assembly is completed.

This method is basically to help the materials manager in controlling
inventory in the area of inbound material movement in the enterprise
and is based on production requirements and scheduling. It helps in
elaborate material requirement planning for the master production
schedules, which is rolled back to create schedules for suppliers of raw
materials, packing materials, and intermediates, along with inventories
of parts/components/their types, quantities and delivery dates. This
can be integrated with the demand estimates.
• DRP is guided by consumer demand/market demand.
• DRP then coordinates what needs to be manufactured, how much and

then what needs to be pumped in to channel and retail.
• DRP uses schedule as a tool and the same is developed using weekly
time increment.
• For each DC, schedule reports current inventory on hand, safety stock,
inventory replenishment cycle lead time, etc.
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DRP method helps in controlling inventory in the distribution system of

the organization. An extension of the MRP, it is guided by the demand
rather than production requirements. However, both are complementary
as neither can work in isolation. The DRP enables allotment of inventory
of finished goods from the factory through the Central Warehouse to
various distribution centres based on:
• Demands,
• Indents,
• Safety stocks,
• Frequencies of supplies, and
• Lead times.
The efficacy and success of a DRP system is largely dependent on the

accuracy of forecast with respect to location and time of requirements
across the distribution centres. Consistent performance cycles is
important for the DRP to succeed.
An effective DRP leads to:

• Improved customer services,
• Decrease in inventory levels,
• Resultant decreased warehouse space requirements,
• Better transport coordination, and
• MRP and DRP are integral parts of any Enterprise Resource Planning
system.
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Benefits of DRP
It can be classified in two separate categories based on areas in which it

gives the benefits.
1. Marketing benefits
2. Logistics benefits
1. Marketing Benefits:
• Better on-time delivery thus reduced customer complaints.
• Improves effectiveness of new product and new promotional plans.
• Enhanced ability to offer customer a coordinated inventory

management system.
• Improved inventory coordination with other enterprise functions.
2. Logistics Benefits:
• Reduce Distribution Centre freights.
• Reduce inventory levels.
• Decrease warehouse or DC space requirements.
Other Inventory Planning Method
1. Just in Time (JIT): JIT is a concept based on the premise that

inventory should not be brought into the system until it is required for
use in the production. It is characterized by maintaining zero
inventories of raw materials and assemblies at the plant. For JIT to
succeed, it must ensure very close coordination between the buyers
and the suppliers on a real-time basis. This would mean frequent
receipts of materials from suppliers which would in turn mean:
» Excellent buyer-seller partnership.
» Online communication and information sharing.
» Commitments to zero defects.
» Frequent and small lot size shipments.
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Figure 6.3: Just in Time (JIT)
The JIT can work on mutual trust and commitments from both the
buyer’s and seller’s side. One other important aspect is the distance of
the supplier’s units from the buyer’s plant, because if the supplier is
situated very far off the lead time becomes an impediment in successful
implementation of JIT. To tide over this difficulty, a concept put into
practice in conjunction with JIT is to organize a collection of materials
across vendors located at different locations through a system of “milk
runs” which in effect means a first-level collection of individual items of
small required lots from across different suppliers and consolidating them
at a hub centre, from where a second-level main route vehicle carries the
aggregated material to the plant. This vehicle can be under constant
surveillance so that its location is always under the scanner.
JIT is often termed as a philosophy rather than a system for its

successful implementation, the mindset of all the partners have to
change to a mode of collaboration.
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2. Vendor Managed Inventory (VMI): JIT, an original Japanese

model, used in automotive industries, did not work very successfully
in the USA, so an adaptation was made more popularly known as
Vendor Managed Inventory, in which the supplier takes charge of the
inventory management of the product and supplies against/manages
the replenishment process based on the consumption pattern of the
customer. This is sought to be achieved by an extensive use of
electronic data interchange or link-ups through software packages or
even by locating a supplier’s representative at the manufacturer’s
premises.
A way out could be for the supplier to have a depot at the plant
premises or in the immediate vicinity from where day-to-day supplies
can be made, periodic replenishments being organized by the supplier
himself.
An example can be that of a commercial vehicles manufacturer who

has an arrangement with the tyre supplier, under which the supplier is
permitted to locate a small inventory store in the premises from which
the daily requirements of tyres are taken, and daily payments are
made so that the supplier arranges replenishments on the basis of
withdrawals as well as shared production plans. This arrangement if
implemented successfully means reduction in the inventory-related
costs and risks of stock-outs for the manufacturer, and on the other
hand, speedy payments as well as assured business for the vendor,
which is a win-win situation for both as the manufacturer does not
block in inventory, whereas the supplier is happy with daily payments.
However, for VMI to be successful, the product must be such that it

lends itself to be manageable under this system, as you can see that
all products may not be adaptable to VMI. The other essential
components should be right suppliers, i.e., suppliers who are
amenable to the idea, and of course, mutual trust and transparency in
dealings between the manufacturer and the vendor.
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3. Kanban: Kanban, which in Japanese means a signboard or a label, is

an information system used to support JIT initiatives. It basically
signals supply of materials when used. It is used as a communication
tool in inventory management. A Kanban is attached to each box
containing a fixed number of parts as they move on to the assembly
lines, and as the parts are used in the process the Kanban is returned
to the issuing store, where the Kanban serves both the purposes of
record of parts consumption as well as an indent for the next lot.
Thus, it coordinates the inflow of parts into the production line and
because it is simultaneously the document for indent, the time in
replenishment is greatly minimized.
A point to be noted in this context is that, JIT/VMI can work where the
variability in demand is less. In cases of high fluctuations in
requirements, JIT/VMI is difficult to achieve and hence not advisable.
• Activity
1. Give an example when you would prefer the concept of Just in Time
(JIT) in inventory management.
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
Adaptive inventory Management System
We have studied different inventory planning methods. There is one more

method known as Adaptive Inventory Management System. As the name
suggests, it is reactive and inventory planning logistics. Salient aspects
are:
• Customer demand must be usually treated as independent.
• It is designed to change based on the environmental changes

(adaptive).
• It is capable to adjust in terms of time and location.
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• Governance is difficult as it needs numerous decision rules that should

be used for making adjustment to make system adaptive.
Adaptive Decision Factors
• Inventory management should consider the relative contribution or

profitability of individual market segment.
• Decision rule is adapted to push inventory to the market since there is

little risk of poor allocation and timely utilization.
• Inventories can be moved upstream facilities/DC that provides

transport economies.
• Adaptive inventory distribution logic does not push slow or inconsistent

market inventory, resulting in optimization.
• Market-dependent demand logic decides appropriate distribution logic.
• It takes care of three major uncertainty of market channel:

» Supply
» Demand
» Performance cycle
Combination of above three uncertainties must be evaluated to

determine which decision rule is appropriate.
6.5 GEOGRAPHICAL SPECIALIZATION IN INVENTORY

Opening depots at several places is geographically spreading the
inventory rather than concentrating the same at a central place, and
servicing the markets from such central location. In this, the organization
would obviously evaluate the advantage of such spread vis-a-vis the
increased cost of storage and transportation.
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6.6 DECOUPLING
Supply chains often have to respond to volatility in demand. For a variety

of reasons, the product and technology lifecycles are shortening,
competitive pressures force more frequent product changes and
consumers’ demand more varieties than ever before. To meet these
challenges, organizations have to achieve more and more agility to
respond to both volume changes and variety changes in a shorter time
span.
This focus/requirement in agility may at times contradict with the

requirements of being “lean” in inventory strategy. The term “lean” which
is often used in a “fit” environment, basically means trying to achieve
more with less. Having its origins in the Toyota Production system, its
main features are elimination of wastes and optimization of uses of
resources. Obviously as a corollary in production, it would mean volume
manufacturing of relatively standard products (i.e., having low levels of
variety) and a focus on achieving efficiencies in the use of resources and
also in maximizing economies of scale.
In real market situations, the demand patterns of different SKUs can

range from highly regular and predictable to extremely irregular and
unpredictable.
While “lean” can work best for products having a regular and high value
demand pattern, the same will not work at all in the case of products
having a high variability in demand.
The lead time of replenishment will also add to the complexity, because if
the lead time is long then for products with high volatility in demand, the
management of the supply chain becomes very complicated. In such
cases, a hybrid lean/agile solution may be tried. This hybrid solution
requires the supply chain to be decoupled through holding a strategic
inventory in some generic or unfinished form, with the final configuration
being completed quickly once the real demand is known. This is also
known as the Postponement Strategy. Postponement may also be
strategized in the distribution point, by holding such products in fewer
locations (in extreme cases may be in single location) and moving them
to the final market or distribution point when the demand is known. The
goal of this hybrid strategy should be to build on an agile response
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system on a lean platform by seeking to follow lean principles up to the

decoupling point and agile processes thereafter.
Figure 6.4: Decoupling
This is a technique of obtaining operating efficiencies through stock piling

work-in-process at certain stages of conversion to finished goods, in the
manufacturing unit, as against converting them into finished goods, so
that when required the work in process can be converted to finished
goods in short notice. The advantage of this is that the inventory is
carried at a lesser value and hence at a lesser cost of capital.
A suitable example can be a manufacturer of tomato ketchup, holding

tomato paste, which can be processed into tomato ketchup as and when
required. Today, many paint companies use tinting machines to make
shades closer to the point of sale.
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6.7 BALANCING SUPPLY AND DEMAND
This refers to balancing/managing the time gap between consumption

and manufacturing, in respect of items that have seasonal upsurges in
demand, but manufacturing of which may have to be carried out and
spread through the year. These items may be of a nature that sell only
during season, like umbrellas, winter wear, air coolers, or which sell
throughout the year but with seasonal upsurges, like mosquito
repellants, air-conditioners, fans, childrens’ wear etc.
Inventory planning revolves around planning decisions, of how much to

make periodically, so that the seasonal spurts in demand are met and at
the same time an extra inventory build up is avoided during off-season
periods of slack demands.
6.8 BUFFERING UNCERTAINTIES
The Traditional approach towards buffering against uncertainties has

been to keep safety stocks. But one must know what the level of cover
should be, because safety stock has an effect of multiplying across
depots, and increases costs of the operation. When discussing inventory,
one of the first terms used is average inventory. The word average can
give different figures under different basis adopted for calculating the
average.
As an example:
The stocks held at a certain store are:
on 1st Jan 150
on 31st Jan 150
The average on reference to the above figures would be (150 + 150)/2 =

150.
Now, supposing you were to probe further and were to find that the
stocks were:
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on 1st Jan 150
on 8th Jan 250
on 15th Jan 200
on 22nd Jan 300
on 31st Jan 150
The average on taking the above figures into consideration would work
out to:
(150 + 250 + 200 + 300 + 150)/5 = 210
Hence, for taking managerial decisions, one must ensure that the basis
for calculation is representative of the ground realities, and at the same
time is not overcomplicated to render the exercise impractical.
When considering average inventory, materials, components, work-in-

process, finished goods, in store as well as in transit should be included.
6.9 COVERAGE PROFILE
Whenever inventory planning for any location is made, the following

factors have to be reckoned, besides of course the likely demand on
stocks at that location, be it to cater to customers, or to next links in the
supply chain, or to meet manufacturing requirements, depending on
where in the chain the location is situated:
• The performance cycle, which is the average standard time taken for
a requirement message to materialize into physical stock received at
the location that initiated the requirement memo, and hence would
cover processing, procurement, manufacturing, and transportation
time. This is also known as lead time, but note that it is not the
transportation time alone.
• The frequency, or the number of times the location is serviced ex the

source during the period for which the requirement memo is initiated,
like twice in a month, once a week etc. Thus, if a depot is serviced
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once a month vis-a-vis a depot that is serviced 15 times in a month,

we may like to keep at least one “month’s +” requirement in the
former depot, whereas in the latter case “2 days’ +” stock may suffice.
If the performance cycle for the first depot is a month, against 15 days
for the second one, some additional stock to cover the demand
requirements during the performance cycle time, would also need to be
stored, where again, the percentage of cover would be more for the
former since the performance cycle is longer.
Distribution managers may segregate inventories on the basis of

following classifications to selectively exercise controls:
ABC classification whereunder, the 10:20:70 rule is applied, in as much

as segregating the inventory items into the numerically small A class
items which contribute to the maximum volume or value of sales, the
medium B class items which contribute to medium sales in volume or
value terms, and the numerically large C class items which contribute to
the least amount of sales in volume or value terms.
VED classification whereunder, the items are classified as to how vital,

essential, and/or desirable they are in the total scheme of things. To give
an example, an electricity appliances shop would classify all electrical
items such as wires, switches, bulbs, fittings, etc. as vital for the
business. Essential items may be certain tools, tapes, pipes, covers, and
the like. Desirable items may be special fancy decorative fittings, lamp
shades, twinkling lamp strings, etc. It is possible that the twinkling lamp
strings may become vital items during the festive seasons.
For a vegetable vendor, normal vegetables would be vital items, ginger,

chillies, coriander leaves would be essential items, whereas mushrooms,
broccoli, lettuce may be desirable items. In this case also, the third
category may become essential if the vendor were to cater to a posh up
market locality.
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Figure 6.5 Inventory Classification
The strategy would be to give priority to all vital, essential, and desirable
items if they are A class, vital and essential if they are B class and only
vital in case of C class ones. A few other methods of classifications are:
SAP analysis which is classifying the inventory on the basis of Scarce,

Available, and Plenty. This may be built into the forecast provisions
inasmuch as limitations in supply or obsolescence of the item in near
future will be the guiding policy for procurement.
FSN analysis, i.e., classifying into Fast, Slow, and Normal rates of off-
take or consumption, and accordingly planning inventories. However, a
consumption pattern where the rate is slowed down or accelerated due to
some exceptional reasons may not give a representative figure.
Let us graphically look at a few instances to appreciate inventory

problems and their implications.
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Figure 6.6(a): Inventory Problems
In the above figure 6.6 (a), one can see that the system has a level
when the order for replenishment of stocks is placed. This level is set at
a point wherefrom the materials being consumed at the pre-estimated
rate would normally result in the stocks reaching the safety stock level
by the time the reordered consignment reaches the location. This would
happen only if the rate of consumption during the performance cycle
period, and the duration of the performance cycle period remain as per
plan.
However, in real life, the following eventualities can happen:
181
Figure 6.6(b): Inventory Problems
In the above figure 6.6 (b), you will observe that during the performance
cycle period the actual consumption was at an accelerated pace resulting
in the inventory level hitting the safety stock level before the arrival of
the consignment. If the safety stock is able to last out till arrival of
stocks a situation of stock out may be avoided, but if the material does
not reach even by then, a stock out will occur.
Figure 6.6(c): Inventory Problems
182
We shall now look at another case see figure 6.6(c), wherein while the
consumption rate remained as planned, the performance cycle slipped,
may be due to processing/ procurement/manufacturing/transportation
delays resulting in the inventory hitting safety stock levels before arrival
of the indented consignment. Again if the safety stock is able to see
through the delay, fine, or else a stock out will be the outcome.
We shall now look at another case.
Figure 6.6(d): Inventory Problems
The case described in the above figure 6.6 (d) is one in which the
problem is a compounded one wherein both the rate of actual
consumption in the performance cycle period is faster than the planned
rate of consumption as well as the performance cycle itself is delayed. In
such cases, the chances of stock-outs are very high.
Obviously, the answer to provide against the above eventualities is

maintenance of the safety stocks.
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6.10 SAFETY STOCK
The question arises as to what should be the level of safety stock, and
how does one go about calculating such levels.
Figure 6.7: Safety Stock and Inventory
Let us take a case where every 10 days 50 units of an item are

consumed on an average, and the average lead time is 10 days (we are
building up on a very ideal single item and simplistic situation to
understand the concept). The system works on the basis that an order
for 50 units is placed, at a point when the opening inventory is 50 units,
orders are serviced with a performance cycle of 10 days so that by the
end of the 10th day 50 units arrive, stock levels are replenished and the
cycle starts all over again.
However, in reality, the situation may not follow the above ideal pattern.
The demands may vary from day to day.
A study of a few 10-day periods shows:
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Demand Patterns During Three Replenishment Cycles
Forecast Cycle 1 Cycle 2 Cycle 3
Accumu Accumu Accumu

Demand Demand Demand
Day lated Day lated Day lated
of Day of Day of Day
demand demand demand
1 9 9 11 0 0 21 5 5
2 2 11 12 6 6 22 5 10
3 1 12 13 5 11 23 4 14
4 3 15 14 7 18 24 3 17
5 7 22 15 10 28 25 4 21
6 5 27 16 7 35 26 1 22
7 4 31 17 6 41 27 2 24
8 8 39 18 9 50 28 8 32
9 6 45 18 s0 50 29 3 35
10 5 50 20 s0 50 30 4 39
You will observe that during the 1st 10-day period, while the actual daily
demands varied, overall the average demand of 5 per day got maintained
resulting in 50 units being sold in the 10-day period. But during the 2nd
10-day period, again while the daily demands varied because the
demand was a bit high, by the 8th day demand equalled 50 units and
since the period started with 50 units of inventory, a stock-out situation
resulted.
During the 3rd 10-day period, the situation was different. Again the daily
demands varied, but this time around the pace was slow, resulting in
unsold inventory of 11 units lying in stock at the end of the cycle.
In the above case, a stock out occurred on 2 out of 30 days. Since sales
never exceeded 10 units throughout the period under study, no
possibility of a stock out can be expected to occur on the first 5 days of
any performance cycle. Stock outs could occur from day 6 onwards,
provided the the average demand during the first 5 days are 10 units per
day, and no inventory is carried over from the previous cycle.
185
Since the study shows that demand of 10 units occurred only once in the
30 instances recorded, the real risk of stock out exists mainly during the
last few days of any performance cycle.
Some approximation regarding the level of sales that could have

occurred, had stocks been available on day 9 and 10 of the 2nd
performance cycle is possible.
The maximum that could have been sold could be 20 units assuming 10
units’ demands came on both the days, whereas the likely figure would
seem between 8 and 10, on the basis of an average demand of 5 per
day, or 139 units sold over a 30-day period making it 4.6 units per day.
The organization now has to take some measure to counter such a stock-
out situation.
Using statistical technique, a solution may be worked out. Though for

using a statistical tool, and ensuring validity of the result, a sizeable
number of observations should be considered, we shall use the above
example with only 30 observations to understand the concept.
Rearranging the sales history over the 30-day period, we can see the
frequency of the demand as under:
Demand/day Frequency/no. of days
Stock out 2
0 1
1 2
2 2
3 3
4 4
5 5
6 3
7 3
8 2
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9 2
10 1
(Source: “Logistics Management” by Bowersox & Closs)
If we were to plot the above observations as a graph, it would appear as

below:
Demand per day
From the above, we can appraise the variations around the average daily
demand.
Given an expected average of 5 units per day, demand > average

occurred on 11 days and demand < average occurred on 12 days.
As per statistical theory, the probability of occurrence of an event

assumes a pattern around a measure of central tendency, which is the
average value of all occurrences.
While a number of frequency distributions are used in inventory control,

the most basic is normal distribution, and we shall limit ourselves to the
same to understand a framework of finding out a basis to determine a
level of safety stock.
187
In the case of a normal distribution, which is characterized by a

symmetrical bell-shaped curve, the essential characteristic is that the
three measures of central tendency are identical, namely the mean
(average) value, the median (middle) observation, and the mode (most
frequently observed) value are the same. Thus, if in a frequency
distribution all the three values are the same or nearly, the same we can
treat the distribution as a normal one.
As per the properties and characteristics of a normal distribution curve,

the standard deviation which is the measure of dispersion of events
within areas under the normal distribution (bell-shaped) curve, stipulates
that within ± 1 standard deviation, 68.27% of all events occur. In this
case, events are unit sale per day, and the dispersion are the variations
in daily sales.
Thus, when we say ±1 standard deviation “δ” what we imply is that

68.27% of days will have daily sales within ±1 standard deviation of the
average daily sales.
Within ± two “δ” 95.45% of all events occur, and within ± three “δ”
99.73% of all events will occur. Using this tool, in terms of inventory
policy, the standard deviation will provide a means of estimating the
safety stocks required to obtain a specific degree of protection against
actual demand being above the average demand.
Let us calculate the standard deviation “δ” in the above case.
Deviation
Frequency Deviation
Units from mean Fi(Di)2
(Fi) squared (Di)2
(Di)
0 1 -5 25 25
1 2 -4 16 32
2 2 -3 9 18
3 3 -2 4 12
4 4 1 1 4
5 5 0 0 0
6 3 1 1 3
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7 3 2 4 12
8 2 3 9 18
9 2 4 16 32
10 1 5 25 25
No. of observation n = 28 mean “s” = 5 ΣFi(Di)² = 181
The formula for standard deviation
where δ = standard deviation

Fi = frequency of event/occurrence “i”
Di = deviation of event value/observation from the mean for event
“i”
n = total of observations recorded, or considered
Hence, on the above basis, the standard deviation in this case would be:
Since units would have to be kept in whole numbers, this would translate
to:
68% of all events in a situation as per the one studied above, would get
protection against an order being missed due to stock outs, if 3 units
(2.54 rounded off) are kept as safety stocks, at all times, and 95.45% of
all eventualities would be guarded against by keeping (2.54×2) 5 units
as safety stocks.
One may note that the situations of concern are the probability of events
that exceed the mean value. No problems would be faced concerning
inventories where the demand would be equal to or below the average.
189
If 1 δ covers approx. 68% of the area on the two sides of the mean
point, formed by the normal distribution curve, it implies that 32% of the
area would remain uncovered. But of this 16% would be on the side
where the daily demand is < 5, the average daily demand, and another
16% will be on the side formed by daily demand > 5, the average daily
demand. A Stock out will not be an issue if the daily demand is < 5, so
effectively 1δ of safety stock will afford protection against stock outs in
84% occasions (100% less 16%). Similarly, a 2δ safety stock level, will
protect against 97.72% of all possible events. This additional benefit due
to the normal distribution pattern of these events is called a one-tailed
statistical application. Depending upon the organization’s customer
service objectives, and also making a cost-benefit evaluation, the
decision as to what level of safety stock should be kept/can be taken.
When we started this discussion, we stated that the stock out could occur
as a result of forecast failure, inasmuch as the rate of order inflow is
more than the projection made, or due to delivery failure, in as much as
the performance cycle being longer than the average considered.
6.11 PERFORMANCE CYCLE DELAYS
We shall now see how the issue of performance delays can also be
tackled. One can expect that the length of the performance cycle will
have a level of occurrence, i.e., frequency, around the average length of
performance cycles, and be skewed whether in excess of or below the
planned cycle days. If one were to decide on the safety stocks based on
the minimum possible days of the inventory performance cycle, average
expected days of the inventory performance cycle or maximum possible
days of the inventory performance cycle, one would get different levels of
safety stocks, where under, cover based on the minimum possible days
may provide inadequate protection, and the cover based on maximum
possible days may result in excessive safety stocks.
Let us take the same situation of a 10 days’ performance cycle, and a

sale of average 50 units in 10 days’ time. However, we may plot actual
performance cycle days over a longer period and may have figures as
under:
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Performance Frequency Fi Deviation Deviation FiDi2

Cycle (days) from mean Di squared (Di)2
6 2 -4 16 32
7 4 -3 9 36
8 6 -2 4 24
9 8 -1 1 8
10 10 0 0 0
11 8 1 1 8
12 6 2 4 24
13 4 3 9 36
14 2 4 16 32
No. of observation N = 50 mean “t” = 10 Σ Fi(Di)² = 200
The formula for standard deviation
As per data in the above instance, although 10 days is the most

frequently occurring experience, replenishment actually ranges between
6 and 14 days. If the distribution is following a normal bell-shaped curve,
then within a range of 1δ that is the performance cycle between 6 and 14
days will occur 68.27% of the time.
In this case also, when the performance cycle time drops below 10, no
immediate problem exists with safety stocks. If the actual performance
cycle was to be consistently below the planned performance cycle over a
period of time, then a case would exist of adjusting the expected
performance cycle period below the 10 days’ figure.
However, the problem of safety stock for protection arises when the time
duration of the performance cycle exceeds the expected value of 10
days.
191
If we were to analyze the deviations from the norm of 10 days, we may

get sets of instances of occurrences of equal to and less than 10 days
and more than 10 days. If these values are skewed that is they are not
normally distributed then Poisson distribution characteristics may apply,
wherein, the standard deviation would be the square root of the mean.
We have by now seen that safety stocks on the basis of the standard
deviation of the occurrences of demands, as well as the performance
cycles will be able to take care of such deviations, when the two
occurrences are independent variables. But in real life, the two
independent variables may act in concert, and hence the safety stock will
have to take care of the joint impact of the probability of both
demand and performance cycle variations.
Frequency Distribution – Demand and Replenishment

Uncertainties
Demand Distribution Replenishment Cycle Distribution
Daily Sales Frequency Days Frequency
0 1 6 2
1 2 7 4
2 2 8 6
3 3 9 8
4 4 10 10
5 5 11 8
6 3 12 6
7 3 13 4
8 2 14 2
9 2
10
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Total number of observations Total number of observations

n = 28 n = 50
Average daily sales Average length of performance cycle

d=5 t = 10
Standard deviation of daily sales Standard deviation of performance cycle

Ss = 2.54 St = 2
To approximate a combined standard deviation by combining the

standard deviations of the daily demands, and the lengths of the
performance cycles, a convolution formula is:
This formulation provides the convoluted or combined standard deviation

of ‘t’ days with an average demand of ‘d’ per day when the individual
standard deviations are St and Ss, respectively. The average for the
combined distribution is simply the product of t and d, i.e., 10×5 = 50.
Thus, given a frequency distribution of daily sales from 0 to 10 units per

day and a range of replenishment cycles of duration 6 to 14 days, 13
units (one combined standard deviation δc) of safety stocks are required
to protect 84% of all performance cycles (100% less 16%) with
deviations in the daily demands.
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6.12 INDENTING FOR INVENTORY
While the general procedure is to forecast demand for a period and

accordingly place an indent for materials, there is a school of thought,
which practices indenting on the basis of replenishment of inventory,
triggered by stock depletion.
In this method, the system is enabled to monitor the stock levels at all
the stocking points, through an interconnected monitoring process, and
as and when an actual outward movement of stocks take place the
immediately preceding link in the chain, or the central planning module,
based on the information, initiates the procedure of replenishment.
However, the following would have to be factored in when planning and

executing the replenishment shipment:
• The coverage profile on the basis of cycle demand, performance cycle,

and frequency of supply,
• Capacity of transport, and
• The operation/manufacturing/procurement planning horizon.
For SKUs that are of a regular movement nature, replenishment-based

indenting may be comparatively easier, but in case of items that are not
so regular in off-takes, or which are subject to wide fluctuations in
demands, it may be difficult to control through replenishment-based
indenting. In such cases, the distribution function may resort to treating
one depot to operate as a mother depot covering a cluster of other
depots around there, wherein such items may be stored on a forecast
basis, and supplies may be made from there to the smaller depots
assigned to them on a replenishment basis.
194
Figure 6.8: Indenting for Inventory
The continuous line shows the linkage of regular offtake materials on the
replenishment base, and the disjointed line shows the flow of the
irregular items which are replenished ex the C&FA1 which also acts as a
mother depot.
Where indents are forecasts based, the objective should be to make the
forecast as accurate as possible. More often than not the actual and the
forecast are at variance, and this is the origin of most of the
discrepancies such as excess stocks, shortage of stocks, mismatched
stocks, happening at depots.
When the supply chain has to adjust to a MTS (Make to Stock) situation
in place of a MTO (Make to Order) situation, by virtue of nature of the
product, market and competition, the element of forecasting becomes
very critical.
In any forecasting, one must remember the following rules:
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Rule 1: Forecasts are always wrong. Who can predict the future? Hence,
every forecast must include both an expected value of the forecast and
also factor in, a measure of forecast error.
Rule 2: The accuracy of any forecast tends to be inversely proportional

to the length of the period of time, at the end of which the forecast is
being made for. This in other words means, that long-term forecasts
have a larger standard deviation of errors relative to the mean than
short- term forecasts.
Rule 3: Aggregate forecasts are usually more accurate than

disaggregate forecasts. Thus, forecasts of a composite category will be
more accurate than forecasts for individual components of the composite
category. Thus, the sales forecasts for total toothpaste in a month at a
depot, will be more accurate than forecasts of case lots of 200 gms, 150
gms, 100 gms and 50 gms.
Rule 4: This follows from the previous three rules, viz., further up in the
supply chain of the company, the forecasting point is, viz., the further
removed from the consumer, the forecasting point is, greater will be the
distortion, leading to more errors.
To obviate these, supply chains try to break the aggregations of demand

at different points in the chain, i.e., make forecasts decentralised. The
Retail chain, Seven-Eleven of Japan, has a forecast based replenishment
model whereunder, a particular store manager makes a half-day cycle
forecasts, i.e., he/she has to forecast for just the day. This short forecast
cycle time allows the manager to factor in the latest situational factor.
For example even in summer, if on a particular day, near a store, the
conditions are indicative of rain, she/he may decide to ask for less ice-
cream.
Wal-Mart initiated a process of Collaborative Planning Forecasting and

Replenishment (CPFR) model, which in effect means collaborating with
upstream suppliers and business partners by sharing the downstream
sales plans and thereby truncating the end total forecast into smaller
short- term (immediate at times) forecasts. These can be the ways to
circumvent the problem of forecasting.
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A student may observe that generally the accuracy of a forecast is

inversely proportional to the length of the period at whose end the
forecast is made. That is, longer the period less accurate is the forecast.
In today’s competitive market, this is becoming even more critical.
Though Forecasting is a subject in itself and is generally treated more in

detail in Sales Management, Quantitative Techniques, we shall in brief
cover the topic so that students get an overview of the issue.
At a very elementary level a forecast can be explained as:
Ft = (Bt × St × T × Ct × Pt) + I
where:
Ft = forecast quantity for period t
Bt = base level demand for period t
St = seasonality factor period t
T = trend component: quantity increase or decrease per time period
Ct = cyclic factor for period t
Pt = promotional factor for period t
I = irregular or random quantity.
While some forecasts may not include all components, it is useful to at

least understand the behaviour of each so that the same can be
estimated and incorporated.
Base demand is the quantity that is left after the influences of all or
most of the other components have been removed. A good estimate of
base demand is the average over an extended period.
Seasonal component is the recurring, upward or downward movements

in the demand pattern due to seasonal influence, an example can be a
surge in the demand for mosquito repellents after rains, or in winter,
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childrens’ wear during Diwali and Christmas, gold/silver at Akshay Tritiya

or Dhanteras.
Trend components are long-range upward or downward movements in

demands influenced by certain factors in the environment. For Example:
increased life expectancy may have an upward influence on the demand
for geriatric products, increased migration to urban areas may influence
the demand for urban housing, lowering of interest rates may influence
the demand for cars positively, whereas increased cost of fuel may
influence the same negatively.
Cyclic components are swings due to business/economic factors such

as recessions, booms, etc. Machine tools, trucks, are certain items whose
demands are greatly influenced by cyclical factors.
Promotional components are instances of demand swings influenced

by the firm’s promotional activities. If a consumer offer is planned, then
the running rate would automatically have to be adjusted upward.
Irregular components would include random unpredictable fluctuations

which just happen, like a sudden spurt in the competitor’s sales cutting
into the firm’s products’ demand, or a sudden shortage of the
competitor’s product creating an upsurge in the firm’s products’ demand.
6.13 QUALITATIVE AND QUANTITATIVE TECHNIQUES
Several forecasting techniques are in use, such as:
Qualitative Techniques
Qualitative techniques using surveys, panels, market research,

consensus meetings are one set of options. Examples of qualitative
techniques are the Delphi method, Panel of experts, Market Research,
Historical analogy.
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Time Series Techniques
Time series techniques are statistical methods using historical sales

data which contain relatively clear relationships and trends. Since they
predominately depend on historical data, there is an implication that
existing demand patterns will continue into the future. When the trend
changes significantly, the demand patterns experience a turning point.
Thus, by their very nature, time series based forecasting may not be
sensitive to turning points. Commonly used time series based forecasting
methods are:
• Moving average,
• Weighted moving average,
• Exponential smoothing,
• Exponential smoothing adjusted with trend, and
• Straight line fit.
Moving average forecasts use an average of the most recent periods.

They may be three monthly, four monthly, even 12 monthly. In the last
case, the forecast uses the average of the last 12 months, and every
time a new period of actual data gets available, it replaces the oldest
time period’s data.
Exponential smoothing bases the estimate of the future sales on the

weighted average of the previous demand and forecast levels. The new
forecast is a function of the old forecast adjusted by some fraction of the
differential between the old forecast and actual sales realized. The
adjustment index is called the alpha factor. The value of lying between
0 and 1. The format of the model is
Ft = D(t – 1)* α + F(t – 1)*(1 – α)
where Ft is forecasted sales for time period t
Ft – 1 is forecast for time period t – 1
Dt – 1 is actual demand for time t – 1
α is alpha factor or smoothing constant (0 < α < 1)
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To illustrate, assume that the forecast for the most recent period was
100 and actual sales experience was 110 units.
Furthermore, assume that the alpha factor is 0.2. Then substituting
Ft = α D(t – 1) + (1 – α) F(t – 1)
= (0.2) (110) + (1 – 0.2) (100)
= 22 + 80 = 102
The new forecast will be for 102 units.
The major decision when using exponential smoothing is selecting the

alpha factor. Higher the value of the alpha factor, the closer the forecast
will be to the sales of the most recent period.
Exponential Smoothing Adjusted with Trend
In this method, the basic exponentially smoothed forecast is adjusted by

including a trend component. Thus in this type of forecasting, there are
two components and these are smoothing constant to represent the
base, and a trend component.
For calculating the trend component, α factor is used, value of β lying

between 0 and 1.
First, an exponentially smoothed forecast is calculated. Then to find the

trend component for period “t”, one takes the trend factor “tr” for the
period “t – 1”, multiplies the same by β, and adds
it to the differential between forecast for the period “t” and forecast for
the period “t – 1” multiplied by β – 1, to obtain the trend component for
period “t”.
Thus if the exponentially smoothed forecast for period “t” is 120, and the
same for period “t – 1” is 115, and the trend component for period “t –
1” was 2, and we have agreed upon a β factor of 0.6, the trend
component for period “t” will be β * 2 + (1 – β) * (F “t” – F “t – 1”) =
0.6 * 2 + (120 – 115) * (1 – 0.6) = 1.2 + 2 = 3.2.
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This trend component 3.2 is to be added to 120 to arrive at the

exponentially smoothed forecast adjusted with trend, i.e., 123.2.
Adaptive Smoothing
Adaptive smoothing provides a regular review of the alpha factor

validity, inasmuch as, at the conclusion of each forecast period the value
of the alpha factor is reassessed to determine exactly what value of the
alpha factor would have resulted in a perfect forecast. System-driven
adaptive smoothing may include an automatic tracking mechanism that
may trip as a result of a major forecasting error and automatically
readjust the alpha factor.
Straight Line Fit Method
In the straight line fit method, one plots the sales along the “x” axis
on the basis of actual sales at different points of time. Having thus
plotted the sales, one obtains the corresponding values of the co-
ordinates on the vertical axis of the graph. The vertical axis of a graph is
known as the ordinate and the horizontal axis of a graph is known as
the abscissa. In a system of rectangular Cartesian co-ordinates which is
two-dimensional, the vertical co-ordinate is denoted by the letter y.
Therefore, the ordinate or the vertical axis of a graph is also commonly
known as the y-axis of a graph. On the other hand, the horizontal co-
ordinate is denoted by the letter x. Therefore, the abscissa or the
horizontal axis of a graph is also commonly known as the x-axis of a
graph.
The sales figures thus plotted will represent actual sales at successive
time points as depicted on the “x” axis which represents the time points.
Using the formulae for a straight line equation, “y = mx + c”
where
and
One can draw the straight line and extend the same further into future
time periods. Thereafter, one can calculate the deviation from the ideal
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straight line of individual sales at different time points, and maintaining

the same relation, forecast the sales for future periods.
The next set of forecasting methods are based on causal techniques.

Using econometric tools, regression analysis based forecasting simply
means estimating the sale of an SKU on the basis of some independent
factor. For example, using the rise in temperature in degree celsius to
estimate the sales of cold drinks in ’000 crates. The sales estimate which
is the dependent variable on basis of rise in temperature which is the
independent variable, is basically an use of a linear regression model,
in which the proportion of dependence of the dependent variable (sale of
cold drinks crates) on the changes in the independent variable (degree of
celsius change in temperature) is known as the correlation coefficient.
If more than one independent variable are used in predicting a
dependent variable event, it is known as a multiple regression.
Economic Order Quantity (EOQ)
Commonly known as EOQ, it is the replenishment order quantity that

minimizes the combined costs of inventory maintenance and ordering.
However, application of EOQ assumes that demands and costs are
relatively stable throughout the period for which the same is applied.
The formula for deriving the Economic Order Quantity is:
where,
D = sales volume or demand for the period being/considered.
Co = cost per order, here one must note that there are certain costs
associated with ordering, these can be costs of paperwork,
communication tasks, follow-ups, executive time, etc. The per order cost
can be calculated by aggregating all such costs during a period and
dividing the same by the total number of orders placed during that
period. Thus, one may see that the total cost of ordering will tend to
decrease as the number of orders go down which in other words will
mean a larger size of individual orders.
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U = cost per unit of the product/item of which the EOQ is being

calculated
Cc = inventory carrying cost of that product/item expressed as a

percentage/factor of the cost per unit. This can be calculated by
considering the several such costs, like cost of capital as a percentage,
storage insurance as a percentage, facility costs as a percentage of value
of materials held in store, and arriving at a combined percentage.
When deciding on order quantities, one has to see that the larger the
order quantity the larger will be the average inventory carried, the larger
will be the inventory carrying costs, whereas the larger order quantity
will translate into lesser numbers of orders, and hence lesser ordering
costs. This relationship is very much influenced by the total number of
orders placed during a period, and hence the EOQ is that order quantity
as a consequence of which the number of orders calculated results in the
least total cost.
Hence, you will note that normally:
• Higher the demand during the period, higher will be the EOQ.
• Higher the ordering costs, it makes economic sense to have a higher

EOQ, because the number of orders will come down.
• If carrying costs are high, it makes economic sense to have a lower

EOQ.
• Similarly, products having a high per unit cost will also be economical
to order in lesser quantities.
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In spite of arriving at an EOQ, one should note that in practical situations

a few deviations may have to be consciously taken at a managerial level:
• If the formula derived figure arrives as a fraction, whether in units or in

cases, the same may have to be rounded off to the nearest whole.
• The figure may have to be further modified to accommodate lot sizes.
• Also adjustments may be necessary for getting quantity discounts.
• May require further modification for convenience in booking as per a

particular mode of transport.
• Also to avail of transport related freight discounts.
• At times fund constraints may influence the quantity.
• Actual quantity may need modification based on the market conditions,

such as indication of a likely scarcity situation, or an impending price
hike may prompt an increase, or indication of a very substantial price
reduction may prompt to order less.
6.14 REORDERING PROCEDURES
For reordering inventories, the following two distinct procedures exist.
The first one envisages ordering fixed quantities at different

intervals.
This method at times is called the “Q” method because quantity is the
fixed element.
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Figure 6.9: Inventory Reordering (The “Q” Method)
In the above figure 6.9, you will observe that the system has a safety
stock level, as well as a reorder level. Whenever the stock level reaches
the reorder level, an indent of a pre-fixed quantity is placed. The
quantity will be the EOQ already worked out.
The reorder level is set at an inventory level, wherefrom at the average

rate of consumption, the inventory will deplete to the level of the safety
stock by the time the indented material reaches the store. This is set on
the basis that the performance cycle time is equal to the number of days
during which the total consumption/sales at the average rate will equal
the difference between the reordering level and the safety stock. This
system will work perfectly provided the lead time (performance cycle)
and the average daily rate of consumption/sale remains by and large
constant. The inventory manager need not be very concerned about the
rate of consumption till the inventory reaches the reorder level, but
thereafter he may have to monitor the consumption rate as an upsurge
may lead to an earlier exhausting of the stocks. This method has the
advantage that it is closest to the theoretical inventory control model,
because it can use the EOQ and hence achieve the objective of cost
minimization. But its disadvantage lies in the close monitoring
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(practically on a daily basis) of inventory balance to know when the

inventory is hitting the reorder level. This system finds more application
for A class high value, vital items.
The second type of ordering envisages ordering at fixed intervals

separate quantities.
This method at times is called the “P” method because the period is
fixed. In the figure given below, one can see that reordering periods have
been set, and on those days orders are placed. For deciding on the
quantity to be ordered, an upper inventory limit which we may name “Q”
Max has to be set, and the order can be placed for a quantity that
represents the balance between “Q” Max and the level of actual inventory
on that date, to calculate “Q” Max we can take the average consumption
during the period fixed as the order interval, add the average
consumption during the average performance cycle, add the level of
safety stock and the resultant figure will be the “Q”Max quantity.
Figure 6.10: Inventory Reordering (The “P” Method)
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To calculate the fixed period, you can divide the EOQ by the average
period’s demand/sales and the result multiplied by 365 will give the
period in days, if multiplied by 12 will give the period in months, and if
multiplied by 52 will give it in weeks.
In this method, one can observe that the inventory in charge has to
monitor the rate of consumption not only during the performance cycle
but even during the balance period as an increase in the rate of
consumption/sale can deplete the stock at a faster rate than planned,
and may require change in the date set for indent. However, so much
cushion is built into the system, that the safety factors are very high.
The advantage of this system is one does not have to daily review the
actual stock level, unless the rate of consumption has changed
significantly, and also obtaining advantages of bulk transportations by
clubbing several items whose reordering dates coincide or are proximate.
Though easier to work, this system has the disadvantage of higher cost,
because factoring in cushions of stock layers to take care of several
eventualities, results in too high a stock level and hence this type of
ordering is recommended for C class/low value items.
However, in real life, any of these systems may not be applied in

isolation, but a combination of them is normally used. Besides, time to
time, the method may also need a fresh look at.
We must also be aware that in a practical business environment the

inventory stocking systems may be influenced by:
• Limitation of space, whereunder, even actual stocking requirements

may have to be compromised.
• Value risks, namely expectation of a sharp drop in prices may have to

be factored.
• To spread vulnerability on environmental risks, storages may be split at

several locations, even compromising costs and efficiencies.
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• For obtaining economies of scale/transportation discounts, order

quantities may be changed even against the pre-set standards.
It is also important that:
• Each item of inventory is listed on the basis of its physical

characteristics, usage, department- wise, size-wise.
• Each item is given a unique code number, numeric/alphanumeric,

consumption/demand figures are noted.
• Variations in the patterns are also noted.
Before we end this chapter, we shall have a look at a few special systems
and processes in the area of inventory management.
6.15 TECHNOLOGY SUPPORT FOR INVENTORY

MANAGEMENT
In this section, we will take an overview of technology support available

for inventory management.
a. I n v e n t o r y m a n a g e m e n t s o f t w a r e s y s t e m s : I n v e n t o r y
m a n a g e m e n t s o f t wa r e s y s t e m s g e n e ra l l y b e g a n a s s i m p l e
spreadsheets that tracked the quantities of goods in a warehouse.
Inventory management software can now go several layers deep and
integrate with accounting and ERP systems. The systems keep track of
goods in inventory, sometimes across several warehouse locations.
The software also calculates the costs so that accounting systems
always have an accurate assessment of the value of the goods.
1. Traders/Small-scale Industry: Generally, reply on spreadsheet

(Excel), which today also offers standard template for inventory
management OR it is available on numerous free platforms.
2. Small and midsize industry: Such companies typically do not

need complex and costly systems, and they often rely on stand-
alone inventory management products, generally through SaaS
(Software as a Service) applications.
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3. Large and very large industry: Such companies generally

deploys Enterprise Resource Planning (ERP) software system,
designed for large enterprises, and they may be heavily customized
for the particular requirements of those organizations. Large
systems were traditionally run on premises, but are now also
deployed in public cloud, private cloud and hybrid cloud
environments.
b. Enterprise Resource Planning (ERP) system for inventory

management: ERP inventory management is an integrated approach
to business planning and operations. With an ERP inventory
management system, businesses can manage all their finances,
logistics, operations and inventory in one place, online and in real
time.
ERP systems that can help you to manage your retail locations and your
warehouses. Power of ERP system lies in its integrated online
connectivity with multiple in-house, within the city operation points,
within the country operation point or worldwide operation points, offering
you real-time update. Thus, with ERP, you are able to manage:
1. Inward inventory record.

2. Stock level adjustments based on inward supply and usage.
3. In-pipeline/WIP inventory/In-transit inventory/returned goods
status.
4. Monitoring min-max reorder levels and triggering reorder process.
5. Economic Order Quantity logic management.
6. Categorization – ABC Analysis.
7. Moving/slow moving or non-moving inventory picture.
8. Stocking bay management.
9. In-ward/outward order status.
With above, it links financial aspects, reporting and financial funds flow
management.
Despite above list not being exhaustive, it gives you an idea that ERP
system-based inventory management is a powerful way to manage
inventory on real-time basis.
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Another important aspect of ERP is that it allows different ERP system to

communicate with each other. Due to this feature, you can integrate your
ERP with raw materials/parts manufacturers, third party logistics support
provider, transporter and ensure flow of information and drive your
integrated monitoring and inventory management more deeper and not
only optimize your investments in such system but save due to
prevention of stock-outs situation based production losses, market
losses, achieve customer service level at lower inventory carrying cost.
One more dimension to this is whether your inventory management is

network based or cloud based. Cloud-based inventory management is the
monitoring and maintenance of a business’s inventory levels using online
integration software, which brings more real-time management
perspective. It has made next revolution – Internet of Things (IoT)
possible.
c. Internet of Things (IoT) for wider inventory management

automation: The Internet of Things briefly means a system of
interrelated computing devices, mechanical and digital machines,
objects or people that are provided with unique identifiers (UIDs) and
the ability to transfer data over a network without requiring human-
to-human or human-to-computer interaction.
This disruptive technology can be used in various areas of inventory

planning, we take the example of post-sales customer service stage.
Spare parts are needed by the consumers, when their machine fails,
especially within the warranty time frame. Companies have choice to
either stock more or stock less, and in both cases, it stands to lose.
The key to accurately stocking parts is knowing which ones are likely to
fail and when they’ll need to be replaced. This logic works for online
monitorable machines or off-line installed machines. By using this
methodology and analyzing historical failure data on the entire
installed base, businesses can predict the exact spare parts they are
likely to need, when and in what quantity. Using the IoT-driven parts
inventory methodology, organizations are likely to reduce spare parts
inventory need by 6-10%.
Online sensors-based capabilities offered by IoT technology, further

revolutionizes the way spare parts are predicted to fail, within a
specific time frame, thus triggering need for replacement (to minimize
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the production loss), ordering in time and ensuring its availability,

where needed.
On the other extreme, with vehicle tracking, it has become possible to

manage your inwards supplies positions, in-transit inventory positions
for raw materials and finished goods, outwards or depot-based
inventory management system more integrated to derive right time for
reorder, etc.
6.16 INVENTORY MANAGEMENT in online retail business
In the earlier section on Warehouse Management, we have studied online

warehousing system. Essentially, it is a complex system with: (1) Central
warehouse, (2) Distribution centre and (3) Retailers based collection/
goods return points spread wide and deep within the city, which is
utilized for sellers to upload goods for sale, online product/stock
availability status to consumers, routing received order, ensure order
dispatch, online tracking, manage goods return and re-fulfilment need as
indicated by the consumer.
Its cloud-based ERP and IoT made it possible for online platforms to
operate without any inventory vis-à-vis their traditional business model
wherein they used to stock all the goods. Add to above, various add-on
tools like bar code scanners, better net connectivity makes it possible to
arrange your algorithm of goods availability, ordering, order routing and
collection, onward dispatch to DC and final delivery to you consumer so
seamlessly and on real-time basis. On one hand, consumer feels happy
when he receives SMS update/tracks online and feels being serviced well,
and on the other hand, you manage your online business w/o making
anything or stocking anything.
It may be partially wrong to assume that online marketers do not carry

any inventory. However, various learnings we studied earlier applies to
their inventory management and thus not elaborated here.
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6.17 SUMMARY
Inventory control plays a significant role in improving the overall

profitability of an organization. It is capital and hence incurs a cost of
capital (working capital tied up). Inventory cost also involves: inventory
carrying cost, cost of obsolescence, loss of sales due to stock out (loss of
sale and the consequent loss of gross profit), stock of wrong products.
With increased competition and margins coming under pressure, logistics
functions are approaching the issue with faster transportation modes,
better information management to reduce uncertainties and also
alternative sources of supply. While evaluating the inventory
management performance, the organization has to keep in mind various
techniques to minimize the incidence of inventory across the supply chain
and inventory has to be integrated with the logistics process to meet
service objectives. Whether to open more depots (geographical
specialization in inventory), whether to keep stock at work in progress or
as finished goods from (decoupling), balancing supply and demand,
buffering uncertainties, coverage profile, SAP analysis, safety stock,
performance delays, indent vs. replenishment, use of qualitative
techniques, reordering procedures, Material Requirement Planning (MRP),
Distribution Requirement Planning (DRP), Just in time (JIT), Vendor
Managed Inventory (VMI) and Kanban are some of the terminologies,
appropriate use of which play an important role in Inventory
Management for better performance has been covered in this chapter in
detail.
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1. What is inventory management? Explain different inventory

management process.
2. What role “geographical specialization in inventory” plays in Inventory

Management?
3. What is the meaning of Buffering uncertainties?
4. Explain the meaning of the term ‘Decoupling’.
5. Highlight different technology support available for the inventory

management.
6. Explain the terms: (a) Coverage profile, (b) Safety stock, (c) Just In
time (d) MRP.
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1. As a component of supply chain management, _________ supervises

the flow of goods from manufacturers to warehouses and from these
facilities to point of sale.
(a) Distribution management
(b) Inventory management
(c) Reorder management
(d) Packaging management
2. Inventory control procedures are of two types – Perpetual review and

______.
(a) Periodic review
(b) Performance review
(c) Procedural review
(d) Quantity review
3. Opening depots at several places is _________ the inventory rather

than concentrating the same at a central place and servicing the
markets from such central location.
(a) Decentralized spreading
(b) Wider spreading
(c) Geographically spreading
(d) Rapid spreading
4. When the supply chain has to adjust to a MTS (Make to Stock)

situation in place of a MTO (Make to Order) situation, by virtue of
nature of the product, market and competition, the element of
_________ becomes very critical.
(a) Goal setting
(b) Planning
(c) Connectivity
(d) Forecasting
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5. Several qualitative and quantitative forecasting techniques are

available for the inventory planning. In one such technique namely
________, historical sales data which contain relatively clear
relationships and trend is used for forecasting the future, inline with
the past trend.
(a) Time series technique
(b) Linear series technique
(c) Data trend technique
Ans.:1. – (b); 2. – (a); 3. – (c); 4. – (d); 5. – (a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
216
TRANSPORTATION
Chapter 7
Transportation
Objectives
• Understand the different levels of transport.

• Understand the Hub and Spoke model of transport.
• Understand the role and use of Road transport.
• Understand the role and use of Rail transport.
• Understand the role and use of Air transport.
• Understand the role and use of Sea transport.
• Understand the role and use of Ropeways.
• Understand when to use Inland Waterways.
• Understand about the multimodal transportation method.
• Understand about the vehicle tracking system.
Structure:
7.1 Introduction
7.2 Road Transport
7.3 Rail Transport
7.4 Air Transport
7.5 Sea Transport
7.6 Ropeways
7.7 Inland Waterways
7.8 Multimodal Transportation – Dynamic Approach
7.9 Vehicle Tracking System
7.10 Summary
217
TRANSPORTATION
7.1 INTRODUCTION
When discussing transportation, we have to look at transportation at two

distinct levels and they are:
a. At the Primary Level: Which covers movement to that point in the

chain wherefrom the product will be sold to out side parties.
b. At the Secondary Level: The transportation there after, cost of

which many a times may be borne by the seller — for example, when
a company picks up the transportation charges from the C&FA to the
Distributor point.
One of the main reasons for this bifurcation is that materials are
predominantly moved in bulk at the primary level, and hence would
normally use modes of transport which offer such economies.
At the secondary levels, the materials are normally moved in smaller

lots, and hence the choice of transport may also undergo suitable
changes.
Let us take the instance of a company selling pharmaceutical items in

Mumbai, from a C&FA located at Thane. The primary transportation to
Thane would have been made in full truck loads.
From Thane, the secondary transportation to a Distributor, who is let us

say situated at Byculla, can be made by a van, by a three-wheeler, by a
car, by a person traveling by a local train, or by a person travelling by a
BEST bus. The choice may be decided upon by the quantity to be
supplied, the urgency of supply, even by the nature of the consignment.
The transports normally used at the primary level are:
Road Transport which is by and large the most preferred.
Rail Transport which in spite of certain limitations such as fixed

terminals, is very economical when it comes to carrying in bulk.
218
TRANSPORTATION
Air Transport which has distinct advantages in terms of speed, and

safety, particularly for very high value items, of a delicate and extremely
perishable nature.
Ship-cum-Waterways Transport which also has advantages of bulk

transportation over long distances particularly across countries and of
products bulky in nature and/or in very large quantities, at a
comparatively lower transportation cost.
Pipeline Transport for bulk movement of materials in a fluid form or

semi-fluid slurry form, pipelines offer a very convenient safe and low
variable cost-based mode of transport.
At the secondary level, by and large road is the medium, but the mode of
road transport may be different. Smalls bookings through trucks, through
buses as booked consignments, use of 4-wheeler vans, 3-wheeler vans,
2-wheelers, cycles, cycle rickshaws, people-based such as hand carts,
head loads, bags in hand, couriers, animal drawn such as bullock carts,
and even animal backs such as mule loads in hilly terrains, or camel
loads in desert areas are varied usage of road as a medium.
Secondary transportation using rail would be similar in either booking as

small parcels, or leveraging the train transport facility to make deliveries
by persons. Examples can be of the famous Mumbai dabbawalas who
deliver lunch parcels using the local train network of Mumbai suburban
services.
Besides the above modes of transports, ropeways are also used in hilly
areas where linkages across distances can be shortened by moving
materials across valleys through ropeway cables, or where the terrain is
such that ropeways may work out a safer and faster route for
transportation as in the case of a few coal fields in the eastern part of
our country.
After understanding different means of transportation, we need to

understand one fundamental format of transportation. With different
variations, it is used across most means of transportation. This is known
as “Hub and Spoke”’ model of transportation.
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Hub and Spoke Model of Transportation
Figure 7.1: Hub and Spoke Mode of Transportation
Hub is a large warehouse/distribution location, closer to major market,

e.g., large warehouse at the outskirts of Mumbai, Delhi, Bengaluru,
Kolkata. Later, from Hub, goods are sent to smaller warehouses within
the marketplace to ensure availability and speed of delivery. As per the
distribution strategy, area of distribution radius is decided and
accordingly different godown locations are decided to serve the large
market. If we take Mumbai, say spokes could be there to serve North
Mumbai, South Mumbai, East Mumbai and West Mumbai. Hub could be at
say Thane or Bhiwandi. From there as per the pre-decided frequency,
goods will be sent to various spokes. You need to visualize this for other
means of transportation. Also, this model is in use for incoming raw
materials where different spares vendors deliver ordered goods at the
indicated spoke. From there, collected spares from different vendors
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comes to main hubs in large quantity and finally it reaches plant

warehouse.
We shall now study each of the above media of transport in detail.
7.2 ROAD TRANSPORT
The Indian road transport sector is pretty large, the trucking industry
being at about Rs. 200,000 crore per annum.
While in the mid-eighties rail and road used to share the freight volume
more or less equally, at present the load is skewed more favorably
towards the road sector to about 55%, the railway’s share being about
45%.
The biggest advantage of road transport is its extreme flexibility and

adaptability. By and large, an all-weather mode of transport, it covers
and can connect practically all the nooks and corners of the country.
Door-to-door connectivity makes it the most preferred means of
transport.
The Indian roadways network is:
National highways and Expressways 66754 km

State highways 128000 km
Major district roads 470000 km
Village and other roads 2650000 km
Total length 3314754 km
(Source: Wikipedia)
Of the above, a length of 5846 km is being upgraded under the golden

quadrangle project which will make the connectivity between Delhi –
Kolkata – Chennai – Mumbai – Delhi much improved, fast and of a very
high order.
The national trucking industry is still by and large not very organized. A
rough estimate pegs the total number of heavy duty commercial vehicles
at 45 lakh of which 50% ply on the national circuit. The road sector
carries about 60,000 crore of tonne km national transport load.
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The ownership pattern is so fragmented that the larger transporters

individually may have less than 1% of the market share. Most truck
owners have less than 5 trucks individually, as a matter of fact 77% of
truckers are single vehicle owners, who rely on agents to get them loads.
(Source: ET 14.01.05)
In the above background, most of the transporters procure vehicles from

the open market and place them for picking loads.
There are, of course, a few large fleet owners who may be having their
own vehicles but by and large even they supplement their carrying
capacities by obtaining vehicles from the open market.
In this type of environment, the trucks which are requisitioned for

carrying loads move from location to location, at times not touching base
for prolonged periods of time.
Tracking movements and whereabouts of vehicles under such

circumstances is quite a task. We shall cover later progress made
recently in these areas by using technology for monitoring the vehicles
during their journeys.
Traditional vehicles plying in the market are 18 to 20 ft in length, 7 ft.

wide. Rules prohibit loading vehicles beyond 11 feet in height from the
road level. The platform base of the vehicle being at a height of 4 ft from
the ground level, it translates into a cubic carrying space of 18 ft. × 7 ft.
× 7 ft. that is 882 cu.ft. Vehicles with tall sides reaching up to 5 to 6 ft.
from the platform base are known as Punjab body trucks, and those
with shorter sides about 3 to 4 ft. from the platform base are known as
half body trucks.
These trucks are allowed to carry 9 metric tons of load. Recently the
market is shifting towards vehicles which are 23 ft in length, the breadth
and height dimensions remaining more or less the same but capable of
carrying 16 tons of load. As against the earlier trucks which were having
6 wheels, 2 in the front and 4 at the rear, these vehicles have 10 wheels,
2 in the front under the driver’s cabin, and two sets of double wheels in
the load carrying portion of the chassis.
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The older versions have a fuel consumption rate of 4.5 km per liter of
fuel, while the new versions have a fuel consumption rate of 3.5 km per
liter. However, due to the comparatively higher load-carrying capacity,
these vehicles are more cost-effective, provided the load is full.
New vehicles initially are used in the trunk routes for about 5 to 6 years,
after which they start plying in the less important routes, whereafter
they start covering local areas. Thus, one can see that vehicles are not
usually discarded very easily.
When transporting cargo through road transport the consignor, i.e., the
party sending the goods has to offer the cargo for carriage under a
forwarding note.
The transporter prepares a consignment note which is also known as a

lorry receipt, in which the following information needs to be
incorporated:
• Transporter’s name and address

• Date of the Consignment Note
• Consignment note serial number
• Name and address of the Consignor
• Name and address of the Consignee
• Total units or number of packages
• Brief description of the materials being carried
• The freight amount, plus any other charges to be paid,
• Whether the freight is paid, or to be paid, or to be billed
• Whether the consignment is consigned to the consignee or “selves”
• Whether the consignment is insured by the owner or transporter
• Whether the cargo is for door delivery or to be cleared by the
consignee from the transporter’ godown.
• Truck number in case of a FTL
There may be instances when the consignor would not wish to part with
the cargo in the absence of payment, and the party may not be willing to
send advance payments by way of demand drafts. In such cases, the
consignment is sent as consigned to “selves” and the consignment note
is sent through the consignor’s bank to its branch at the consignee’s
location with the specific instruction that the consignment note is only to
be handed over to the consignee after he makes payment of the amount
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as per the accompanying invoice. On the original consignment note

(which is sent through the bank), the remark “consignee selves” is
penned through and an endorsement is made “please hand over the
consignment to ………………..” where the consignee’s name is put and it is
signed by the consignor. This way the credit exposure is secured and the
consignee is also spared the burden of advance payment.
This system can, however, work provided the transporter has its own
depot at the consignee location, as otherwise the truck driver who would
want to unload the cargo as soon as possible to take the next load, may
deliver the cargo somewhere and most likely to the consignee himself if
he knows the party.
From the legal aspect, one should note that the carrier’s responsibility for
the goods tendered for dispatch is that of a “bailee” which is like that of
a warehouseman, i.e., the transporter is expected to take care of such
goods as a person of normal prudence would take care of his own goods.
Being a bailee, the transporter cannot claim any ownership rights on the
cargo, even in case his freight has not been paid. However, he can
exercise “lien”, which is right to hold property till the debt on it is paid.
During the entire period of transit, the responsibility of the transporter is

of a common carrier, and hence he is fully responsible for loss,
deterioration, damage, except when such loss or damage or deterioration
occurs due to an act of God/nature, an act of public enemy, civil
restraint, default on the part of the consignor or consignee, or the nature
and/or inherent quality of the goods.
In such instances, the transporter has to prove that he had made every
effort to avoid loss, damage or deterioration.
Post arrival of the cargo at the destination, delivery of the goods should
be taken within a reasonable time, say a week, unless specifically agreed
to by the parties, whereafter the transporter can charge demurrage,
which is detention charges, for the consignment.
In respect of cargo which may be subject to quarantine, the transporter’s

responsibility will cease with handing over of the cargo to the authorities
concerned. In respect of cargo of an extremely perishable nature, and if
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the delivery is refused by the consignor or consignee for over 48 hours,

the carrier may dispose off the goods by private or public auction, or if
the auction is not possible, sell the goods and recover his outstanding
dues therefrom. This may be done without any notice to the consignor or
consignee.
However, in respect of cargo of a non-perishable nature, on refusal by

the consignee or consignor to take delivery within 30 days, the carrier
may sell the goods by public auction, after giving due notice. The carrier
is authorized to apply the sale proceeds of the goods sold or auctioned to
the payment of outstanding freight, demurrage, storage, or other lawful
charges.
To protect the cargo against risks while the goods are in transit,
insurance covers are taken. At times, the goods can be booked at the
carrier’s risk in which case the transporter may charge a little extra.
In case of materials covered under transit insurance, the

following rules apply:
At the point of delivery, any apparent damages to the cargo or its

containers must be noted on the consignment note. Thereafter, a claim
must be filed on the transporter in writing within seven days. At times
insurance companies change such time limit, hence one should check the
current status. In case there has been an accident en route, the carrier
must lodge an FIR at the police station under whose jurisdiction the
accident has occurred, and inform the consigner, who in turn will inform
his insurers by registered Post AD. This AD is very important, and
insurance companies have been known to reject claims on grounds of
non-receipt of intimation.
Thereafter the insurance company will send its surveyor to make an on

the spot inspection, and the consignor may be offered compensation on
the basis of the survey report, and value insured. Insurance companies
would try to make as much salvage as possible so that their out going is
at the minimum. After the claim has been settled, the consigner
(insured) gives a letter of subrogation to the insurance company, which
in effect means that the consignor (insured) has passed on all his rights
to the insurance company and they can take any action to recover their
losses. In case of a non-delivery if the cargo has been insured, then the
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transporter must provide to the consignor a copy of the FIR he must

have lodged regarding the missing vehicle, and the consignor will follow
up with a notice of claim to the Insurance company under a registered
letter AD. Claim on the carrier must be filed within 60 days after a
reasonable time for delivery has elapsed. This implies that the claim
must be filed within 60 days after the normal transit time for delivery has
elapsed, or after the agreed date of delivery of goods, or the date of the
issue of the consignment note. Since insurance companies may change
such time limit, one should check the current status.
If the carrier refuses to entertain the claim, then a suit must be filed in
an appropriate court within a reasonable time but not beyond six months
from the date of refusal. Do note that no suit may lie against a carrier in
respect of a consignment if a written claim has not been filed first.
Normally, insurance companies after settling the consignor’s claims and

obtaining the letter of subrogation, proceed against the carrier to recover
their costs of settlement. Generally, these settlements are done at
certain percentages of the value of the cargo, at about approx. 30% in
case of damages and about approx. 40% in case of shortages and losses.
So, sometimes organizations negotiate with transporters that instead of

going in for transit insurance for the consignments, they may have an
arrangement whereunder the transporters will settle the consignor’s
claims on the above basis, and thus they may avoid all the hassles of
declarations, filing claims, follow-ups, survey formalities, etc. This
procedure generally goes by the name of self-insurance. However, this
system can work if the consignor has a substantially large volume of
transportation billing with the transport company, so that the claims can
be recovered, and individual truck loads of consignment are not very
costly. Like in the case of a pharmaceutical company if one truck load is
valued at 50 lakh then this proposition may not be workable because loss
of one such truck load of medicine may wipe out more than all the
savings that the company may have achieved through the above self-
insurance initiative.
This brings us to the next step of selecting transporter contractors.
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The following factors need to be properly scrutinized before

selecting a transporter:
• Constitution of the carrier’s firm,
• The carrier’s business turnover,
• The carrier’s area of operation,
• The carrier’s branch offices or associates’ offices,
• Number of trucks owned by the transporter,
• Clients the carrier is servicing, and if possible their experience with the
transporter – this aspect may need discreet market intelligence
gathering,
• Check with existing customers the track records of the transporter as

regards to the settlement of claims, and
• The transit time quoted by the carrier.
When obtaining/inviting quotations from prospective transporters, it is

advisable to give them a brief of the organization’s activities, the type
and load of traffic to be handled, the destinations to which the cargo has
to be moved, with respective volumes for individual destinations, the
expected delivery time duration per sector, special requirements if any,
such as self-insurance, “no transshipment” clause in case of FTLs point to
point, risk purchase clause, penalties for delayed deliveries, etc. the
expected tenure of the agreement, conditions for revision of rates, during
the validity period, namely in case of increase in fuel rates, any other
issue that the organization may deem critical to the smooth functioning
of the arrangement.
Transporters usually tender rates destination-wise, depending upon their

total business on those sectors. There may be some who have
considerable traffic in certain sectors, which enable them to offer
competitive rates in those routes. Certain transporters may have
considerable back loads from certain destinations, and may be plying
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their own vehicles, and hence to obtain better overall cost advantages,
can offer very low rates for those routes.
As has been stated earlier, the transporter may be procuring trucks in the
open market at market rates and placing the vehicles at the consignor’s
location. These market rates of vehicles from the originating location to
the sought destination location may vary considerably depending upon
the supply of vehicles in the originating market, the demand for vehicles
ex the originating location as well as the load expected from the
destination location. Thus, during the orange season truck rates ex any
location to Nagpur may be low because the trucks will get outbound
loads ex Nagpur very easily.
Since the transporter is going to be bound by the rates for a fixed period
of time, but the procurement ex the market may vary, he makes certain
estimates of the likely rates to be operative in the market, and
accordingly makes his offer.
Thus, there are chances of his making losses at times which he may
make up during other periods.
Because of this feature in the business, it is advisable to have one

transporter for any sector/routes. If more than one transporter is given a
transport contract for any same route, there are chances of bickering
during periods of high market rates, as one would complain against the
other being given favorable treatment during periods of low market rates
by way of more requisitions, and lesser requisitions during periods of
high market rates.
Since during times of high market rates, transporters resort to delaying

tactics to place vehicles, it is advisable to incorporate in the contract a
clause regarding risk purchase, under which the company can requisition
a truck from the open market and debit the difference to the regular
transporter if he fails to place a truck as per requirement.
After obtaining quotations from several transporters, the distribution

manager can first plot the rates and after a comparative study call them
for a rate negotiation. While negotiating, the overall impact on the
transportation cost should be kept in mind, inasmuch as, a little higher
rate in certain sectors with lesser volume, against a lower rate in sectors
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with a significant higher volume, can be more cost beneficial to the

organization on the whole. Reverse auction is often practiced in
transportation rate negotiations. In this process, just the reverse of a
normal auction procedure is adopted, inasmuch as instead of a floor price
above which bidders have to quote in case of a normal auction, in
reverse auction a ceiling rate is announced, below which the bidders
have to quote. With proper passwords this can be done online, where the
identities of the bidders can be hidden while the rates being quoted can
be available. In the agreement, specific mention should be made
regarding penalties for late deliveries. For this, it is important to list the
accepted transit time in days for each route, and what will be the delayed
delivery charges.
Often, transporters resort to transshipment along the route.

Transshipment means the cargo is transferred from one vehicle to
another en route. At times, it may happen due to mechanical failure of
the vehicle, or it may so happen that the truck procured from the market
was not having a permit to ply from the originating point to the
destination, and hence a vehicle shifting is made en route. In respect of
full truck loads, this should not be accepted because transshipments
cause damages to the cargo, due to the extra handling and that too
unsupervised.
Truckers resort to another irregularity which can cause a lot of damage to

cargo. Let us take an example of a truck carrying refrigerators or
washing machines. Because of volume restriction it may be loaded with
48 pieces, each piece weighing approx 40 kg, i.e., a total of approx. 2
tons. We know that the truck can carry a total of 9 tons. If the trucker
can organize for the same destination, (and that may not be difficult at
all, because of agents being around), a load of 7 tons of steel sheets,
which being flat can be accommodated in the truck at the bottom of the
refrigerator/ washing machine load, there is enough temptation for the
trucker to do this, because he has the opportunity of earning twice the
freight on a single run.
This will result in the cargo of refrigerators/washing machines being

loaded at the consignor's premises, being taken to some spot and
unloaded, because an empty truck will have to be placed at the steel
sheet consignor's place, then after loading of the sheets, the truck will be
taken back to where the consignment of refrigerators/washing machines
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were kept unloaded, the same loaded over the steel sheets, and at the
destination the entire process being repeated once again in the same
pattern, and one can imagine what may be the condition of the cargo of
refrigerators/washing machines.
This which is nothing but an adjustment of the freight should be avoided

at any cost, as the resultant damages can put the whole chain into a lot
of problems.
If suspected, very regular checks should be carried out, and if required

escorts may also be provided, and the transporters penalized.
Incorporating all the above features in a proper form is known as a

Service Level Agreement under which the user and the provider come to
agreements on the extent of continuity of service, loading and transit
times, fulfilling peaks and troughs for the truck demand, etc.
For better management of the transportation, you would by now

appreciate that dedicated/owned trucks have a distinct edge over the
practice of hiring trucks from the open market. However in that case the
largest hurdle is the problem of trucks coming back empty in the reverse
journey, unlike in the case of the hired trucks who move from one
location to another as and where they get cargo. Back haul can work
best if a national grid for trucking exists, with a flow of information. A
typical format of back haul can be worked if the trucks that bring in raw
materials/components can be used to transport finished goods.
Appliances companies may have scope to use these concepts to some

extent, because in most of the cases the source of materials and
components may match with centers of high demand for the finished
goods.
To evaluate the comparative efficiency of transporters across sectors in

terms of the transit time achievement, one can use a tons-days
parameter:
Let us take a sector Mumbai to Guwahati, where the approved transit

time is 12 days, and the performance records of two transporters are as
under:
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Transporter A has delivered

• One consignment of 8 tons in 18 days – 6 days
• One consignment of 7 tons in 13 days – 1 day
• One consignment of 4 tons in 11 days + 1 day
Transporter B has delivered

• One consignment of 4 tons in 18 days – 6 days
• One consignment of 7 tons in 13 days – 1 day
• One consignment of 8 tons in 11 days + 1 day
If we take the average of the deviations from the agreed standard in

days, of the two transporters we shall get a figure of:
(–6 – 1 + 1)/3 = –2 in both the cases
However if we take it in tons-days, the picture may be a bit different in

the case of transporter A it will be:
(–6 × 8 + –1 × 7 + +1 × 4)/3 = –17 tons-days and in case of

transporter B it will be:
(–6 × 4 + –1 × 7 + +1 × 8)/3 = –7.66 tons-days
The change is because transporter B delayed the lesser loads, but for the
larger loads they were more efficient.
If one were to calculate what could be the approximate cost of

transportation across any sector, one can build a model as under:
Please note what is being set hereunder is a model, the costs considered
can change, the parameters can also change, but the overall applicability
of the model can be retained.
Let us assume a 9 ton truck chassis costs Rs. 6.5 lakh and the body
fitting another Rs. 2 lakh. And the cost of the truck will be amortized in
10 years time.
The vehicle maintenance and repairs are expected to be Rs. 20,000 per
annum in the earlier years moving up to Rs. 50,000 per annum in the
later years.
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Because depreciation as well as the interest charges would be larger in

the earlier years and similarly repair and maintenance charges higher in
the later years, we may take the two together @ Rs. 1.20 lakh per
annum {Rs. 6.5 lakh + Rs. 2 lakh = Rs. 8.5 lakh ÷ 10 = Rs. 85,000 +
(20,000 + 50,000 = 70,000 ÷ 2 =) Rs. 35,000 = Rs. 1.2 lakh}.
There would be a driver and a cleaner whose salaries we may assume @

Rs. 8,000 per month both taken together. Certain replaceable items such
as tyres and batteries may cost Rs. 30,000 per annum. Insurance and
taxes, permits, etc., may cost another Rs. 30,000 per annum. The
vehicle is expected to give 4.5 km per liter of diesel and consumption of
lubes and engine oil is assumed @ Rs. 0.50 per km of running.
Whenever the vehicle goes out on a trip the driver and cleaner will have
to be given some allowances towards food, incidentals which may be
taken @ Rs. 150 per day. If we are to sum up the above costs, we shall
get the following type of a cost sheet:
Fixed per Variable Variable

day (Rs. ) per day per km
(Rs. ) (Rs. )
Cost of vehicle (vehicle being used for 250 480
days running in a year
Driver/cleaner salary 384
Tyres/battery 120
Insurance/taxes/permits fuel/engine oil/ 120

lubes
Assuming diesel Rs. 40/ltr 9.38
Driver/cleaner daily allowances 150
Total 1104 150 9.38
Now supposing one were to calculate what might be the cost of running
the vehicle on certain routes, the above base can be very helpful.
Let us say we were to calculate the fare ex Mumbai to Pune a distance of

180 km and a travel time of 1 day, Ahmedabad a distance of 620 km with
a travel time 2 days, Indore at a distance of 700 km and a travel time of
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3 days, Ranchi a distance of 1,800 km with a travel time of 7 days, and

Kolkata at a distance of 2,100 km and travel time of 10 days.
Mumbai To Pune Ahmedabad Indore Ranchi Kolkata
No. of days 1 2 3 7 10
Distance in kms 180 620 700 1800 2100

Fixed expenditure (Rs. ) 1104 2208 3312 7728 11040
Variable expenditure 150 300 450 1050 1500

(Rs. )
Fuel, etc. (km* 9.38) (Rs. 1689 5816 6566 16885 19698
)
Total 2943 8324 10328 25663 32238
Freight per km 16.35 13.43 14.75 14.25 15.35
Fuel as a percentage of total 57% 70% 64% 66% 61%

cost
If you analyze the above cost sheet, you will observe that the rate per
km increases as the km per day reduces because of the fixed and
variable components.
Thus for destinations involving relatively more running time than idle
time the comparative rate per km of movement reduces, and makes long
hauls more economical on a ton km basis. This is the reason one may
find that vehicles hires in the city for town running are quite costly on a
per km basis. The second point to note is that the cost of fuel ranges
between 57% and 70% of the total cost, this time it being less for the
routes involving more idle time. This leads to the fact that when diesel
costs move up transporters’ demand for an increase in the rate by a
similar percentage is unjustified. Hence in the service level agreements,
it is advisable to incorporate that rate revision on account of diesel costs
changes will be reckoned at the rate of the vehicle giving a mileage of
4.5 km per liter, reckoning the distance and calculating the amount. In
the above cost sheet, one item has not been recorded, which is loading
and unloading charges. Loading and unloading charges in the Indian
context is influenced more by local conditions and practices rather than
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by task loads. Like for instance in a certain place local practices may
dictate a certain rate for loading or unloading a truck, and even if the
charge seems high there is not much that can be done about the same.
In road transport, use-specific adaptations take place continuously. The

oldest such modification was the introduction of tankers for carrying
liquids. From an initial phase of tankers being in use by organizations for
their own use, transporters started providing them on a dedicated
fashion to large users, till today, they have come to be available like any
other normal vehicles. Similarly, refrigerated vehicles are also a part of
the transport scenario, being used by organizations dealing in perishables
that need a refrigerated mode of transport.
Starting from light commercial vehicles capable of carrying approx 3.5

tons of cargo to the very large 40 tonner multi-axle heavy duty vehicles
there are varieties of vehicles to choose from, to suit individual needs
and requirements. Currently, the 16 tonners whether plain heavy duty
trucks, or haulage trucks, car carriers, tippers, multi-axle concrete
mixers-cum-tippers are taking a share of the largest segment which used
to be ruled by the 9 tonners.
Container vehicles are also a part of the road transport scenario. These
are normally fitted on the 25 to 40 tonner multi-axle trucks or tractor
trucks or are loaded on to the trailer as a detachable unit. But in case of
container vehicles the cargo has to be of a certain specific nature. Since
the cargo inside a container is difficult to lash around, because hooks or
protrusions to secure lashing may cause damage to the cargo when not
lashed, separate stuffing has to take care of securing stability of the load
during transit. This puts restriction to the type of cargo, and hence the
trucker may not be able to get return loads very easily. This is somewhat
stymieing the growth in popularity of these types of vehicles.
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7.3 RAIL TRANSPORT
We shall now look at Railways as a mode of transportation. The Indian

railways network as per 2002-2003 figures are 63,327 km which is a
growth of approx. 18% over the 1950-1951 figures of 53,596 km.
The freight output is approx. 500 billion ton km at 2008-2009 figures.
Railway’s share in the total national freight is today approx. 45% of the
total volume.
Similar to the road golden quadrangle, the railways have also a similar
project. This is basically linking the four mega metro cities and the
diagonals and connectivity to the major ports. The lengths of these
corridors are:
Corridor Length (km) Four-laned (km)

Delhi-Kolkata 1453 322
Kolkata-Chennai 1684 146
Chennai-Mumbai 1290 197
Mumbai-Delhi 1419 494
This high density network along with the diagonals that is Kolkata-
Mumbai, Chennai-Delhi, though comprising only 15% of the network,
carries about 65% of the rail freight traffic.
Predominantly, the railway network caters to the movement of bulk

commodity traffic, namely coal, iron ore, minerals, grains, cement, and
even oil in tankers.
Between rail and road, rail is safer, faster, and cheaper.
Railways offer several types of rates such as class rates as per which
several commodities are classified into several classes, and according to
the classification rates are charged. Class rates generally taper off as the
distance increases.
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Wagonload rates which are a bit lower can be availed of if the

commodities are offered in full wagon load quantities, and as per the
specified minimum weight condition specified for a particular commodity.
Small rates which are at a higher level than the wagon rates are
applicable to bookings in smaller lots.
Railways also offer train load rates for certain commodities which are
cheaper than wagonload rates.
At times, organizations depending upon the volume of traffic can

negotiate with the railways for station to station rates.
For booking purposes, traffic can be classified into two categories,

namely wagonloads and small. Traffic in large quantities requiring
exclusive use of a full wagon is known as wagon traffic, whereas traffic
offered in small quantities, not requiring exclusive use of full wagon is
referred to as small traffic. For obtaining full wagons the consignor has
to place an indent for a wagon, along with a deposit, and the wagon, will
be made available on a first-come-first-served basis. For booking in
railways, the consignor has to make a forwarding note, which should
indicate, description of goods, classification for tariff rates, station from
and station to, selection of a route in case there are different routes,
value of the goods, packing conditions, etc. This in fact is like a contract
between the railways and the consignor, and in the event of a claim for
compensation, this may be used to determine the extent of liability of the
railways.
Railways often prescribe packing requirements for items, and may insist
on compliance, otherwise they may put remarks on the railway receipt,
and not take liability for damages. Railways have their own marking
system which in short will enable them to identify the packages. This
marking will be made by the railways irrespective of the private markings
made by the consignors. Even in wagonloads, certain portion of the
packages need to be marked. Weighments are carried out at the railway’s
weighing scales in case of small consignments, and for wagonloads, the
railway’s wagon weigh bridges are used. At times if the cargo is more
voluminous than heavy, the charge may be on cubic area basis.
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While goods are normally booked by the shortest route, in case of the
same being closed for any reason, bookings by an alternate longer route
may be accepted provided the consignor opts for the same and is willing
to pay the extra freight. Class rates for certain commodities particularly
low value perishables may be obtained at much lower rates under the
owner’s risk category. However, in such cases, the onus of proving the
railway’s negligence in case of any damages will lie on the consignor.
Similar to the lorry receipt in case of road transport, railway

consignments are covered by a railway receipt. The railway receipt
which like a lorry receipt mentions the station of origin, the destination
station, the number of packages, and description of the goods, has a
serial number and is dated, is a very important document, can be
negotiated, and has to be surrendered at the destination by the
consignee at the point of taking delivery. In case the railway receipt is
lost, the delivery of the goods can only be taken on execution of an
indemnity bond.
Railways charge demurrages if consignments are not unloaded from

wagons within the time allowed for clearance of materials. In case of a
wagon requisition, if the wagon is not loaded by the required time
allowed, then too the railways levy demurrage charges. Wharfages are
charges levied by the railways when a consignment after arrival at the
destination are not taken delivery of within the time stipulated. A point to
note about railways is that they do not take any responsibility regarding
information about arrivals. It is on the consignee to follow up and track
arrivals.
If at the point of delivery any sign of damage or pilferage is noticed the

consignee can ask for an open delivery or assessment, a copy of which
document is taken by the consignee and on the basis of which he can
prefer a claim on the railways.
However if delivery is taken under clear signatures, then later on no

claim will be entertained by the railways.
Description of goods, rates, and freight are subject to recheck at the

destination, and any upward or downward changes are to be paid or can
be recovered from the consignee.
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Freight can be either paid or needs to be paid, except in case of cargoes

of a very perishable nature and very low value where railways insist on
only prepaid bookings.
Freights may have to be paid in cash, or sometimes on the basis of

previous arrangement for regular users, credit note systems may be in
operation.
At an additional charge railways book consignments whether in wagon

loads or in smalls between pairs of stations within a targeted transit time
under what is called quick transit service.
The biggest disadvantage that railways have vis-a-vis road transport is

its route rigidity which implies that cargoes have to be taken to a rail
head where only it can be booked, and again it can be taken delivery of
from rail heads.
Large users of railways, of course, can have railway sidings built at their
own premises, but then that involves quite a bit of capital investment,
cost, and volumes must justify such outlays.
To counter this problem, the railways have taken quite a few initiatives,
of which the oldest is the railway container service, initiated way back
in 1967.
Container services are door-to-door integrated services and avoid

multiple handling. They are of about 5 tons capacity (the smaller vertical
types, as against current 20 footer and 40 footer containers which move
both inland and on ships) and are loaded on flat wagons. They are
transported from the consigner’s premises on flat trucks specially
designed to carry these containers after stuffing. At the destination, the
containers are similarly ferried to the consignee’s location where the
cargo can be unloaded. The advantages of containers is that they provide
door-to-door service, they are safe and fast, avoid handling outside the
consignor’s/consignee’s premises. No repacking or transshipment en
route, rates are extremely competitive as against road transport, and
chances of damages and pilferages are very much less. With the growth
in demand for container services (of the 20 ft and 40 ft type) by the
export sector, the profile of containers on the rail network has also
undergone substantial changes. Concor whose majority holder is the
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Indian Railways is so far the sole provider of containerized goods

transport by rail in the country. It has over 30% share of the Exim cargo
(ICICI Direct Equity Research). Inland rail linked container depots help in
the movement of containers and their turnarounds.
Railways also have a scheme where they tie up with reputed road
transporters under what is known as the freight forwarder scheme,
under which the road transporter collects goods from the consignors for
the same destination, and then transport the consignments in a
wagonload to the common destination, whereafter clearing from the
wagon they deliver the consignments to the consignees as road delivery.
The railways offer the freight forwarders special wagonload rates for such
consignments which make the scheme cost attractive.
Off late, the railways have even bettered on this by introducing full
special cargo trains on a few selected routes.
At the starting point and at the destination, a transporter through his

agent arranges to book and clear the cargo from the rail head and deliver
to the consignee locations as road delivery. Thus, the consignor gets the
advantage of faster movement via rail transit, lesser rate as per part rail
freight, and the flexibility of road transport.
Konkan Railways have a service known as RoRo – roll on roll off –

wherein, the train service carries trucks on rail flats.
A daily service between Kolad-Verna-Kolad about 860 km between

Mumbai and Goa, the rail service runs parallel to the national highway.
Under this scheme, filled trucks carrying freight for Goa and there
around, avail of the service of the railways by rolling on their filled trucks
on to the flat wagons of the railways, where the trucks are lashed on. At
the destination, the trucks roll down and disperse to their destinations.
The freight for the filled trucks are on a truck weight basis and the
normal railway practice of charging freight, commodity/class of item-wise
is not applied. Thus, the freight for carrying oil or coal would be the
same per unit of weight.
The detention of vehicles at terminals for loading and/or unloading is

minimal, as trucks have only to roll on or roll off.
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The advantage to the truckers is also tremendous, as along this sector,

when it is taking a ride on the rail the average speed is about 60 to 70
km per hour as against 20 to 25 it makes on the road.
The saving on fuel and wear and tear is weighed against the freight paid
to railways and in the process it is a win-win for the Konkan Railways,
individual truckers, and the consigners.
The railways are also trying to improve their offerings to users by tying
up with the Central Warehousing Corporation to create rail side
warehouses or logistics terminals so that users can avail of rail head side
warehouse facilities. Industrial sidings connected by laying rail lines are
offered between railway stations and industrial premises to facilitate
direct loading or unloading of goods at factories/manufacturing locations.
Sidings are either private or railway assisted.
Depending upon the specific needs, several types of wagons are

available, like tank wagons for, petroleum products, milk, liquid items,
eight-wheeler open flat wagons, four-wheeler open falling ends wagon,
fully covered wagons, etc.
AMAZON Recognizes the Utility of Indian Railway
Amazon believes in using local means of transportation extensively

anywhere in the world. Likewise, they have recognized the utility of
Indian Railways and they have commenced the use of Indian Railway’s
local passenger train services for the first time in India. It is a first of its
kind also for Indian Railways.
Indian Railways is constantly looking to tap available opportunity to

maximize its differentiator namely connectivity and regularity of
movement. It has challenging freight movement targets to achieve. In its
bid to increase its revenue from non-fare sources, it has decided to ship
e-commerce consignments on its EMU services in non-peak hours.
The Railways decided to ship e-commerce consignment from Amazon on

a pilot project on its Eastern Railways Zone. It carried out the trial runs
from Sealdah to Dankuni. This trial will run for three months during
which total 7 MT of consignment per day has been allowed to be carried
in the EMU trains.
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The consignment is allowed to be carried in vendor compartment along

with other vendors in non-peak hours from 11.00 hours to 16.00 hours,
thus causing no disruption/inconvenience to the existing system.
The project is to benefit both Railways and e-commerce company

Amazon.
The route from Sealdah to Dankuni was preferred by Amazon for quick
movement of their consignment to the existing facility at Dankuni.
"The railways will be benefitted through generation of revenue, without

putting any additional stress or burden on the existing system, whereas
Amazon will be benefitted through a reduced transit time. Road transport
within the city of Kolkata is stressful and thus use of local trains will
expedite the deliveries to their distribution centres. This will improve
their customer deliveries as well. Other e-commerce companies may too
join this route. This project is taken up without giving any discount on
rates applicable. Indian Railways plan to introduce these services on
other routes across the country, post successful completion of this trial
run.
7.4 AIR TRANSPORT
Though extremely costly on a rate basis vis-à-vis other mediums of

travel, air transport has a few distinct advantages over the others:
• It is very useful in creating new markets, and also bringing new distant
markets within reach.
• In the short run when experimenting with new markets, it helps in the
process by enabling servicing the new customers without opening
storage locations with high investments.
• It helps in tackling seasonal spurts in demands by quick

replenishments without stocking up over prolonged periods in
anticipation of such spurts.
• Security, regularity, reliability and flexibility are certain added

advantages of this medium of transport.
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• While transportation per air may have a very high variable rate per unit
transported, there is the other positive side that the fixed outlays in
warehouse, inventory, etc. may be comparatively much less.
To appreciate this trade-off between the cost levels, we shall take up an

example.
Figure 7.2: Understanding the Trade-off in Using Air Transport
The dark lined graph represents the fixed cost which may be incurred for
transport by air, because the outlay would be much less, whereas the per
unit variable cost would be higher.
The dotted line graph represents the fixed cost which may be incurred for
transport by let us say rail or road where the initial fixed cost would be
much higher but the per unit variable cost would be much less.
Consequently the total cost curve depending upon the differential

between the fixed and the variable costs of the two modes would at
some point cross and up to that point the total cost of distribution of air
would be less than by rail or road, where after the air mode would be
more costly.
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This point which is known as the change point is calculated as under:
If the fixed component of cost when transporting by air is F1 Rs. 1 lakh
The variable component when transporting by air is v1 Rs. 20,000/ton
The fixed component of cost when transporting by rail/ F2 Rs. 10 lakh

road is
The variable component when transporting by rail/road is v2 Rs. 1,500/ton

The change point is:
Thus, you will observe that upto ≤ 46 tons the transportation by air is on
the overall cheaper than transportation by rail/road.
The national air traffic scenario is as under:
International Traffic Carried by Indian Carriers

Year Passenger (’000) Cargo (tons)
Scheduled Non- Total Scheduled Non- Total
scheduled scheduled
1999-00 3657 160 3817 100298 143 100441
2000-01 3828 156 3984 101351 2 101353
2001-02 3698 56 3754 97529 125 97654

2002-03 4201 62 4263 103729 91 103820
2003-04 4493 64 4557 97698 41 97739

2004-05 5326 52 5378 112157 0 112157
2005-06 6547 29 6576 112179 9 112188
2006-07 7561 6 7567 123694 0 123694

2007-08 9108 73 9181 142901 4 142905
2008-09 10049 104 10153 174092 0 174092

(Source: Business Line 3.3.2010)
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Domestic Traffic Carried by Indian Carriers


scheduled scheduled
1999-00 12711 229 12940 158879 196 159075
2000-01 13712 249 13961 166668 118 166786
2001-02 12854 247 13101 160556 289 160845
2002-03 13951 282 14233 179585 506 180091

2003-04 15677 241 15918 197490 145 197635
2004-05 19445 300 19745 245151 402 245553
2005-06 25205 374 25579 256481 293 256774

2006-07 35793 444 36237 266421 418 266839
2007-08 44384 484 44868 302565 360 302925

2008-09 39467 576 40043 277608 995 278603
Total (Domestic and International) Traffic Carried by Indian Carriers

scheduled scheduled
1999-00 16368 390 16758 250177 339 250516
2000-01 17540 405 17945 268019 120 268139
2001-02 16552 303 16855 258085 414 258499

2002-03 18152 344 18496 283314 597 283911
2003-04 20170 305 20475 295186 186 295372
2004-05 24771 352 25123 357308 402 357710

2005-06 31752 403 32155 368660 302 368962
2006-07 43354 450 43804 390115 418 390533
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2007-08 53493 557 54050 445466 364 445830
2008-09 49516 680 50196 451700 995 452695

Air freight structures are different between the domestic and the
international scenario.
While the domestic rates are partly influenced by government

regulations, in the international scene the rate structures are dependent
on competition, supply demand, capacity, and other market forces,
except in instances where rates are introduced bilaterally by
governments to boost trade.
Normally, international tariff structures are negotiated through the IATA

machinery.
Major constituents of the current IATA rates structures are:
a. General Cargo Rates (GCR): These constitute the normal rates for
cargo transportation. They are applicable to normal cargo shipments
and rates generally differ on the basis of weight offered, inasmuch as
separate rates for cargo weighing £ 45 kg and different rate for cargo
weighing more. These rates may reduce as the weight goes up and
reduced rates may get applicable at higher slabs and so on.
Mumbai to London Air France Alitalia (Rs. British Airways

(Rs. ) ) (Rs. )
Minimum 1700 2200 2300
≤ 45 kg per kg 195 190 176
45-100 kg per kg 188 180 144
100-250 kg per kg 139 130 132
The above is by way of an example only.
b. Class Rates: Class Rates are surcharged or discounted rates for

certain classified items, e.g., valuable cargo, live animals,
commodities being air freighted in bulk, etc.
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c. Specified Commodities Rates: Specified Commodities Rates are

heavily discounted rates applicable in a particular route between two
points. These are market-oriented rates and take into account actual
demand requirements, as well as the users’ freight cost threshold, i.e.,
ability to pay. Specified Commodity Rates can be changed from time
to time depending on the market situation, and the price levels of that
commodity in the buyer market.
d. Freight All Kind: Freight All Kind is an extension to the Specified

Commodity Rates in as much as under these rates the restriction to a
particular commodity is waived, and the consigner can send any
commodity specially approved by IATA carriers under the same rate
between those stations. Certain carriers do not prefer these rates as it
practically amounts to whole selling of the fare rates.
Sometimes to bolster bilateral or multilateral trade the Government may

influence the Freight All Kind rates. While bulk use of air freight is one
aspect, there is a substantial use of this mode through the courier route,
whereunder, not only paper but small parcels are also dispatched.
7.5 SEA TRANSPORT
The next mode of transport for our study is Sea as a medium.

International trade through the sea route is often governed by Liner
Conferences, which basically is an agreement between two or more
vessel operators plying on particular or specified routes to provide
uniform rates and other conditions for transportation on those routes.
Thus, constituents of a liner conference will offer:
• Regularity of service between certain ports of call,
• Stability of freight rates for a relatively long period of time which will
enable the shippers to quote c.i.f. prices on a relatively safe basis,
• Uniform rates for all shippers who are members of the conference,
• Relatively a wide coverage of ports, and
• Rebates on freight rates based on loyalty agreements.
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While liner conferences cover a wider ambit of issues besides freight

rates alone, a rate agreement merely may specify the conditions under
which the signatories will be charging freight rates.
If a shipper exclusively uses the services of a particular member of a

conference, the shipping line may offer the shipper some rebate on the
rate, but at times the rebate may be actually credited at the end of some
period, to ensure that the shipper continues to patronize that shipping
line.
An improvement on this can be a lower continuous rate if the shipper

signs an exclusive agreement with the member of the conference. At
times, spot rebates on rates can also be obtained depending on the
negotiating capability of the shipper, based on the volume of business he
has to offer and the international shipping market.
Conference rates are normally calculated factoring in:

• Character of the cargo,
• Volume of cargo,
• Susceptibility to damage,
• Susceptibility to pilferage,
• Packing and storage requirements,
• Ratio of weight to measurements,
• Heavy lifts or extra length,
• Competition with rates from other sources,
• Cargo via competitive ports,
• Competition from other carriers,
• Actual cost of operations,
• Distances,
• Cost of handlings at ports,
• Port facilities,
• Port charges,
• Possibility of return loads, and
• An assessment of the market conditions in as much as what rates will
attract the customers to use the facility.
Besides conference liners which are normally on fixed predetermined

routes, there are tramp vessels where individual ships may be
chartered on time/voyage/or demise (bare bottom) basis.
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Voyage Charter: Ships are chartered for a particular voyage.
Time Charter: Ships are chartered for a particular period of time.
Demise Charter: Here, the bare ship is chartered for a particular period
of time, i.e., without any floating personnel, fuel, or provisions. The
charterer has to equip the ship with every thing necessary for operating
the ship.
After terms have been settled, the charter party or the agreement is
drawn up and signed. In shipping, ton refers to the carrying capacity in
cu.ft. (100 cu.ft. or 2.83 cu.mtr. is a ton). Hence if a ship’s gross
registered tonnage is mentioned, it indicates the total of all permanently
enclosed space above and below docks, with the exception of the wheel
house, radio room, galleys, etc.
The net registered tonnage is the earning space of the ship, namely the
gross tonnage less the crew’s accommodation, steering gear, ballasts,
tanks, etc. Tonnage by weight is the weight of water displaced by the
vessel. Light displacement refers to the weight of the ship’s hull,
engines, etc. required for its working. Load displacement refers to the
ship’s weight when fully laden, i.e., with personnel, cargo, provisions,
etc. Dead weight is the difference between load displacement and light
weight and therefore, gives the weight of the cargo, crew, provisions,
fuel, etc. i.e., the weight of the stuff it is carrying.
Types of Cargo
General cargoes are materials packed in some form of packaging and are
normally finished goods. Dry bulk cargoes would be raw materials such
as ore, foodgrains, or other commodities that can be transported in loose
condition. Liquid bulk cargoes such as petroleum products, crude, edible
oil etc. are another set of cargoes.
General cargoes are mainly transported by containers.
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Some containers may have dimensions as under:
• 20 ft containers have inner dimensions of length 5,830 mm × width

2,347 mm × height 2,380 mm
• 40 ft containers have inner dimensions of length 11,975 mm × width

2,352 mm × height 2,390 mm
Containers are normal or can be refrigerated, where the inner

dimensions will alter.
• 20 ft refrigerated containers may have inner dimensions of length

5,385 mm × width 2,159 mm × height 1,956 mm
• 40 ft refrigerated containers may have inner dimensions of length

1,2040 mm × width 2,235 mm × height 2,311 mm.
Containers can be loaded/stuffed at the inland manufacturing point,

checked and sealed. Thereafter the sealed container is transported to the
wharf where it can be loaded on board the ship, through mechanical
handling, carried on the sea, and again at the port of destination,
unloaded mechanically and transported to the destination site without
disturbing the load. To facilitate the export operations, inland customs
checking can be conducted at bonded warehouses and the container
sealed after checks.
In container terminology, one comes across a term TEU. TEUs are twenty
foot equivalent units of containers. As for instance in 2003, the total
TEUs handled in the country was 5 lakh TEUs. Concor handled about
90% of this volume. Many ships are totally containerized. For the
purposes of calculations, a 40 ft container is considered as two 20 foot
containers.
The other types of ships are the tankers or liquid bulk carriers who have
huge tanks in place of holds. The very large tankers of half a million tons
dead weight often discharge their cargo at deep sea terminals from
where the oil is pumped direct into refineries through pipelines. Bulk
cargo carriers are ships capable of carrying bulk cargoes like ores,
commodities, Combination Ore Bulk and Oil (OBO) carriers can carry a
combination of the three, Roll on Roll off or RoRo ships that can allow
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wheeled cargo such as cars, trucks, vehicles, to roll on and roll off
horizontally can be very useful in carrying such types of cargoes,
particularly as automobiles are being sold internationally. While RoRo
vessels can be quick in turnarounds, the capacities may often be
underutilized.
Market requirements as well as reducing vulnerability on specific types of

cargos, have spawned types of combination ships, such as a combined
general cargo liner-cum-container; which is a combination of a general
hull to carry general cargos, as well as cellular facility to accommodate
containers. Combination container/RoRo vessels, which are similar to a
combination of cellular container space in combination with RoRo facility.
Similarly, vessels can be with container facility and RoRo facility on the
upper deck and the hold for carrying bulk cargo.
In shipping, there are significant roles played by freight brokers and

(C&FAs) clearing and forwarding agents.
Freight brokers who are normally formed in association, operate at ports,

keep a track of shipping space, obtain requirements of shippers and
assist in booking shipping space. Normally, the freight broker gets his
commission from the shipping company.
Clearing and Forwarding Agents (C&FAs) are also formed into

associations and are required for the following activities:
• Assisting in customs documents processing,
• Paying the export/import duties on behalf of the customer,
• Obtaining a carting order from the shipping company/agent and

moving the goods to the wharf, and
• Delivering goods to the shipping company and obtaining a mate’s

receipt, which after payment of freight/port charges is exchanged for a
Bill of Lading.
The freight in shipping may have several add-ons. Like, besides the basic
freight for the container, or the cargo on some volume or weight basis,
there may be fuel surcharge, fuel adjustment factor, destination delivery
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charges, peak season surcharges, bunker adjustment factor, currency

adjustment factor, congestion/port surcharges, etc. which the shipper
must know before hand to reckon what exactly will be the impact of
freight in the c.i.f. quotation. Since these may have to be paid in foreign
currencies, the exchange rates will also have to be considered.
The Bill of Lading is a very important document. Similar to the Lorry

Receipt, it is the document of title to the cargo, it has:
• The name of the ship

• The name of the shipping company
• The shipper’s name
• The destination port
• To whom shipped
• Marks on packages
• Description of goods
• Freight
• The Bill of Lading has a number and date
If the mate’s receipt has any remark about breakage or damage to the
cargo, then the same may be reproduced in the Bill of Lading, in which
case the Bill of Lading is known as a clause Bill of Lading, and it may
cause problems at the point of negotiation with the bankers against the
Letter of Credit.
Pipeline
It is the ideal mode of transporting large quantities of liquid, gaseous, or

slurry types of cargoes over long distances. The specialty of this medium
of transport is that unlike other mediums where the cargo remains
stationary and the carrier moves, in the case of pipelines it is the cargo
that does the movement the medium remaining stationary.
At times, we forget that this medium has been in operation from very old
times for water supply and sewage disposal, in towns and municipal
areas.
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The main advantages of using pipelines are:
• Very reliable, continuous, all-weather means of transport
• Low energy consumption, many a time on certain stretches it may work

on gravity
• Hence, low operating costs
• Generally does not require continuous maintenance
• Since it may mostly traverse uninhabited terrain or even be

subterrestrial, the pressure on space is comparatively less
• Easier to run through difficult terrain
• Transit losses minimal, unless there is deliberate sabotage
However, against all the above advantages, the biggest disadvantage of

pipelines is its capital cost.
As per Economic Times 22.3.10, India is likely to add 7,450 km of gas

pipeline over the next 2 to 3 years. The current natural gas
transportation infrastructure in the country is around 10,800 km with a
capacity to move 270 million standard cu.m. of gas per day.
According to (EBR) Energy Business Review 30.8.2009, a 54 km stretch

pipeline (8") between Kashipur and Rudrapur/Pantnagar will be estimated
to cost Rs. 56 crore, i.e., Rs. 1.03 crore per km.
As per a news item in Economic Times, Reliance in 2004 had announced

a project to set up a 6,000 km pipeline at a cost of Rs. 4,576 crore which
translates to Rs. 76 lakh per km. As per the same report, Reliance
estimated that transporting cost by rail of 4 million metric ton of oil per
annum across 971 km would be Rs. 425 crore whereas transporting
similar quantity through a distance of 803 km by pipeline would cost
about Rs. 192 crore which would translate to Rs. 1.09 per ton km by
railways against Rs. 0.60 per ton km by pipeline. By road, this cost can
be much higher at about Rs. 3 per ton km. No doubt, pipelines carry
about 35% of the (POL) petroleum, oil, and lubricants movement. “The
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freight cost for pipeline movement is about 75% of the rail freight and
road movement about 180% of rail freight … …” as per industry experts.
Most of the pipelines in the country are public sector controlled like IOC,
GAIL, ONGC. Some of the major pipelines are the 17,00 km-long IOC-
operated Kandla Bhatinda pipeline, total pipelines in India is about 5,000
km. There are several old ones in the Eastern sector connecting the oil
fields to refineries.
7.6 ROPEWAYS
The advantage of ropeways in certain terrains is its ability to connect two

places with large altitudinal differentials with relative ease. In ropeways,
the rate of rise or altitudinal gain can be much more over a horizontal
stretch than through road, like in the case of a road, a height gain of 1
km on a hilly terrain can be achieved over a stretch of about 20 km while
in the case of a ropeway the same gain can be achieved in about 2 km.
Figure 7.3: Ropeways
Ropeways are extremely eco-friendly, and in hilly terrains they can be set
up with least damage to the environment, apart from the putting up of
the towers required for setting the cables.
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Ropeways can be set up to operate in tandem with roadways, inasmuch

as along side roads winding on hilly terrains ropeways can be set up at
convenient vantage points to connect places across valleys on an
adjacent/opposite hill.
This can help in movement of products over locations separated by hills

and valleys or other difficult to navigate terrain, to vantage points where
they can link up with regular roadways.
Thus, this medium can be exploited for transport:
a. In hilly and otherwise inaccessible areas,
b. Across alternate long and circuitous routes with intervening obstacles,
c. Where the commodity is of a nature that it can be easily transported

in small ropeway buckets,
d. The haul being not very long, say 40 to 50 km maximum, and
e. Alternate modes of transport are either absent, or very irregular, or

extremely costly.
Ropeways have been in use in coal fields and iron ore belts for
transportation across long stretches.
Another advantage of putting up ropeways is that while the per km cost

of setting up a ropeway is less than a road, a road may not be laid across
the points in a straight line, which a ropeway can, thus making the
ropeway even cheaper by that extent.
Apart from the ropeways that operate in the Dhanbad Jharia coal field
belt, there are ropeways in Sikkim, Shillong, and several places of tourist
and pilgrimage interest.
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7.7 INLAND WATERWAYS
Wherever there are navigable rivers or inland creeks, with settlements

along such water bodies, scope exists for inland waterways as a viable
alternate mode of transportation.
In the Eastern parts of our country, as well as in the Kerala backwaters,
inland waterways do exist but the same can be developed substantially.
Cost-wise, this medium is extremely cheap, as unlike roads, rail, ships,

air, as well as pipelines there is not much cost on set-up/maintenance of
infrastructure facilities for this medium to operate.
Using barges as lashing vessels, cargoes unloaded from ocean-going

ships can be moved inland through inland waterways provided the
workings can be coordinated. Despite being so eco- friendly, cost-
effective, fuel efficient, there are not many takers, and its share of the
National Freight Movement is less than 0.2%.
The country has 14,500 km of navigable waterways, including rivers,

canals, creeks, and back waters, of which almost 52,00 km of major
rivers, and 485 km of canals are suitable for mechanized crafts.
The Government has declared:
• The Ganges from Haldia to Allahabad as National Waterway No. 1,
• The Brahmaputra from Dhubri to Sadiya as National Waterway No. 2,

and
• The West Coast canal from Kottapuram to Kollam along with the
Udyogmandal and Champakara canal as National Waterway No. 3.
• The Government is also planning to develop three more national

waterways.
• Plans are there to increase the share of the inland water transport
(IWT) in the inland cargo transport, from about 0.17% to about 3.00%
by 2020.
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Steps are also being taken to remove shoals on the river beds which
obstruct free movement of vessels in certain sectors, like the stretch of
Ganges between Allahabad and Varanasi.
Miscellaneous
Before we close this chapter, we shall briefly mention the several other
mediums of transport which can be exploited for distribution efficiencies
and efficacies.
Ranging from non-mechanized human-driven units:
• Such as handcarts, cycles, cycle rickshaws, cycle vans, head loads, to

animal-driven.
• Bullock carts, camel carts, horse-drawn carriages, plain animal backs,

there can be several mediums which can be used depending upon:
• The type of cargo
• The specific terrain condition
• The availability of mediums
• And cost/delivery equation.
Students should also be imaginative to obtain leverages from available

public transport/commuting mediums to obtain synergies in distribution
efficiencies.
Very good examples are of couriers who leverage the bus/train/and even
the air medium to create their space in the transportation spectrum.
The much talked about Dabbawallas of Mumbai have leveraged the very
efficient suburban train services to build their space in the transportation
sphere.
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• Activity
1. You have been relocated to a different location by your organization

and you will be reimbursed the cost of transportation of your personal
belongings. What mode of transport would you choose and why?
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
7.8 MultiModal Transportation – DYNAMIC APPROACH
This may not be actually one of the modes of transportation but it is one
of the transportation methods, which has revolutionized the logistics
industry. It is known as multimodal transportation.
Consider that you want to move a very large consignment from Cochin,
Kerala to Jammu, J&K. In conventional way, you will do it using road
transport by contracting it with one transporter. But you want to reach
goods faster than the road transport. In such a case, you need to hire
one contractor, comply with set of documents needed for transporting
your goods from your warehouse at Kerala to the nearest railway station.
From there, you need to hire another contractor, meet specific
documentation needs to railway authority to take your goods to Jammu.
Again, from Jammu railway station, you need to hire another contractor
and comply with local documentation needed to take your goods on road
from Jammu railway station to your customer’s warehouse. What if there
is one methodology which unifies it and offers you a seamless service
with just one set of document/s applicable across different mode and
same can be contracted through one contractor?
This is possible under Multimodal transportation method. Multimodal

transport is the transportation of goods under a single contract, but
performed with at least two different modes of transport; the carrier is
liable (in a legal sense) for the entire carriage, even though it is
performed by several different modes of transport (by rail, sea and road,
for example). Same holds good, even if it is a delivery across the
different country. The carrier does not have to possess all the means of
transport. The carriage is often performed by sub-carriers (referred to in
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legal language as "actual carriers"). The carrier responsible for the entire
carriage is referred to as a multimodal transport operator or MTO.
This is a result of treaty signed by various countries as per the Article

1.1. of the United Nations Convention on International Multimodal
Transport of Goods (Geneva, 24 May 1980).
Multimodal transport developed in connection with the “container

revolution” of the 1960s and 1970s; as of 2011, containerized transports
are by far the most important multimodal consignments. However,
multimodal transport is not equivalent to container transport; multimodal
transport is feasible without any form of container.
Key Features of Multimodal Transportation
a. It is a carriage of goods by two or more modes of transport, under

one contract.
b. It is a contract with one responsible contractor (generally MTO) with

single document for the entire carriage, which may involve the use of
other sub-carriers.
c. In case of any damage or loss, thus specific sub-carrier will bear the
responsibility under his part, in line with rules applicable as per the
international convention.
Advantages of Multimodal Transportation
a. Faster transit of goods by minimizing the time loss at the different

transit points.
b. Reduced burden of formalities and different documentation needs

across different points of transit or different countries.
c. Saves cost – cost of transport, minimal loss, damages, etc..
d. Minimizes cost of exports and gives you competitive cost edge.
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Different Models under Multimodal Transportation
With the advent of multimodal transportation conventions and its

growing popularity, different transport modes have evolved and what is
known as combined container transportation models have been
developed. Under combined container transportation, standardized
loading units are transshipped along different means of transport. In
doing so, different means of transport such as road, water and air
transportation are used. Different combined container transportation
models are as follows;
1. Combined container transport: Full load container is moved on a

container truck at the supplier’s end, then the container is loaded on a
ship and again by container truck is utilized to reach the consignment
at the final destination.
2. Rolling Road: In this, entire container along with the container truck
is loaded on a flat-bed container rack of the railway. Container truck
carries the container to the nearest railway station, where the entire
truck gets moved on to the flatbed container rack of the railway and
then railway moves it to the identified destination station, and from
there, container truck moves on road to reach the goods to the
customer.
3. Forwarding of trailers: Most of the aspect is same as above, except

the fact that here instead of the entire truck being loaded only the
trailer on which container is loaded, is loaded on railway carriage. At
the other end, post unloading, another truck gets coupled with the
trailer to move the goods to the final destination.
4. Roll-on Roll-off: Most of it is same as Rolling Road transport, except

the fact that here ship is used instead of railway.
5. LASH transportation: Popular where inland waterways are utilized.

Here, inland water vessel (LASH Barge) is carried by the barge carrier
known as Sea Going Vessel. Containers are loaded on a barge and
inland waterways are used. At the specific point, this entire barge is
loaded on a container ship.
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TRANSPORTATION
We have studied multimodal transportation, which is instrumental in the

growth of logistics function, simplified distribution management and
offered unified ways for managing the supply chain.
7.9 VEHICLE TRACKING SYSTEM
As the name suggests, it is a system (or a set up), which enables you to
track where your vehicle is. Thus, it means you have to have something
inside a vehicle (which is moving), something available with you (at your
office) and something which connects the both. In simple terms, vehicle
tracking system consists of a device inside a moving vehicle, one device
at your office (desktop, laptop of your smartphone), connected through
internet. As a result, it is possible to generate signals from the device
inside a truck, and using Global Positioning System (GPS), you are able
to locate your vehicle on a map on the device at your office. Having done
this, you use generated data to obtain other desired information in the
form of different reports – total kms travelled, determine time taken to
travel, identify stoppages, identify duration of stoppages, determine
authorized stoppages vis-à-vis unauthorized stoppages, compare similar
data periodically, year on year, etc. Other vehicle information can include
fuel amount, engine temperature, altitude, reverse geocoding, door
open/close, tire pressure, cut off fuel, turn off ignition, turn on headlight,
turn on taillight, battery status, GSM area code/cell code decoded,
number of GPS satellites in view, glass open/close, fuel amount,
emergency button status, cumulative idling, computed odometer, engine
RPM, throttle position, GPRS status and a lot more.
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TRANSPORTATION
Typical Architecture
Major constituents of the GPS-based tracking are:
GPS Tracking: The device fits into the vehicle and captures the GPS
location information apart from other vehicle information at regular
intervals to a central server. Capability of these devices actually decide
the final capability of the whole tracking system; most vehicle tracking
systems, in addition to providing the vehicle’s location data, feature a
wide range of communication ports that can be used to integrate other
onboard systems, allowing to check their status and control or automate
their operation.
GPS Tracking Server: The tracking server has three responsibilities:

receiving data from the GPS tracking unit, securely storing it and serving
this information on demand to the user.
User Interface: The UI determines how one will be able to access

information, view vehicle data and elicit important details from it.
Nature of Tracking System
Two types of tracking systems are sued namely: (1) Active tracking
and (2) Passive tracking. Typically, they are classified as “passive” and
“active”. “Passive” devices store GPS location, speed, heading and
sometimes a trigger event such as key on/off, door open/closed. Once
the vehicle returns to a predetermined point, the device is removed, and
the data downloaded to a computer for evaluation. Passive systems
include auto download type that transfer data via wireless download.
“Active” devices also collect the same information but usually transmit
the data in near-real-time via cellular or satellite networks to a computer
or data centre for evaluation.
Many modern vehicle tracking devices combine both active and passive
tracking abilities: when a cellular network is available and a tracking
device is connected it transmits data to a server; when a network is not
available, the device stores data in internal memory and will transmit
stored data to the server later when the network becomes available
again.
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Common Uses of Vehicle Tracking System
a. Fleet Management: Large fleet operators uses this to manage their

fleet efficiently by ensuring better turnaround time, ensuring more
trips within a specific period, improve vehicle utilization and more.
b. Urban Transport System: Agencies responsible for managing urban

public transport system use the technology for a number of purposes,
including monitoring schedule adherence of buses in service,
triggering automatic changes of buses' destination sign displays once
the vehicle approaches the bus terminus, and triggering pre-recorded
(or even synthetic speech) bus stop, route (and its destination) or
service announcements for passengers.
c. Unconventional Uses: Industry has found various unconventional

uses like logistics industry and transportation for route optimization,
effective maximization of hub and spoke model, hospitality industry
uses in their assigned cars to ensure safety and security of their
guests, food delivery vans to ensure vehicle temperatures, etc. for
ensuring right billing to customers where cost of transportation is
chargeable.
7.10 SUMMARY
Transportation occurs at two levels — primary and secondary. One of the

main reasons for this bifurcation is that materials are predominantly
moved in bulk at the primary level, and hence would normally use modes
of transport which offer such economies. At the secondary levels the
materials are normally moved in smaller lots and hence the choice of
transport may also undergo suitable changes. We also understood Hub
and Spoke model of distribution. Hub is a large warehouse/distribution
location, closer to major market. Later, from Hub, goods are sent to
smaller warehouses within the marketplace to ensure availability, and
speed of delivery. The transport normally used at the primary level are:
Road, Rail, Air, Ship and Pipeline. At the secondary level, by and large,
Road is the medium but the type of road transport may be varied.
Secondary transportation using rail would be similar to either booking as
small parcels or leveraging the train transport facility to make deliveries
by persons. Besides, ropeways are also used in hilly areas where linkages
across distances can be shortened by moving materials across valleys
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through ropeways cables. This chapter studies in detail all the above-
mentioned medium of transport.
We have studied one distinct methodology of transportation namely

multimodal transportation. Multimodal transport is the transportation of
goods under a single contract but performed with at least two different
modes of transport. Multimodal transportation has given birth to
combined container transportation methods. There are several
transportation options under this namely combined container
transportation, rolling road, forwarding of trailers, roll-on roll-off, etc.
In this modern era, using technology, vehicles are tracked using vehicle
tracking system. Enormous amount of data is recorded and reported for
ensuring productivity of vehicles.
1. What are the different modes of transport available and on what

purposes would you use them? Describe with examples.
2. What is Hub and Spoke model of transportation? Explain in brief.
3. When would you prefer to use Road Transport? Give an example.
4. When would you prefer Road over Rail Transport and why?
5. Under what circumstances, you would opt for the Ropeways mode of
transport?
6. Explain what is multimodal transportation method and various optional

transportation solutions available under it.
7. Explain the various aspects of vehicle tracking system in

transportation.
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1. Nowadays, a large warehouse/distribution location, closer to major

market is chosen. From this large warehouse, goods are sent to
smaller warehouses within the marketplace to ensure availability and
speed of delivery. This concept of logistics management is known as
_________ model.
(a) Large and Small
(b) Hook and Spook
(c) Hub and Spoke
2. Door-to-door connectivity makes this transport mode the most

preferred means of transport. It is known as __________.
(a) Air transportation
(b) Ropeway transportation
(c) Inland water transportation
(d) Road transportation
3. Railways have a scheme where they tie up with reputed road

transporters under what is known as the ________, under which the
road transporter collects goods from the consignors for the same
destination, and then transport the consignments in a wagonload to
the common destination, hereafter clearing from the wagon they
deliver the consignments to the consignees as road delivery.
(a) Fleet floater scheme
(b) Freight forwarder scheme
(c) Multi-freight scheme
4. Two of the most underutilized modes of transport in India are: (a)

Ropeways and (b) ________.
(a) Railways
(b) Inland waterways
(c) Courier forwarding ways
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5. A revolutionary system (or a setup), today enables transporter to

keep an eye on their vehicle is known as _________.
(a) Vehicle tracking system
(b) Vehicle Google mapping system
(c) Vahan management system
(d) Radiowave vehicle tracking system
Ans.: 1. – (c); 2. – (d); 3. – (b); 4. – (b); 5. – (a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
266
OPERATIONS RESEARCH TECHNIQUES IN TRANSPORTATION
Chapter 8
Operations Research Techniques In
Transportation
Objectives
• Understand the application of a few OR techniques in transportation
• Understand how to apply the North-West Corner rule in the area of

transportation
• Understand how to apply a model using the Listing Method
• Understand the applications of scheduling techniques like PERT and

CPM
Structure:
8.1 Introduction
8.2 The North-West Corner Rule
8.3 The Listing Method
8.4 PERT/CPM
8.5 Summary
8.7 MCQ Questions
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8.1 INTRODUCTION
We shall discuss hereunder a few operations research OR techniques that

are commonly applied in the area of transportation.
One of the most commonly used models to determine the optimum

solution to a problem of separate demand points being supplied from
separate supply points, where the transport/associated costs differ
supply point/demand point combination-wise, is known as the North-
West Corner rule.
8.2 the NORTH-WEST CORNER RULE
Let us take a situation where there are three supply sources S1, S2, S3,
and four-five demand sinks D1, D2, D3, D4.
The costs associated with the 12 combinations as well as the supplies ex

each supply point and the demands at each demand center are depicted
in the figure 8.1(a) below:
Figure 8.1(a): North West Corner Rule Approach
The three supply points S1, S2, and S3 can supply 9 units, 4 units, and 8
units respectively, whereas the five demand points D1, D2, D3, D4 and
D5 require 3 units, 5 units, 4 units, 6 units, and 3 units, respectively.
268
The costs at the point of calculation will be treated as negative figures,

because they are basically costing whose negative impact the exercise is
trying to minimize.
Figure 8.1(b): North West Corner Rule Approach (with negative values)
In this case, see figure 8.1(b) the total demand is 21 units and the
supply available is also 21 units.
Where the supply may be more than the demand, an additional dummy
demand column must to be put with the residual supply being shown as
units required by this demand center, and in the boxes for costs zero
should be put. Similarly, in case demand exceeds supply, an additional
dummy supply row should be added, the uncovered demand shown there
against, and again in the cost zero should be put in the respective
additional squares. The logic for this, you may note, is that for the
purpose of optimization these combinations are non-options, and hence
there can be no costs associated with such hypothetical source sink
linkages, but the additional supply or demand has to be reckoned for
finding the optimum linkage.
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Figure 8.2: North West Corner Rule ― Working
In Fig. 8.2, we shall give the 15 squares individual numbers for easier
identification. Thus, the five squares across supply point 1 will have
numbers 11 to 15, against supply point 2 the numbers will be 21 to 25,
and for the third one the numbers will be 31 to 35.
We now must start allocating supplies from the supply sources to the
demand sinks. The process starts from the north-west corner, i.e., square
11, and hence the name north-west corner rule.
So if we start allocation from square 11, we observe that since demand

sink 1 has a requirement for 3 units, and supply source 1 can supply 9
units, the total requirement of D1, i.e., 3 units can be met from S1.
When the situation is such, that after meeting the demand of D1 from
S1, more units remain for allotment, then the next allotment should be
made horizontally, i.e., the next supply from S1 should go to D2.
If the situation were such that the total requirement of D1 was not met
from S1, then we would have to move vertically because the total need
of D1 must be fulfilled before we move to D2.
In case the supply of S1 is equal to demand of D1, then we move

diagonally as now D2 will have to source from S2. This pattern of
allocation will have to be followed, continuously. The logic would be clear,
as explained below.
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Figure 8.3 would give the allocation as made per the first move, following
the logic as explained above. You can now observe that of the 15 squares
in the matrix prepared, there are figures in only 7 squares, the remaining
8 being empty. The next step is to select each empty square and carry
out the following tracing step by step:
If for instance we start with empty square 21, then first we select a filled
square in the same row and starting from there trace back a path to
empty square 21 by moving vertically or horizontally and making right
angle turns but stepping only on filled squares. Thus, for empty square
21 we shall start with filled square 23, then to filled square 13, then to
filled square 11 and come back to empty square 21. While tracing this
route we shall also sum up the costs applicable to the respective squares
but alternating them as positive and negative.
For empty square 21, the path is:
23 → 13 → 11 → 21
+ (-13) – (-12) + (-3) – (-14) = 10
You would have noted earlier it was stated that all the costs are to be
treated as negative figures. This exercise is to be carried out throughout
for all the empty squares.
Two more exercises are being shown below:
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For empty square 33, move to filled square 34 to filled square 24 to filled
square 23 to empty square 33.
+(–9) – (–6) + (–13) – (–13) = –3
For empty square 15, move to filled square 13 to filled square 23 to filled
square 24 to filled square 34 to filled square 35 to empty square 15.
+(–-12) – (–13) + (-6) – (–9) + (–6) – (–9) = 7
After you have gone through this exercise for every empty square, you
will get a certain figure for each empty square. Because of the alternate
+ and – signs, you may get +ve or –ve figures in the squares.
You may observe while all the empty squares have positive figures there
is only one empty square namely 33 which has a negative figure.
In this example, there is only one negative value figure, but there may
be instances where more than one negative value is possible.
The next step is to select the most negative value figure, in case there
are more than one of an equal negative value, either may do. Now, one
retraces the path that was taken for arriving at the negative value.
In the case of 33, the path would be filled square 34 to filled square 24
to filled square 23 back to empty square 33.
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But in this instance the figures of supplies in the filled squares are to be
considered, which are 5,1 and 3. Alternating positive and negative signs,
the figures will read:
+5, –1, and +3
We choose the lowest positive value, in this case 3.
Move this figure of supply to empty square 33 and realign the supply
getting:
Figure 8.5: North West Corner Rule ― Revised Allocation
But if we apportion 3 units from S3 to D3 then D4 will get 4 units from

S2 and because S3 has supplied 3 units to D3, D4 will get another 2
units from S3, D5 retaining the original allocation of 3 units from S3.
Thus, the final allocation will be:
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Figure 8.6: North West Corner Rule ― Final Allocation
It may so happen that the steps throw up quite a few negative figures. In
such cases, starting with the most negative (in case of more than one of
the same value any one), and doing the shifting of allocations, as shown
above, the process of retracing will have to be repeated, a new set of
values found, re-shift in case of negative values till no further negative
values are left, and that will be the most optimum source sink
combination.
This problem can also be approached from another angle. The method
known as Vogel’s Approximation Method (VAM) assigns penalties to
bad choices by calculating for each row/column the penalty equal to the
difference between the lowest and the second lowest (one of the last
alternatives if the lowest is not available) cost for each row and column.
Such differences are defined as “penalties”, because, by not allotting at

the lowest cost (by any chance) the difference between the lowest and
second lowest, is an additional cost that the system is being forced to
bear. And hence the objective of the exercise is to reduce the penalty to
the lowest possible level.
Let us take the example given earlier and step by step understand how
the (VAM) Vogel’s approximation method is put to effect.
Difference between the lowest and the lowest but one, both row-
wise and column-wise
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Destinations
D1 D2 D3 D4 D5 Cost
Origins
S1 3 7 12 10 9 4
S2 14 20 13 6 12 6
S3 12 15 13 9 6 3
9 8 1 3 3
Cost ↓ maximum
We observe that in the column under Destination D1, the difference

between the lowest cost and lowest but one cost is the maximum
amongst all rows and columns. If we wish to avoid this, we must allocate
the quantity that can be earmarked to the particular cell that has the
lowest cost in this column, taking into consideration what the situation
permits. D1’s demand is 3 and S1 can supply 9. So, we allot 3 units from
Source S1 to destination D1.
Now since D1’s demand has been met; we can remove D1 from our
matrix.
The new matrix now looks:
Destinations
D2 D3 D4 D5 Cost
Origins
S1 7 12 10 9 2
S2 20 13 6 12 6
S3 15 13 9 6 3
Cost 8 1 3 3
We now observe that in column D2 the highest difference of 8 between
the lowest and the lowest but one cost occurs. In this column, again the
cell “S1, D2” has the lowest cost of 7. Now, D2’s requirement is 5 and S1
still has 6 (9 – 3) available. So, we can allocate 5 to D2 from S1, after
which S1 will have 1 unit available to supply. After this allocation, D2 will
no longer figure in our allotment exercise.
275
So, the matrix will now look:
Destinations
D3 D4 D5 Cost
Origins
S1 12 10 9 1
S2 13 6 12 6
S3 13 9 6 3
Cost 1 3 3
Now, we observe that the highest differential cost is coming in row S2,
and the lowest cost is in the cell “S2, D4”. D4’s requirement is 6 and S2
can supply 4. So if we supply 4 from S2 to D4, the situation will be S1
having 1, S2 having nil, S3 having 8 and D3 requiring 4, D4 still
requiring 2, and D5 yet to be supplied 3.
The new configuration is:
Destinations
D3 D4 D5 Cost
Origins
S1 12 10 9 1
S3 13 9 6 3
Cost 1 1 3
We now observe the highest penalty point is in either column D5 or Row

S3, and the corresponding lowest cost cell is “D5, S3”, where 3 units
from S3 can be allotted, after which D5 will depart from our exercise
matrix. Now, we find, D3 has still to be allotted its full requirement of 4
and D4 balance 2. The quantities remaining with S1 and S3 are 1 and 5
respectively.
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The new matrix is:
Destinations
D3 D4 Cost
Origins
S1 12 10 1
S3 13 9 3
Cost 1 1
Now, we can see D4 should be supplied from S3, i.e., 2 units which will
mean D3 will get 1 from S1 and 3 from S3, which makes the final
allotment as:
Destinations
D1 D2 D3 D4 D5
Origins
S1 3 5 1 9
S2 4 4
S3 3 2 3 8
Cost 3 5 4 6 3 21
This is the same allotment as it was done through the North-West Corner
rule.
There can also be a very short way to allocate from source to

destination, which is just making allotments on the basis of starting
allotting to source/destination combinations by starting from the lowest
cost cell and then gradually moving up.
The process will be as under (taking the same example and continuing
with it):
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Destinations
D1 D2 D3 D4 D5
Origins
S1 3 7 12 10 9 9
S2 14 20 13 6 12 4
S3 12 15 13 9 6 8
Cost 3 5 4 6 3 21
If we follow a procedure of allotting first to the lowest cost cell and then
gradually moving up. The effect will be:
which again brings us to the initial allocation.
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8.3 The LISTING METHOD
The next models that we shall see are ones that may be used when
deploying vehicles for deliveries/deliveries and collections, and
scheduling vehicles with capacity constraints.
Let us take the following example:
A is the starting point from where materials are sent out for delivery to
various points B, C, D, E, F, and G.
Figure 8.7: The Listing Method
The distances between:
A and B is 9 km
A and C is 11 km
B and C is 9 km
C and D is 14 km
C and E is 11 km
D and E is 7 km
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E and F is 10 km
D and F is 10 km
D and G is 15 km
F and G is 11 km.
To find the least distance, we use a listing method wherein we will first
list all the distances in pairs:
A B C D E F G
AB = 9 BA = 9 CA = 11 DC = 14 EB = 14 FD = 10 GD =15
AC = 11 BC = 9 CB = 9 DE = 7 EC = 11 FE = 10 GF = 11
BE = 14 CD = 14 DF = 10 ED = 7 FG = 11
CE = 11 DG = 15 EF = 10
To initiate the solution procedure, a value of zero is assigned to the

starting point, in this case A.
Thereafter select the shortest distance from origin A which in this case is
AB as AC is longer at 11. In case both the distances are the same, then
selecting either will do.
The value of B will be the total of value for A zero plus the value AB,
which is 9, i.e., 9.
A=0 B=9 C D E F G
CA = 11 DC = 14 EB = 14 FD = 10 GD =15
BC = 9 CB = 9 DE = 7 EC = 11 FE = 10 GF = 11
BE = 14 CD = 14 DF = 10 ED = 7 FG = 11
CE = 11 DG = 15 EF = 10
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Thereafter from B, we again choose the shortest of the alternate routes,

viz., BC which is 9. You would have noted that under B, the route BA has
been removed because that is no longer an option.
A=0 B=9 C = 18 D E F G
DC = 14 EB = 14 FD = 10 GD =15
DE = 7 EC = 11 FE = 10 GF = 11
BE = 14 CD = 14 DF = 10 ED = 7 FG = 11
CE = 11 DG = 15 EF = 10
Next, we observe that from C the combination CE is a shorter route
hence:
A=0 B=9 C = 18 D E = 29 F G
FD = 10 GD =15
DE = 7 FE = 10 GF = 11
CD = 14 DF = 10 ED = 7 FG = 11
DG = 15 EF = 10
The route becomes A – B – C – E = 29 km. Proceeding this way, you will

finally find that the shortest route is:
A – B – C – E – D – F – G = 9 + 9 + 11 + 7 + 10 + 11 = 57 km.
One may wonder this is such a simple straightforward route, what is the
fuss of making so much of fanfare about listing and going step by step.
While the system is very simple, the importance of this model is the
listing, because what looks like straight lines in the figures can be
circuitous in real life, with alternate routes, and apparent short cuts.
Unless they are plotted systematically and eliminated sequentially the
above apparently simple exercise may be difficult in real life. We shall
now add a little complexity to the above simple model.
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In the above case, we had a straightforward task of picking up cargo at a

depot and sending out the vehicle to deliver to various points and select
the shortest route.
We shall now look at a scenario, where the task is not only delivery, but
simultaneous collection. For example, a room air-conditioner workshop
has the task of collecting defective air- conditioners, but only after
delivering a service unit, or delivering repaired air-conditioners and
simultaneously collect back the service unit earlier installed there. Or, a
gas cylinder delivery set- up which delivers filled cylinders and takes
back empties, bottled soft drink sellers delivering filled crates and
simultaneously collecting back empties, and so on.
In the figure below, we are going to look at a problem where A is the

starting point, from where materials must be sent to and collected from
various locations B, C, D, E, F and G.
The routes have been indicated and the distances are:
AB = 9 km
AC = 9 km
BC = 12 km
BD = 10 km
CD = 4 km
BE = 11 km
DE = 11 km
CG = 11 km
DG = 14 km
EF = 14 km
DF = 13 km
GF = 15 km.
The layouts are such that vehicles can only move along the routes
captured in the route map given below. Thus, if a vehicle wants to move
from A to F it cannot chart an independent route AF, it must go via any of
the points like ACDF, or ACGF or for that matter ABEF, or even ABDF if it
so desires and requires.
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Figure 8.8: Revised as per the Listing Method
You have to note that the vehicle for every move has to consider final
return to base that is if we plan a trip from A to B the trip will not be
complete unless we reckon the return trip to base A thus movement to B
will be:
A – B – A which means it will be 9 + 9 = 18 km.
The routes are the roads which the vehicle can take, like if the vehicle
moves from A to D via B or C it can return to A via B or C only and
cannot make a D to A route because such a route does not exist, in this
case.
Proceeding on the above logic you can see:
The first movement will be A – B – A = 9 + 9 = 18 km next when we add

C there are two possibilities:
A – B – C – A = 9 + 12 + 9 = 30 km or
A – C – B – A = 9 + 12 + 9 = 30 km
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Both being the same we can choose either, say we choose A – C – B – A

now we add D and the following possibilities open.
A – D – B – C – A = 13 + 10 + 12 + 9 = 44 km
(Note that to move from A to D the vehicle has to travel A – C – D which

is the shortest.)
A – B – D – C – A = 9 + 10 + 4 + 9 = 32 km
A – B – C – D – A = 9 + 12 + 4 + 13 = 38 km
Obviously, the route A – B – D – C – A = 9 + 10 + 4 + 9 = 32 km will be

chosen.
When we add E, the possibilities will be:
A – E – B – D – C – A = 20 + 11 + 10 + 4 + 9 = 54 km
A – B – E – D – C – A = 9 + 11 + 11 + 4 + 9 = 44 km
A – B – D – E – C – A = 9 + 10 + 11 + 15 + 9 = 54 km
A – B – D – C – E – A = 9 + 10 + 4 + 15 + 20 = 58 km
The choice will obviously be A – B – E – D – C – A = 9 + 11 + 11 + 4 +

9 = 44 km the shortest of the lot.
Adding F, we shall get,
A – F – B – E – D – C – A = 26 + 23 + 11 + 11 + 4 + 9 = 84 km
A – B – F – E – D – C – A = 9 + 23 + 14 + 11 + 4 + 9 = 70 km
A – B – E – F – D – C – A = 9 + 11 + 14 + 13 + 4 + 9 = 60 km
A – B – E – D – F – C – A = 9 + 11 + 11 + 13 + 17 + 9 = 70 km
A – B – E – D – C – F – A = 9 + 11 + 11 + 4 + 17 + 26 = 78 km
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The choice will be:
A – B – E – F – D – C – A = 9 + 11 + 14 + 13 + 4 + 9 = 60 km
When we add G, similarly,
A – G – B – E – F – D – C – A = 20 + 23 + 11 + 14 + 13 + 4 + 9 = 94
km
A – B – G – E – F – D – C – A = 9 + 23 + 25 + 14 + 13 + 4 + 9 = 97 km
A – B – E – G – F – D – C – A = 9 + 11 + 25 + 15 + 13 + 4 + 9 = 86 km
A – B – E – F – G – D – C – A = 9 + 11 + 14 + 15 + 14 + 4 + 9 = 76 km
A – B – E – F – D – G – C – A = 9 + 11 + 14 + 13 + 14 + 11 + 9 = 81
km
A – B – E – F – D – C – G – A = 9 + 11 + 14 + 13 + 4 + 11 + 20 = 82
km
So, at the end we find that the route:
A – B – E – F – G – D – C – A = 76 km is the shortest route.
While the above two models dealt with situations where we were to find
the shortest routes only, there may be constraints due to capacity
limitations.
In this instance, we are going to tackle issues of scheduling a limited

number of vehicles from a central facility subject to but not limited by
the following constraints:
Delivery requirements to all destinations must be met, vehicle capacity

may not be violated, total time or distance traveled, by a given vehicle
may not exceed a predetermined amount, demand requirements and
route lengths.
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So we have a situation where from the point of origin, which we may call
loc. 0, there are requirements of loads at various destinations starting
from loc. 1 to loc. 10, and the distances of each location from loc. 0 is
given vertically under origin, the distances interlocations are given
vertically under each location, and they also relate to the outer location
distance, depicted horizontally.
Thus, location 1 needs 200 kg of load and is at 9 km from the location

origin. Location 3 needs 100 kg of load, is at 16 km from loc. 0, and its
distance from location 2 is 7 km and from location 1 is 8 km.
Initially, let us assume there are enough vehicles to allocate one per
customer. Suppose the vehicles available are:
Load capacity Numbers

300 kg 10
400 kg 3
800 kg 2
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Since there are enough vehicles of 300 kg capacity and all the locations
are wanting deliveries of ≤ 300 kg the allocation will be:
Vehicles 300 kg 400 kg 800 kg
Available 10 3 2
Allocated 10 0 0
The next step is to find out the distance that will be saved if routes can
be combined to form single routes. Like for instance, if the vehicle
instead of making trips from loc. 0 to loc. 1 and again from loc. 0 to loc.
2, were to make a combined trip loc. 0 to loc. 1 to loc. 2 and then back
to loc. 0 the distance would be instead of:
9 + 9 + 12 + 12 = 42
Only 9 + 5 + 12 = 26 because the vehicle would go to loc. 1,
9 km then to loc. 2,
5 km and then back to loc. 0,
12 km = 26 km, i.e., a saving of 16 km.
This saving can also be calculated by adding the distance individually to

each location and deducting there from the intervening distance, because
in a combined trip, one to, and one from distances are saved, but one in
between distance is additionally incurred.
9 + 12 – 5 = 16 km.
Calculating these savings, we can get a savings matrix as under:
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The next step would be to see which combined routes gives the
maximum travel time saving, and simultaneously also see whether the
combined load can be fitted into any available vehicle.
You can see that in terms of maximum saving in distance the

combination of route loc. 0 – loc. 9 – loc. 10 – loc. 0 gives the maximum
saving in distance 63 km.
To do this, the combined load is 300 kg + 200 kg = 500 kg and there are
vehicles capable of carrying 800 kg. Hence, this is possible.
The next largest saving (linking with the chosen loc. 0 – loc. 9 – loc. 10 –
loc. 0) being 60 km by combining loc. 0 – loc. 8 – loc. 9 – loc. 0, would
require combining 200 kg with the 500 kg already in combination with
loc.9 and loc.10, which will bring the total to 700 kg which can still be
put in one vehicle of 800 kg capacity.
Following up this way, you will find that the following combination will
give the most saving. The limiting factor for combination you would have
observed was the vehicle capacity.
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Load Route
275 kg loc. 0 – loc. 1 – loc. 2 – loc. 0
750 kg loc. 0 – loc. 3 – loc. 4 – loc. 5 – loc. 6 – loc. 0
750 kg loc. 0 – loc. 7 – loc. 8 – loc. 9 – loc. 10 – loc. 0
Hence, at the end of the exercise, the vehicle status would be:
Vehicles 300 kg 400 kg 800 kg
Available 10 3 2
Allocated 1 0 2
8.4 PERT/CPM
In order to realize valid results within time and budget expectations, one
has to schedule jobs and tasks.
Through scheduling one not only plans tasks, but also checks that
resources are utilized optimally.
Two scheduling techniques are very commonly used: Project or Program

Evaluation Review Technique (PERT), and Critical Path Method (CPM).
In a Critical Path concept, the entire project work plan is graphically

portrayed. This graph or network displays the interdependencies between
activities that will lead to successful completion of the project.
It must satisfy the following objectives:
• Evaluate progress towards the attainment of project completion,
• Focus attention on potential and actual problems during work,
• Provide frequent, accurate status reports at critical checkpoints,
• Provide a regular and updated prediction of when the project will be

completed, and
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• Provide at any time during the project, determination of the shortest

completion time if priorities and resources are shifted.
When preparing a flow chart of:

- The project events
- Joined by lines (that are activities)
- We get a network in which
- T h e a c t i v i t i e s a s d e p i c t e d b y l i n e s i l l u s t ra t e t h e p r o j e c t
interrelationships and interdependencies

- The events depict significant occurrences or milestones in the
completion of the project

- The activities may be real or dummy, real when it signifies an actual
task that has to be done,
Which means resources to be needed, whereas dummy are activities

depicted in the flow chart just to show that the dummy activity needs to
be completed before another activity can be taken up, which in turn
means that in terms of resource the dummy will not expend any.
Figure 8.9: A PERT Network
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The above is a typical PERT network where the circles with numbers are
events, the dark continuous lines depict real activities and the
hyphenated lines depict dummy activities.
The next step is to assign time to the activities as well as resources and
costs. This is where the CPM comes in. While in PERT probabilistic time
estimates are put in while preparing the flow chart, CPM will use exact
deterministic times with cost-benefit trade-offs.
Let’s take an example of putting up a new system set up at a

manufacturing location.
The system requires the following task schedules:
1. Studying the existing system in detail and documenting all the current
procedures,
2. Customizing the system to suit the organizational requirements,
3. Configuring the hardware requirements,
4. Making application to excise authorities to accept the new system for

excise pass book records and excise payments,
5. Training staff for the new system,
6. Preparing a new master data,
7. Setting a date for change over when the new system will go live, and
8. Uploading old data on the new server.
You will observe that event (7) is the final task that will depend upon (8)
preceding that event, (8) requires (6) to be made prior to it (5) can take
place simultaneously with (6) provided (2) has been completed before
that. (2) requires completion of (1), and (3) will be simultaneous with
(2). As far as (4) is concerned, it is crucial to the successful
implementation of (7) but is not in the hands of the internal
implementers.
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While the application will have to be made by the organization which can
only be done after the acceptance will depend upon the authorities and
for that best time estimates can be made, but the probability of the date
materializing depends upon external factors.
This brings up the issue of:
• Optimistic time: the time estimate if an activity proceeds perfectly

(a)
• Pessimistic time: the time estimate if extreme difficulties are

experienced (b)
• Most likely time: the expected time (c). The expected time as a mean
time can be calculated by apportioning weights to the 3 times, for
instance giving weights of 1 each to (a) and (b) and 3 to (c) one can
calculate the mean time.
Depicting times for each activity in the above case: activities and
variable times in months
Expected
Activity (a) (b) (c )
mean time
(1) Studying the existing system in detail 1 3 1.5 1.7
and documenting all the current
procedures
(2) Customizing the system to suit the 2 4 3 3

organizational requirements
(3) Configuring the hardware requirements 0.25 0.1 0.5 0.37
(4) Making application to excise authorities 1 4 1.5 1.9

to accept the new system for excise
passbook records and excise payments
(5) Training staff for new system 1 2 1 1.2
(6) Preparing new master data 1 2 1 1.2

(7) Setting date for changeover when the
new system will go live
(8) Uploading old data on new server 1.5 3 2 2.1
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The above events and activities if depicted in a network would look as

under:
Figure 8.10: The Critical Path
You may observe that the linkage between (2) and (4) and (8) does not
require an allotment of resources from the organization, save may be
follow ups but non-completion of event (4) will not bring about event (8)
and finally (7). Now, on the basis of the expected mean time if we track
the path from (1) to (7) via the three routes we shall get three sets of
time. The one with the longest time is the critical path, while the others
are the slack paths.
If because of overcomplexities the critical path is not easily and

immediately obvious, it may help to determine the following for each
activity:
• ES – earliest start time

• EF – earliest finish time
• LS – latest start time
• LF – latest finish time
The difference in the latest and earliest finish of each activity is that
activities “slack”. The critical path, then, is the path through the network
in which none of the activities have slack.
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In order to accelerate, one can allocate more resources to hasten it up.

This is sometimes known as “project crashing”. Limitation of this
method is that, much depends upon time estimates, and hence however
much precautions can be taken, they are ultimately, and after all
“estimates” only.
Attention of course will have to be focused and concentrated on the

critical path. In CPM, the manager further evaluates the project network
on the basis of cost estimates in the light of the time estimated, in as
much as, can the time estimates be improved by allocating more
resources and hence committing more costs.
Obviously, the trade-offs will have to be vis-a-vis the increased profits,

reduced costs, better service, better efficiencies that can be achieved by
reducing the time estimates of completing the project.
Thus, in summary, one can observe that complex projects require a

series of activities, some of which must be performed sequentially and
others that can be performed in parallel with other activities. This
collection of series and parallel tasks can be modelled as a network.
A term which is used in the critical path is “time window”. For any event
which has a preceding and a succeeding event, time window is the
difference between the earliest estimated time of a tail event and the
latest estimated time of its head event.
• Activity
1. Given various applications of OR techniques in transportation, give an

example which you will apply and why?
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
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8.5 SUMMARY
In this chapter, the use of few Operations Research (OR) techniques

commonly applied in the area of transportation has been described. One
of the most commonly used models to determine the optimum solution to
a problem of separate demand points being supplied from separate
supply points where the transport/associated costs differ supply point/
demand point combination-wise, is known as the North-West Corner
Rule. An example of this rule using three supply sources a model using
listing method and applications of two commonly used scheduling
techniques have also been covered here.
1. Name a few applications of OR techniques in dealing with

transportation issues.
2. Describe the steps involved in application of the North-West Corner

Rule in solving a transportation problem.
3. When would you suggest the applications of scheduling techniques like

PERT and CPM? Briefly describe the techniques.
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8.7 Multiple Choice QUESTIONS
1. One of the most commonly used models to determine the optimum

solution to a problem of separate demand points being supplied from
separate supply points, where the transport/associated costs differ
supply point/demand point combination-wise, is known as the
_________.
(a) Point-to-point Differential Rule
(b) North-South Corner Rule
(c) North-West Corner Rule
(d) North-East Corner Rule
2. One of the transportation operation research technique applicable

where we shall see vehicles being deployed for deliveries/deliveries
and collections, and scheduling vehicles with capacity constraints.
Name the OR technique.
(a) The Scheduling Method
(b) The Listing Method
(c) The Combo Scheduling Method
(d) The Collective Listing Method
3. Through scheduling, one not only plans tasks, but also checks that
resources are utilized optimally. Two scheduling techniques are very
commonly used: ________ and Critical Path Method (CPM).
(a) Performance Evaluation Review Technique
(b) Plan-Evaluate-Review Technique
(c) Project or Program Evaluation Review Technique
4. In a __________, the entire project work plan is graphically

portrayed. This graph or network displays the interdependencies
between activities that will lead to successful completion of the
project.
(a) Critical Path Concept
(b) Crisis Prevention Concept
(c) Careful Path Concept
(d) Completion Path Concept
Ans.: 1. – (c); 2. – (b); 3. – (c); 4. – (a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
297
MULTILEVEL MARKETING AND DIRECT DISTRIBUTION
Chapter 9
Multilevel Marketing And Direct
Distribution
Objectives
• Understand the meaning and utility of direct marketing set-up.
• Understand the concept of multilevel marketing.
• Understand the meaning of Direct marketing.
Structure:
9.1 Introduction
9.2 Direct Selling Set-up
9.3 Summary
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9.1 INTRODUCTION
Multilevel or “network” marketing is a way of selling goods or services

through “distributors”. These “distributors” are unlike distributors in the
normal sense of the term or distributors one comes across in the supply
chain of pharmaceutical/FMCG companies.
Multilevel marketing is also referred to as Network Marketing or Direct

Sales.
The typical Multilevel Marketing Program works through recruitment. You

are invited to become a distributor by another distributor. Such invites
are in the form of collective gathering at an event, wherein you are
exposed to what is multilevel marketing, its benefits, how much more
can you earn during your spare time and more.
If you choose to become a distributor with the direct selling company,

you will earn money both through the sales of the MLM's products and
through recruiting other distributors, by receiving a portion of the income
these distributors generate.
And when those distributors recruit distributors of their own, you will
earn money on the income they generate too.
The distributors that you sign up with your Multilevel Marketing Plan and
the ones they sign up in turn are called your downline.
Sometimes, these networks can be like pyramids in which commissions

are based on the number of distributors recruited. Thus, sales are to the
recruits and not to customers.
A good multilevel marketing organization however sells to the general

public also. Thus, you will observe that the success of this type of
marketing depends upon the rate of growth of the distributor base and
also on the distributors being able to do business.
But this type of business has one risk and that is the entire exercise
degenerating into a “pyramid” type of a structure in which the
commissions are based on the number of distributors recruited. This
typically happens in products that do not have a customer base, are not
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able to create a substantial customer base in a reasonable period of

time, and hence end up in dissatisfied “distributors” holding stocks they
purchased as part of the “distributor” deal.
The top 3 MLM business across the world are:
Avon Products Inc. was founded in 1986. Avon has annual sales of
$11.3 billion and over 6.5 million sales associates. Avon markets various
beauty products, jewelry and fashion apparels.
Amway founded in 1959. Amway has annual sales of $10.9 billion and
over 3 million sales associates selling cosmetic, wellness and food and
beverage products.
Herbalife Ltd. was founded in 1980. Herbalife has annual sales of $4.8
billion and has over 2.7 million sales associates. Products include
cosmetics, personal care items and nutritional supplements.
The top 3 Indian MLM business are:
Balaji Multi Services is an Indian MLM Company, gaining a large

following as it allows not only appointment of distributors but share in
the profit.
Oriflame, is in the business of highly competitive cosmetics marketing

company, which is quite popular in India and deals in make-up, bath and
body care items. What differentiates this is focus on direct selling thus
allowing income to their appointed distributors.
Tupperware kitchen storage essentials are very popular across India

due to its air-tight quality and non-leaky containers. Their success also
lies in encouraging direct selling rather than network selling route for
income rewards.
Since 2015, the global retail sales from direct selling have increased from
about US $184 billion to approximately US $190 billion dollars in 2017.
Direct selling companies specializing in wellness products make up a 34%
share of sales in this industry, making it the largest direct selling product
category.
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In India, retail sales from direct selling was Rs. 2,500 crores in 2003-04
and touched Rs. 13,000 crores in FY2019 as per the last IDSA (Indian
Direct Selling Association) report, published on Moneycontrol website.
Indian direct selling industry has grown by 13% in FY2018-19. Over half
of this turnover is contributed by wellness products.
Direct marketing as a sector was growing also at a good pace @ 20%. As

per the World Federation of Direct Selling Association (WFDSA), the world
business in 2007 was $114 billion.
The sectors that typically do well in Direct marketing are:

• Nutrition
• Wellness
• High-end personal care products
• Herbal-based items
• Very specialized types of items that sell more on word-of-mouth and
personal contact or meetings
9.2 DIRECT selling SET-UP
Avon with an over US $8 billion turnover and presence in over a hundred

countries and over 4 million distributors worldwide, operates in India
with a head office set up at Delhi. It imports the formulations from US
and gets the skin care/beauty products manufactured at facilities in
Assam and Panvel. Products are supplied to distributors through couriers.
Their main objective of taking the direct selling route is to reduce the
cost of the final product substantially, and they plan to do this by
bringing the store to the customers.
T h e r o u t e t h e y a d o p t i s Av o n - t o - B e a u t y A d v i s o r - t o - B e a u t y
Representative-to-Customer.
In their sales structure, they have independent sales managers who

recruit Beauty Advisors, who in turn induct Beauty Representatives.
The beauty representatives are at the lowest level of the chain, and can
enter the Avon network through the beauty advisor. The beauty advisor
is the one who gets an Avon identity card, and the beauty representative
works on the identity card of the beauty advisor.
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The beauty representative gets a 20% discount on buying Avon products

while the beauty advisor gets a 20% discount plus points on volume
discount, based on volumes of sales which progresses on a slab-wise
basis.
For example, on sales between Rs. 650 and Rs. 1,500, the volume
discount is 5%, on Sales Rs. 1,500 to Rs. 2,500 the discount is 7% and
on Rs. 2,500 to Rs. 3,750 the discount is 9% and so on.
The inventory is replenished at the beginning of each month, and the

orders are placed on the Delhi office. Thus, from the distribution point of
view, you will observe that storages at multi locations are avoided,
transportation is normally in small units, and the courier system is
mostly used as the unitary volumes are small. These tend to reduce the
costs in the chain and the resultant savings can be passed on to the
“distributors” as high margins/commissions. (Above based on market
information obtained through uncertified secondary sources thus it is
indicative in nature for understanding purpose only).
Apart from the ones like Avon, Amway, Oriflame, etc., certain mainline
FMCG companies have also taken to direct marketing by passing, or
leveraging on conventional distribution channels.
A modern trend among Direct Marketing organizations in India has also

been to induct the customer (end-user) more into experiencing its
products. Hence, Amway advertises its products in India, on mass media.
Besides it is actively sponsoring Experience centers, where passersby
and its own business owners (ABO, Amway Business Owners, synonym of
Amway Distributors) can walk in with prospects and customers to try out
its various products, viz., nutritional supplements, skin care products, or
colour cosmetics. There would be professional nutritionists,
cosmetologists and other experts to handle prospects’ queries. This
would also ensure that they work with the business owners, rather than
around them. This basically is being done to counter the lower incidence
of online sales due to lower internet penetration and the Indian public’s
lack of enthusiasm to go for an online purchase.
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Tupperware has also initiated measures of extending its presence in the

market through participation in exhibitions by way of putting up kiosks.
Kiosks are also being planned in malls. These would help in connecting
its customers with its sales force.
In 2003-04, (HLL) Hindustan Lever Ltd. introduced its Sangam Direct in

Thane, Navi Mumbai, and Ghatkopar, Bhandup, Mulund, Chembur, in the
Eastern suburbs of Mumbai, under which any customer who wishes to
buy groceries and items of daily necessity, can log on to the appropriate
internet site www.sangamdirect.com and place an order, or even can
place an order over the phone.
Orders are normally serviced the next day, with a three to four hour time
window, as specified by the customer. There is a minimum order size
below which the customer has to pay a delivery charge. The range of
products covered extends beyond HLL’s home brands to products of
competitors as well as unbranded items such as cereals, etc., the site
talks of 3500 SKUs. Every customer is given an ID which enables the
company to keep a track of the customers.
Subsequently HUL sold off their “Sangam” initiative to Wadhwan Foods’

who were the promoters of “Spinach Foods” in April 2007.
Besides sales and volumes one of the objectives of this initiative is to

connect with customers, understand their buying preferences, leverage
the knowledge and database to expand the sales of home brands, and
develop customer acquisition and retention strategies.
The order after receipt is sent to the warehouse or franchisee at the back
end via an interconnected computer network. Simultaneously, a
computer generated pick list is printed, based on which the picker
collects the items from the shelves/bins indicated in the pick list, puts
them in a shipper carton, which is then bar coded and the product
invoiced, container sealed and the cargo is ready for dispatch as per the
next delivery schedule.
The franchisees are only service providers like C&FAs, the ownership of
the products remaining with the company.
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The scope of this initiative lies in its size. The number of SKUs handled is
in thousands, and is growing, ultimately with a scope of becoming a
virtual hyper market. The sales are driven by frequent offers.
These types of direct marketing formats compete directly with the

humble kirana stores at one end, and at the other end with the value-for-
money-based stores such as Big Bazaar, Giant and even Apna Bazaar.
For retention of customers, incentives in the form of volume-based

discounts on repeat purchases, or discounts on specific products on a
continuous basis are also offered. On frequency and monetary order
basis, customers are extended privilege offers.
International experiments in this areas are “net grocer” and “peapod”.

These are formats to integrate stores/product brands, direct marketing
skills, and the shopping habits of customers to drive profitable volumes.
Similar to HUL, certain other companies have also made forays into this
area of sales and distribution. They are Marico, with their Har Ghar direct
to home marketing initiative in select markets of UP, MP, Rajasthan,
Gujarat, etc. Under this scheme, the consumer is offered the
convenience of door delivery, via a cold call strategy whereunder a
salesman of the Har Ghar agency accompanied by a detailer, makes a call
to a home where the detailer explains the benefits of the product and if
the customer wants the product, the same is door delivered.
Thus, the company leverages the normal distributor channel to try out
direct selling via the Har Ghar agencies who take stocks from the
distributors under the above scheme, and after-sales returns whatever
remains unsold. However, in 2007, HUL hired off its Sangam initiative to
Wadhwan Foods (SPINACH). HUL was of the opinion that Sangam did not
fit with its long-term strategy.
Godrej and Amul have e-tailing sites, through which customers with
“internet-based” purchasing abilities are serviced.
Godrej has arrangements with fabmall.com and have authorized partners

who are offered specially discounted prices, and access to Godrej’s
nationwide distributor network.
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Amul leverages its distributor network to service orders received on the

net through its distributors, whereby the dealer is also kept happy.
P&G does direct marketing in the form of house-to-house demonstration-

cum-sales. It also does product demos at shops and retail outlets to
induce trials among target groups. Stocks are routed to the direct
marketing agency through its distributors, for demo and sale to
customers. The demo may also be supported by price discounts.
In all these forms of direct distribution, one common thing you will
observe is that the organization has to be careful about the following
aspects:
• The performance cycle between the point of sale and the immediately
preceding stocking point has to be as short as possible, because the
success depends very much on the response time.
• Try and involve the channel partners be they “distributors” in network

sales, or associates in the other forms of direct marketing, in sharing
the inventory burden, so that the stock holding spreads across the
chain.
• Activity
1. Give an example where you would propose the MLM approach.

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9.3 SUMMARY
A way of selling goods and services through “distributors” is known as

Multilevel Marketing (MLM) or network marketing. These “distributors”
are different from the ones we come across in normal marketing
distribution channels. In this set-up if one signs up as a “distributor”, he
will receive commission on the sale he makes and also on the sales that
are made by “distributors” appointed by him. The recruited “distributors”
are known as the “down line”. This type of business has one risk and that
is the entire exercise degenerating into a pyramid type of a structure in
which the commissions are based on the number of “distributors”
recruited. This typically happens in case of products that do not have a
customer base, and/or are not able to create a substantial customer base
in a reasonable period of time, and hence end up in dissatisfied
“distributors” holding stocks they purchased as part of the “distributor”
deal. The word “network” is also very appropriate as the chain moves on
the basis of networking. Direct marketing as a sector is also growing up
and the sectors that typically do well in Direct marketing are: Nutrition,
Wellness, High-end personal care products and herbal-based items. The
main objective of taking the direct selling route is to reduce the cost of
the final product substantially and they plan to do this by bringing the
store to the customers. The chapter concludes with a number of
examples including Hindustan Unilever, Godrej, P&G and international
experiments.
1. What are the new “breed” of “Distributors” and how they are different
from traditional distributors?
2. What do you understand by the term “Direct selling set-up”?
3. Define the concept of Multilevel Marketing with some examples.
4. What are the advantages of Direct Selling and under what kind of
situations/market conditions, this approach is likely to be successful?
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1. Multilevel marketing is also referred to as Network Marketing or Direct

Sales.
(a) False
(b) True
2. A modern trend among Direct Marketing organizations in India has

also been to induct the customer (end-user) more into ________ its
products.
(a) Trying
(b) Testing
(c) Experiencing
(d) Exchanging
3. The distributors that you sign up with your Multilevel Marketing Plan
and the ones they sign up in turn are called your ________.
(a) Network line
(b) Deployed line
(c) Developed line
(d) Downline
Ans.: 1 – (b); 2 – (c); 3 – (d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
308
A FEW CASE STUDIES IN DISTRIBUTION
Chapter 10
A Few Case Studies In Distribution
Objectives
• Gain an insight into few cases of special distribution efforts.
• Understand how the Dabbawallas of Mumbai case demonstrates the

principal distribution objective of accuracy of distribution.
• Understand how the Newspaper case demonstrates the principal

distribution objective of speed of distribution.
• Understand how the Fresh flowers case demonstrates the principal

distribution objective of the chain maintaining the quality of the product
handled..
• Understand Walmart’s Supply Chain Management based growth.
• Understand how ZARA maintains its supremacy through efficient

inventory management.
Structure:
10.1 Introduction
10.2 Case 1: Dabbawallas of Mumbai
10.3 Case 2: Newspaper Distribution
10.4 Case 3: Walmart’s Supply Chain Based Success
10.5 Case 4: Zara Fashions – Excel through Inventory Management
10.6 Summary
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10.1 INTRODUCTION
In this chapter, we shall discuss about a few distribution cases which are
representative of special efforts that go into making these distributions
quite unique and distinct in their characteristics.
10.2 CASE 1: DABBAWALLAS OF MUMBAI
The first one will be the dabbawallas of Mumbai where the operations
involve collecting tiffin/lunch boxes from homes, spread across Mumbai and
its suburbs, transporting the same across the city, delivering at the offices/
workplaces, collecting the empties, and delivering the same back at the
place of origin, repeating the same process over and over again.
The principal distribution objective is the accuracy of distribution.
This set-up which has been attracting a lot of attention off late has been a
fascinating piece of distribution marvel, which has grown and thrived with
the city’s milieu for quite some time.
It has been quietly carrying on its activities efficiently and effectively since
may be the last decade of the 19th century, when a Parsi gentleman hired
a young man who had come from Pune, to fetch his lunch in the forenoon,
from his Grant Road house to his Ballard Pier office. The business which
built up through pure referrals, and word-of-mouth, grew in size, over the
period, and today
• There are over 5,000 dabbawallas who
• Service approximately 2 lakh odd customers per day.
• Servicing over 2 lakh customers translates to about 4 lakh transactions

per day.
• The spread of the operation is across 70 kms sprawled in an interwoven

relay with each dabba changing hands at least 4 times.
• With an annual turnover of Rs. 5 crore.
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This entire operation is carried out with zero documentation, and with an
error factor of may be 1 in 80 million transactions, i.e., again may be 1 in a
year (4 lakh transactions per day × 200 days per year = 80 million).
Obviously, this has been recognized as a distribution marvel, and
particularly after the hype surrounding Prince Charles’ visit and interaction
with them, every one seems to have sat up and noticed these dabbawallas
of Mumbai.
If we analyze their working we observe their work system is evolved on

certain characteristics:
- Their incoming logistics is basically collecting dabbas from households

and delivering them at the railway station of origin.
- The processing/operation is, segregating the dabbas as per their
destination and rearranging them in suitable lots before transportation.
- Scheduling the transport, handling and delivering the dabbas at the
final destination, as part of the outgoing logistics.
- And what they render as a service is on time delivery, consistency and
reliability of delivery in a perfect condition.
They use a simple but very effective coding system. Each tiffin carrier is of
a standard size and more or less of a similar shape has painted on top a
set of symbols through which the following can be identified:
- The identity of a particular dabbawala,
- The area from where the tiffin has to be collected,
- The area where the box has to be delivered,
- Details of the particular building, floor, etc. where the tiffin has to be
delivered.
While simple, like let us say a symbol “K-BO-10-19/A/15” would denote

that K dabbawalla, will collect the tiffin from station BO, meant for area 10,
building 19, office A, on the 15th floor, or something similar, would in
practice be extremely effective, for the purpose. Further differentiation is
effected through use of different colors which in combination with the
above coding, creates focused differentiations/distinctiveness, plus it also
enables the code to capture and display more information.
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They use certain simple material handling aids in the form of a longish
strong wooden tray/crate type box carriers, in which the boxes can be
arranged, and the entire unit can be carried as a head load, or in a hand
cart trolley.
They also chalk out their journey very meticulously, like for instance the
times of collection from individual homes, the time of aggregation of the
originating station's load at the platform, the particular train the dabbas
are to be loaded on.
Thereafter the tray/crates are off-loaded at the destination station, and are
rearranged into trays/crates final destination-wise. If dabbas are to be re-
routed between the Western and the Central railways the inter-transfer
may be done at Dadar. Thereafter the return journey will retrace the steps
backwards after about an hour of the onward delivery, terminating with the
return of the empty box with the house from where the morning journey
had initially begun.
The entire organization set-up is very distinct in its hierarchical structure,

viz., it is quite a flat type of organization, with a relatively narrow span of
control comprising a President assisted by 11 members, who have under
them 800 supervisors, known as Mukkadams, who in turn supervise a
complement of 5,000 carriers.
If we observe the job content, we can see that the jobs are extremely
limited in scope, extremely simple in content, and basically involve a very
narrow range of tasks.
Thus, the individual tasks are not complex at all either in structural or
technical scope or content, and are quite stable over a period. The
protocols being common with the participants sharing a common agenda,
the simplicity lends the entire process its strength.
As a student of distribution and logistics, one can see that this very
effective system is working on a simplified hub and spoke model.
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Figure 10.1: The Hub and Spoke Model
- A very simplistic coding system, to control the materials flow.
- Leveraging public transports namely the suburban railways to carry the

material over long hauls. Mumbai suburban railways have the reputation
of punctuality and reliability. In case of the suburban trains failure (heavy
downpour, or strike), the system may also stop.
- Successfully synergizing the railway network with manual transportation,

be it by cycle, or hand carrying, and sometimes with other public
conveyance such as bus.
- An extremely flat organization structure which ensures a narrow span of

control.
- Simplicity in the command structure which ensures that a seemingly

complex activity is broken down in to very simple individual tasks which
can be executed with comparative ease and without any problem.
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10.3 CASE 2: NEWSPAPER distribution
The second distribution model we shall look at is the distribution of

newspapers, where the task is to distribute newspapers from the printing
office to customers across not only in the city where the paper is
published, but across the country. The principal distribution objective
is the speed of distribution.
Newspapers in India are published in about 100 odd languages, besides of

course Hindi and English, and the product is of an extremely perishable
nature.
Newspapers by nature are perishable in the hands of both the seller as well
as the buyer, unlike certain products which may be perishable in the hands
of either the buyer or the seller. Normally, the newspaper has to be printed
after all the news items and editorial as well as comments related matter
has been decided, checked and cleared by the editorial board. Hence, the
time available between printing the paper and distributing the same is
relatively very short.
Depending upon the destination to be catered to, the newspapers print

early morning editions and late city editions.
The early morning editions are sent out from very early hours to catch
connecting transportation modes such as trains, flights, long haul buses,
and shared taxis on certain routes. To reduce delays on sorting at transit
points, the packets are prepared on the basis of daily requirements of
regular purchasers namely agents and the bundles are handled on that
basis.
This same principle is adopted for local distribution as well. For instance, if
there are 10 distributors at Andheri, a suburb of Mumbai, each of them is
given a code and when the vehicle carrying newspapers from the company
reaches Andheri for distribution, the codes are announced and the
respective agents are handed their packages. This saves on the distribution
time.
If there is a distributor for Mumbai, then he allots persons at each

suburban railway stations whose job is to unload the lots for that suburb,
allocate loads for each area in that suburb and dispatch the loads to the
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area. Newspapers are sold through a line sales force who are vendors
catering to homes on a daily requirement basis, or stalls whose sales may
fluctuate depending upon several factors like important news items or
headlines as well as weather conditions like heavy downpour causing less
traffic at stalls.
Since stalls play a significant role in the non-regular sales, estimating

their demand is quite crucial.
At the railway station or similar transport head where the newspapers land
in bulk lots, the agent has to receive the bulk consignment, break bulk,
and forward onwards, in the chain. One can see how important the
linkages are in this type of distribution set-up, and how the entire
emphasis at each stage is on fast onward movement of the material
through the chain, all the processes and operations being planned and
executed with that single objective in mind.
10.4 CASE 3: WALMART’S SUPPLY CHAIN BASED SUCCESS
Walmart is a global retail giant and operates more than 11,700 stores
under 59 company names, with 2.3 million employees in 28 countries
around the world while managing an average of $32 billion in inventory.
Over the past twenty years, Walmart has become the world’s largest
retailer with the highest sales per square foot, inventory turnover and
operating profit.
Walmart is globally known for the best rate deal. Thus, entire way of
operation should be such that it minimizes cost, takes the advantage of
economies of scale, removes inefficiencies and thus unwarranted cost,
constant evaluation of doing same thing differently, investment in
technology and drive to offer best value to their consumer differentiates
them. The entire organization is committed to a business model of driving
costs out of supply chains to enable consumers to save money.
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Core Thoughts at Walmart to Charter their Success Journey
• The goal is to provide customers with the goods they wanted, whenever
and wherever they wanted them.
• Focus on developing cost structures that allowed it to offer everyday low

pricing.
• Concentrated on developing a more highly structured and advanced

supply chain management strategy to exploit and enhance this
competitive advantage to gain the market leadership position.
Shred the Links and Shorten the Supply Chain
• Supply chain innovation began with the company removing a few of the
chain’s links, right from the very beginning – selectively purchased bulk
merchandise and transported it directly to his stores.
• Since 1980s, Walmart began working directly with manufacturers to cut

costs and more efficiently manage the supply chain.
• Under a Walmart’s supply chain initiative – called Vendor Managed

Inventory (VMI) – manufacturers became responsible for managing their
products in Walmart’s warehouses. As a result, Walmart was able to
expect close to 100% order fulfillment on merchandise.
• Implement cross-docking. Cross-docking inventory management

approach to inventory replenishment enabled them with the direct
transfer of products from inbound or outbound truck trailers without the
need for extra storage, by unloading items from an incoming semi-trailer
truck or railroad car and loading these materials directly into outbound
trucks, trailers or rail cars (and vice versa), with no storage in-between.
• Suppliers have been delivering products to Walmart’s distribution centres

where the product is cross-docked and then delivered to Walmart stores.
Cross-docking keeps inventory and transportation costs down, reduces
transportation time and eliminates inefficiencies.
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Believed in Strategic Vendor Partnership
• Source goods strategically to get best price and continuous supply.
• Make vendors your strategic partner – establishes strategic partnerships

with most of their vendors, offering them the potential for long-term and
high-volume purchases in exchange for the lowest possible prices.
• Attend to inefficiencies – streamlined supply chain management by

constructing communication and relationship networks with suppliers to
improve material flow with lower inventories. The network of global
suppliers, warehouses and retail stores behaving almost like a single
unified unit.
Believed in Investing in Advancement – Has Most Advanced

Inventory Management Infra
• In 2015, the company spent a reported $10.5 billion on information

technology and has also invested significantly in improving their e-
Commerce capability.
• Adoption of new technology has helped them to become an innovator in

the way stores track their inventory and restock their shelves. This
helped them to cut costs.
• This state-of-the-art technology and network design allow Walmart to

accurately forecast demand, track and predict inventory levels, create
highly efficient transportation routes, manage customer relationships,
and service response logistics.
❖ Company-wide use of Universal Product Code (barcodes) in 1983.
❖ Reversed engineered this to help consumer scan product barcodes on

their smartphones to compare best prices – known as Savings Catcher.
❖ The company then devised Retail Link – mammoth database collection,

collation and analysis capabilities – through a global satellite system.
Retail Link is connected to analysts who forecast supplier demands to
the supplier network, which displays real-time sales data from cash
registers and to Walmart’s distribution centres.
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❖ Suppliers and manufacturers within the supply chain synchronize their

demand projections under a collaborative planning, forecasting and
replenishment scheme, and every link in the chain is connected
through technology that includes a central database, store-level point-
of-sale systems and a satellite network.
❖ Walmart has started using radio frequency identification tags (RFID),

smart tags, read by a handheld scanner to update inventory record.
Visible Results
• All these initiatives have helped Walmart to achieve distribution costs at

mere 1.7% of its cost of sales – far superior to competitors like Kmart
(3.5%) and Sears (5%).
• There has been a 16% reduction in out-of-stocks incidences post

Walmart introduced RFID technology into its supply chain.
• The products using an electronic product code were replenished three

times as fast as items that only used barcode technology.
Walmart’s supply chain management strategy has provided the company

with several sustainable competitive advantages, including lower product
costs, reduced inventory carrying costs, improved in-store variety and
selection, and highly competitive pricing for the consumer. This strategy
has helped Walmart become a dominant force in a competitive global
market. As technology evolves, Walmart continues to focus on innovative
processes and systems to improve its supply chain and achieve greater
efficiency.
A close look at Walmart’s supply chain and inventory operations definitely

provides valuable learning points that businesses can take and apply to
their own operations.
Adopted from the blog – tradegeko.com
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10.5 case 4: ZARA FASHION – EXCELS THROUGH

INVENTORY MANAGEMENT
Zara is a large retail chain with its 6,900+ stores in 86 countries and 450
million items sold in a year.
The retailer has opened about 400 stores annually on average over the
past 5 years spread out among eight brands.
The brand is renowned for its ability to deliver new clothes to stores quickly
and in small batches. Twice a week, at precise times, store managers order
clothes, and twice a week, on schedule, new garments arrive.
To achieve this, Zara controls more of its supply chain than most retailers
do. On the contrary to H&M, Zara keeps a most of its production in-house.
For Zara, its supply chain is its competitive advantage. In-house production
allows it to be flexible in the amount, frequency and variety of new
products to be launched. Incredibly, it designs, manufactures, distributes
and retails clothes within 2 weeks of the original design first appearing on
catwalks.
Six months in advance, Zara commits to only 15% to 25% of a season’s

line. And it locks in merely half of its line by the start of the season,
meaning that up to 50% of its clothes are designed and manufactured right
during the season.
If a style becomes highly popular all of the sudden, Zara reacts instantly,
creating a new design in the popular style, then gets new items into stores
while the trend is still peaking.
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From Customer Feedback to Inventory Management
Zara’s inventory management software lets the store managers

communicate customer feedback on what they are looking for, what they
like and dislike. Zara’s designers keep sketching, based on the data.
Constant slight changes give customers a sense of scarcity and

exclusiveness. This strategy allows Zara to sell more items at full price.
Less mark-downs, less inventory piling up in any part of the supply chain
from raw materials to finished products.
Inventory optimization models are used. So, the company can determine
the quantity to be delivered to a single retail store twice a week.
The stock delivered is strictly limited, ensuring that each store receives just
what it needs. Thus, the brand image looks exclusive, and building up of
unpopular stock is avoided.
The batches delivered are small, so if the hastily created design does not
sell well, little harm is done inventory-wise.
Peaks in demand can be addressed quickly, as a Zara factory usually

operates only 4.5 days per week on full capacity, leaving flexibility for extra
shifts.
The core of Zara’s success is centralized enterprise resource planning.

Inventory, products, and logistics are managed in central cloud-based
software.
The merchandise is already priced and labelled for selling it to a store. The
operations are monitored in real time and changed accordingly. At Zara,
change does not disrupt the system; it is part of the system.
Adopted from the business site – erply.com
From above two success stories-cum-case study, one can conclude that,
irrespective of your business model, effective, real-time inventory
management, warehouse management and distribution management, an
organization can achieve significant reduce cost associated with
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inefficiencies, inadequacy, unwarranted movement and storage to achieve

cost advantage and be competitive in the market.
10.6 SUMMARY
This chapter discusses about a few distribution cases which represent

special efforts that go into making these distributions quite unique and
distinct in their characteristics. These are: (1) The Dabawallas of Mumbai
case which demonstrates the principal distribution objective as accuracy of
distribution, (2) The Newspaper case which demonstrates the principal
distribution objective as speed of distribution, and (3) The Walmart case
study with principal objective of explaining importance of technology and
inventory management, and (4) The Zara fashionware case with principal
objective of once again making inventory management as catalyst of
constant change.
1. Give an example of a case which demonstrates the principal distribution

objective: Accuracy in distribution is the essence.

objective: Speed of distribution is the key.

objective: “It is important to maintain the quality of the product handled
throughout the chain”.
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1. The Dabbawallas of Mumbai case demonstrates the principal distribution

objective as _______.
(a) Accuracy of networking
(b) Accuracy of distribution
(c) Accuracy of collaborations
2. The Newspaper case demonstrates the principal distribution objective as

_________.
(a) Speed of distribution
(b) Speed of transportation
(c) Speed of IT integration
(d) Speed of time
3. Walmart has implemented ________ inventory management approach

to inventory replenishment enabling them with the direct transfer of
products from inbound or outbound truck trailers without the need for
extra storage.
(a) Inter-docking
(b) Intra-docking
(c) Cross-docking
(d) Cross-integration
Ans.: 1. – (b); 2. – (a); 3. – (c).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
323
LOGISTICS FOR RETAIL
Chapter 11
Logistics For Retail
Objectives
• Understand the distribution management in the wake of retailing.
• Understand the concept of different types of retail formats.
• Understand the evolution of large retail formats and the changing role of
Distribution Management.
• Understand the evolution of distribution management in an online

business.
• Strategy involved in locating a retail store.
Structure:
11.1 Introduction
11.2 Retail Formats
11.3 Evolution of Large Retail Formats and Distribution Management
11.4 Reilly's Law and Huff's Law
11.5 Evolution of Distribution Management in an Online Business
11.6 Summary
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11.1 INTRODUCTION
Organized Retail in India has indeed come of age. From the old days of
“neechay dukaan upar makaan” (shop below dwelling above), the
organized retail business as per recent estimates is pegged at around over
Rs. 80 k crore (4% to 5% of total retail) and it is expectedly growing at a
frantic speed of about 30% to 40% per annum.
It is important to understand the special aspects of logistics involved

with Retail in the emerging format.
11.2 RETAIL FORMATS
The great Indian retail boom is not only confined to the Metros, but is fast
moving towards the small towns.
However, smaller players such as Apna Bazaar and Sahakari Bhandar are
also not lying idle. Apna Bazaar had signed up with Spar, a retail venture of
Radhakrishna Foodlands and Spar International of Netherlands for
providing back end operations controlling solutions. Distribution capabilities
of Radhakrishna Foodlands was utilized to spruce up the supply chain and
improve the process efficiencies. These smaller organized retail formats
have certain obvious cost advantages which they can leverage in their
battle against the large players.
At the world-class level, as we have Wal-Mart, Tesco, Carrefour, Shoprite,

we have today our own home-grown large retailers as Shoppers’ Stop,
Pantaloons along with its groceries wing Food Bazaar, Big Bazaar, Trent’s
Westside, RPG Group’s Food World, Vijay Sales in Mumbai, Vivek’s in the
south for appliances, Nilgiris and certain new players making their own
spots in smaller towns such as Vishal Mega Mart in towns like Ludhiana,
Indore, Siliguri, besides Delhi, and of course one of the earliest ventures
Akbarallys, though the last two have lost out of late. Another instance of
failure has been Subhiksha, but on the overall organized retail is making
headways in the country.
There is also another type of retail format making its presence felt and that
is the so-called factory outlet chain, which are basically catering to
value-seeking customers who would also like to be owners of upmarket
brands.
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Above apart we also have the company owned or franchised outlets selling
exclusively the company brands. The most extensive presence of organized
retailers is in the apparel, clothing’s and different wear’s markets, followed
by foods groceries and appliances.
One of the substantive changes brought about by the rise in this retail
format is the shift in bargaining power balances from the previous
manufacturer biased to more retailer advantaged.
Earlier, the distributors as well as the retailers were at the receiving end of
promotion schemes, inasmuch as they had to accept whatever schemes
that were planned by the manufacturers, their inputs, if and when invited,
being more of a formality. But today, the large retailers not only suggest
promotion schemes but actually dictate their requirements. In terms of
prices and margins too, the retailers demand concessions and get them
from the manufacturers since they cannot ignore the volumes. Besides,
running promotions at large retailers, facilitate faster feedbacks on the
success or failure of a particular promotion, which the manufacturer can
build upon and extend elsewhere. Thus, we observe that the retailers who
were once the passive recipients of products allocated to stores on the
anticipation of demands, are today the active designers and
controllers of product supply in reaction to known consumer demand.
They in fact are getting into the driver’s seat to control, organize, and
manage the supply chain from production to consumption. When we
look at this transformation, we shall observe that because of this revised
role of large retailers a more cooperative and collaborative stance in
many aspects of logistics is emerging.
• The retailers are having more control over the secondary

distribution. In classical distribution models, as seen earlier, the
distributors were supplied their orders as per the company’s delivery
system, which would have factored in, optimizations of delivery loads,
costs, as well as scheduling conveniences. Today, the large retailers
would not be content with such delivery schedules, as their
replenishments cannot await the manufacturer’s delivery conveniences,
but must satisfy their requirements. Most of the large retailers work
out of very expensive outlets, and space being so costly, they
work on extremely slender inventories, which in turn require very
quick supplies of replenishments.
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• Retailers maintaining reduced inventories mean supplies should be of

composite loads, that is, the vehicle must carry mixed products of
varying loads from multiple sources if necessary, so that, the dual
objective of quick supplies of various items in small quantities is
achieved simultaneously with aggregation of several items in
order to obtain the advantage of vehicle capacity utilization.
• This in turn may mean more collaboration either between competing

manufacturers who individually may not have a full load but can achieve
it so if the products are clubbed, or alternately the retailer itself
conducting milk runs to collect requirements from separate
manufacturers’ warehouses or appointing a third-party logistics firm to
do the task. If the retailer runs a chain, the task may become easier and
more cost-effective.
• The aim being simultaneously cutting inventories and at the same time
improving the speed of product flow, reduction in the order fulfillment
lead time and moving to a system of more frequent delivery of
smaller consignments is called for. This has to be done both at the
level of supplies from the manufacturer to its distribution centers as well
as from the distribution centers to the retailers. It may also extend to the
movement from the centralized procurement point of the retailer (in case
the retailer operates as a chain) to individual retail points. This
phenomenon which we may term as a quick response strategy, results
in increased stock turns as well as more stocks being cross decked rather
than being as idle stores. Such improvements are possible through
electronic data interchange and also use of equipment (bar code
scanners, etc.) at the point of sales which facilitate sales-based
orderings. Sharing such data with suppliers only facilitate the process
further.
• When dealing with very large retailers, manufacturers may, at times,

have to integrate their primary and secondary distribution activities in
order to meet an increasing quick response time pressures as well as
heat from competition for a share of the retailer's space.
• Retailers have got more involved in the reverse logistics of empties, bulk
handling aids such as pallets, crates, etc. because reusable containers
can substantially reduce the cost of the end-products which have a
significant bearing on the ultimate price to consumers.
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• To improve the overall efficiency of the distribution operations, large

retailers collaborate closely with manufacturers in implementations of
integrated supply chain management solutions within which the retailers
and their suppliers can coordinate their activities more effectively,
leading to a more efficient consumer response.
Thus, on the overall, we can see that there is:
- A basic shift from push to pull that is the supply chain is more
demand-driven.
- The customers are gaining more power in the marketing channel.
- Enhanced reliance on information systems to control the supply

chain.
- Drastic reduction of idle inventories.
- More collaborations with channel partners to make the system

deliver to the mutual advantage of all.
11.3 EVOLUTION OF LARGE RETAIL FORMATS AND

DISTRIBUTION MANAGEMENT
As a corollary to this, we can state that in the case of distribution

management in the context of evolution of the large retail formats, the
emphasis is shifting to retailers demanding:
- More and frequent deliveries

- With shorter and shorter lead times
- Of smaller and smaller quantities
- Resulting in more and more of the manufacturer suppliers not being
able to make optimum utilization of delivery units and
- Holding more stocks at delivery centers to cater to the retailer’s urgent
requirements.
The distribution managers of both manufacturers as well as large organized

retail chains therefore have to get into more collaborative arrangements,
involving sharing of information on important issues of trends in demands,
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stock levels, future plans, marketing initiatives, etc. to make the working
smooth as the ultimate goal of both is obtaining and retaining customers.
Engaging third party logistics providers who also service other

manufacturers of non- competing and/or non-related products can help
in obtaining economies of scale in transportation of items from distribution
centers to retailers. As a normal extension of what has happened abroad
for companies such as Wal-Mart, Tesco, Sainsbury, the large retailers such
as Pantaloons, Shoppers’ Stop, Trent, have started B2B business in India,
particularly for their in house private label apparels. This is often called the
cash and carry format.
In this, the retailer itself assumes the role of the manufacturer and caters
to the requirements of other retailers.
It is now the turn of the retailer to manage the distribution chain as

effectively as possible. The Cash and carry business is akin to wholesaling
to smaller retailers, as well as large institutional buyers like hotels,
hospitals. This format thrives on efficient management of the supply chain.
By compressing the chain, it cuts wastages and costs and
consequently can offer a better price to trade. The German cash and
carry giant Metro has already set up base.
In the apparel business, one must note that fashion changes are an
integral part of the marketing process, and hence the inventory cannot
be held for long. Besides the premium which is there on the cost of
space, it makes sense to liquidate stocks at whatever price is possible to
make way for fresh arrivals, and this accounts for all the sales drives
undertaken by retailers. With globalization and the spread of “e-
commerce”, as well as large retailers having a cross-country presence,
several initiatives have been taken to establish draft standards for global
internet trading. One such initiative is to align FMCG companies and large
retailers across all international markets through the Global Data
Synchronization system. By attaching a unique code, description,
classification and identification number to a product, companies are
ensuring that their supply chain partners use common product descriptions
so that there’s no scope for even minor inefficiencies. For instance, a
retailer whether he is in the middle east or London can place orders for a
Lux toilet soap of 200 gms or a packet of Tide detergent powder 1 kg by
punching in the uniform code. If implemented this would enable
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companies, both manufacturers/suppliers as well as large retailers to

exchange accurate up-to-date standards compliant supply chain friendly
information.
As stated earlier, many organized retailers are putting a lot of emphasis on

private labels, which is not limited to apparels alone. For large retailers like
Giant, Food World, Food Bazaar, Nilgiris, it makes a lot of economic sense
to push their in-store brands of normal grocery items where the profit
margins can be as high as 20-25% as against 15-20% on normal FMCG
brands. Private labels being product lines that are owned, controlled,
merchandized, and sold by the retailer himself, has its own distribution
strategy. Very recent times are witnessing two other features in this area:
(1) Private labels are being priced as high as regular brands of MNC,
thereby private brand owners exerting their brands as brands on their own
and (2) MNC manufacturers are increasing the retailer margins to
unorganized retailers to woo them.
Since the retailer has to control a major part of the supply chain from the
source of the grocery item which may be the commodities market (mandi)
itself, store up the commodity to obtain price advantages of the harvest
season procurement rates, ensure proper storage to avoid/ minimize
losses, package and deliver at the shop front, the distribution and logistics
function has to be spruced up accordingly.
There is another format of retail namely the standalone supermarket

store which is bigger than a normal grocer. With an average shelf space of
around 15,00 to 20,00 sq.ft., they are single (i.e., not part of a chain) self-
service stores, and are an integral part of many cities. The distribution
parameters for this type of store is a bit unique, in as much as they also
have on offer products at slightly less than the MRP which means sourcing
at a lesser price from manufacturers either directly or through normal
distributors at a discount, and ensuring quicker turnarounds.
These stores have made their appearance in many cities time and again,
but have endured and flourished in Delhi, Jaipur, Chennai, Lucknow,
Varanasi, Patna, Guwahati, Pune, Nagpur, and currently also in some parts
of Mumbai.
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Stand-alones are able to hold on because of their ability to service a major

part of the population in their catchment areas and also a telephonic order
service coupled with home deliveries, which is but a deviation from the
initial concept of self-service and on-the-shelf display of products.
With a population of over 5.5 lakh, chemists are an important part of the
retail distribution scenario.
Besides medicines which they are in any case supposed to store and sell,
FMCG products rely on them substantially for width of distribution and
availability. (OTC) Over The Counter items (current estimate Rs. 8,000
crore p.a.) apart chemist stores are also very good outlets for several fast
moving health goods. This set of outlets are also seeing several activities
such as the opening of chemist outlets chain like Medicine Shoppe, a
franchisee of the US-based Cardinal Health, having about 60 outlets spread
across the country. In the smorgasbord of retailer categories in the market,
the ubiquitous paanwalla has become a very important category by itself,
and retailer profiling cannot be complete unless we cover them in our
study. Numbering anywhere between 25 and 30 lakh out of a total
compliment of about 120 lakh retailers across the country the panwalla is
an important constituent of the supply chain for a variety of FMCG
products.
While the cost of buying visibility in a paan shop is far lower as

compared to a normal retailer, the cost of servicing is
comparatively far higher. The footfalls at paanwallas may be high but
unit pick ups are relatively low, most of the purchase being a result of
impulse or very quick convenience nature. The distribution manager has to
weigh the several options namely through a distributor, or the wholesale
channel or some type of supplementary incentive based distribution model
to cater to this category, but he cannot ignore this segment. Companies in
the large FMCG sectors may also use the distributors of cigarettes and
paan masalas to handle the distribution to paanwallas.
A very important and relevant point to note in this context is that whatever
may be the great powerful onslaught of the organized retail behemoth, the
kirana grocer stores, known as “pop” and “mom” stores will continue to
hold their own because:
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a. They service a very compact trading area around wherever they are
located.
b. They serve as extended refrigerators cum kitchen store for low income
households, who can buy fragmented merchandise whenever they want.
c. These stores do not require the aid of any CRM initiative to store and
monitor customer database in servers.
For them the storage is in the storekeepers/salesman’s mind and their CRM
initiatives are not artificial cosmetic smiles, but something more genuine
coming from the hearts.
11.4 REILLY’S LAW and HUFF’S LAW
When setting up a retail outlet, a strategic decision has to deal with choice
of the exact location. To aid in this exercise, two models are used.
1. Reilly’s Law
Also known as Reilly’s Law of Retail Gravitation, is used to find a point

of indifference between two locations, so that the trading area of each
location can be determined. This point is assumed to be a function of the
distance between two locations demarcated and influenced by their
respective size. Initially when this rule was framed, it was with the
objective of defining the municipal boundary limits of cities and towns and
hence population was used as a indicative pulling force.
Let’s take the following:
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If there are two such locations separated by a distance of 75 km, one may
assume that on an average the point of indifference, that is the point up to
which one locations influence will end and the other locations influence will
start (reverse either way) should be somewhere at the middle, viz., 37.5
km.
However in real life, the location which has a higher population will have an
edge over the other in terms of attraction. This is calculated by the
following formula:
where, Mab is the point of indifference between location a and location b.
Thus, in the above case, the point of indifference instead of 37.5 km, i.e.,
midway between a and b will actually be:
The implication of this in Retail location can be, that instead of population
we consider what other features of a store may have an influence on
people getting attracted to it, viz.,
• The overall size of the store,
• Square foot of space under display,
• Types and varieties of merchandise,
• Other features which may create comparatively more attraction such as

air-conditioning, parking space, etc., and
• Put these figures instead of population which may give us a lead as to

upto where a particular store’s area or influence of attraction may
extend. Using this principle, any stores’ comparative area of attraction
(trading area) can be estimated.
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Figure 11.1(a): Reilly’s Law
For example, let us assume there are three stores A, B and C. The distance
between A and B is 1 km, between A and C is 2 km and between B and C is
1.5 km.
Further, we get to know that A has 3,000 sq.ft. of display area, B has
2,000 sq.ft. of display area and C has 4,000 sq.ft. of display area.
The number of items under display on an average in A is 3,000, in B is

3,000, but in C is 4,000.
In terms of parking space, C has a slight disadvantage on A, but B is the

best. And supposing on parking if B is given 10 points, A will get 8 and C
will get 6.
We can then give the same weightage to these factors and supposing we
just multiply the same and get comparative benefits for customers as:
A = 3000 (area under display) * 3 (weight for items under display) * 8

(weight for parking)
= 72000
B = 2000 * 3 * 10 = 60000
C = 4000 * 4 * 6 = 96000
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By substituting these benefit figures for the population figures, our diagram
will be:
Figure 11.1(b): Reilly’s Law
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Figure 11.1(c): Reilly’s Law
If a particular retailer wishes to attract more customers from the adjoining

trading area, the above would give an idea in terms of changes in criteria,
such as area under display, varieties, etc. would have what amount of
effect.
2. Huff’s Law
This model assumes that a customer evaluates, alternatives before

deciding which particular retail outlet they may like to visit. If we take our
first diagram under Reilly’s law.
After calculating the point of indifference, we discovered that the point of

indifference was at 45.9 km from a on the link AB.
If we were to use probability, then a customer at this point would have

equal probability of visiting either A or B.
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But supposing we were to take some one at the midpoint, i.e., 37.5 km
from A, the probability of that person of visiting B would be more than his
visiting A. Huff’s Law recognizes this probability and states that at this
point the probability of the person visiting A would be:
This principle can be extended to estimate probabilities of prospective

customers at any particular location visiting different shops at different
locations.
In this model, you would have observed that the population (advantage,
benefit) is divided by the distance (disadvantage, cost).
So, let us go back to our earlier example of the three shops A, B and C.
Figure 11.2: Huff’s Law
A has 3,000 sq.ft. under display, with 3,000 items and parking points 8
B has 2,000 sq.ft. under display with 3,000 units and parking points 10
C has 4,000 sq.ft. under display with 4,000 items and parking points 6
Further from the prospective customer/shopper’s location S, the distances

to A are 1 km, to B are 2 km and C are 3 km.
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While the square feet under display and the items under display would be
benefits, as well as parking would be benefits, the distance would be the
cost.
Applying Huff’s Law, the probability of a customer/prospect from point S

visiting A, B and C would be:
This can give shopowners some basis to estimate probabilities of

customers coming to their shops, vis-a-vis other shops.
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• Activity
1. As an advisor of distribution management to an organization exploring

entry into the retail sector, what will be the contents of your strategy?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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11.5 EVOLUTION OF DISTRIBUTION management IN AN

ONLINE BUSINESS
Evolution of distribution management in online business is a challenging

task looking at the aspects such as very widespread location of consumer
base, widespread vendor base supplying you finished product as well as
utility items needed by you. Besides this, inter-city and intra-city supply
movement to be coordinated giving consumer tracking access and
managing goods return.
There are multiple formats for managing distribution. For our better
understanding, we take one of India’s largest online homegrown megastore
namely Flipkart. What started as merely an online bookstore is today one
of the largest online multi-product stores, competing with likes of Amazon.
Old warehousing and distribution management format was as

follows:
a. Have strings of smaller size warehouse, closer to markets where

demand is very high.
b. These places are leased space with contracted period of lease.
c. These warehouses are connected with IT bandwidth to offer seamless

order fulfilment need.
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New age warehousing and distribution format is as under:
a. Invested in setting up company-owned mega-size logistics hubs with

smaller size fulfilment centres which act as spokes, closer to where
market is.
b. Some of these fulfilment centres are also owned by the Flipkart.
c. This was possible due to implementation of GST across India with

uniform applicable tax structure, no addition of multiple taxes, simplified
transportation documentation and removal of state check posts.
d. These mega-size logistics hubs are of 80-100 acres in size. Currently at

Kolkata, Bengaluru, more such hubs are in pipeline.
e. Each of these hubs will entail investment of over Rs. 600 crores.
f. These hubs will have fulfilment and sorting centres under a single roof.
g. Such hub and spoke model is likely to provide 20% savings on logistics
cost.
h. It will not only lead to cost efficiency, reduce delivery time by half, but it
will also help Flipkart in ensuring their leadership in the Indian e-
commerce market.
i. Company’s investment to set up these owned warehouses is after

considering the growth paradigm for next 10-15 years.
j. Each of these fully automated warehouses will be self-sufficient in

energy requirement with solar panels, carbon neutral with double the
ceiling height matching the warehouses of Amazon in US and Alibaba in
China.
The above story clearly indicates the changing warehouse and distribution
management face of logistics in online retail marketplace.
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11.6 SUMMARY
The great Indian retail boom has indeed come of age. It is important to
understand the special aspects of logistics involved in retail in the
emerging format. The smaller organized retail formats have certain obvious
cost advantages which they can leverage in their battle against the large
players. Other types of retail formats making their presence felt, are
factory outlet chains, company owned or franchised outlets selling
exclusively the company brands. Few substantive changes brought about
by the rise in this retail format are: (a) shift in the bargaining power
balances (advantage retailer), (b) designers and controllers of the product
supply, (c) retailers getting into the drivers seat to control, organize and
manage the supply chain from production to consumption and becoming
more cooperative and collaborative. There is a basic shift from push to pull
that is the supply chain is more demand-driven, enhanced reliance on
information systems, drastic reduction of idle inventories, more
collaboration with channel partners to make the system deliver to the
mutual advantage of all. A number of examples have been cited to
emphasize the changes in marketplace with different players adopting
different strategies to take on the challenges of retailing.
We have also seen how distribution management is also changing in an

online business. Due to the implementation of GST system, it has become
possible to build your own large mega-size warehouse and need-based
fulfilment centres near the market.
1. “Logistics for retailing is an emerging challenge to marketers.” Discuss.
2. Describe various concepts of different types of retail formats.
3. Write a brief note on the evolution of large retail formats and the
changing role of Distribution Management.
4. Write a brief note on how new-age warehousing and distribution

management is changing in an online business.
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1. There is one type of retail format making its presence felt and that is
the so-called _________, which are basically catering to value-seeking
customers who would also like to be owners of upmarket brands, sold
exclusively in such stores.
(a) Factory outlet chain
(b) Brand store chain
(c) Experience store chain
2. The retailers do not have more control over the secondary distribution.
(a) False
(b) True
3. To obtain economies of scale, organization can engage _______ who

also service other manufacturers of non-competing and/or non-related
products can help in obtaining economies of scale in transportation of
items from distribution centres to retailers.
(a) Outsourced service provider
(b) Partial load service provider
(c) Third party logistics provider
(d) Interconnected logistics provider
4. One of the retail operation laws is known as _________, wherein you

find a point of indifference between two locations, so that the trading
area of each location can be determined.
(a) Ripley’s Law of Retail Differentiation
(b) Reilly’s Law of Retail Gravitation
(c) Pocter’s Retail Site Location Law
5. Evolution of distribution management in online business is a challenging

task looking at the aspects such as very widespread location of
consumer base, widespread _______ supplying you finished product as
well as utility items needed by you.
(a) Vehicle base
(b) Connectivity base
(c) Retailers base
(d) Vendor base
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Ans.: 1 – (a); 2. – (a); 3. – (c); 4. – (b); 5. – (d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
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USE OF TECHNOLOGIES IN LOGISTICS
Chapter 12
Use Of Technologies In Logistics
Objectives
• Understand different classifications of technology based system support

available in the logistics industry.
• Understand automatic identification technology based system solutions.
• Understand computer based system solutions.
• Understand IT based system solutions.
• Understand the disruptive technology going to change the face of

logistics industry.
Structure:
12.1 Introduction
12.2 Automatic Identification Technology Based System Solutions
12.3 Communication Technology Based System Solutions
12.4 Information Technology Based System Solutions
12.5 Disruptive Technology Based Trends in Logistics Industry
12.6 Summary
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12.1 INTRODUCTION
We are going to study the use of technology in logistics management. To

understand it better, we need to visualize multiple spare parts coming from
different parts of the world vis-à-vis production and storing finished goods,
and later distributing it across the world using different channels of
distribution. Now, visualize that Logistics Head at the centre is answerable
on many questions. One such simple example is as follows.
One of the biggest worries of any Distribution Manager is the fate of a

consignment after it has left base and the scheduled time of arrival at
destination is well past. Frantic phone calls and follow-ups with the
transport agent ensue, till either the cargo arrives at the destination or
news comes of any mishap that may delay the receipt at destination.
To support Logistics Manager, technology has also moved ahead and

developed solutions, which enables him to be in control. We will study this
aspect in this chapter.
To understand the use of technology better, we need to understand the

main classifications. The latest technologies being used in logistics and
supply chain management are classified into:
• Automatic Identification Technology
• Communication Technology
• Information Technology
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12.2 AUTOMATIC IDENTIFICATION TECHNOLOGY BASED

SYSTEM SOLUTIONS
Automatic Identification Technology facilitates the direct entry of data or

information in the computer/computerized system/device without operating
a keyboard. These technologies include some of the following technologies.
(a)Bar Codes and Bar Coding: In earlier chapters, we have discussed

about the resultant problems that inventory managements encounter
when in manual handling of stocks, wrong batch items are dispatched
causing mismatches between the batches of stocks as per records and
as physically available. The first step in automating this process to
reduce dependency on human checking accuracies was the use of bar
codes in managing inventories. Bar codes effectively capture and store
several information in them which can give the batch number, date and
time of manufacture, source and similar other details which the
company may wish to track through them. Stuck as bar code slips or
printed on the body or package of the product being tracked, bar code
scanners are used for reading bar codes.
They can scan the bar codes, decode the information and transmit the
same to a computer. Based on the scanning technology used, scanners
can be classified as handheld scanners, fixed mount scanners, flatbed
scanners as well as cordless scanners. Starting from simple linear bar
codes having 15 to 18 characters, the technology has progressed to
m o r e v e r s a t i l e a n d i n c r e a s e d i n f o r m a t i o n s t o ra g e c a p a b l e
multidimensional codes, viz., stacked code 49, code 16 k and advanced
PDF 417. They are two-dimensional bar codes, capable of stacking one
bar code on another. Unlike the earlier versions capable of holding
information in 15 to 18 characters, the PDF 417 can store up to 1800
characters per square inch. 2D bar code scanners are also available.
At factory exits, stores exits as well as entry points, fixed mount

scanners can be placed so that at the point of loading as well as
unloading the bar codes can be scanned, by holding the package in front
of the scanner and automatically the store records can be updated along
with all relevant information regarding the batch numbers for effective
inventory management. Handheld scanners can be used when picking
materials for deliveries to update records. The oldest packed first out
inventory management can be well managed through this.
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The bar coding offers the following advantages:
• Identification of inventory items during storage, retrieval, pickup and

dispatch becomes easy.
• Paperwork and processing time get significantly reduced.
• Reduce human error.
• Increases logistics system productivity through speed, accuracy and

reliability.
Impact of bar code technology on operations of logistics and supply

chain management are as follows:
• Procurement operation: Real-time update of parts and other raw

materials procured is possible enabling inventory control and
management.
• Processing: Processing and use of inventory based on date of

procurement/ manufacturing is feasible and helps in dispatch using FIFO
(First In First Out) inventory management system.
• Production operation: During the production process, the identification

of in-process and finished items become easier due to bar coding. The
various bathes at different stages of production can be easily tracked.
• Distribution operation: During distribution, barcode helps in identifying

and tracking the transit of finished goods to the customers.
(b)Radio Frequency Identification (RFID): RFID is an Automatic

Identification and Data Capture (AIDC) technology, wherein system
allows for non-contact reading and are effective in a scenario, where
material also need to be tracked (where it is stored, is it in transit and
likewise). It uses wireless technology to communicate the inventory
data to the reader via radiowaves between a tagged object and a
reader.
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RFIDs use an Electronic Product Code (EPC) which is a unique number that
identifies a specific item in the supply chain. EPC is stored on the RFID tag
which combines a silicon chip and a reader. Once the EPC is retrieved from
the tag, it can be associated with dynamic data, such as origin of the item,
date of its manufacture, etc.
RFID will impact management of raw materials, packing materials,

reusable assets, warehouse inventories, shipments, reverse logistics, and
will reduce the need for hand counting and checking.
RFID brings following impact on distribution:
• RFID helps Indian exporters to global retailers like AMAZON get better
and more visibility into movement of their goods within the supply chain
and thus become more competitive.
• Improve the ability of manufacturers to better manage the inventory

levels.
• Improve the complex tracking and distribution operations of the Indian

Postal Services.
• Improve the tracking, logistics and planning operations of large logistics

firms, postal departments, mineral and thermal power for coal
management.
• Implement automatic toll collection on vast network of highways.
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12.3 COMMUNICATION TECHNOLOGY BASED SYSTEM

SOLUTIONS
New age technology is looking at replacing oral or written business

communication with secured data transfer technology. Few emerging
communications technologies discussed below are enablers to superior
customer service leading to competitiveness through the speed and
accuracy in communication.
1. Electronic Data Interchange (EDI): EDI technology is used for

transfer of business documents from one computer to another
computer. With EDI, the business documents such as invoices, cheques
and challans are sent electronically from one organization to another.
The difference between the email message and EDI message is that e-
mail is composed and interpreted manually, while EDI message is
composed using one software and interpreted by other software. E-mail
data is not structured while EDI data or message is structured. EDI
message has legal standing in the Court of law.
The benefits of using EDI technology in logistics and supply chain

management involves:
• Faster transactions – real-time document transfer in the supply chain.

• Implementation of just-in-time manufacturing.
• Reduction in transaction cost due to paperless operations.
• Reduction in inventory carrying cost and speed of delivery which will
help to improve the competitiveness.
• Improve the corporate trading relationships between parties in the
supply chain and creating barriers for competitors.
2. Very Small Aperture Terminal (VSAT): The satellite communication

channels are playing a crucial role in real-time data collection and its
exchange, which is vital for customer service. To trace and track the
goods carrier, a dish antenna is fixed on the vehicle. This allows the
communication between driver, consignor and consignee. The real-time
interaction helps in having the up-to-date information on the location of
truck and the delivery position. For example, majority of retail giant
across the globe are using this system for controlling the inventory
movement.
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3. Geographical Positioning System (GPS): The GPS is more accurate

system used in developed countries wherein a vehicle could be traced
accurately with the help of Geo Stationary Satellites to the accuracy of
one meter in terms of latitude and longitude. Once the position of the
vehicle is known, it can be transmitted to consigner or consignee
through the transmission network i.e., mobile phones or internet.
It is a mobile vehicle tracking system, modular in design, having two

parts: a mobile vehicle unit and a fixed base station. The mobile vehicle
unit attached to the vehicle will have a GPS module through which the
vehicle’s position will be monitored via satellite and GSM technology will
be used to transmit that information to the base station. Configured
around a main controller module, which executes the software to
configure and control, the GPS receiver, and the GSM module, the unit is
fitted on the vehicle along with an appropriate GPS and wireless antenna.
The GPS receiver detects/tracks the position and provides it to the
controller module which in turn converts the received data and sends it
to the central station via SMS.
Optional add-on features such as displaying messages received from the

central station on an LCD in the driver’s cabin, and a keypad for the
driver to send messages can also be provided. The controller can also
handle input output ports to continuously monitor the health of the
connected attachments and in the event of misuse or any case of alarm,
information can be transmitted to the central base station immediately.
4. Geographical Information System (GIS): GIS are the software tools

for visualization of special location of any entity on earth which is stored
in databases relating to geography. This could be in terms of physical
maps of the surface of earth, layout of inner surface of earth or a layout
of streets or roads. GIS in integration with GPS is used in logistical
operation for tracking and tracing of the consignment location to the
extent of road or street in particular city.
5. Web-based Tracking: Logistics service providers operating in India are

extending the services of web-based tracking of consignments to their
clients. AFL, Fed-Ex, Blue Dart and others are providing the status
report of the consignment to their clients. The clients can download this
report by connecting through the Internet. This information helps in
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planning the dispatch schedule and making follow-up with clients for
payment collections.
6. Automated Guided Vehicle System (AGVS): The system makes use

of magnetic or optical guidance system. The magnetic system uses
energized wire laid on the warehouse floor for guiding the material
handling equipment. The new generation AVGS are guided with video
and do not follow the fixed path. AGVS can perform all the material
handling operations without any human involvement. Robot coupled
with AGVS is used to pick up exact material requirement for a customer
order.
7. Information Directed System (IDS): In this, a centralized computer

controls the material handling equipment. The communication between
the equipment and the computer is through radio frequency. The
required movement are fed into computer and it assigns the jobs to the
individual equipment considering its maximum loading capacity and
handling speed. IDS can perform variety of complex material handling
jobs such as multiple order picking or multiple vehicle loading by the
same material handling equipment leading to enhancement in
warehouse productivity and flexibility in handling variety of jobs.
8. Swipe Cards: Another initiative in this direction has been by a group of

logistics and transportation professionals (Winex Trans Pvt. Ltd.), a
public sector undertaking (Bharat Petroleum Corporation Limited) and a
very specialized electronic gateway service provider in the banking
sector (Infotek Global Pvt. Ltd.) who have joined together in a joint
venture Vi Etrans to create a very unique system to keep track of
vehicles while they are in transit (Source: ET).
The system which is based on a very simple and stripped-down version

of technology namely the swipe cards, enables the tracking mechanism
to work via a magnetic strip card-based vehicle tracking system
combined with research-based data on the routes distance and transit
time parameters. Akin to normal credit cards, these swipe cards with
basic data such as registration, engine and chassis numbers of the
vehicles are issued to drivers of the vehicles covered under the scheme.
Swiping these cards at predetermined specified kiosks is mandatory. On
swiping, a slip gets generated which the driver is supposed to retain as
proof of reporting. The venture has established a network of over 200
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swipe stations on major national and state highways at intervals of

approx. 150 to 200 kms mostly at BPCL retail outlets as well as some
PCOs, border checkposts and wayside popular dhabas. Once the truck
driver swipes the card at a kiosk, the data travels by a phone line to the
nearest hub, and then through a virtual private network to the central
server for processing.
The data is made available on a website which can be accessed by

registered users, e-mail updates also being sent to them periodically.
Maruti Udyog Ltd., Hero Honda and Samsung are some of the large
companies who are subscribers to this project. The cost is also
substantially lower at approx. Rs. 1,500 per month of connectivity per
terminal by the corporates, cost of installation and telephony being borne
by the service provider, the swipe cards costing Rs. 220 to Rs. 300
on a one-time basis for each vehicle owned by transporters using the
system, while temporary ones with 10 days’ validity are available at Rs.
100 per card, as against approx. Rs. 10 to Rs. 20 thousands per
vehicle for the GPS systems plus connectivity charges for the web log.
Impact of Communication Technology Based Systems
• Rapid transfer of data across long distance improves monitoring and

control.
• Less human interventions required.
• Can work 24 × 7, 365 days of the year as such systems have backup and
alternative gateways to take care during any breakdowns.
• Reliable, accurate and authenticate data transfer brings speed of

response and better customer satisfaction.
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12.4 INFORMATION TECHNOLOGY BASED SYSTEM

SOLUTIONS
Information technology is all about connected web servers and computers.

Following IT system solutions are:
• Enterprise Resource Planning (ERP)
• Distribution Requirement Planning (DRP)
We have covered both IT systems in our earlier chapter, thus not explained
here. However, it is a part of the various technology system solutions
available for logistics management. Thus, the same must be covered
whenever you discuss this topic.
12.5 DISRUPTIVE TECHNOLOGY BASED TRENDS IN

LOGISTICS MANAGEMENT
We have studied some of the recent/advanced technology system solutions

used in logistics management. We also need to study some of the expected
disruptive technology trends in logistics management.
1. Robotics and Automation: Forklifts are getting replaced by automated

moving robots. The primary goal is improved efficiency. Amazon is a
leading example in this space. Autonomous forklifts and robots can pick
products much sooner than humans, which means companies do not
have to pay human forklift operators. As Amazon and other companies
have shown, implementing robotics and autonomous machinery into the
fold can condense delivery times to just a 24- to 48-hour period. The
combination of lower costs and a speedier assembly is a dream come
true for any business owner.
2. Mobile Apps: Internet of Things (IoT) will promote logistics service

providers and shippers to increase adoption of mobile apps. These types
of apps exist for inventory management, bar code scanning, fleet
management, shipment tracking, order management, customer service
and more. Logistics businesses can pull information and capabilities via
an app to manage capacity and satisfy demand. Freight sharing apps
354
are one of the prime app groupings that will see a significant boost
throughout 2018.
3. Transportation Management Systems: Any movement of goods

need transportation. This subject encompasses so many complex
challenges such as loading efficiency, route optimization, and load
optimization. A good TMS acts as an integration for all logistics
communications and processes, including route scheduling and
optimization, freight auditing and payment processing, carrier
management and more. Furthermore, TMS applications have shifted
from terminal-based installs to cloud-based platforms, reducing
postponements in implementation, removing bottlenecks from downtime
and refining cybersecurity simultaneously. As a result, more companies
will adopt such solutions throughout the year to keep up with growing
demand and to integrate into the amplified use of the other logistics
technology trends.
4. Artificial Intelligence: The potential to utilize Artificial Intelligence

(AI) to improve decision-making, transform business models and
networks, and modify the customer experience will drive the payoff for
digital enterprises. While using artificial intelligence appropriately will
result in a great digital business reward, the promise of general AI to
perform any intellectual duty that a human can do, and vigorously
absorb and comprehend as much as humans can.
5. Blockchain Technology: Blockchain is a public, dispersed and

decentralized archive that eliminates business friction by being
autonomous of individual applications or contributors. The technology
has the promise to transform industries, including the government,
healthcare, content dispersal, supply chain and more. An applied
approach to blockchain requires a clear understanding of the business
opportunity, the drawbacks, a dependable architecture, and a solid
implementation strategy. BiTA (Blockchain in Transport Technology) is
an organization that is leading the charge to help develop and set
standards for blockchain technology within the transportation industry.
355
• Activity
1. List any technology interventions you may be aware off, where have you
seen it being used, how it gets used?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
12.6 SUMMARY
Today, technology is making waves in logistics activities in several ways.

They are classified as: (a) Automatic Identification Technology, (b)
Communication Technology and (c) Information Technology.
Automatic identification technology includes bar codes and RFID. Various

communication technology based system solutions for logistics include
Electronic Data Interchange (EDI), Very Small Aperture Terminal (VSAT),
Geographical Positioning System (GPS), Geographical Information System
(GIS), Web Based Tracking, Automated Guided Vehicle System (AGVS),
Information Directed System (IDS) and Swipe Cards. IT based system
solutions include Enterprise Resource Planning (ERP) and Distribution
Requirement Planning (DRP).
We have also studied few disruptive technology trends expected in logistics

industry such as Robotics and Automation, Mobile Apps, Automated
Transportation Management Systems, Artificial Intelligence and Blockchain
Technology.
356
1. Briefly describe different classification of technology support solutions

available in logistics and list actual solutions within it.
2. Describe how GPS (Global Positioning System) mechanism works.
3. Explain the utility of Swipe Cards and Bar Codes.
4. “Today, the technology that is making waves and is being touted as the
most important one in logistics is the RFID.” Discuss.
5. What are the disruptive technologies expected to change the face of

logistics in India?
1. The latest technologies being used in logistics and supply chain

management are classified into: (a) Automatic Identification Technology,
(b) Communication Technology and (c) __________.
(a) Relay technology
(b) Electronic technology
(c) Radio frequency technology
(d) Information technology
2. __________ technology facilitates the direct entry of data or

information in the computer/computerized system/device without
operating a keyboard.
(a) Relay technology
(c) Automatic Identification
(d) Radio frequency technology
3. Electronic Data Interchange (EDI) and Swipe Cards is which category of

technology used by any logistics firm?
(a) Communication technology
357
4. Distribution Requirement Planning (DRP) is which category of

technology used by any logistics firm?
(a) Communication technology
(b) IT technology
5. ___________ will promote logistics service providers and shippers to

increase adoption of mobile apps. These types of apps exist for
inventory management, barcode scanning and fleet management.
(a) Intelligence of technology
(b) Robotics technology
(c) Electron based technology
(d) Internet of Things (IOT)
Ans.: 1. – (d); 2. – (c); 3. – (a); 4. – (b); 5. – (d).
358
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
359
PACKAGING RULES IN THE CONTEXT OF DISTRIBUTION
Chapter 13
Packaging Rules In The Context Of
Distribution
Objectives
• Understand what are the packaging rules applicable in the context of

distribution management.
• Understand what are the Acts and Rules applicable to commodities in a

packaged form.
• Understand rules contained in the Standard of Weights and Measures Act

1976 and the Standard of Weights and Measures (Packaged
Commodities) Rules 1977.
Structure:
13.1 Introduction
13.2 Prescribed Rules and Acts
13.3 Important Aspects of the Act And Rules from a Distribution Manager’s
Perspective
13.4 Packaging Management from Distribution Management Perspective
13.5 Summary
360
13.1 INTRODUCTION
Any professional in the area of distribution should be aware that any goods
sold or distributed by weights, measure or number have to conform to the
prescribed rules as contained in the Standards of Weights and Measures
Act 1976, and the Standards of Weights and Measures (Packaged
Commodities) Rules 1977.
While some important points relating to the matter are being enumerated
below, the student is advised to always make it a point to discuss with and
obtain clearance of the concerned legal departments about compliance of
the packages with the requirements before sending them out in the
marketplace, as any fault detected later will only compound the distribution
problem.
13.2 PRESCRIBED RULES AND ACTS
The Act defines what constitutes commodities in a packaged form. It also

defines who can be a dealer and manufacturer under the Act. Label means
any written, marked, stamped, printed, or graphic matter affixed to, or
appearing upon any commodity or package containing any commodity. All
units of weight or measure are to be based on the metric system, unless
specifically exempted either under the Act or by some notification.
The Act provides that any commodity (to which the Act applies) in a
packaged form should not be made, manufactured, packed, sold, or caused
to be packed or sold, distributed, or caused to be distributed, unless such
packages bear thereon or on a label securely attached thereto a definite,
plain and conspicuous declaration, made in the prescribed manner of:
• The identity of the commodity in the package,
• The net quantity in terms of the standard unit of weight or measure of

the commodity in the package,
• If the commodity is packed or sold in numbers, the accurate number,
• The unit sale price of the commodity in the package, and
• The sale price of the package.
361
The Government or appropriate authorities may at times allow export of

items in non-standard weights and measures subject to conditions,
limitations, and restrictions as may be prescribed, however only with the
prior permission of the authorities concerned.
Similarly unless provided for under the Act and Rules, packages in non-
metric weight and measures cannot be imported. The Standard of Weights
and Measures (Packaged Commodities) Rules 1977, gives elaborate
definitions of various terms which is important to note.
13.3 IMPORTANT ASPECTS OF THE ACT AND RULES FROM

A DISTRIBUTION MANAGER’S PERSPECTIVE
For instance, a few important ones from the Distribution Manager’s

perspective may be:
• A “combination package” means a package intended for retail sale

containing two or more individual packages, or individual pieces, of
dissimilar commodities, e.g., a package containing dissimilar
commodities such as spoons, forks, cups, napkins, etc.
• “Drained weight” in relation to a solid commodity contained in a free

flowing liquid, means the weight of such solid commodity after the liquid
has been drained for a period of two minutes.
• “Group package” means a package intended for retail sale containing two
or more individual packages or individual pieces of similar but not
identical (whether in quantity or size) commodities, e.g., a package
containing assorted biscuits or sponges of different sizes is a group
package.
• “Multi-piece package” means a package containing two or more

individually packaged or labelled pieces of the same commodity of
identical quantity, intended for retail sale, either in individual pieces or
the package as a whole, e.g., a package containing “5 toilet soap cakes
of net weight 20 g each, total net weight 100 g” is a multi-piece package
• “Principal display panel” in relation to a package means the total surface

area of the package where the information required under the rules are
to be given. The rule also specifies what should be the area, size, and
362
letterings including the minimum height of numerals and their width

which should be followed.
• “Retail package” means a package containing any commodity which is

produced, distributed, displayed, delivered, or stored for sale through
retail sales agencies or other instrumentalities for consumption by an
individual or a group of individuals.
• “Wholesale package” means a package containing:
a. A number of retail packages, where such first-mentioned package is

intended for sale, distribution or delivery to an intermediary and is
not intended for sale direct to a single consumer.
b. A commodity sold to an intermediary in bulk to enable such

intermediary to sell, distribute or deliver such commodity to
consumers in similar quantities.,
c. Packages containing ten or more than ten retail packages provided

that the retail packages are labelled as required under the rules.
• “Retail sale price” means the maximum price at which the commodity in
a packaged form may be sold to the ultimate consumer and where such
price is mentioned on the package, there shall be printed on the
packages the words “Maximum [or Max] retail price ……… inclusive of all
taxes [or in the form MRP Rs. ……… . incl. of all taxes]”
The rules specify declarations that have to be made on every package,

viz.,
• Name and address of the manufacturer,
• The common or generic name of the commodity contained in the

package,
• The net quantity in terms of the standard unit of weight or measure, or

the number of pieces if the commodity is sold in numbers,
• The month and year in which the commodity is manufactured or pre-

packed,
363
• The “retail sale price” of the package, and
• Any other matters that may be specified as per the rules.
The rules also specify items which may be exempted from certain
provisions under certain conditions. These can change from time to time,
items being included or excluded, as per Government notification. An
example can be drugs covered under the Drugs (Price Control) Order 1995
were exempted from using “MRP Rs. incl. of all taxes” and instead it used
to be “maximum price Rs. local taxes extra”. But from 2nd October 2006,
this exemption has been withdrawn, which means that the medicine
packages also must display “MRP Rs. incl. of all taxes”. Liquid milk sold
returnable bottles, soft drinks again sold in bottles, where the bottle is
returnable by the consumer or any package containing bidis or incense
sticks are exempted from the provisions of the date of manufacture.
Students are, however, advised to check these provisions as they are
changed from time to time.
The Act provides for first-time violations to be compounded under certain

conditions, and the students can obtain details from perusal of the relevant
provisions
• Activity
1. As a Distribution Manager, what are the Rules and Acts you should be
conversant with?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
364
13.4 Packaging Management From Distribution

Management Perspective
After understanding packaging rules, it is useful to understand packaging

management from distribution management perspective. Distribution
Manager needs to optimize the packaging process. He is responsible for
ensuring that his team is sending the right products to the right customers
and in the most efficient way. Packaging is not merely arranging items
needed by the consumer in a box. It needs to ensure orderliness for its
storage, retrieval, legal packaging compliance to be followed and ensure
safe transportation. It reaches the final consumer through network of
distributors. We will, however, limit this study to outward distribution of
finished goods.
Distribution Manager, thus, needs to look at: (a) the box, (b) packaging
materials and (c) Labelling.
a. Box Size: More and more shipping companies are incorporating

package weight-volume aspect into their pricing – rather than it being
based solely on weight, meaning box sizes could be having a direct
impact on costs. However, having 50 different box size options is a great
way to overwhelm packers and severely slow down warehouse
operations. Depending on your individual business needs, balance needs
to be arrived at. If you know every order is the same physical size, then
having one box size makes sense – and it is a lot easier for the packer.
But a typical retailer will usually do best with around 3-5 size options.
This keeps things manageable for packers while still allowing room to
minimize courier costs.
b. Packaging Material: Another element to the packing process is

choosing the most appropriate packaging material. This is all about
striking a balance between keeping the goods protected during transit,
minimizing the overall weight of the package (and therefore courier
costs) and keeping the cost of the packaging material itself down.
Obviously, shipping a soft drinks box may not need a better (and more
expensive) packaging material than shipping a book. So, it is worth
analyzing your product catalogue (and track record of delivering
damaged items) to determine the range of packaging materials you
need to have available.
365
Some of the most common packaging materials are:
• Air pillows: Plastic bag filled with air, very lightweight and good
protection, but require work to inflate. 90% protection rating.
• Shredded wool: Loose fill wool which is lightweight but limited shock
protection. 60% protection rating.
• Bubble wrap: Two layers wrapped around products using sellotape to

hold. 75% protection rating.
• Packaging peanuts: Biodegradable or recycled foam peanuts. 90%

protection rating.
• Shredded paper: Cheap and lightweight, but limited protection. 50%

protection rating.
• Crunched paper: From paper dispenser and crunched by packer.

Limited protection. 50% protection rating.
c. Labelling: Labelling has multi-layer connotations. We will understand it

from the final packaging perspective. Essentially, it has two layers – (1)
In-house and (2) External. In-house label is purely for internal logistics
management including warehousing need, etc. It is done with the need
to have right location for its storage, proper identification by pickers and
other information needed for inventory management and accounting.
This label must not go to the final consumer. External label is for the
consumer. It is over and above mandatory packaging info needed as per
the prevailing norms. It is generally on external container giving
information such as product name, product model number,
manufacturer, date of manufacturing, service tag number (if it is a
consumer durable), etc. What is significant to note here is that this info
is so well synchronized internally with your computer system that when
a consumer calls your helpline, he will be asked to provide service tag
number, and the moment you give it, your other information is retrieved
by the Call Centre staff and then they are able to provide you with
requisite support.
366
• Activity
1. Look behind your refrigerator or LED screen and check the kind of
labelling done and what kind of information is provided. Also, recall how
did you get them delivered at your home, nature of protective
packaging it had, packaging materials used, etc.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………
13.5 SUMMARY
Goods sold or distributed by weights, measure or number have to conform

to the prescribed rules as contained in the Standards of Weights and
Measures Act 1976 and the Standards of Weights and Measures (Packaged
Commodities) Rules 1977. This chapter deals with the rules and Acts as
applicable to commodities in a packaged form. The Act provides the
requirements to be complied with by the manufacturer or distributor in
terms of declaration, label, quantity, sale price, contents and things like
this. This section focuses on points arising from Acts and rules mostly from
the Distribution Managers perspective. The rules also specify items which
may be exempted from certain provisions under certain conditions, from
time to time, subject to notifications from relevant authorities.
1. What are the Acts and Rules applicable to commodities sold in a

packaged form?
2. Elaborate on some of the important provisions enumerated in the

Standard of Weights and Measures Act 1976 and the Standard of
Weights and Measures (Packaged Commodities) Rules 1977, which have
relevance to a Distribution Manager’s work?
3. Determine important packaging aspects from distribution manager’s

perspective and list various aspects within each one of them.
367
1. Any Logistics Manager in the area of distribution should be aware that

any goods sold or distributed by weights, measure or number have to
conform to the prescribed rules as contained in the __________.
(a) Packaging Standards and Measures Act 1977
(b) Standards of Weights and Measures Act 1976
(c) Standards of Packaging and Weights Measurement Act 1976
(d) Packaging Weights and Measures Act 1977
2. In India, all units of weight or measure are to be based on _________,

unless specifically exempted either under the act or by some
notification.
(a) The British system
(b) The Kilogram system
(c) The Metric system
3. The specific Act governing the packaging standards, provides that any
commodity (to which the Act applies) in a packaged form should not be
made, manufactured, packed, sold, or caused to be packed or sold,
distributed, or caused to be distributed, unless such packages bear
thereon or on ________ securely attached thereto a definite, plain and
conspicuous declaration, made in the prescribed manner..
(a) A declaration
(b) Content and nutritional value
(c) A price sticker
(d) A label
4. A “__________” means a package intended for retail sale containing

two or more individual packages, or individual pieces, of dissimilar
commodities, e.g., a package containing dissimilar commodities such as
spoons, forks, cups, napkins, etc.
(a) Contents package
(b) Combination package
(c) Camouflaged package
(d) Collective package
368
5. Distribution Manager needs to look at three aspects from packaging

management perspective namely, (a) the box, (b) _________ and (c)
labelling.
(a) Protection materials
(b) Secondary packaging
(c) Container packaging
(d) Packaging materials
Ans.: 1. – (b); 2. – (c); 3. – (d); 4. – (b); 5. – (d).
369
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
370
THE IMPLICATIONS OF GST ON DISTRIBUTION MANAGEMENT
Chapter 14
The Implications Of GST On Distribution
Management
Objectives
• Understand what is the Goods and Services (GST) tax system.
• Understand salient aspects of GST and its long-term advantages for

business.
• Understand the relevance of GST with the business.
Structure:
14.1 Introduction
14.2 Understanding GST
14.3 Relevance of GST with Business
14.4 Summary
371
14.1 INTRODUCTION
Effective from 1st July 2017, new business tax structure was implemented
across India by the Government of India, namely the Goods and Services
Tax, considered to be the greatest tax reforms of India. This amendment
was under discussion for over 17 years but became reality under the
erstwhile NDA government, under the leadership of Mr. Narendra Modi,
Prime Minister of India. It was hailed as the biggest tax reform as it was
expected to boost business development by removing various state-specific
tax structures, creating hurdles in development of local business as well as
hindering the inroads of foreign business.
The GST is a consolidated tax that replaces the various taxes previously
charged on various goods and services. The VAT (Value Added Tax), service
tax, entertainment tax, central excise duty, etc. have been replaced by one
single GST. The GST is a graded tax and various goods and services are
covered by the various tax slabs. Earlier, when goods used to move from
one state to the another, it must pay the local tax, call for different
documentations thereby creating numerous hassles for business owners.
In this chapter, we will study how introduction of GST is going to change
the way distribution and logistics management, and supply chain
management will be impacted.
14.2 UNDERSTANDING GST
Earlier to GST, there was a Value Added Tax (VAT). VAT replaced the Sales
Tax. Under the VAT, specific percentage of tax was applicable on the invoice
value. It was designed to be charged on actual value addition being carried
out. VAT was under the purview of State Government. On one hand, every
state decided their own tax rate and when goods used to pass it on from
the one state to the other state, VAT on the total invoice value was levied
(due to inability of businessman to bring out the value addition he could
bring in). This had cascading effect on the final rate. Besides this, each
state had their own documentation formalities, road permits requirements
leading to trucks being held up at every octroi points for hours and giving
birth to corrupt practices.
372
Salient Aspects of GST
• Under GST, good or service will be taxed in different tiers in a way that
the tax burden is significantly lower on any single buyer.
• The tax paid depends on the slab the product is in and this varies with
each level of production.
• The tax charged on every product or service is broken up into CGST and
SGST. The CGST or the Central GST is revenue that goes to the Central
Government and the SGST or the State GST goes to the state. This
allows for equitable distribution of the tax revenue. One more
classification Integrated GST is applicable on interstate (between two
states) transactions of goods and services as well as on imports. This tax
will be collected by the Central Government and will further be
distributed among the respective states.
• One of the biggest benefits of GST is that it nullifies the cascading tax
effect.
Long-term Advantages of GST Implementation
• GST rollout will bring a uniform tax policy across the country allowing
India to function as one single market. The same goods and services
procured in any state will attract the same rate of tax.
• GST rollout will eliminate the complications in the tax structure

particularly in the case of inter-state manufacturing/production and
sales. Previously, if a manufacturer were to sell products to a wholesaler
or retailer in a different state, the transaction would be subject to Central
Sales Tax (CST) and other taxes imposed by the State Governments
(LBT). This means that the manufacturer would need to comply with the
taxation system in both the states. This will not be necessary with GST
implementation.
• The transportation of goods across states created another challenge.

About 40% of the time taken for the transport of goods was spent in
clearances at state border checkposts. Middlemen took advantage of this
and corruption was rampant. GST eliminates all these illegal practices,
373
and allows for one single compliance mechanism and quicker delivery
time.
• The benefits of GST implementation will translate into reduced tax

burden on the taxpayer since it does away with all other indirect taxes.
• GST implementation will reduce the import and export duties previously
borne by the taxpayer.
Over half the items in the daily life sustaining items have been placed in
the zero -tax slab. This means basics such as food, cereals and vegetables
will not be taxed. As we move up from basics to essentials to luxury and so
on to sin items, the tax slab increases. This makes all basics of life
affordable to the lower- and middle-income groups.
14.3 RELEVANCE OF GST WITH BUSINESS
We have studied what is GST, and its salient features and advantages.
Now, we can look at the relevance of GST with doing the business.
Relevance of GST with the Business
With any goods, ownership of the goods is always related. In pre-GST era,
our tax system was so designed that when the goods ownership gets
transferred, only then tax applicable with the sale of goods gets applied.
Now, consider a situation where one manufacturer producing goods and

sells it to the trader/ company situated at the distance location, where
goods needs to pass through a multiple state, the cost of goods will shoot
up. To avoid this, manufacture has opened warehouses in most state and
transfers goods under his own ownership till that warehouse. Post reaching
specific state warehouse, goods are invoiced to the distributor by paying
applicable state-specific taxes. Thus, operationally, you have warehouse in
every state. You need to have essential stock levels to cater to the market,
employ staff, as there may not be economies of scale. Most warehouses
operate with manual and non-mechanized, non-automated ways of
working, leading to inefficiencies and costs.
374
Under GST regime, you can invoice directly from the plant or central
warehouse. You pay only one single tax, have common documentation, no
transportation delays and above all, economies of scale can be created by
having large to very large warehouses, giving opportunity to mechanize
and automate it, and thereby improve efficiencies and need less manpower,
thus lowering the costs.
Relevance of GST for Business
• Multiple taxation is removed.
• Single tax structure makes whole country as one market. Buying and
selling of goods became easy.
• Simplification of documentation led to standardization and automation,

reducing time required to prepare and more transparency.
• Trucks do not need to wait at the state checkpost to pay state taxes.
Thus, speed in transportation, reduction in corrupt practices and
improved utilization of trucks for deliveries has helped reduce per unit
transportation cost, which either helps in remaining competitive or
improve margins.
• Limited number of tax slabs has helped many industries to reduce their
finished goods cost and helped in economic stability and inflation control.
(However, automobile industry is adversely affected as all types of cars
were put on 28% tax slab vis-à-vis earlier 18% to 22% due to which it
has resulted in significant increase in its cost, and since then, market for
automobiles remained lackluster.
• Activity
1. From the internet, find out applicable GST rates for daily consumables,
clothing, electronics items and luxury items and arrive at understanding
about the different slab structures.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
375
14.4 SUMMARY
With the introduction of the Goods and Services (GST) Act with effect from
July 2017, doing business is simplified purely due to easy single tax
structure, no multiple taxes having cascading effects on final cost to the
consumer, whole country became one market, less documentation and
transportation hassles and centralization of warehousing became feasible
vis-à-vis earlier multi-state warehouse structure leading to more
manpower cost, lack of technology and modernization leading to
inefficiency of operation and all these adding to the cost of doing the
business making you less competitive in domestic market as well as
international market.
We have seen the salient features of GST tax system, advantages and its
relevance for doing a business.
It is considered as the biggest tax reforms of its time, which has opened
the doors for foreign direct investment as there are many brands and
manufacturers who wanted to enter India but due to the complexity of
doing business and multiple tax structure, found it unviable to put up a
set-up here.
1. Briefly describe what is GST tax system implemented in India and list
out its salient features.
2. What are the long-term advantages of GST tax system. List any five.
3. What is the relevance of GST with the business and indicate how it has
simplified doing a business in India?
376
1. Effective from _________, new business tax structure was implemented

across India by the Government of India, namely the GST.
(a) 1st July 2016
(b) 1st July 2017
(c) 1st August 2017
(d) 1st August 2016
2. GST stands for Goods and Security Tax.

(a) True
(b) False
3. The GST is a _________ that replaces the various taxes previously

charged on various goods and services such as the VAT (Value Added
Tax), service tax, etc.
(a) Combined tax
(b) Cumulative tax
(c) Consolidated tax
(d) Assessment tax
4. GST rollout will bring ________ across the country allowing India to
function as one single market.
(a) A universal tax policy
(b) An identical tax policy
(c) The complex tax policy
(d) A uniform tax policy
5. Under GST regime, you can invoice directly from the plant or central
warehouse, you pay only one single tax, and have common
documentation. True or False?
(a) True
(b) False
Ans.: 1. – (b); 2. – (b); 3. – (c); 4. – (d); 5. – (a).
377
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
378

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Distribution Management

Sub Code - 706

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

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1st Edition, January 2020

You have aspired to pursue an education in management and are looking

However, this function needs a deep understanding of investment-driven

I have endeavoured to provide you with an idea about newer ways of

I highly recommend everyone to acquire more knowledge about

(a) Logistics Management: A Systems Integration of

(b) Logistics and Supply Chain Management by Martin Cristopher

(c) Physical Distribution Management

Distribution and logistics management is an integral part of successful

1 Introduction To Logistics Functions 6-39

4 Systems In Distribution Management 89-108

After reading this chapter, you will be able to:

• Understand the meaning and definition of the term “Distribution

• Understand and appreciate the scope and impact of Logistics and

• Understand what is distribution mission.

• Understand what is distribution strategy.

1.2 Overview of Logistics Management

1.3 Distribution Mission

1.4 Distribution Strategy

1.5 Brief Overview of Logistics Function in the Online World

1.7 Self Assessment Questions

1.8 Multiple Choice Questions

Distribution Management can be defined as that arm or wing of

Thus, if we are to map the supply chain of a refrigerator, we may observe

For manufacturing refrigerators, the organization may be buying

Thus, we can see that the refrigerator, manufacturing organization has

Similarly, the refrigerator manufacturer may also decide to bypass the

Thus in the above case, the refrigerator manufacturer will concentrate on

One more example is worth mentioning here. Any bearing manufacturer

The ‘Supply Chain’ also takes care of distribution and logistics.

distribution may have more to do with ensuring finished goods are

Logistics as a function is more involved with the physical movement,

Logistics can be defined as the science of organizing the

Supply chain is driven by marketing/sales objectives, any marketer would

So besides a lengthy manufacturing/processing time, the presence of

Most of our day-to-day purchase items in the consumer products segments

The MTS scenario demands anticipation of the demand, which in other

anticipate and forecast demand, and accordingly manufacture and stock up

• MTS — Make to Stock, which is most common, particularly for a mass

We all know that bulk manufacturing/processing can offer scope of

This way, he has been able to achieve the following objectives: