Supply Chain Management and

Logistics Course Module

Chapter One
Introduction to Supply Chain Management
Supply chain is Flow of products and services from raw materials manufacturers,
intermediate products manufacturers, end product manufacturers, wholesalers, distributors
and retailers connected by transportation and storage activities.

 Integrated through information, planning, and integration activities

 Cost and service levels

 A supply chain is a set of organizations directly linked by one or more of the upstream
and downstream flows of products, services, finances, and information from a source
to a customer.

 Supply chain management (SCM) is the management of a network of

interconnected businesses involved in the ultimate provision of product and service
packages required by end customers.

 Supply chain management spans all movement and storage of raw materials, work-in-
process inventory, and finished goods from point of origin to point of consumption
(supply chain).

Two Other Formal Definitions of SCM

 The design and management of seamless, value-added process across organizational

boundaries to meet the real needs of the end customer

Institute for Supply Management

 Managing supply and demand, sourcing raw materials and parts, manufacturing and
assembly, warehousing and inventory tracking, order entry and order management,
distribution across all channels, and delivery to the customer

The Supply Chain Council

Thus, an integrated supply chain management is the coordination and efficient management
of information, material and financial flow through improved relationships at all stages of
supply chain to obtain a sustainable competitive advantage.
The Need for Supply Chain Management

 To improve operations.

 Increasing levels of outsourcing.

 Increasing transportation Performances.

 Competitive pressures.

 Increasing importance of e-commerce.

 Increased performance and profitability

 The need to manage inventories

 Lower inventory, transportation, warehousing, and packaging costs

 Greater supply chain flexibility

 Improved customer service

 Higher revenues

The Importance of Supply Chain Management

 Dealing with uncertain environments – matching supply and demand

Boeing announced a $2.6 billion write-off in 1997 due to ―raw materials shortages, internal
and supplier parts shortages and productivity inefficiencies‖

U.S Surgical Corporation announced a $22 million loss in 1993 due to ―larger than
anticipated inventories on the shelves of hospitals‖

IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue

Hewlett-Packard and Dell found it difficult to obtain important components for its PC‘s from
Taiwanese suppliers in 1999 due to a massive earthquake

U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998

 Shorter product life cycles of high-technology products

Less opportunity to accumulate historical data on customer demand

Wide choice of competing products makes it difficult to predict demand

The growth of technologies such as the Internet enables greater collaboration between supply
chain trading partners

Major buyers such as Wal-Mart demand a level of ―supply chain maturity‖ of its suppliers
Availability of SCM technologies on the market

Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to
integrate internal processes

E.g. Global Steel and Metal Supply Chain

E.g. Steel Supply Chain for Automobile Door

External Suppliers

 External suppliers provide the necessary raw materials, services, and component
parts.

 Purchased materials & services frequently represent 50% (or more) of the costs of
goods sold.

 Suppliers are frequently members of several supply chains often in different roles.

Suppliers

Key Material Decisions

Location

Capacity

Lot sizes; that is, how much to make in a production run

Inventory (mainly raw material)

Key Information & Related Decisions

Customer orders

Costs, market prices

EDI; web-based;…

Functions of Supplier Integrations

 Supplier Integrations in Planning and Optimization Process: In supply chain

firms and the supply chain members, organizations or individuals should be
continuously involved and integrated for effective flow of material, information and
money.

 In a supply chain integration process the planning are often separated hierarchically
into strategic, tactical, and operational planning.

 While, in the strategic planning as the process of identifying the goals for the supply
chain firms and sharing them within all functions (Thunberg, 2016).
Supplier Integrations with Logistics and Transportation Integrations:

 In a supply chain process integrated logistics process is the mature stage of logistics
industry development that provides to improving the logistics system of the firms.

 Since, logistics integration is provides to enhance right products in the right place at
the right time at the right cost and in the right condition in supply chain systems
(Kondratjev, 2015).

 Thus , the logistics industry become a leader in the production chain and coordination
and is able to provide the community with a full range of logistics services (Ran,
2009).

 Thus, strategic integrations have an impact on supplier logistics integrations process.

In supply chain systems the logistics system components includes logistics services,
information systems, infrastructure or resources.

Internal Functions

Vary by industry & firm, but might include:

Processing

Purchasing

Production Planning & Control

Warehousing Management

Quality Assurance

Shipping

Internal Functions Integrations

Internal Company Integrations in Manufacturing and Production Process

Integrated production process evolved in industry as an outgrowth of efforts such as

concurrent engineering to improve customer satisfaction and competitiveness in a global
economy.

 As well manufacturing integration with suppliers, customers have a key aspect for
achieving sustainable competitive advantage (Ely Laureano, 2011).

 The production integration empowered representatives (stakeholders) from all of the

functional areas involved with the production process involving the activities
including on design, manufacturing, test and evaluation (T&E), and logistics
personnel, and, especially, the customer (Deafens, 1998).

Warehouse/Distribution Centers
Key Material Decisions

Location

Capacity

Inventory (finished & semi-finished)

Key Information & Related Decisions

Customer orders

Manufacturer/Assembler shipments

External Distributors …

External Distributors transport finished products to appropriate locations

Logistics managers are responsible for managing the movement of products between
locations. Includes;

Traffic management – arranging the method of shipment for both incoming and outgoing
products or material

Distribution management – movement of material from manufacturer to the customer

Retailers

Key Material Decisions

Location

Inventory (finished goods)

Key Information & Related Decisions

Customer orders

Shipments from Warehouses/DCs

Market prices

External Customer Integration

 CI involves directing attention, haring of customer's demand information and

resources toward understanding how products and processes interact with the
customer‘s business and

 Encompasses methods and strategies that improve coordination between the firm
(Gizaw, 2016),(Safar Fazlia, 2014), (Pamela Danese, 2011), (Kenneth J. Petersena*,
2005).
  CI includes aiding producers to understand customer's demand, collaborating and
cooperating with customers to design, product development process, innovation (Tim
Straub1, 2013),

 CI in risk management, market level (Gizaw, 2016), (Ellen Enkel, 2005)

Structure of Supply Chain Integrations

Vertical Integration

 Is defined as ―when a company expands its business into areas that are at different
points of the same production path‖(Wangler, 2000).

 Mainly companies of different stages of the value chain are working together.

 Combination of business units, each at successive stages in a chain of productive

operations for a commodity, into one firm and under one managerial control is
considered as vertical integrations (Ma & Abdulai, 2017)a.

 Vertical integration in the manufacturing industries, business organizations, which

come one after another in the successive stages or levels of production, in the series of
operations through which a commodity moves "from the primary producer to the
consumer.

 For instance, Carnegie steel company owned mills where the steel was manufactured,
mines where the iron ore was extracted, coal mines that supplied the coal
(upstream), ships and railroads that transported the material(downstream) is a
typical example of vertical integration.

Backward (upstream) vertical integration:

 When a company owns some of the subsidiaries that produce some of the inputs used
in the production of its products.

 Company expands its operations into an industry that produces inputs to the
company‘s products.

Example: When and automobile company owns a tire company

Forward vertical integration: this is when a company owns the subsidiaries that market the
product.

 Company expands into an industry that uses, distributes, or sells the company‘s
products.

 A vertical integration is described as being forward when it is initiated at or near the

raw material stage of production and is extended toward the finished product and the
ultimate consumer(Lafontaine & Slade, 2007).

Example is an movie studio that also owns a chain of theaters

Stages in the Raw Material to Consumer Value Chain

Raw Material to Consumer Value Chain in the Personal Computer Industry

Balanced Vertical Integration: is a company that sets up subsidiaries that supply them with
inputs as well as market their product.

Full Integration: Company produces all of a particular input from its

own operations(Airlines .F)

Disposes of all of its completed products through its own outlets.

Taper Integration

In addition to company-owned suppliers, the company will also use other suppliers for inputs
or independent outlets in addition to company-owned outlets.(University.E

Full and Taper Integration

Advantages of Vertical Integration

Reduce transportation cost

Improve supply chain coordination

More opportunities to differentiate by means of increased control of inputs

Capture upstream and downstream profits

Increase entry barriers to potential competitors

Disadvantages of Vertical Integration

 Capacity balancing: Making sure that inputs will match outputs at all levels

 Potentially higher cost due to the lack of supplier computation

 Decreased Flexibility

 Developing new competencies may compromise existing competencies

 Increase bureaucratic costs

 Monopolization of markets

Horizontal Integration

 Is two or more companies of the same industry and in the same stage of production
work together.
  These companies belong to the same supply chain stage and normally produce or
trade the same products (Wangler, 2000).

 Beside, business organizations operates in different industries or in several branches

of the same industry, but remaining at the same level of the production chain is
considered as horizontal integrations(Pasutham, 2012).

For instance, telecommunications, water, gas and electricity distribution work jointly ,to
utilize resources such as the use of similar assets (networks), whose maintenance requires
similar skills, synergies in the management of customers, in advertising and in administrative
activities, a stronger position in raising financial performances.

Advantages of Horizontal Integration

Economics of scale: Selling more of the same product in different parts of the world

Economics of Scope: Sharing resources common to different products. ―Synergies‖

Increased Market Power

Reduction in cost

Disadvantages of Horizontal Integration

 Problems associated with merging very different company cultures

 High management turnover in the acquired company when the acquisition is a

hostile one

 Costs

 Increased work load

 Increased Responsibilities

 Anti-trust issues

 Creating a monopoly

Important Elements of SCM

Purchasing- Supplier alliances, supplier management, strategic sourcing

Operations- Demand management, MRP, ERP, JIT, TQM

Distribution- Transportation management, customer relationship management, network

design, service response logistics

Integration- Coordination/Integration activities, global integration problems, performance

measurement
Important Elements of SCM...

Purchasing:

 Long term relationships

 Suppliers: Monitoring supplier quality, on-time delivery, and flexibility maintaining

supplier relations

 Supplier management- improved performance through

 Supplier evaluation (determining supplier capabilities and performance)

 Supplier certification (third party or internal certification to assure product quality

and service compliance)

 Strategic partnerships- successful and trusting, long-term relationships with top-

performing suppliers

Important Elements of SCM...

Operations:

• Demand management- match demand to available capacity

• Linking buyers & suppliers via MRP and ERP systems

• Use JIT to improve the “pull” of materials to reduce inventory levels

• Employ TQM to improve quality compliance among buyers and suppliers

Distribution:

 Transportation management- tradeoff decisions between cost & timing of

delivery/customer service via trucks, rail, water & air

 Customer relationship management- strategies to ensure deliveries, resolve

complaints, improve communications, & determine service requirements

 Network design- creating distribution networks based on tradeoff decisions

between cost & sophistication of distribution system

Integration:

 Supply Chain Integration- when supply chain participants work for common
goals.

 Requires intrafirm functional integration.

 Based on efforts to change attitudes & adversarial relationships

  Global Supply Chains- advantages that accrue from sourcing from larger
global market e.g., lower cost & higher quality suppliers.

 May involve operating exposure, which is risk found in foreign settings

 Supply Chain Performance Measurement- Crucial for firms to know if

procedures are working

Also

 Capacity Planning : Matching supply and demand

 Processing -: Controlling quality, scheduling work

 Customers: Determining what products and/or services customers want

 Forecasting : Predicting the quantity and timing of customer demand.

 Location: Determining the location of facilities

 Logistics: Deciding how to best move information and materials

Success stories in SCM; Wal-Mart, Dell Computer, Seven-Eleven

Supply Chain Management Processes

Key Activities and Processes of SCM are

Primary

Setting customer service goals

Transportation

Inventory management

Location

Secondary, or supporting

Warehousing

Materials handling

Acquisition (purchasing)

Protective packaging

Product scheduling

Order processing
SCM Process and SC Flow Management…

Three types of flow management

Product and service flow

Involves movement of goods and services from suppliers to customers as well as handling
customer service needs and product returns

Information flow

Involves sharing forecasts and sales data, transmitting orders, tracking shipments, and
updating order status

Financial flow

involves credit terms, payments, and consignment and title ownership arrangements

 Supply chain management is a process used by companies to ensure that their supply
chain is efficient and cost-effective.

 A supply chain is the collection of steps that a company takes to transform raw
materials into a final product.

 The five basic components of supply chain management are the following

Role of Information Technologyin a Global Supply Chain

 Digitization makes the supply chain more efficient, agile, and customer-focused.

 The vision of Industry 4.0 is to be realized, most enterprise processes must become
more digitized.

 A critical element will be the evolution of traditional supply chains toward a

connected, smart, and highly efficient supply chain ecosystem.

 The supply chain today is a series of largely discrete, series of steps taken through
marketing, product development, manufacturing, and distribution, and finally into the
hands of the customer

 Digitization brings down those walls, and the chain becomes a completely integrated
ecosystem that is fully transparent to all the players involved

 From the suppliers of raw materials, components, and parts, to the transporters of
those supplies and finished goods, and finally to the customers demanding fulfilment.

 This is done through IT

Information Technology’s Role In The Supply Chain

IT‘s primary role is to create integrations or tight process and information linkages between
functions within a firm

 Information is the driver that serves as the ―glue‖ to create a coordinated supply chain

 Information must have the following characteristics to be useful:

Accurate

Accessible in a timely manner

Information must be of the right kind

 Information technology (IT)

Hardware and software used throughout the supply chain to gather and analyze information

Captures and delivers information needed to make good decisions

Effective use of IT in the supply chain can have a significant impact on supply chain
performance

 Information provides the basis for supply chain management decisions

Inventory

Transportation

Facility

The Importance of Informationin a Supply Chain…

 Relevant information available throughout the supply chain allows managers to make
decisions that take into account all stages of the supply chain

 Allows performance to be optimized for the entire supply chain, not just for one stage
– leads to higher performance for each individual firm in the supply chain

 Information used at all phases of decision making: strategic, planning, operational

 Examples:

Strategic: location decisions

Operational: what products will be produced during today‘s production run

The Supply Chain IT Framework

The Supply Chain Macro Processes

Customer Relationship Management (CRM)

Internal Supply Chain Management (ISCM)

Supplier Relationship Management (SRM)

Plus: Transaction Management Foundation

Customer Relationship Management

The processes that take place between an enterprise and its customers downstream in the
supply chain

Key processes:

Marketing

Selling

Order management

Call/Service center

Internal Supply Chain Management Includes all processes involved in planning for and
fulfilling a customer order

ISCM processes:

Strategic Planning

Demand Planning

Supply Planning

Fulfillment

Field Service

There must be strong integration between the ISCM and CRM macro processes

Supplier Relationship Management

Those processes focused on the interaction between the enterprise and suppliers that are
upstream in the supply chain

Key processes:

Design Collaboration

Source

Negotiate

Buy
Supply Collaboration

There is a natural fit between ISCM and SRM processes

The Transaction Management Foundation

 Enterprise software systems

 Earlier systems focused on automation of simple transactions and the creation of an

integrated method of storing and viewing data across the enterprise

 Real value of the TMF exists only if decision making is improved

 The extent to which the TMF enables integration across the three macro processes
determines its value

Information Technology As A Supply Chain Enabler(Enabling Tools

 Information links all aspects of supply chain

 E-business: replacement of physical business processes with electronic ones

 Electronic data interchange (EDI): a computer-to-computer exchange of business

documents

 Bar code and point-of-sale: data creates an instantaneous computer record of a sale

 Radio frequency identification (RFID): technology can send product data from an
item to a reader via radio waves

 Internet: allows companies to communicate with suppliers, customers, shippers and

other businesses around the world, instantaneously

Enterprise Resource Planning (ERP) Systems

Enterprise resource planning (ERP) is a term used to refer to a system that links individual
applications (for example, accounting and manufacturing applications) into a single
application that integrates the data and business processes of the entire business.

Today, an ERP system can encompass, but is not limited to, the following functions:

Sales and order entry

Raw materials, inventory, purchasing, production scheduling, and shipping

Accounting

Human resources

Resource and production planning

E-Business and ERP Systems

An e-business must keep track of and process a tremendous amount of information

Businesses realized that much of the information they needed to run an e-business — stock
levels at various warehouses, cost of parts, projected shipping dates — could already be
found in their ERP system databases

A major part of the online efforts of many e-businesses involved adding Web access to an
existing ERP system

E-business and Supply Chain

Cost savings and price reductions

Reduction or elimination of the role of intermediaries

Shortening supply chain response and transaction times

Gaining a wider presence and increased visibility for companies

Greater choices and more information for customers

E-business and Supply Chain (cont.)

Improved service as a result of instant accessibility to services

Collection and analysis of voluminous amounts of customer data and preferences

Creation of virtual companies

Leveling playing field for small companies

Gaining global access to markets, suppliers, and distribution channels

Radio Frequency Identification

RFID technology uses radio waves to read data put on a chip embedded within a tag.

Primarily used for identification and tracking

Monitor product location at all time, updating both planning and execution systems

RFID in Practice

Implementing Supply Chain Information Technology Systems

 Select an IT system that addresses the company‘s key success factors

 Take incremental steps and measure value

 Align the level of sophistication with the need for sophistication

  Use IT systems to support decision making, not to make decisions

 Think about the future

The Future of IT in the Supply Chain

At the highest level, the three SCM macro processes will continue to drive the evolution of
enterprise software

Software focused on the macro processes will become a larger share of the total enterprise
software market and the firms producing this software will become more successful

Functionality, the ability to integrate across macro processes, and the strength of their
ecosystems, will be keys to success

Collaborative engineering

Collaborative demand planning

Types of transportation models

There are several types of transportation models used to calculate the appropriate distribution
of goods/materials in the supply chain as part of the logistical requirements.

These focus on the amount of supplies, demands, and a relative measurement unit (cost,
distance, time etc) needed to move items between supply stations to destinations. Some are:

The Vogel Approximation Method (VAM)

The linear programming (LP) model and

The Hungarian Method for Assignment Problem

General Description Transportation Problem

Lets do one, by example

Starting with a VAM Solution technique

Determine Row Penalty Number (PN i) – the difference between lowest and 2 nd lowest
Row cost

Here: R1 is 1; R2 is 1: R3 is 2

Determine Column Penalty Number (PN j) – the difference between the lowest and 2 nd
lowest Column cost

Here: C1: 3; C2: 0; C3: 0

Choose R or C with greatest penalty cost – here is C1 = 3

If there is a tie, break tie by choosing C or R with smallest costs

Max out the allocation in chosen C or R at lowest cost cell then x-out the C or R

And so on after allocation (after we re-compute PN’s!)

step 1 of VAM

step 2 of VAM

step 3 of VAM

step 4 of VAM

First optimization of VAM

Costing The model:

Current:

100*5 + 200*9 +200*4 + 100*3 + 100*5 = $3900

Before proceeding, check if the Feasible solution is (or isn’t) degenerate:

Number of allocation must be at least: m + n - 1 = 3 + 3 - 1 = 5 (we have 5 hence the

above set of solution is not degenerate! See next slide if it was)

Now, we must determine if it’s optimal?

We must continue to a second phase to determine this!

The linear programming (lp) method

In the LP method, we determine how much supply is sent from each source to each
destination using an optimization equation.

We define xij= the amount of supply distributed from source i to destination j.

Objective function will be the optimization (maximization or minimization) of distribution

cost to the destinations

Constraint will be

The total amount supplied by each source cannot exceed the source capacity

Each destination will receive sufficient supply to meet its peak demand

Lets do the example by lp

The constraints are

x11 + x21 + x31 <= 300

x12 + x22 + x32 <= 200

 x13 + x23 + x33 <= 200

x11 + x12 + x13 <= 100

x21 + x22 + x23 <= 300

x31 + x32 + x33 <= 300

The Hungarian method

Theorem: If a number is added to or subtracted from all of the entries of any one row or
column of a cost matrix, then an optimal assignment for the resulting cost matrix is also an
optimal assignment for the original cost matrix.

The following algorithm applies the above theorem to a given (n × n) cost matrix to find an
optimal assignment.

Step 1: Subtract the smallest entry in each row from all the entries of its row.

Step 2: Subtract the smallest entry in each column from all the entries of its column.

Step 3: Draw lines through appropriate rows and columns so that all the zero entries of the
cost matrix are covered and the minimum number of such lines is used.

The Hungarian Method

Step 4: Test for Optimality:

(i) If the minimum number of covering lines is n, an optimal assignment of zeros is possible
and we are finished.

(ii) If the minimum number of covering lines is less than n, an optimal assignment of zeros is
not yet possible. In that case, proceed to Step 5.

Step 5: Determine the smallest entry not covered by any line. Subtract this entry from each
uncovered row, and then add it to each covered column. Return to step 3.

The Hungarian Method

Step 2: Subtract the column minimum from each column

Step 3: Draw lines through appropriate rows and columns so that all the zero entries of
the cost matrix are covered and the minimum number of such lines is used.

Chapter Two
Supply Chain Network Design
The network design in supply chain determines
  Its physical arrangement, design, structural layout and infrastructure of the supply
chain.

 The major decisions to be made are on the number, locations and size of
manufacturing plants and warehouses and the assignment of retail outlets to
warehouses, etc.

 Physical location of facilities and transportation links are the decision variables that
allow used products to transfer from their former users to a producer and to future
markets again (Cascini, 2015).

Network Design Decisions

Facility role: What role should each facility play? What processes should be performed at
each facility?

Facility location: Where should facilities be located?

Capacity allocation: How much capacity should be allocated to each facility?

Market and supply allocation: What markets should each facility serve? Which supply
sources should feed each facility?

(How many plants, DC‘s, retail stores, etc. to build?)

Factors Influencing Network Design Decisions

Strategic – Cost vs. Responsiveness

ex) Apparel producers, Convenience stores, Discount stores

Technological

– Economies of scale  few high-capacity locations ex) Manufacturer of computer

chips

– Lower fixed costs  many local facilities

ex) Bottling plants for Coca-Cola

Macroeconomic

– Tariffs, Tax incentives, Exchange rate and Demand risk

Political

Infrastructure factors

Availability of skilled labor

Availability of transportation facilities

Ports, Airports, Rail, Highways

Availability of necessary utilities

Power, Water, Sewage, Telecommunications / IT

The Role of Distribution in the Supply Chain

Distribution: the steps taken to move and store a product from the supplier stage to the
customer stage in a supply chain

Distribution directly affects cost and the customer experience and therefore drives
profitability

Choice of distribution network can achieve supply chain objectives from low cost to high
responsiveness

Examples: Wal-Mart, Dell, Proctor & Gamble, Grainger

Factors Influencing Distribution Network Design

Distribution network performance evaluated along two dimensions at the highest level:

Customer needs that are meet

Cost of meeting customer needs

Distribution network design options must therefore be compared according to their impact on
customer service and the cost to provide this level of service

Elements of customer service influenced by network structure:

Response time

Product variety

Product availability

Customer experience

Order visibility

Return ability

Agile & Reverse Supply Chain Management

An agile supply chain can be defined as a chain of supply that has the potential to respond to
changing requirements in a way that accelerates the delivery of ordered goods to customers.

Supply chain agility is a custom adopted by many companies for choosing a dealer.
A supply chain with flexibility and the ability to quickly react to emergency requirements can
help the business answer more efficiently to its customers.

Apart from flexibility, speed and accuracy are also signature marks of this type of supply
chain.

Agile Supply Chain

To acknowledge the advantages of an agile supply chain, we have to learn about the elements
of any type of supply chain.

These include elements like collection of orders and processing, supply of materials to create
the goods used to complete orders, packaging and transport of finished goods, and the quality
of customer service that is advertised throughout the process from the point of sale to the
actual delivery and beyond.

Thus, for considering the functions of supply chain as agile, each one of these elements must
be managed efficiently and coordinated in such a way that makes it possible to adapt to
changing circumstances.

With the help of an agile supply chain, merchants can easily respond to the varying
requirements of customer with relatively less time required.

Working collaboratively, the merchant and the customer develop a strategy to permit the
delivery of as much of the order as possible within the new time frame required.

Reverse Supply Chain

Reverse supply chain states the evolution of products from customer to merchant.

This is the reverse of the traditional supply chain evolution of products from merchant to
customer.

Mostly RSC is designed to carry out the below given five key processes

Product acquisition − Accumulating the used product from the user by the reseller or
manufacturer because of some manufacturing defect or some other reason. It is basically
considered as a company‘s growth strategy.

Reverse logistics − Shipping of products from their final destination for auditing, sorting and
disposition.

Reverse logistics is the process of planning, executing, monitoring and controlling the
efficient and effective inbound flow and storage of secondary goods and information related
to the purpose of recovering value or proper disposal.

Inspection and disposition − Examining the condition of the product returned along with
making the most profitable decision for reusing it in some other way.
Remanufacturing or refurnishing − Returning the product to its original source from where
it was ordered in the very first place along with specifications. This is done basically when
there is a manufacturing or furnishing defect in the goods.

Marketing − Establishing secondary markets for the goods that have been recovered by the
merchant from the client who initially ordered it in the beginning but chose to return it.

There are emissions and consumptions of resources at every stage of product life

Life Cycle Assessment (LCA) – process used to evaluate the environmental impact at every
stage of production of a product or service

Final goal: purchase products with the minimal negative environmental impacts

Green Supply Chain Management

 Management of Materials and Resources from Suppliers to Manufacturer/Service

Provider to Customer and Back, with the Natural Environment Explicitly
Considered

 GSCM is an integrating environment thinking into supply chain management,

including product design, material sourcing and selection, manufacturing processes,
delivery of the final product to the consumers, and end-of-life management of the
product after its useful life.

Definition of Terms and Concepts

GSCI is integrating environmental thinking into supply-chain systems including

Product design,

Material,

Manufacturing processes,

Warehouse,

Delivery of the final product to the consumers in order to achieve a greener supply
chain and maintain competitive advantage (Seman1, 2012).

Green Supply Chain Management

The supply chain has been traditionally defined as a one way, integrated manufacturing
process wherein raw materials are converted into final products, then delivered to customers.

Nowadays due to recent changing environmental requirements affecting manufacturing

operations, increasing attention is given to developing environmental management (EM)
strategies for the supply chain.
GSC strengthens & build greater support with suppliers for additional environmental
initiatives

GSC also screens suppliers for environmental performance, work with them on green design
initiatives and provide training & information to build suppliers' environmental management
capacity

GSC- buyer requiring certain level of environmental responsibility in the business practice

Benefits of GSCM

 Economic benefits from increased efficiency.

By reducing wastes, companies decrease handling expenses, fines, and even costly inputs.
Supplier's savings may be passed along to buyer companies.

 Competitive advantage through innovation.

Efficient production is enhanced through the use of cleaner technologies, process innovation,
and waste reduction. Reduction in wastes equals dollars earned.

 Improved product quality. Supply chain partnerships help maintain relationships

between buyers and suppliers leading to increased control over product quality.

 Consistent corporate environmental goals.

 In an era of multi-faceted, non-vertical manufacturing, companies include supplier

outreach to address corporate environmental goals.

 Improved public image. Consumers, investors, and employees respond positively to

companies with a reputation for good environmental performance.

Factors Drive A Company To Adopt GSCM

Government

Environmentally aware customer

Market and competitor

Company

Some Ways of Greening Supply Chains

Product Packaging

Design for Upgradeability

Design for Recyclability

Materials Innovation
Energy Efficiency /Green/Alternative sources of energy

Environmental cleaning and greening e.g tree planting

GSC and the 5 Rs

Reduce

Reuse (Replace)

Recycle

Refuse (Reject, Return)

Repair (Refine)

What is a ‘Green’ Product?

A ‗Green‘ Product:

Can be recycled

Have a recycled content

Be energy efficient

Emission reducing

Re-usable

Biodegradable

Organic

Purchasing Criteria

Green Purchasing

Considering the quality, price and the environment

A way of purchasing which gives preference as far as practicable to those products &
services which cause least harm to the environment

The purchase of items made with recovered materials.

It encompasses environmentally preferable purchasing i.e. the purchase of products which are
least harmful to the environment & human health

Taking into considerations of the quality, price & environment, the purchase of a product or
service with the least environmental impact

Green Purchasing
Environmental issues to consider:

Packaging

Recycled contents

Low energy

Longer life

Locally produced

Low pollution

Purchasing Criteria …

 Green Purchasing Policies and Product Specifications

 Include environmental considerations as a factor

 Product Life Cycle

 Emphasis on eliminating or reducing potential risks to health and

environment

 Comparison of Environmental Impact

 Environmental impact to be given due consideration

 Environmental Performance Information

 Manufacturers and distributors to provide comprehensive, accurate and

meaningful information for purchasing consideration

Green Purchasing changes a corporation

Green Purchasing & Costs …

■Do not be biased against Green Purchasing – does it cost more ? There are increasing
numbers of products which can be purchased at the same price as conventional products.

■Seek measures to avoid cost increases as a whole, including the reduction of purchasing
quantity, reuse, etc.

―Reviewing the waste, reconsideration of the necessity, co-ownership, etc.

■Also consider ―life cycle costs‖.

■Some Green Products may be costly for now, but the stance to support it may be necessary
in consideration of the social significance of Green Purchasing: ―Social Costs‖.

Issues in Green Supply Chain

Financial Cost

Smaller suppliers have financial constraint and may not devote the necessary resources

Essential for consumer to consider overall benefits

Awareness amongst consumers

Liabilities and Responsibilities

Supplier must comply to the laws and regulations

Example: Computer manufacturer increase offerings to meet the Green Star standard for
energy efficiency

Issues In Green Supply Chain

Documentation

To meet environmental criteria, consumer can demand supplier to meet standards in

operation and practise

Formal environmental management system (EMS) or other certification such as International

Organisation for Standardisation (ISO) to validate supplier‘s compliance

Transparency versus Confidentiality

Supplier should be transparent in providing information for customer‘s decision making

However, lack of protection for innovation & intellectual property challenge the
confidentiality of the information

Issues In Green Supply Chain….

Cooperation and Long-Term Business Relationships

Supplier‘s effort in addressing the environmental issue can result in:

Cost reduction for consumer

Greater operational efficiency

Enhanced value for consumer

Advantage of cooperation between supplier and consumer:

Strengthen customer-supplier relationship

Shared savings and benefits

Supply chain performance measure

Supply chain performance measure can be defined as an approach to judge the performance
of supply chain system.

Supply chain performance measures two categories

Qualitative measures − for example, customer satisfaction and product quality.

Quantitative measures − for example, order-to-delivery lead time, supply chain response
time, flexibility, resource utilization, delivery performance.

Quantitative Measures

 Mostly the measures taken for measuring the performance may be somewhat similar
to each other, but the objective behind each segment is very different from the other.

 Quantitative measures is the assessments used to measure the performance, and

compare or track the performance or products.

Non - Financials Measures

 The metrics of non-financial measures comprise cycle time, customer service level,
inventory levels, resource utilization ability to perform, flexibility, and quality.

There is a hike in prices because of the inventories, transportation, facilities, operations,

technology, materials, and labor.

Generally, the financial performance of a supply chain is assessed by considering the

following items −

Cost of raw materials.

Revenue from goods sold.

Activity-based costs like the material handling, manufacturing, assembling rates etc.

Inventory holding costs.

Transportation costs.

Cost of expired perishable goods.

Penalties for incorrectly filled or late orders delivered to customers.

Credits for incorrectly filled or late deliveries from suppliers.

Cost of goods returned by customers.

Credits for goods returned to suppliers.

The Supply Chain Operations Reference (SCOR) Model

This model was attempts to integrate well known concepts of process reengineering,
benchmarking, and process measurement into a cross functional relationship by:

Capturing the ―as is‖ state of a process and derive the ―to be‖ future state (reengineering);

Quantify the operational performance of similar companies and establish ―best of class‖
performance (benchmarking); and,

Characterize and describe the management processes that will result in ―best in class‖
performance (best practice analysis).

Chapter 3
Role of Logistics in Supply Chains
Logistics management

● Logistics is the process of strategically managing the procurement, movement and

storage of materials, parts and finishing inventory (and the related flows of
information) through the organization and its marketing channel in such a way that
current & future profitability are maximised through the cost-effective fulfilment of
orders.

Logistics – Generic Definition

A SCM component that plans, implements, and executes flow and storage of goods, service
and information from the point of origin to the point of consumption.

Four views of Logistics

Business Logistics:

● That part of the supply chain process that plans, implements, and controls the
efficient, effective flow and storage of goods, service, and related information from
point of use or consumption in order to meet customer requirements.

Military Logistics:

● The design and integration of all aspects of support for the operational capability of
the military forces (deployed or in garrison) and their equipment to ensure readiness,
reliability, and efficiency.

Event logistics:

● The network of activities, facilities, and personnel required to organize, schedule, and
deploy the resources for an event to take place and to efficiently withdraw after the
event.
Service logistics:

● The acquisition, scheduling, and management of the facilities/assets, personnel, and

materials to support and sustain a service operation or business.

Key Logistics Activities

 Customer service  Material handling

 Demand forecasting & planning  Order processing

 Inventory management  Packaging

 Logistics communications ● International Logistics

International Logistics

 International logistics is the design and management of a system that controls the
forward and reverse flow of materials, services, and information into, through, and out
of the international corporation.

 The implementation of international logistics, the firm can implement cost-saving

programs such as just-in-time (JIT), electronic data interchange (EDI), and early
supplier involvement (ESI).

 The two phases of the movement of materials include:

 Materials management, or the timely movement of materials, parts, and

supplies.

 Physical distribution, or the movement of the firm‘s physical product to its

customers.

Domestic Vs. International Logistics

● Domestic logistics is the distribution of goods within a country,

● While international logistics is the distribution of goods beyond the country

boundaries.

● Managing logistics domestically is very different from managing logistics

internationally because of the much narrower geographic scope in a domestic
operation.

Management…

● Domestic logistics companies have a single logistics manager to supervise and

manage all sides of planning and execution related to the movement of goods.

● International logistics will have a corporate logistics manager who will coordinate
logistics activities with other managers.
 ● This will require clear plans on execution and distribution processes, and may lead to
challenges in decision making.

Supply Chain Relationships

● In order to build relationships between businesses or between a business and the

customers, trust is the most important factor, which decides on the nature of the
relationship.

● It gets easier to build trustworthy relationships domestically

● But, in international cases, different country regulations, geography and economic

roadblocks present more challenges in building reliable relationships.

Costs involved

● In both domestic and international logistics, you have to consider the costs involved
with store facilities, transportation, workers and technology.

● But, in international logistics, there are some additional costs to be considered too
which include tariffs, government taxes, fees and currency exchange fluctuations.

● From International to Global I

Trans-national

 Need to Coordinate Responsive National Unit in a Globally Efficient System by

Simultaneously Responding to

(1) Host Country Pressures &

(2) Global Competitive Demand Management Challenge

International

 Domestic Companies with Foreign Appendages

 Opportunistic / Portfolio Approach to Managing Foreign Logistics Operations

● From International to Global II

Multi-national

 Increased Realization of Importance of International Markets

 Manage Overseas Operations as Federation of Independent Companies

Global

 Manage Worldwide Operations As Single Entity

  Growing Concern about International Competition & Inefficiencies of Multi-national
Response

 Drive For Cost Competitiveness Through Product Standardization & Centralization

Global vs. International Logistics

Global Logistics

 Worldwide basis

 Logistics strategies shaped by corporate design, not government requirements

 Integrated strategic sourcing, financial production and transportation strategies

 Aim to serve global markets

International Logistics

 Country to Country (In different areas of the world)

 Logistics strategies shaped by currency, political and economic fluctuations

 Focus on different modes of international transportation

 Importing/exporting issues

Why Firms enter International Markets

 Market Potential

 Geographic Diversification

 Excess Production Capacity and Low Cost Position

 Near end of Life-Cycle in Domestic Market

 Source of New Products and Ideas

Features of International Logistics

 Multiple Operating Environments (Diverse Pattern Of:)

• Consumer Preferences

• Distribution Channels

• Legal Frameworks

• Financial Infrastructures

 Political Demands & Risks

 • Mesh Corporate Strategy With other Countries‘ Industrial Development
Policies  Potential For Conflict

Chapter 4
Reverse Logistics
Reverse Logistics Activities

 Handling of returned merchandise

• Damage

• Seasonal inventory

• Resell via outlet

• Salvage of outdated products

• Stock–balancing returns

 Recycling and reuse

• Material reuse

• Remanufacturing / refurbishing

 Hazardous materials disposition

Forward vs. Reverse Logistics

STRATEGIC USE OF REVERSE LOGISTICS

• Reverse Logistics as a Strategic Weapon

• Many firms have not yet decided to emphasize reverse logistics as a strategic
variable.

• The handling of reverse logistics challenges is an strategic capability.

• Reduce the risk of buying products that may not be ―hot selling‖ items.

• Increase the switching costs of changing suppliers

Competitive Reasons

• Liberal return policies over the last few years due of competitive pressures.

• Taking back unwanted products or products customers believe do not meet

needs.

Good Corporate Citizenship

• Use reverse logistics capabilities for altruistic reasons, such as philanthropy.

• These activities enhance the value of the brand and are a marketing incentive
to purchase their products.

Clean Channel

• Clean out customer inventories, so that they can purchase more new goods.
 • Fresher inventories can demand better prices, which in turn, protects margin.

Operational Factors in Reverse Logistics Systems

• A holistic view of reverse logistics is essential for a profitable and sustained

business strategy.

Key Reverse Logistics Management Element

 Avoidance

Goal: design its merchandise and systems in a manner that will minimize returns since
the impossibility of fully prevent customers from sending purchased products back

Preventive Measures:

 To increase Quality – minimize returns by defective products

 Return agreements with retailers / distributors

 Customer Service – providing toll-free numbers that customers can call before
returning products

 GATEKEEPING

―The screening of defective and unwarranted returned merchandise at the entry point
into the reverse logistics process‖. Rogers, Dale, and Don Tibben-Lembke

Compacting Disposition Cycle Time

 Goal: to reduce the amount of time to figure out what to do with returned products
once they arrive

 Important to know beforehand what to do with returned goods

 When material often comes back in to a distribution center, it is not clear whether the
items are: defective, can be reused, or refurbished, or need to be sent to a landfill

 The challenge of running a distribution system in forward is difficult – employees

have difficulty making decisions when the decision rules are not clearly stated and
exceptions are often made

 Reverse Logistics Information Systems

 One of the most serious problems that the companies face in the execution of a
reverse logistics is the dearth of a good information systems.
 To work well, a flexible reverse logistics information system is required.

Zero Returns

 A program where the company in question does not accept returns from its customers.
  Rather, it gives the retailer an allowable return rate, and proposes guidelines as to the
proper disposition of the items. Such policies are usually accompanied by discounts
for the retailer

 It passes the returns responsibility onto the retailer, while reducing costs for the
manufacturer or distributor

 The drawback: the manufacturer losses control over its merchandise

 Centralized Return Centers (CRC)

 Consistency in disposition decisions and minimizations of errors
 Space saving advantage for retailers who want to dedicate as much of the shop
floor to salable merchandise as possible
 Labor cost reduction – due to specialization, CRC employees can typically
handle returns more efficiently than retail clerks can
 Transportation cost reduction – empty truckloads used to pick up return
merchandise
 A selling tool – the easy disposition of returned items represent can be an
appealing service to retailers, and may be a deal-maker for obtaining or
retaining customers

 Remanufacture and Refurbishment

 Negotiation is a key element for all parties of the reverse logistics process. Because of
the inherent lack of expertise on product returns, negotiations usually are informal and
approached without formal pricing guidelines. Firms often do not maximize the
residual value of returned product.

 Financial Management

 Probably the most difficult part of reverse logistic and also one of the most
important
 Returns are sometimes charged against sales. People in the sales department
may tend to fight returns and delay them as much as possible. Furthermore,
accounts receivables are impacted by returns

 Outsourcing

 Reverse logistic is usually not a core competence of the firm. In many cases,
however, it makes more sense for the firm to outsource their reverse logistics
functions than keep those in-house.

REVERSE LOGISTICS CHALLENGES

• Retailer – Manufacturer Conflict

• Inefficiencies that lengthen the time for processing returns:

  Condition of the item

 Value of the item

 Timeliness of response

• They have to develop a working partnership to derive mutual benefit.

• Cause and Effect

• Poor data collection leads to uncertainty about return causes.

• Improving the return process decreases costs.

• Being able to see defective products and to track return issues.

• Reactive Response

• Government regulation or pressure from environmental agencies

• It has not been possible to justify a large investment in improving reverse

logistics systems and capabilities.

Reverse Logistics and the Environment

• Environmental considerations have a greater impact on many logistics decisions.

• For example:

• Many products can no longer be placed in landfills

• Firms forced to take back their products at the end of their useful lifetime.

• Decrease of landfill availability and increase in Landfill costs.

Green Logistics and Reverse Logistics

• Reverse Logistics refers to all efforts to move goods from their typical place
disposal in order to recapture value.

• Green Logistics refers to minimizing the ecological impact of logistics, for

example, reducing energy usage of logistics activities and reducing usage of
materials.

Chapter Five
Vehicle Routing & Scheduling
The primary components of any transportation system are facilities, equipment and people.
 • Facilities include terminals, tracks, bridges, tunnels, signals, roadways, waterways
and docks.

• Equipment includes containers, cars, tractors, trailers, locomotives, aircraft and

vessels.

• People resources include loading and unloading crew, maintenance workforce,

operating crew and other administrative and support staff.

Long-haul versus short-haul transportation

In long-haul freight transportation, goods are moved over relatively long distances, between
terminals or other facilities. Commodities may be transported by truck, rail, ship or any
combination of modes.

In short-haul freight transportation, goods are transported, usually by truck, between pick-up
and delivery points situated in the same area. Such tasks are of short duration, shorter than a
work shift.

Vehicle routing problem

VRP is a combinatorial optimization and integer programming problem seeking to service a

number of customers with a fleet of vehicles.

Often the context is that of delivering goods located at a central warehouse or depot to
customers who have placed orders for such goods. Objective of such problems is to minimize
the time and distance traveled.

Vehicle Routing & Scheduling: Part 1

 Setup and Model

 Problem Variety

Pure Pickup or Delivery Problems.

Mixed Pickups and Deliveries.

Pickup-Delivery Problems.

Backhauls.

Complications.

 Simplest Model: TSP

Find best vehicle route(s) to serve a set of orders from customers.

Best route may be

 minimum cost,
 minimum distance, or
  minimum travel time.

Orders may be

 Delivery from depot to customer.

 Pickup at customer and return to depot.
 Pickup at one place and deliver to another place.

General Setup

 Assign customer orders to vehicle routes (designing routes).

 Assign vehicles to routes.
Assigned vehicle must be compatible with customers and orders on a route.
 Assign drivers to vehicles.
Assigned driver must be compatible with vehicle.
 Assign tractors to trailers.

Tractors must be compatible with trailers.

Model

 Nodes: physical locations

Depot.

Customers.

 Arcs or Links

Transportation links.

 Number on each arc represents cost, distance, or travel time.

Pure Pickup or Delivery

Delivery: Load vehicle at depot. Design route to deliver to many customers (destinations).

Pickup: Design route to pickup orders from many customers and deliver to depot.

Examples:
UPS, FedEx, etc.

Manufacturers & carriers.

Carpools, school buses, etc.

Pure Pickup or Delivery

TSP & VRP

TSP: Travelling Salesman Problem

One route can serve all orders.

VRP: Vehicle Routing Problem

More than one route is required to serve all orders.

Mixed Pickup & Delivery

Mixed Pickup & Delivery

Applications of TSP

• Many more applications of TSP come from logistics, transportation

– Scheduling of buses to pick up school children

– Pickup and Ride

– …..

– Air force Logistics

• Yet TSP &VRP provide a perfect test ground for the development of novel ideas

– Simulated Annealing, GA, Tabu Search

– Langragean relaxation, Branch and Cut, Column Generation.

TSP Solutions

• Heuristics
 – Construction: build a feasible route.

– Improvement: improve a feasible route.

• Not necessarily optimal, but fast.

• Performance depends on problem.

• Worst case performance may be very poor.

– Exact algorithms

– Integer programming.

– Branch and bound.

• Optimal, but usually slow.

• Difficult to include complications.

TSP Construction Heuristics

• Nearest neighbor.

– Add nearest customer to end of the route.

– Nearest insertion.

– Go to nearest customer and return.

– Insert customer closest to the route in the best sequence.

– Savings method.

– Add customer that saves the most to the route.

Chapter Six
Fleet Management
• Fleet Management is a reduction of materials handling costs resulting in increased
efficiency.

– This requires a planned replacement program which optimizes the economic

life of the fleet.

• The overall goal is universal: to reduce costs.

• However, each customer‘s definition of, and expectation from, fleet management is
unique.
• Fleet Facts – Understanding Costs

• 20% of the total cost of materials handling is associated with the acquisition cost of
the fleet.

• Fleet Facts – Lifecycle

• The average vehicle is over 12 years old.

• The average vehicle has an estimated economic life of 10,000-14,000 hours.

• As a fleet ages, the cost of operation increases:

– Repair expenses increase

– Downtime increases

– Productivity decreases

• Fleet Facts – Utilization

• On average, companies have 10% to 20% more units in operation than are required to
do the job.

• Short term rental units are often used to address shortages created by excessive
downtime.

• vehicles are often sourced through multiple vendors, limiting flexibility related to
fleet rotation and re-location.

• Fleet Facts – Maintenance

• Many companies do not have scheduled or preventative maintenance programs for

their vehicle fleets.

• vehicle fleets typically consist of a diverse mixture of brands, requiring an extensive

inventory of parts to support them.

• Record keeping regarding vehicle maintenance is generally poor or non-existent.

• fleet: the focus of TPM

• The Six big Losses

• fleet Effectiveness

• Calculating fleet Effectiveness

• fleet Management

• Factors Affecting fleet Effectiveness

 • fleet failure (breakdown)

• Setup and adjustment downtime

• Idling and minor stoppages

• Reduced speed

• Process defects

• Reduced yield

• Cycle Time and Set-Up Reduction

Shorter runs produce customer orders with less lead time

• However, fleet breakdowns, idling and minor stoppages will make it very difficult to
reduce cycle times

• Hence, cycle time reductions result in shorter and more frequent production runs.

• Suddenly, set-ups and adjustments become crucial in reducing cycle times

• Past OEE studies show that set-up and adjustments can consume up to 50% of total
production time

• In such situation the six big losses become more of an issue to solve

• The Six Big Losses

 Down Time.

1. Breakdowns due to fleet failure.

2. Setup and adjustment (e.g. exchange of dies in injection molding machines,

etc.)

 Speed Losses.

1. Idling and minor stoppages (abnormal operation of sensor, etc.).

2. Reduced speed (discrepancies between designed and actual speed of fleet)

 Defects.

1. Defects in process and rework (scrap and quality defects requiring repair)

2. Reduced yield between machine startup and stable production.

Availability

• Loading time = Total available time per day (or month) – Planned downtime
 • Planned downtime: amount of downtime officially scheduled in the production plan

Performance Efficiency

Alternative formula in case ideal cycle time is not known or products with different cycle
times are run on the same machine.

Operation time - Lost time

PE 
Operation time

• Lost time due to

– Idling and minor stoppages,

– Speed losses,

Rate of Quality

Pr ocessedamount - rejects
Rate of Quality  100
Pr ocessedamount
Usable operating time - Defects time loss
Rate of Quality  100
Usable operating time

SMED was originally designed to improve die press setups but its principles apply to
changeovers in all types of processes. Set-ups can be either:

– Internal Setup: Operations that are performed while a machine is stopped

– External Setup: Operations that are performed while a machine is running

• 3 Phases of SMED

• Separating Internal and External Setup

• Converting Internal Setup to External Setup

• Streamlining all Aspect of the Setup Operation

Overall fleet Effectiveness (OEE)

In an ideal factory, fleet would operate 100 percent of the time at 100 percent capacity, with
an output of 100 percent good quality.

In real life, however, this situation is rare.

The difference between the ideal and the actual situation is due to losses. Calculating the
overall fleet effectiveness (OEE) rate is a crucial element of any serious commitment to
reduce fleet- and process-related wastes through total productive maintenance (TPM) and
other lean manufacturing methods like Operational Excellence, Six Sigma or World Class
Manufacturing.

• When we buy a piece of fleet, we do so to carry out a specific function.

• So, let‘s imagine that we have bought our new tool and installed it to the
manufacturer‘s standard.

• Everyone has been trained and we all know how to use it, how to set it up for
production, and we have also started making our first product.

The question is how do we know when the tool has failed?

• We, as the users, need to consider all the different ways it can fail or how many ways
it can fail to fulfill the description.

• Overall fleet Effectiveness (OEE) contd.

Possibly there are three ways that failure may occur.

1. The fleet can stop working completely known as a total failure (Availability),
total time available downtime
Availability (%)  * 100%
total time available

2. The fleet can work slower than it is capable of known as the partial failure
(throughput rate/Performance), and

number of units manufactured

Performance (%)  * 100%
possible number of manufacturable units

3. The fleet or product can lose quality known as quality failure (Quality).

number of units produced  number of defects

Quality (%)  * 100%
number of units produced

Fleet Management Process

Step 1: Survey

• Gather Information on the Existing Fleet

– Make/Model

– Age/Serial Number
 – Current/Anticipated Operating

– Utilization/Required Availability

– Specifications/Special

– Application/Operating

– Maintenance History

Step 2: Analysis

• Compare Existing Fleet to Replacement

– Maintenance History

– Utilization Studies

– Projected Maintenance

– Potential Savings

– ROI Analysis

Step 3: Proposal

• fleet Recommendations

– Replacement Units and Configurations

• Maintenance Options

– Contract Maintenance or Parts Inventory

• Training Recommendations

– Operator and Mechanic

Step 4: Implement

• Finalize Action Plan

– Standardize Proposed Recommendations

– Product Supply Plan

– fleet Disposal Plan

– Establish Training Schedule

– Maintenance Arrangements
 – Customer Commitment

Step 5: Monitor

• Regular Review of Plan

– Condition of fleet

– Hours

– Utilization

– Maintenance Cost

– Fleet Size and Replenishment

– Management Reporting

International Air Regulation

• US policy has opened direct flights into many cities other than coastal gateways

• Price reductions not yet realized

• Foreign carriers may be reluctant -- requires opening of several European cities

• IATA provides collective rate making for international carriers

Modal Selection & Carrier Management

Cargo Characteristics

• Size: Dimensions & Volume

• Weight: Absolute weight of cargo

• Hazardous Cargo: Special handling and service requirements

• Density: the weight-to-volume ratio

• Stowability: degree to which a product can fill the available space in a transportation
vehicle

• Handling: ease or difficulty of handling the product

• Liability: Likelihood (& cost) of threat of theft or pilferage

Conference Rate Making

• Conferences represent several firms which have banded together for collective rate
making -- a steamship conference

• Composed only of member firms

 • Contract or discounted rates (10 - 15%) charged to shippers signing ―exclusive
patronage agreements‖

Problems with Conference System

• Oversupply of space has resulted in some liner firms withdrawing and offering lower
rates

• Price cutting by ships owned by the former Soviet Union (under variable costs) in
order to obtain hard currency

• Overall, they provide a somewhat stable rate structure which foster uniformity of rates
and procedures

 Air

• Expensive

• Fast

• Move highly perishable, high value and low volume items

• Mostly Intermodal

 Rate Making: Air Cargo

• Value of service or cost of service

• Value of service applied to sensitive cargo and high demand routes

• Cost of service used in pricing cargo

• Utilization of space and product density drive

• Use standard density of 10.4 lbs/cf

• Suppose a carrier charges $90 per cf

• Product has weight of 480 lbs with dimensions of 6‘x5‘x3‘ or 90 cubic feet. 480/90 =
5.33 lbs/cf

• Carrier charges based on standard density since this is a low density item

• 90cuft x 10.4 lbs = 936 lbs is basis for charge

• Items with high density (> 10.4 lbs/cf) charged on actual weight

• Other Air Cargo Rates

• General Cargo: Available for many commodities

 • Class Rate: Used to attract freight and allow shippers to penetrate markets (generate
demand)

• Container Rates: Cost based, often discounted based on number of containers on a

route

• Other Rate Considerations

• Time/volume Rates: Rate reduction for a guaranteed amount of tonnage or

containers over a specific time period

• Currency Adjustment: Covers currency fluctuations

• Ports: Less competitive ports have had higher rail rates

What is Intermodal Transportation?

• The use of two or modes of transportation in moving a shipment from origin to

destination

• Mostly associated with ―piggy back‖ or container shipments

• Combines advantages (and disadvantages) of each mode used

• Reduces risk of theft and loss

• Shortens customer order cycle time and effectively reduces costs

• Promotes ―seamless‖ product movement: Eliminates unnecessary handling

Growth of Intermodal Transportation

• Deregulation

– Removed barriers to modes working together

– Global business

– Off-shore sourcing of goods

– Changes in business environment

– Higher operating costs

– Driver shortages

– Increased competitive pressures

Containerization

• Significant growth during Vietnam War

 • Improves efficiency, protects materiel, reduces handling & pilferage

• Sizes: 20 ft (TEU) or 40 ft (FEU)

• Shorter to permit multiple units on railcars

Other Forms of Carriers

I. Third Party Providers

• The offering of nearly any form of transportation to a shipper or receiver as part of a

total package of logistics services

• Shipper or user avoids capital outlays and investment

• Focus on core competency--let experts do logistics

II. Freight Forwarders

• Formerly common carriers

– non-asset owning

• Earn difference between what they charge (LTL, LCL) and what they pay (CL, TL)

• Issue bill of lading

III. Owner-Operator

• Own or lease a truck and trailer and make services available to for-hire carriers

• Contract out their services to non-union carriers

• Provide overflow capacity and flexibility

• Reduce financial risk to carriers

IV. Freight Brokers

• Intermediaries who bring shippers and carriers together for a fee

• Find customers for carriers or carriers for shippers

• Reduce burden for carriers & shippers

• Find best means/rate for shippers

• Help maximize capacity for carrier

• Information Systems expanding opportunities

V. Express & Courier

 • UPS, FEDEX, DHL

• Fast, door-to-door service

• Operate large network of terminals, pick up and delivery vehicles, and line haul

• Typically under 200 lbs

• Compete with Postal Service

• Future good due to expansion and innovative practices

Key Principles of Transportation Management

I. Improving Efficiency

• Rule of efficiency: Straight line, minimize stopping--avoid damage and cost (delay)

• Minimize handling: Avoid ―handshakes‖ and attempt to make process ―seamless‖

• Full capacity: Reduce cost per unit

• Break bulk & consolidation on long haul

• Avoid empty backhauls

• Effective Scheduling: ―Optimize‖ labor and fleet (5%-10%)

• Transportation rates are distance related, not distance proportional

II. Efficient Use of Technology & fleet

• High utilization of expensive assets

• Larger the vehicle, the lower the cost per unit

• Speed does not equal economical operations

• Minimize vehicle gross weight

• Standardized vehicles and fleet

• Balance specialization with adaptability

• Examine trade-offs between IT and traditional logistics functions

III. Coordinate Operations

• Coordinate operations with requirements to ensure trade-offs and appropriate level of

service

• Cost accountability as part of performance measurement

 • Reliability is sometimes better than speed

• Look for opportunities to innovate, but recognize proven principles

Costing & Pricing

Rate versus Price

Rate:

– the amount that is lawfully charged and is based on cost plus market supply
and demand

Price:

– implies value based on prevailing market forces. Charged under deregulation-

-carriers much more concerned with price.

Factors Influencing Transportation Costs

 Market-related factors

» Degree of competition

» Location of markets

» Government regulation

» Freight traffic into and out of a market

» Domestic versus international movement

 Product-Related Factors

» Density: the weight-to-volume ratio

» Stowability: degree to which a product can fill the available space in a

transportation vehicle

» Handling: ease or difficulty of handling the product

» Liability: threat of theft or pilferage

Factors Influencing Transport Pricing

• Market Structure Models

• Pure Competition (Road)

• Monopoly (Rail/Air)
 • Oligopoly (Ocean/Air)

• Monopolistic Competition

Cost Concepts Used in Transportation

• Accounting cost: Cash outlays of firm. Allocation a problem

• Economic cost

– Opportunity cost

– Sunk cost

• Social cost --what are costs to society

Cost Structures

• Separable (traceable or directly assignable)

• Common

• Fixed, do not vary with volume

• Variable, vary with volume

• Marginal or incremental cost

• Out-of-pocket, immediately payable

Pricing of Transportation

• Transportation firms claim to know their costs but do not know how to price

• Relied on regulation and tariffs to set rates

• Must recognize impact of market forces, government regulation, other channel

members, and competitors in establishing prices

Comparison of US Domestic Transportation Modes

 Economic characteristics

» Cost

» Market coverage

» Degree of competition

» Predominant traffic

» Average length of haul

 » fleet capacity

 Service characteristics

» Speed (time-in-transit)

» Availability

» Consistency (delivery time variability)

» Loss and damage

» Flexibility (adjustment to shipper‘s needs)

 Carrier Pricing

• Free-on-board (FOB)

• Cost-of-service pricing

• Value-of-service pricing

• Delivered pricing

• Quantity discounts

• Allowances

 Mode/Carrier Selection

• Problem recognition

• Search process

• Choice process

• Postchoice evaluation

FOB Terms

• FOB = Free (freight) on board

• Comprise of two key elements of freight ownership and freight payment.

• Identifies your legal responsibilities during a transaction and perhaps hidden costs.

The Maritime Shipping Industry

• IntroductionShips and Shipping fleetShipping Company

OperationsMaritimeEconomicsShipping RegulationManaging Ocean Carriers

Port and Facility Operations

 • Introduction Port and Facility Functions Ocean Ports Air Ports Other Ports
Warehousing Free Trade Zones.

Air Transportation

• Introduction A Brief History of Aviation Airline Economics Airline Regulation

Airplanes and Aviation fleet Managing Air Carriers.

Revenue Management

• Revenue management, also known as yield management, is an essential instrument

for matching supply and demand by dividing customers into different segments based
on their purchase intentions and allocating capacity to the different segments in a way
that maximizes a particular firm‘s revenues (El Haddad, Roper & Jones, 2008).

• Basically, yield management is the process of allocating the right type of capacity to
the right kind of customer at the right price so as to maximize revenue or yield.

• It is profitably applied by airlines, hotels, restaurants, golf courses, shopping malls,

telephone operators, conference centres and other companies.

• The airline industry is considered the birthplace of yield management. After

deregulation in the late 1970s, airline competition increased, and the airlines tried to
operate their planes as efficiently as possible.

• Yield management was one of the methods developed as a way of increasing

competitive advantage and increasing revenue. In airlines, yield management is
concerned with selling the right seat to the right customer at the right price so as to
maximize yield.

• Yield management is also applied mostly in a hotel industry.

• In a hotel context, yield management is concerned with market sensitive pricing of

fixed room capacity relative to specific market characteristics. The 'goal' of YM is the
formulation and profitable alignment of price, product and buyer.

Generally, Yield Management system will significantly alter the traditional approach to
accommodation management specifically within the following key areas:

 Management focus

 Data collection

 Optimum guest mix

 Capacity levels

 Technological input

 Pricing
 Customer hotel interface

 Human resource implications

 Incentive schemes

 Training