UNIT 1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

Objectives
After going through this unit, you should be able to:
• learn the management concept and its application in SCM;
• explain how the evolution of SCM took place;
• define the various definitions of SCM and logistics;
• Illustrate the basic working of SCM with case studies;
• Differentiate between SCM and Logistics.

Structure
1.1 Introduction
1.2 The management Concept and evolution of SCM
1.3 What is supply chain management?
1.4 The basic SCM model
1.5 Relationships in SCM
1.6 Significance of SCM
1.7 Case Studies
1.8 Fundamentals of Logistics Management
1.9 Summary
1.10 Keywords

1.1 INTRODUCTION

In this unit, you are going to study the basic concepts of Supply Chain Management and logistics. Before
studying SCM, it is essential to understand the management concept as SCM is the branch of
management. The SCM is evolved from materials management. Therefore, you should also understand
the concept of materials management. It is required to know how the evolution of SCM and logistics
took place as a separate branch of management, from the origin of mankind. The management era
began from three schools of management. F.W. Taylor, Henry Fayol, and Elton Mayo are the three
pioneers of these schools. Their contribution to establishing management concept is also explained.
Further, Japanese management developed a management concept by providing philosophy such as
Kanban, Kaizen, Quality Control, Quality Assurance, Just In Time ( JIT ), and Total Quality Management (
TQM ). The implication of these concepts in SCM is very important. With the advent of Information
Technology, new horizons in SCM and logistics emerged. Management Information System ( MIS ) is a
useful tool for the operation and maintenance of the supply chain. The terms SCM and Logistics are
defined by various people differently. The main definitions are mentioned and discussed in this unit.
The working of SCM is explained with case studies. The basic model of SCM involving upstream and
downstream movements source centers and distribution centers are also explained. The evolution of
logistics management began during wartime. wars are won and lost because of logistics. Further, SCM
and logistics merely do not involve the physical distribution of material only. The difference between
physical distribution and Logistics is stated in this unit.

1.2 THE MANAGEMENT CONCEPT AND EVOLUTION OF SCM

Supply Chain Management is evolved from Materials Management. Materials management is as old as
a human being. From the old days of the stone age, man has tried to ‘ manage ‘ materials. During the
stone age, he had to collect different types of stones for making weapons. He had to store food, fruits,
leaves of trees, etc. to meet contingencies in the future. Later on, he began cultivating the land. It is
believed that the concept of godowns to store agricultural products was developed at the same time.

Sumerian people were knowing the procedure of record-keeping in 5000 BC. They used to keep the
records of materials available with them. Thus the concept of store recording originated from these
olden days. In 4000 BC Egyptian Pyramids were constructed. This involved the transportation and
storage of building blocks and other construction materials. As Peter Drucker has rightly said, these
are the first CEOs who were knowing management techniques. Babylonian people were knowing the
techniques of setting targets and comparing them with actual achievement in early 2000 BC. For
example, they used to decide the quantity of material to be transported and compare with actual
transportation work carried out. Hebrew people used to keep the hierarchy of various works in 600 BC.

Coming to the Indian scenario, Chanakya was knowing the management of materials. Temples,
Palaces, Forts, the sculpture of those days indicates that the people were knowing the management of
materials and material handling.

During the later period, Adam Smith [1723-1790] gave the real concept of the Supply Chain function.
He made a great contribution to the demand and supply relationships of material. In his book ‘Wealth
of Nations’, he emphasized that wealth not only lies in gold and silver but agricultural products also.
Smith, however, ignored industrial products. Because during that period, industrial development was
negligible. However, he threw light on poor arrangements in industries and mines in 1760.

He further stated that a market economy is based on the Demand and Supply relationship. If a demand
for a product increases, there is an increase in its cost. To meet demand, more industries will come up
with increased production. This would result in lowering the cost of products. Due to the lowering of
the price of a product, its demand would increase again. This procedure would continue.

Smith believed that it is not necessary to control the economy of the market. It will be controlled
automatically.
However, these efforts were not organized. The real direction in the development of management was
given by three schools of management – School of Scientific Management [ FW Taylor ], School of
Functional Management [ Henry Fayol ], and School of human relations management [ Elton Mayo ].

School Of Scientific Management: Fredric Winslow Taylor is named as a father of the school of scientific
management. He was a strong supporter of applying scientific methods to work. In 1911, Taylor wrote
a book ‘ Principles of Scientific Management ‘ in which he expressed the following thoughts:

• Replace thumb rule by scientific methods.

• There should be maximum work than restricted work. Taylor stated that a man is lazy and tries
to avoid work.
• The efficiency of a person depends on his internal desire to do the work and external working
conditions.
• Taylor further stated that efficiency is the ratio of output by input [ O/I ratio ]. Therefore the
efficiency can be improved by obtaining maximum output at minimum input.

If the material is to be transported from the store to the shop floor, divide it into subactivities such as
loading, transportation, and unloading. Set the standard time of each subactivity. Find the total standard
time for complete work. From this, find the time for one hour.
Compare this standard with the actual time taken by the worker. Accordingly, decide his efficiency.

In this way, Taylor has given the basis of scientific management. The concept of work measurement,
motion studies, time studies, operations research is the extensions of Taylor’s theory. The concepts of
the assembly line and mass production have emerged from Taylor’s work. Management thinkers like
Gilbreth, Gant, etc were followers of F.W. Taylor.

The implementation of Taylorism was made by Henry Ford. Henry Ford established the Ford motor
company in 1903. The manufacturing of cars [ Model T ] was based on the principle of the assembly line
and mass production conceptualized by Taylor. Even at that time, the rate of manufacturing was one
car per 24 seconds.

But Taylor’s work was strongly criticized by the following class:

• First criticism came from trade unions that the workers are not machines so that the formula
O/I is applied to them. Taylor was blamed that he is mechanizing the workers. The film ‘
modern times ‘ released in 1936 criticized Taylorism.
• Secondly, the traditional managers criticized because they thought of losing their importance
because of Taylorism.
• The third criticism came from commercial institutions like banks where the formula O/I is not
applicable.

However, despite the above criticisms, Taylor’s theory pioneered modern management.
School Of Functional Management
Henry Fayol [ 1841-1925 ], a French management thinker has put forward 14 principles of management
which are applicable even today to the modern SCM.

1 ] Division of labor 2 ] Authority and responsibility 3 ] discipline 4 ] Unity of command 5 ] Unity

of direction 6 ] Stability of tenure 7 ] Scalar chain 8 ] remuneration 9 ] Unity of direction 10 ]
centralization 11 ] order 12 ] equity 13 ] subordination 14 ] Team Sprit.

In his book ‘ General and Industrial Management ‘, Fayol stated that to achieve the desired output, an
organization should be divided into following six sections 1 ] technical 2 ] commercial 3 ] financial
4 ] accounting 5 ] security 6 ] Administration.

Taylor emphasized on the shop floor. On the other hand, Fayol emphasized on Top management. Fall is
the father of Functional Management.

School of Human relations management

Elton Mayo is called to be the father of the School of Human relations management. Taylorism was
criticized to be a dehumanizing concept. Elton Mayo had first stated that it is a human factor that plays
an important role in productivity. According to him, if a worker is motivated by excellent human
relations, he will work more efficiently.

This concept was followed by several management thinkers such as Mary Parker Fellow and Abraham
Maslow.

Hawthorne Experiments were conducted in support of Human relations management at Hawthorne

in the USA. The lady workers were given the task of assembly of telephonic devices at Bell Laboratory.
The supervisor appointed was humble and affectionate.

Under his supervision, they started working in an ordinary room. Next week, some facilities were added
in the hall such as ventilation, drinking water, etc. It was observed that there was an increase an
efficiency. Next week some more facilities such as Music, tea, etc were added. It was realized that there
was a rise in production. Next week some more facilities were added which resulted in rising in
production again.

On one day, keeping the facilities provided, the supervisor was immediately replaced. The new
supervisor was appointed who was arrogant, dehumanizing, and rude in behavior. It was surprisingly
noted that despite all facilities, there was a greater fall in production.

Thus the inference from Hawthorne experiments reveals that the human factor decides productivity
and not perks.
Maslow’s Theory Of Human needs -Abraham Maslow [ 1908-1970 ] has categorized human needs
into the following hierarchies:
• Physiological Needs: food, Clothing, and Housing
• Safety Needs: Protection against Theft, deprivation
• Social Needs: Fellowship, Friendship, love
• Egoistic Needs: Self-respect, Recognition, Reputation
• Self Fulfillment: Self Realisation, Self-actualization

These three schools made a tremendous impact on organizations and a separate branch of management
science emerged. Earlier there was no separate branch of management. It was a part of the engineering
department. In the later period, after the second world war, three branches of management viz.
production, personnel, and financial management came into existence.

The materials management was effectively followed by many organizations. This resulted in giving them
greater returns in terms of profit and turnover. Some of such industrial organizations are discussed
below:-

McDonald
The concept of ‘ Franchise ‘ is very significant in logistics management. McDonald was the first who
pioneered this concept successfully.

McDonald's is a famous name in the world of fast food. It was established by McDonald brothers
Richard McDonald and Morris McDonald. They started a business of selling eatables with a single stall.
Due to the good quality of material, good taste, and cleanliness, the customers get attracted. Then they
opened a restaurant in California. Later on, it was taken over by Remand Croc. Today there are 20,000
hotels owned by the McDonald group in 120 countries in the world. About one lakh employees are
working in the McDonald group. The total turnover is 14 ½ billion dollars [ Rs 66,500 crores ]. The net
profit is 2 billion dollars [ Rs 9300 crores ]. The concept of the franchise is first given by McDonald's to
management. The secret of there success lies mainly ineffective material management, as follows:

• appropriate quantity of materials – the dimensions, weight, combination, and taste are
appropriate. No compromise in this standard set.
• Cleanliness
• The simplicity of arrangement – they popularly called it a KISS [Keep it simple, stupid ]

Peter Drucker is called ‘Guru’ of management science. He wrote about 26 books and thousands of
articles on all management subjects. The popular terms such as Team manufacturing, Knowledge work,
empowerment were created by Drucker. He strongly opposed the concept of the assembly line.
According to Drucker one ‘inefficient‘ component of the chain of assembly adversely affects the overall
performance of the assembly line. He suggested that the concept assembly line should be replaced by
Team manufacturing.
Knowledge worker, as defined by Drucker is a person who is qualified, innovative, and experienced.
Such knowledge workers tend to change jobs for better prospects. Therefore, it is a task before
management to retain them.

Drucker put forward an important management technique called MBO [ management by Objectives ].
The MBO concept emphasizes to set an objective before the work is started. For example, a firm has to
decide whether to make a profit or reduce prices. Because if the prices are lowered, more profit cannot
be expected.

Japanese management

The difference between management at Japanese and US industries can be outlined as follows

• There is lifetime employment in Japanese industries. US industries work on a ‘hire and fire ‘
basis.
• There is a concept of job rotation in Japanese industries. US industries are based on the concept
of specialization.
• In Japanese industries, the promotion policy is based mainly on seniority. In US industries
experience, qualification and achievement are considered for promotion.
• In Japanese industries, the decision making is done collectively by all. In US industries, the
decisions are taken only by few people of top management.

Japanese people came up from the ash. There were a lot of problems and difficulties.
• There was Social and economical disturbance due to a nuclear attack in the early 1940s. The
national income of Japan was only 20% of the income of America.
• 75% of the land is non-arable. No crops can be cultivated. There are very few natural resources
like coal, fuel, etc.
• 90% of raw material is required to be imported from other countries.

Despite the above difficulties, Japan made tremendous progress. In 1995 the national income of Japan
was 80 of the income of America.

Several movies were released in which Japanese management was criticized. The film Shri 420 was
released in 1955. The song ‘Mera Joota hai Japanee‘ indicated the poor quality of the material. In the
film ‘Rising sun‘ Japanese military officers are shown cruel. In the film ‘ Fist of fury ‘, it is shown that
Japanese people exploited Chinese people.

Several books were published on Japanese management. The book ‘ Theory Z ‘ written by Ouchy
admired the workstyle of the Japanese administration. Pascal wrote the ‘ art of Japanese Management
‘ in which he stated that these are seven success factors [ 7s ] responsible for achievement made by
Japanese. These are Strategy, structure, system [ For management ] and Staff, Skill, Style, Shared
values [ For employees ]. Hays in 1984 wrote the book ‘ Restoring our capital age ‘ in which he stated
that because of dedication, handwork, cleanliness, ‘ no wastage concept ‘, Japan could prosper in a
short period.

Deming and Juron were American quality management thinkers. They were strong supporters of the
quality movement. At that period, American industries were not quality conscious. Also, there was a
wastage of raw material due to improper storage and material control. Deming and Juron strongly
opposed this fact in the US but people ignored them. However, they were welcomed in Japan. During
those days, Japanese products were not quality-oriented. Deming and Juron conducted quality
movement to eliminate this drawback of Japanese products. The quality movement originated from
Quality control, then to quality assurance, and finally total quality management.

Quality Control –ascertaining the quality of the finished product. The quality control department verifies
the finished products whether these are flawless and as per order and specifications.

Quality Assurance- is the next step after quality control. It involves ascertaining the quality of the
product at every stage of manufacturing so that the flaw if any can be removed during the stage of
manufacturing.

Total Quality Management - the step after QA is TQM. It involves ascertaining the quality of the raw
material required for the product, WIP checking, and finished product checking. This also involves
checking the quality of tools and plants, machines, processes, etc.

Just in Time – The concept of JIT relates to zero inventory. JIT is a philosophy that tells us that
expenditure on inventory affects adversely the profitability. Hence the material should be directly
supplied to the production unit rather than storing it in a warehouse.

MRP – The master schedule of inventory items is prepared for JIT implementation. The use of software
like oracle, Sybase help to develop MRP systems.
The secret of success of companies like Toyota, Sony, Matsushita [ Sanyo, National Panasonic ] lies in
the implementation of JIT and quality management. Toyota is the world-famous manufacturers of cars.
The rate of manufacturing is one car per second. Still, no defect is observed in any of the cars [ zero-
defect concept ]. Even an ordinary worker can stop the assembly line if he is not convinced about the
quality of any component of the car. There is no unnecessary movement of people in the industry. The
heavy works are performed by robots, not human beings.

From the above developments, a separate branch of management called materials management has
emerged. Earlier, materials management was a part of production management. However, it was
realized that functions to be performed by manufacturing management are different than those to be
performed by materials management. As a result, a separate branch of materials management was
established.
 New Horizons
After the 90s, there was a boom in the field of information technology. There were revolutionary
changes in materials management in the advent of IT. The main steps are discussed below:-
MIS – [ Management Information Systems ]

It is the system that provides the right information at the right time. It is a computerized information
system. The various types of MIS are as follows :
Type Of MIS Tasks Management Level
DSS – Decision Support It provides alternatives for making policy Top Management
System make decisions such as bonus, expansion,
diversification, promotion, dividend
declaration, etc
EIS – executive It provides information required by the Top Management
Information system executive of the organization. Such
information includes monthly progress,
Material receipt position etc.
BIS-Business Information It provides information regarding the Top Management
System position of the business, such as Profit/loss,
opening /closing stock, financial statement,
Balance sheet, etc.
OIS- Operational It provides information regarding the Middle/Lower
Information System erection, operation, maintenance, Management
troubleshooting of the machines.
ES – Expert System It is related to artificial intelligence. Middle
It is also called knowledge-based system The Management
knowledge and experience of the
The skilled worker is inputted to the
computer so that the computer would
decide in the absence of that worker. Such
systems are installed in unmanned
industries. It is also related to robotics. The
computer languages used are lisp, prolog,
and C.

The SCM and logistics evolved from the management scenario discussed above.

SCM & Logistics - These involve the effective distribution of material from supplier to user. With the
advent of the internet, it is quite easy to keep up to date information regarding the position of supply
of material. There are two types of ‘flows ‘ in such a system:- first, the flow of material from supplier
to user and the other, the flow of information between the servers of supplier and user.

In the early days of the 70s, the supply chain was a corporate necessity. Today, SCM has become a tool
to enhance competitive advantage for an organization. In the 80s, emphasis on SCM was to reengineer
the supply chain cost structure. The efforts were successful as a study conducted by the Council of
Logistics Management shows that during the period, companies reduced their logistics costs by 33%.
In the 90s, high-quality products and services were demanded by the customers. In response to these
demands, supply chain strategies undergone tremendous changes. Companies started outsourcing and
partnering with outside enterprises to share the burden of demand for more complex products and
more responsive services. The techniques like third party logistics emerged.

After 2000, there is a concept of the synchronized supply chain in which companies collaborate with
supply chain partners and synchronize operations. This has a major impact on creating value for
company and supply chain partners. Synchronous Supply chain with emphasis on web-enabled
collaboration among supply chain partners has become a major driver for sustaining a long term
competitive advantage for global companies.

1.3 WHAT IS SUPPLY CHAIN MANAGEMENT?

Supply chain management is the combination of art and science that goes into improving the way your
company finds the raw components it needs to make a product or service, manufactures that product
or service and delivers it to customers. The following are five basic components for the supply chain
management.

Plan
This is the strategic portion of supply chain management. You need a strategy for managing all the
resources that go toward meeting customer demand for your product or service. A big piece of planning
is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers
high quality and value to customers.

Source
Choose the suppliers that will deliver the goods and services you need to create your product or service.
Develop a set of pricing, delivery, and payment processes with suppliers and create metrics for
monitoring and improving the relationships. And put together processes for managing the inventory of
goods and services you receive from suppliers, including receiving shipments, verifying them,
transferring them to your manufacturing facilities, and authorizing supplier payments.
Make
This is the manufacturing step. Schedule the activities necessary for production, testing, packaging, and
preparation for delivery. As the most metric-intensive portion of the supply chain, measure quality
levels, production output, and worker productivity.

Deliver
This is the part that many insiders refer to as "logistics." Coordinate the receipt of orders from
customers, develop a network of warehouses, pick carriers to get products to customers, and set up an
invoicing system to receive payments.

Return
The problem part of the supply chain. Create a network for receiving defective and excess products back
from customers and supporting customers who have problems with delivered products.

DEFINITIONS
Supply Chain is a network of facilities and distribution options that performs the functions of
procurement of materials, the transformation of these materials into intermediate and finished
products, and distribution of these finished products to customers.

Supply Chain is a well-balanced and well-practiced relay team. Cooper and Ellram

The supply chain is the network of autonomous or semi-autonomous business entities collectively
responsible for procurement, manufacturing, and distribution activities associated with one or more
families of related products. Jayshankar

A Supply chain is a network of facilities that procure raw materials, transform them into intermediate
goods and then final products, and deliver the products to the customers through a distribution system.
Lee and Billington

A Supply chain is a network of facilities and distribution options that performs the functions of
procurement of materials, the transformation of these materials into intermediate and finished
products, and distribution of these finished products to customers. Ganeshan and Harrison

1. 4 THE BASIC SCM MODEL

The following figure shows a basic model of the SCM system.

The system is mainly having three components - material Flow, information flow, and industries
engaged inflow of material and information. These three components work on the time axis.

Zheng has defined supply networks as, number of organizations that are linked together for the supply
of goods or services that are required by end consumers.

1.5 RELATIONSHIPS IN SUPPLY CHAIN MANAGEMENT

The following figure shows the relationships of SCM components concerning our organization.
The above system is divided into two parts, supply-side and physical distribution. In the supply side, the
raw material is supplied to our organization. This process takes place through Inbound logistics. In
physical distribution, the finished product is transported to the end consumer. This process takes place
through outbound logistics. Thus the combination of Inbound and Outbound logistics gives rise to the
entire SCM system.

Two more terms are introduced in the above layout- upstream and downstream. It indicates that the
material flows from upstream to downstream.
The suppliers are tiered into Tier I and Tier II categories. Tier I suppliers receive the raw material from
the primary manufacturer and application process on the raw material as per our requirement. Tier II
suppliers apply secondary treatment to the raw material as required.

On similar lines, consumers are also tiered into Tier I and Tier II categories. Tier I consumers are
wholesalers and Tier II consumers are retailers. In this way, the end consumer receives our finished
product through wholesalers and retailers.

Cow to Customer Model for SCM

The suppliers of cheese have developed the same for their business. The model is as follows:

1.6 SIGNIFICANCE OF SUPPLY CHAIN MANAGEMENT AND LOGISTICS

Today, SCM and Logistics have become very much significant because of competition, recession, and
other factors. With the advent of emerging information technology, the SCM and Logistics systems can
be very effectively implemented. The significant advantages of SCM and Logistics are discussed below:
• High Speed Of Operation – The flow of material and information is managed such that there is
a quick response to the consumer’s demand.
• Economic Operation – although one has to invest initially in implementing SCML systems, it is
economical in the long term.
• JIT – the purpose of JIT can be effectively fulfilled through SCML systems.
• Flexible – SCML systems are highly flexible to make respectively modifications and alterations
as per requirement.
• Simplicity – the SCML systems are easy and simple so that anybody can monitor and operate.
• Wasteful movements – the wasteful and human fatigue oriented actions are completely
nullified in SCML systems.
• Competitive advantage- consumers are benefited as the cost of the product is lesser because
of competition
• Increased dependability – SCML systems are trustworthy as the delivery schedule can be strictly
followed.
• Optimum Utilization of resources – the supply chains are designed in such a way that there is
optimum utilization of available resources.

1.7 CASE STUDIES

Case Study – TESCO

TESCO is the UK’s largest food retailers. They own 800 stores in Europe out of which 646 are located in
the United Kingdom. In addition to this, there are 40000 SKUs [ Store Keeping Units ], 2000 suppliers, 1
Billion cases of products are shipped in a year. It is required to carry these food products within a specific
temperature.
Old Pattern – The old pattern followed by the company in 1980 is based on the following.
• There are 26 depots to supply the products to the retailer. The material is supplied from
suppliers to retailers through these depots.
• The space to store you is inadequate.
• The temperature is not controlled properly.

The new revised pattern [ SCM&L implementation ] is as follow:

The RDC [ Regional Distribution center ] is formed with having a total area of 250,000 sq.feet . each
distribution center comprises 50 retails stores. The delivery vehicles are provided with insulation
trolleys. The RDC is divided into three compartments – DC1, DC2, and DC3. DC1 operates at a
temperature of –250 centigrade [ frozen ]. DC2 operates at a temperature of –10 centigrade [ chilled ]
and DC3 operates at a temperature of +120 centigrade [semi ambient ]. the system can carry 30,000
million cases per year.

They developed TIE [ Tesco info exchange ] which keeps up to date information of demand and supply
position. The TIE comprises servers, workstations, Network Information systems, communication
channels, etc.

EPOS System – [ Electronic point of sale ] customer purchases are scanned through the bar code reader
and recorded automatically for each SKU.

EDI – [ Electronic data interchange ] is used for the placement of purchase orders.

The breakdown of costs is as follows:

Supplier delivery ………………… 18%
TESCO material handling ………. 28%
Storage carrying cost ……………. 46%
Procurement cost ………………. 8 %
Total ………………………….. 100%

The carrying cost is about 50%. It is necessary to decrease the carrying cost. Hence it was necessary to
implement JIT for upstream and downstream activities.

Oliver & Webber have stated in the theory of SCM that :

• SCM views the supply chain as a single entity
• It demands strategic decision making
• It views the balancing of inventories as of last resort
• It demands system integration
 1.8 FUNDAMENTALS OF LOGISTICS MANAGEMENT

War And Logistics

In 1991, during the gulf war, it had been necessary for the US and its allies to move huge amounts of
material in an impossibly short time frame. Half a million people and over half a million tons of material
[ including weapons, animation ] and supplies were airlifted over a large distance of 12000 KM. Further
2.3 tons of types of equipment were moved through the sea. This was carried out just in a few months.
Through the history of mankind, wars have been won and lost through logistics strengths and
capabilities or lack of them. It has been argued that the defeat of the British in the American war of
independence can be attributed to logistics failure. The British army in America depended almost on
Britain for animation, weapons, grandees, etc. 12000 troops required material. For the first six years of
war, the supply was inadequate. This affected adversely the operation and morale of troops. After
realizing the importance, a separate section of logistics was opened in 1781, but it was too late.

In the second world war also logistics played an important role. Allied forces were having expertise in
Logistics. This resulted in the defeat of Rommel in the desert. Rommel himself said once that “ before
fighting, the battle is won or lost by quartermasters”.

Sun Stu in his book ‘ art of war’ explains the importance of logistics in the war.
Changez Khan moved army comprising of around one Lac soldiers, vehicles and other material over a
narrow road four feet wide

Competitive Advantage
Logistic management can provide a major source of competitive advantage. A position of enduring
superiority over competitors in terms of customer preference may be achieved through logistics. There
is a triangular relationship between 3 Cs – customer competitor and company as follows:-
Definitions
The term Logistics is defined by different people differently, as follows:

According to Webster’s New Encyclopedic Dictionary [ 1993 ]

Logistics is the branch of military science having to do with procuring, maintaining, and transporting
material, personnel, and facilities.

Council of logistics management

Logistics is the process of planning, implementing and controlling, the efficient, cost-effective flow and
storage of raw material, in-process inventory, finished goods, and related information from point of
origin to point of consumption to confirm customer requirements.

Bowersox
Logistics is a single-minded logic to guide processes of planning, allocating, and controlling human and
financial resources committed to physical distribution, manufacturing, support, and purchasing
operations.
Robert A Novack
Logistics is the activity involving the creation of time, place, form, and possession of utilities within and
among firms and individuals through strategic management and to create products/services that satisfy
the customer through the attainment of value.
To summarize, logistics encompasses the total flow of materials from the acquisition of raw material
and purchased parts to delivery of a finished product to the customer. Thus, logistics involves the
following activities:
• Procurement
• Plant and warehouse selection
• Demand forecasting
• Customer service
• Order processing
• Traffic and transportation
• Inventory control
• Warehousing and storage
• Packaging
• Material handling
• Distribution communication
• Return of goods handling
• Parts and service support
• Salvage and scrap disposal.

Components of Logistics
Andrew C, Gross has stated that there are two main components of logistics – material management
and physical distribution management. These are shown in the following diagram:
Once the finished product is rolled out on the factory floor, logistics becomes synonymous with physical
distribution management which involves the management of finished goods inventories [ both within
and outside plant ] and all activities that need to be taken care of to make final delivery of goods to the
customer.

The difference between Physical distribution and logistics is furnished in the following chart:-
 Physical distribution
Physical distribution is the Management of movement,
inventory control, protection, and storage of raw material
and processed or finished goods to and from the
production line.
logistics
Logistics is the process of planning, implementing and
controlling, the efficient, cost-effective flow and storage
of raw material, in-process inventory, finished goods, and
related information from point of origin to point of
consumption to confirm customer requirements.

Narrow scope then logistics Wide scope

Concerned with the creation of time and place utilities. Concerned with the creation of time, place, form and
possession utilities
Deals with outbound activities only. Deals with both inbound & outbound activities.

Logistics also includes receiving and processing orders, releasing goods from industry, transporting
finished goods to ultimate consumers while trying to achieve maximum customer satisfaction within
the distribution channel.

SCM and Logistics

The supply chain is the network of organized activities that are coordinated. In other words, SCM is the
linkage of upstream and downstream linkages of different processes and activities to distribute the
products through channels ultimately to the customers. For example, the shirt manufacturer is the part
of the supply chain that extends upstream through the weavers of fabrics to the manufacturers of
fabrics and downstream through the distributors and retailers to final consumers.

SCM is the philosophy of business, based on the idea of partnership. It believes that if the partnership
is maintained between a marketing channel and entities with the channel, it would increase the
efficiency of the channel. SCM aims to achieve the following:
• Lower costs
• More sales
• Prompt delivery
• Increased goodwill
• Improved customer confidence
• Competitive edge

Thus SCM entails the following

• Management of the flow of goods from suppliers to the final user.
• System-wide coordination of product and information flows.
• Development of relationships and integration of all activities that provide customer value
through the distribution channel.

Difference between SCM and logistics can be stated as follows:-

SCM logistics
 SCM is the management of upstream and downstream
relationships to ensure supplier-customer satisfaction to
the organization.
Not only seeks to create a single plan for the flow of goods
and information through business but also aims to achieve
linkage and coordination between the process of other
entities in the chain, like suppliers, customers, and so
forth.
Logistics is the process of planning, implementing and
controlling, the efficient, cost-effective flow and storage
of raw material, in-process inventory, finished goods, and
related information from point of origin to point of
consumption to confirm customer requirements.
Logistics is 100% planning oriented.
Seeks to create a single plan for the flow of product &
information through business. But it is planning oriented.

1.9 SUMMARY

The SCM and logistics evolved from the management scenario from the stone age to the modern ERP
Environment of today.

SCM & Logistics - Involve the effective distribution of material from the Supplier to the user. With the
advent of the internet, it is quite easy to keep up to date information regarding the position of supply
of material. There are two types of ‘flows ‘ in such a system:- One, the flow of material from supplier
to user, and two, flow of information between the servers of supplier and user.

Supply chain management is the combination of art and science that goes into improving the way your
company finds the raw components it needs to make a product or service, manufactures that product
or service and delivers it to customers. The following are five basic components for the supply chain
management.

• Plan
• Source
• Make
• Deliver
• Return

Supply Chain is defined as a network of facilities and distribution options that performs the functions of
procurement of materials, the transformation of these materials into intermediate and finished
products, and distribution of these finished products to customers.

The system is mainly having three components - material Flow, information flow, and industries
engaged in the flow of material and information. These three components work on the time axis.
Zheng has defined supply network as:

The number of organizations that are linked together for the supply of goods or services that are
required by end consumers.

The significant advantages of SCM and Logistics are discussed below:

• High Speed Of Operation
• Economic Operation
• JIT – the purpose of JIT can be effectively fulfilled through SCML systems
• Flexible
• Simplicity
• Wasteful movements
• Competitive advantage
• Increased dependability
• Optimum Utilization of

The logistics management is evolved from wartime since the beginning. In 1991, during the gulf war, it
had been necessary for the US and its allies to move a huge amount of material in an impossibly short
time frame. Half a million people and over half a million tons of material [ including weapons, animation
] and supplies were airlifted over a large distance of 12000 KM. Further 2.3 tons of types of equipment
were moved through the sea. This was carried out just in a few months.

Logistic management can provide a major source of competitive advantage. A position of enduring
superiority over competitors in terms of customer preference may be achieved through logistics. There
is a triangular relationship between 3 Cs – customer competitor and company.

The term Logistics is defined by different people differently, as follows:

According to Webster’s New Encyclopedic Dictionary [ 1993 ], Logistics is the branch of military science
having to do with procuring, maintaining, and transporting material, personnel, and facilities.

Andrew C, Gross has stated that there are two main components of logistics – material management
and physical distribution management.

The comparison between Logistics and SCM and Logistics and physical distribution has been studied in
this unit.
1.10 KEYWORDS

SCM, Logistics, MIS, JIT, TQM

UNIT 2 FUNDAMENTALS OF SCM

Objectives
After going through this unit, you should be able to:

• differentiate between Push Type Vs Pull Type SCM;

• realize SCM in Indian Organizations;
• define Direct Product Profitability [ DPP ];
• learn the concept of intermediation;
• learn the concept of Supply Chain profitability;
• define various decision phases in Supply Chain;
• illustrate SCM operation with typical case studies.

Structure
2.1 Introduction
2.2 Decision Phases in Supply Chain
2.3 The macro processes of Supply Chain
2.4 Push-Pull based SCMs
2.5 Markov Chain
2.6 Different types of Logistics
2.7 SCM in Indian Industry
2.8 Reverse SCM and Logistics
2.9 Other related topics
2.10 Case Studies
2.11 Summary
2.12 Keywords

2.1 INTRODUCTION

SCM is the dynamic process involving the transfer of goods, information, and funds.
Thus it involves the transfer of 3 Ms namely – Material, Messages, and Money.
Earning profit with a satisfied customer is the primary objective of SCM.

The Supply Chain Profitability is given by the following expression:

Supply Chain profitability = Revenue generated from Customer-Cost across Supply Chain

The Supply Chain profitability can be improved by increasing revenue generated from the customer
and reducing cost across the supply chain. It is more feasible to reduce the cost across the supply
chain. Thus SCM is the effective management of costs occurring between and among the stages of
supply chain done to maximize and increase Supply Chain profitability.

2.2 DECISION PHASES IN SUPPLY CHAIN

There are three decision phases in the supply chain:

• Supply Chain Decisions – involves the structuring of the supply chain over several years.
• Supply Chain Planning - Planning is a process of deciding the course of action in advance. This
phase involves long term planning of one year or six months.
• Supply Chain Operations – This phase involves short term planning of various operations to be
conducted, usually daily or weekly.

Example
The following figure shows various stages of the detergent soap supply chain at Hindustan Lever Ltd.
There are two inbound streams. One, the timber company supplies raw material to the paper
manufacturer who processes it and sends it to Tetra Pack. Tetra Pack further processes it to
manufacture packing material for soap. Second, the chemical supplies raw material to the plastic
manufacturer who processes it and further supplies to Hindustan Lever Ltd. The material is further
processed at Hindustan Lever Ltd and the finished product is manufactured, There is one outbound
stream for dispatching the finished product to the consumer. The consumer receives products through
distributors and retailers. The Food World or the third-party logistics providers are the distributors and
Food World Mega Mart are the retailers. In this way, for this particular supply chain, there are two
inbound streams and one outbound stream.
Cycle View - depicts a series of the supply chain. The following figure shows various cycles of the
supply chain process.
Customer Order Cycle
Customer arrival: indicates customer arrival at the point of purchase where he has access to product
choices and makes decisions for purchase. This place may be a retailer’s shop . an internet website or
a telemarketing center.

Customer Order entry: Refers to the customer informing the retailer what product he wants to
purchase.

Customer Order Fulfillment: Customer Order is fulfilled and sent to the customer.

Customer Order Receiving: the customer receives the desired product and takes its ownership.

Replenishment Cycle
It occurs at the wholesaler and retailer interface. It includes all processes of updating and replenishing
inventory.
Manufacturing Cycle

Order Arrival – distributor prepares a replenishment order based on the forecast for future demand
and current product inventories.

Production Scheduling – The forecasted orders are allocated to the production plan.

Manufacturing and Shipping – products are manufactured as per production schedule and shipped.
Receiving – the distributor receives the products and then updates his inventory records.

The Procurement Cycle – this cycle is exercised to ensure that the material is available all the time to
the manufacturer. See the following figure.
2.3 THE MACRO PROCESSES OF SUPPLY CHAIN

The macro processors of the supply chain are as follows.

Customer Relationship Management [ CRM ]

It helps to generate customer demand and helps in placing and tracking orders from various
customers. Functions of marketing, promotion, sales, and website management are performed during
this process. CRM is at the interface between the firm and its customers.

Internal Supply Chain Management – [ ISCM ]

ISCM comprises processes taking place internally within the organization such as internal production,
inventory policies, storage capacity, demand-supply plans.

Supplier Relationship Management – [ SRM ]

SRM is at the interface between the firm and its suppliers. It comprises macro functions such as
sourcing, negotiations with suppliers, PO placement, etc.

The flow of information, products, and funds takes place through the above three macro-processes.

The following figure shows different macro processes.

2.4 PUSH PULL BASED SCMS

There are two types of SCMs – Push Based SCM and Pull based SCM.

Push based SCM is a traditional type of SCM. In this approach, materials flow from supplier to
consumer via production and distribution. The actual consumption by the end customer is not taken
into consideration.

On the other hand, the pull-based SCM is the opposite. In this case, the actual consumption pulls
distribution, distribution pulls production and production pulls and production pulls material supply.
Pull based SCM is a modern type of SCM.

Push Demand - is the one in which execution is initiated in anticipation of the customer’s order. Here
there is execution even before the product is demanded. Thus in this process, the demand is not
known and must be forecast. This process is also called a Speculative Process as it reacts to
speculative or demand forecast rather than the actual demand.

Pull Process – is the one in which execution is initiated after the customer’s order is received. Here
there is no execution until the organization receives the desired order of the customer. Thus, in this
process, customer demand is known with certainty. This process is also called as Reactive Process as it
reacts to customer demand.

The comparison of Push-Pull systems is as furnished below:

Parameter Push type SCM Pull type SCM
Approach Traditional Modern
Consumption of product at the end-user level Not considered Considered
Whether there is an improvement in overall no Yes
working?
Capacity utilization In a few cases In all cases
Cost of the finished product Usually More Lesser
Consumer service Usually poor Always better
Market share as a salable product Usually decreasing Increasing

2.5 THE MARKOV CHAIN

The Markov Chain is one of the popular techniques used in Operations research. In SCM&L
management, the Markov Chains are used to evaluate the demand for a product so that the supply
chain is designed accordingly. The significant feature of Markov Chain is it is simple but still powerful.
It only involves a simple matrix multiplication.

The example of the Markov Chain is given below, through which the technique can be easily learned.

Example
The certain market comprises of 6400 consumers for a particular product. There are two suppliers A
and B who supply this material to this market. The past sales record of A indicates that there was
75% of sales out of the total requirement in the market. Similarly, the record of B shows that 50% of
products out of total requirements were sold.

Using Markov Chain find:

• share of A and B out of 6400 consumers using matrices
• share of A and B out of 6400 consumers using algebraic expression
• the probability that B will have a share in the market

Answer:
share of A and B out of 6400 consumers using matrices.
Let us suppose that 6400 consumers are shared equally between A and B i.e. 3200 each. Thus the
consumer matrix is formed as follows:-

A B
3200 3200

The transition matrix is formed as follows :

Transition matrix:

A B
75% 25%
50% 50%

Now multiply the consumer matrix by transition matrix. Note that this matrix multiplication is not
commutative.

A B
3200 3200

X
A B
75% 25%
50% 50%

=
A B
4000 2400

Similarly in second iteration A = 4200 and B=2200 as worked out below:

A B
4000 2400

X
A B
75% 25%
50% 50%

=
A B
4200 2200

In the third iteration find out share of A and B in a similar manner.

2 ] share of A and B out of 6400 consumers using an algebraic expression.
Let As the share of product A . Then the following expression can be formed:-

A = 75% of A + 50% of B
= 75% of A + 50% of [ 6400-A ]
= 4266 2/3

3 ] probability that B will have a share in the market.

Let share of B is 1 and no share for A.

[ 0 1 ] X [ 75% 25% ] [ 75% 25% ] [ 75% 25% ]

50% 50% 50% 50% 50% 50%

= [ 0.65625 .34375 ]

Thus the probability that B will have a share is 34.375%.

2.6 DIFFERENT TYPES OF LOGISTICS

The important types of logistics are discussed below:

Third-Party Logistics [ 3PL]

The 3PL is based on the principle of Business Process Outsourcing.
The logistic services entrusted to a third party is called third-party logistics. It is thus
subcontracting or outsourcing. The reasons why the firm wants to go for third party logistics are
stated below:

• Logistics not being the business of some firms tend to go for TPL.
• Some companies do not have enough resources for conducting activities related to logistics.
Hence these companies go for third party logistics.
• The party may be called on in case of urgency.
• The third-party logistics may be economical in many cases.

Various steps involved in TPL are as follows:

• Scoping of requirements
 • Selection of service providers
• Implementation, controlling and follow up
• Management and monitoring

There are certain disadvantages associated with TPL. These are as follows:
• It is difficult to record the measurements of activities carried out by the third-party logistics
company. Very close monitoring is required to note measurements.
• Close coordination is required to perform various activities.
• In case the third party logistics company is not an expert in the job, the problems may arise.

The famous 3PL agencies are FedEx, DHL, TNT, Blue Dart, Sky Pack, etc.

Global Logistics
Global logistics is an international logistics. It involves managing distance, currency, and customs duty.
The benefits of global logistics are as follows.

• Access to raw material and finished product.

• Improved quality and customer satisfaction due to international competition.
• Low cost of the product due to international competition.
• Better customer service due to international competition.

The demerits associated with global logistics are as follows.

• Delivery of material may be unreliable
• Cultural and linguistic problems
• Longer lead time
• nationalistic attitude
• JIT requirement

The important organizations involved in global logistics are listed below:-

• WTO- World Trade Organization
• IMF-international Monitory Fund
• EEC-European Economic community
• NAFTA- North American Free trade Agreement

Benchmarking
The benchmarking involves a comparison of SCM&L activities with a standard reference SCM&L
agency. The deviation from such comparison is found out and accordingly, corrective action is
taken. The various levels of standard reference agencies are as follows:-

• World Class SCM&L performer

 • Best practice of any company within our country
• Best practice in our Industry.
• The best practice followed by a group within our organization

The process of conducting benchmarking can be described in the following steps.

• select the process and form a team
• select a performance matrix
• the select pattern in benchmarking
• go for data collection
• conduct gap analysis
• implement results

2.7 SCM IN INDIAN INDUSTRY

In India, the liberalization process of the economy started in 1991. This was followed by the decontrol
of steel Industries in 1992. The established steel manufacturers like SAIL and TISCO had to face
competition with emerging industries like ESPAT profiles, Lloyd Steel, ISSAR, Jindal Steel, etc. All
steel industries are equipped with state-of-art technology and the availability of skilled manpower.
They have a stock of large quantity and variety of items. They have division and product lines at
multiple locations. Therefore, the opportunities for steel plants exits in their expertise in supply chain
management for contribution to competitiveness and profitability.

The market and industry environment of steel products can be considered to be under the following.
• Globalization
• Competition
• Demand for greater customer service
• Infrastructure

SCM in Maruti Udyog Ltd.

Maruti Udyog has emerged as a pioneer in the field of automobiles in India. It developed the first
fuel-efficient lightweight family car and also brought about major changes in the fields of SCM &L. The
company developed new systems for transportation of vehicles, effective ways of delivering damage
free vehicles to the customers, and introduced buyers to the new standards of consumer service.

Modi Xerox
Modi Xerox is the document company. It develops, manufactures, markets, services and finances a
complete range of document processing products and solutions that help customers make their offers
more productive. The product range includes publishing systems, color printers, color copiers, black
and white copiers, printers, scanners, faxes, engineering plotters, binders, and laminators.
The role of an integrated supply chain in Modi Xerox starts from the acquisition of raw material
through production, distribution in an effective and environment-friendly fashion. The company has
adopted an IT environment to implement the SCM and reduced cost time and WIP.

Indian Textile Industry

The Indian textile industry needs efficient supply chain management. There is global competitiveness
of the entire supply chain between textiles and clothing. There is a changeover from the traditional
supply chain to the garment supply chain.

2.8 REVERSE SCM AND LOGISTICS

The council of logistics management has defined supply chain as “ the process of planning,
implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory,
finished goods, and related information from the point of origin to the point of consumption for a
purpose of conforming to the consumer requirements.

On similar lines, the council has defined Reverse SCM as follows.

“ Reverse SCM is the process of planning, implementing and controlling the efficient cost-effective
flow of raw materials, in-process inventory, finished goods and related information from the point of
consumption to the point of origin for a purpose of recapturing value or proposed disposal.
For example, empty soft drink bottles are returned or reused repeatedly.
Earlier, there was the impression that the returned or reused material has little or no value. However,
with the advent of the internet, there is a growing awareness of sales returns. C Glenn Mauny says
that there is growing recognition of the value that can be recaptured from the unproductive assets
resulting from return merchandize.

Nearly 20% of everything that is sold in the US is retained.

Benefits Of Reverse SCM

• Cost reduction
• Pollution control
• Reasons for improvement
- Why products are returned?
- Was the product returned due to poor quality?
- Were the stores properly stacked?
- Was there a labeling problem?

The activities involved in reverse SCM are as follows

Gatekeeping
 • Collection
• Inspection
• Sorting
• Reconditioning
• Disposition
• Redistribution

The process of Reverse SCM is explained in the following block diagram.

Reverse Logistics
Generally, 5 to 10 % of the material such as defectives, boxes, packing material supplied by the
supplier is returned.

Such material is recycled through reverse logistics. The advantages of reverse logistics are saving in
haulage and pollution control. Thus reverse logistics is environmentally responsible logistics. As shown
in the figure, the material to be returned is kept in the adjacent recycling center. The material
accumulated in recycling centers is then sent to refurbishing centers for disposal.
The disadvantage of reverse logistics is the separate infrastructure is required for disposal which
increases cost.

Barriers in reverse logistics

There are certain barriers to conducting reverse logistics. It was the general share of different barriers
is furnished in the following table.

Barrier %
Importance of reverse logistics compared to other 39.2
Issues
Company Policy 35
Lack of Systems 34.3
Competitive Issues 33.7
Management’s inattention 26.8
Financial resources 19
Personal Resources 19
Legal Issues 14.1

2.9 OTHER RELATED TOPICS

Direct Product Profitability [ DPP ]

Direct Product Profitability [ DPP ] indicates the degree of profitability. The DPP is given by the
following formula.

DPP = [ IP – ( P+M+C+O+T ) ]/IP

The DPP is calculated as shown in the following example.

The company manufactures two types of plastic films A and B. The DPP is worked out from the
following data.

Order Type of Weight IP P M C O T TOT DPP

No film kg
1 A 482 1210 157 876 1.08 1.88 79 1115 0.08
2 A 2418 5997 157 4344 7.83 9.33 190 4709 0.215
3 B 4538 13000 157 8402 20.8 30.33 343 8954 0.311
4 B 2615 7576 157 4897 14.58 17.68 198 5284 0.303

Intermediation, disintermediation, and re-intermediation

Aspects of external value chains of organizations have been critically affected by the creation of
electronic markets. The traditional retail chain is one of the wholesalers, retailers, and distributors.
This is called Intermediation. however, by using internet procedures, we can now sell directly to their
customers. This process is known as disintermediation in the sense that intermediaries are removed
in the customer chain. But the internet suffers from being a large and complex medium for supporting
a market. Potential customers for particular products and services frequently find it difficult to find the
precise company meeting their needs. Hence, in recent times, the new breed of intermediaries called
electronic intermediaries has emerged. such organizations re-impose a middleman supplier and
customer. They supply a service to the supplier in identifying potential customers. On similar lines,
they help the customer in locating the suppliers who fulfill his needs. This process is known as -
Intermediation.
Intermediation dis-intermediation re-intermediation

Supplier Supplier Supplier

Goods data goods data goods data

Wholesaler

Electronic
Goods data intermediaries

Retailer

Goods data goods data

Customer Customer Customer

2.10 CASE STUDIES

Coca-Cola
Coca Cola’s phenomenal success stems from its conviction that there is no mature market on the
planet for its product. Potential demand is still huge.

It is easy to assume that this is hype and overstatement. After all, they sell almost a third of trillion
bottles of Coke, Diet Coke, Fanta, and Sprite each year. This is 48% of the world market. They even
outsell the leading tea in Britain, the leading bottled water in France, and leading coffee in Brazil. But
they still have less than 3% of the total liquid intake world market. This view is “We are just getting
started”.
Managing the distribution supply is one of the keys to current and future success. Its bottling partners,
the companies that buy soft drink concentrate from Coca-Cola and mix it with water before bottling or
canning for the local market, are crucial links in the chain. ‘ Anchor’ bottles are used on a regional
basis. These are the companies with financial resources and management capabilities to match their
ambitious growth targets, Coca-Cola owns equity share in each of them and has invested enormously
in its soft drink infrastructure. This allows top management to focus on global branding and market
innovation.

Federal Express [ FedEx ]

Federal Express [ FedEx ] is the leader in logistics services. In the early days of the 60s, very few
transport companies like Flight Tigers and Emery Air Flight were in existence in the US. Only big
companies like Xerox and IBM could afford to maintain a separate plane for goods transport. Fred
Smith first pinpointed that separate service that takes the goods at consumer doorstep overnight
should be established. He stated that when the jet is used to carry human beings, why can it not be
used for carrying materials?

Smith developed a hub & scope model for logistics services. The hub indicates the headquarter of the
logistics provider. Scopes indicate airlines reaching destinations such as New York, New Jersey,
Atlanta, California, etc. If some material is to be transported, it is taken from the supplier’s place to a
spoke through a vehicle, say lorry. This material would be carried through an air flight and unloaded at
the spoke terminal from where it would be transported to the consumer’s doorstep through lorries.

On 1st June 1971, Smith established a company called Federal Express [ FedEx ] with limited capital of
40 lac us dollars. In 1974, the company faced tough times due to oil crises. After a struggle, FedEx
regained its position. Today Federal Express owns 640 planes, 45000 vehicles including lorries,
minitrucks, pick up vans, etc. The annual turnover of the company is 1963 crore us dollars. There are
2,15, 000 staff members working in the company. The company has opened offices in 211 countries.
On average, 35 lac parcels are carried every day.

Neptune
Neptune is the leading manufactures of computer products in the US. They manufacture desktops,
servers, computers, and laptops. The company WOL [ World On-Line ] provides internet support to
these products. For this, Neptune gets commission from WOL. Saturn is a 100% subsidiary of Neptune
that manufactures switches, routers, and other network communication products. There are two
divisions of Neptune NP and NPS. NP [ Neptune Products ] are designers, developers, manufacturers,
and distributors. They have manufacturing units at California, Pittsburgh, and Taiwan. They have
distribution facilities at Florida, Denver, Madrid, and Singapore. NPS [ Neptune Professional Service ]
undertake installation and maintenance works outside the Company.

Neptune uses Oracle e_Business Suite for communication between its business units and to maintain
a competitive advantage in bringing a new product in the market. The inventory accounting is
maintained in local currency . each manufacturing plant has a central store and RIP [ Raw In process ]
store. Both divisions of Neptune same code for items. The items are classified as finished goods,
subassembly, spare, purchased items, and phantom. A template for each item is developed. To
identify various phases in the life cycle of items, the following status is maintained.

New – default status

Prototype – all activities except sale.
Active – all activities including the sale.
Obsolete – scrap and unserviceable items.

Neptune aims in maintaining a flat bill of material as possible. The Macros are maintained for
frequently handled items. This enables the automatic generation of requisitions. Labor charges are
imposed automatically.

Item, Bill and routing activities

The following actions are taken
Review item attribute controls
Review Status codes
Review category codes
Review likely to use items
Review templates for any modifications
Define cross-reference points
Define resources and their availability
Define alternate designators for bills and routings
ECO [ Economic change orders ] – are used to change a product as per consumer request or complaint,
production problems, cost reduction, etc. ECO is used as a remedial action. ECO is approved or
rejected by a committee. The committee comprises of experts. The committee also decides on any
change or disposition of existing material. If a compound is found to have a high defect rate, it is
replaced in all BOMs.
ATO [ Assembled to order ] – under ATO, the customer can order with his choice of CPU, memory, HD
or CD, etc. Therefore a product is configured or assembled only as per customer choice.
PTO [ Pick to order ] – sometimes a kit includes carrying case, spare battery, external floppy drive, etc.
This is PTO.

Asteroid Laptop Assembly

Neptune has several production lines. They developed a separate assembly line for the manufacturing
of Asteroid laptops.
The line design begins with the identification and removal of non- value-added events. Remaining
value-added events are grouped into logical and standard line operations. These events are reviewed
to balance a line. The speed of the line is adjusted to suit consumer demand. This lowers down
inventory carrying costs.

Supply Chain Planning: Neptune’s planning process covers its entire supply chain. It begins with a
forecast generated by the marketing department with collaboration from some of its larger
customers. The weekly review is taken before being published back to individual forecasts in each
organization.

Demand Planning: Neptune uses item and customer dimensions for forecasting aggregation. Item
dimensions use the following item categories:

Laptops Desktops Servers Embedded Systems Services

Customer dimensions groups customers into the following dimensions:

Individual industrial educational export oriented

Demand planning is the activity carried out by expert groups of Neptune’s marketing department.
Demand planning is carried our monthly. The deviation between forecast and orders received are
notified.

Advanced Supply chain planning

Neptune uses orders and forecasts both in its production planning. It uses a simple holistic advanced
supply chain plan that covers all manufacturing and distribution activities. The supply chain for
Neptune is determined by geography. The Pittsburgh mfg plant feeds distribution centers at Denver,
Orlando, and Madrid, while Taiwan plant feeds Singapore distribution center. California plant is the
sole plant for large services that are shipped directly to their customers. It also provides mfg activities
if needed to supply to Singapore.

Customer orders are normally fulfilled from the closest distribution center except in the large services
shipped directly from California.

Logistics services at Neptune

Neptune provides separate inbound and outbound logistics services

2.11 SUMMARY

SCM is the dynamic process involving the transfer of goods, information, and funds. Thus it involves
the transfer of 3 Ms namely – Material, Messages, and Money. Earning profit with a satisfied customer
is the primary objective of SCM.

There are three decision phases in the supply chain namely, Supply Chain Decisions.
Supply Chain Planning and Supply Chain Operations There are two types of SCMs – Push Based SCM
and Pull based SCM. The Markov Chain is a popular technique used in Operations research. In SCM&L
management, the Markov Chains are used to evaluate the demand for a product so that the supply
chain is designed accordingly. The significant feature of Markov Chain is it is simple but still powerful.
It only involves a simple matrix multiplication.

The 3PL is based on the principle of Business Process Outsourcing.

The logistic services entrusted to a third party is called third-party logistics. It is thus subcontracting or
outsourcing.

Global logistics is an international logistics. It involves managing distance, currency, and customs duty.
The benchmarking involves a comparison of SCM&L activities with a standard reference SCM&L
agency. The deviation from such comparison is found out and accordingly, corrective action is taken.

“ Reverse SCM is the process of planning, implementing and controlling the efficient, cost-effective
flow of raw materials, in-process inventory, finished goods and related information from the point of
consumption to the point of origin for a purpose of recapturing value or proposed disposal.

2.12 KEYWORDS

Markov Chain, Push-Pull Supply Chain, Reverse Logistics, 3PL, Global Logistics Benchmarking.
UNIT 3 INVENTORY CONTROL MANAGEMENT AND SCM

Objectives
After going through this unit, you should be able to:

• define the concept of inventory;

• learn the significance of inventory control;
• realize various types of inventories;
• learn selective inventory control techniques;
• define service level, overstocking, and understocking costs.

Structure
3.1 Introduction
3.2 Need for holding inventory
3.3 types of inventories
3.4 Inventory under conditions of uncertainty
3.5 Symptoms of poor inventory management
3.6 Significance of inventory control management
3.7 Inventory Control Organization
3.8 Duties of the inventory control department
3.9 Conducting Inventory – [ Methods of inventory control ]
3.10 Selective Inventory Control
3.11 Inventory Management in India
3.12 Inventory Ratios
3.13 Service level, Understocking, and Overstocking costs
3.14 Summary
3.15 Keywords

3.1 INTRODUCTION

The inventory is defined in different ways in the following manner.

Inventory is the stock of material required for a particular process. For example, the scooter has a
spare wheel which is very useful in the event of failure of scooter due to tire puncture. Inventory is
the ‘money’ stored in the form of spares.
Inventory is defined as a sum of values of raw material, fuels, lubricants, spare parts, maintenance
consumables, semi-processed materials, and finished goods stock at any point in time. Inventory is an
idle resource of materials having economic value.
In simple words, inventory is defined as a list of items. For the task of manufacturing or assembly, the
inventory is required.

What is inventory control

Inventory control is the phenomenon of controlling the expenditure on inventory. For example, the
use of raw material for a particular process is monitored continuously and balance material remaining
from the process is reused. This results in saving on the raw material.

What is inventory control management

The inventory control management is that branch of management that involves appropriate control
on inventory.

3.2 NEED FOR HOLDING INVENTORY

The inventory is required to be carried out by the organization for the following reasons.

Achieve economies of scale

in purchasing, transportation and manufacturing need to hold inventory.

Balance demand and supply

• seasonal changes in demand and supply of the product make it very necessary for firms to
hold inventory.

• It may also happen that the demand for a particular product may be stable throughout the
year, but the raw material required to produce these products be available only at certain
periods in the year.

Specialization
• Inventory makes it possible for a firm’s plant to specialize in the product that it produces.

• These finished products are shipped to the mixed warehouses from where customer orders
can be shipped.

• These enable economics of scale due to larger production runs and also because of saving in
the transportation costs and saving in the cost of additional holding.

Protection from uncertainty and order cycles

• Inventory is also held by firms against protection from uncertainties.

 • Raw material inventories above the quality required to support the production as a result of
speculative purchases.
• Work in progress inventories is maintained usually to avoid a shutdown.
• An increase in finished goods inventory will enable the manufacturer to maintain higher levels
of product availability and lesser chances of stock out.

Acts as a buffer between the stages of supply chain

• inventory in the form of safety stock functions combat variation in either demand or
replenishment.
• a lot of planning is required to determine the size of safety stock.
- safety stock is as good as purchasing insurance where it is necessary to protect inventory
position in times of uncertainty.
- safe stock provides cover of two uncertainties, the first being the demand above forecast
during the performance cycle.
- The second one is the uncertainty involving delays in performance i.e. cycle length itself.

3.3 TYPES OF INVENTORIES

The inventories are mainly classified into the following five types.

• cycle inventory
• safety inventory
• speculative inventory
• seasonal inventory
• deadstock
Let us understand these types of inventories in brief.

Cycle inventory
• Cycle inventory – is defined as the average inventory that exists in the supply chain due to
either production or purchase of products in lot sizes that are larger than those demanded by
the customers.

• Cycle inventory = lot size / 2 i.e. the average inventory.

Average inventory  lot size
thus average inventory is directly proportional to the lot size.

• Average flow time = average inventory / average flow rate

In any supply chain, the average flow rate is the demand itself.
Safety inventory
• the safety inventory is defined as the inventory called to satisfy the demand that exceeds the
amount forecasted for the given period.
• Rising the level of safety inventory increases product availability and also the higher margin
from the customer purchases.
• Raising the level of safety inventory rises the overall holding cost of the firm.

Speculative inventory
Speculative inventory is the stock that is held for the reason other than satisfying current demand.

Seasonal inventory
Seasonal inventory is the form of speculative demand that involves the accumulation of inventory
before any season begins to maintain stable production or maintain a stable workforce during the
periods of seasonal demand i.e. high demand.

Dead Stock
Dead Stock refers to those products for which no demand has been registered over a large period.
These products are treated as obsolete and block the working capital of the firm. These products can
be stocked over a long period at a particular location and if so then they must be transshipped to
another location to be sold.

Cycle inventory costs in practice

Inventory holding costs
• Cost of capital
• Spoilage cost
• Handling cost
• Occupancy cost
• Miscellaneous cost

Safety inventory in practice

The safety inventory involves the following factors.
• Account for variability in demand in the supply chain
• Adjustment of inventory policy if demand is seasonal
• Use of simulations
• Begin by using pilot
• Keep the eye on service levels
• The main focus on reducing safety inventories.

Classification of inventory items

There are various ways by which we can classify inventories. The inventory is classified as RWF, as
follows.

• Raw Material Inventory

• Work in progress [ WIP ] Inventory
• Finished product inventory

There should be an operational convenience with minimum possible investment in inventories. The
main objectives of inventory control management are operational and financial. However, both are
conflicting. The solution lies in exercising selective inventory control and applying inventory control
techniques.

3.4 INVENTORY UNDER CONDITIONS OF CERTAINTY

Managing inventory under conditions of uncertainty :

Maintain safety stock or safety inventory instead of taking risk of losing sales revenue due to stock-
outs. Thus the supply chain manager must consider an additional cost trade-off that is between the
inventory carrying cost and the stockout costs.

Calculating appropriate safety inventory

a ] c=  ( Rs2 + S2R )

Where
c= units of safety stock to satisfy a particular service level in %
R = average replenishment cycle
s = standard deviation of daily sales
S = average daily sales
R = standard deviation of the replenishment cycle

b ] s =  fd2 / (n-1)
Where s = standard deviation of daily sales
f = frequency of the event
d = deviation of event from mean
n = total number of observations

Calculating fill rate

The fill rate represents the magnitude of stock out. It represents the percentage of units demanded
that are on hand to fill the customer’s order.
The fill rate can be calculated using the following formula.

FR = 1 - c [ I(K) ] / EOQ
Where FR = Fill rate
c = Combine safety stock
EOQ = Economic Order Quantity
I (K) = service function magnitude factor based on the number of standard deviation
K = safety factor = safety stock / c

3.5 SYMPTOMS OF POOR INVENTORY MANAGEMENT

The following symptoms indicate that inventory control is poor and needs improvement.
• Increase in the number of backorders
• Increase in inventory investment with backorders remaining constant
• High customer turnover rate
• Lack of sufficient space
• Increase in the number of orders being canceled
• Wide variety in inventory turnover among distribution centers and major inventory items
• Deteriorating relationships with intermediaries i.e. stages in the supply chain.
• Increase in production and stocking of obsolete products.

3.6 SIGNIFICANCE OF INVENTORY CONTROL MANAGEMENT

Like Materials Management, Inventory control is as old as human beings. During the stone age, the
man had to keep balance stock of stones for weapons, food storages, etc. It is mentioned in the
history that the workers engaged in the construction of the ‘Taj Mahal ‘ were given lay off due to a
shortage of material. They were called back after the procurement of material. The importance of
inventory control can be understood from this example.

The formula for calculating return on investment can be stated as follows:

ROI = profit /Sales X Sales/Assets
Canceling sales factor
ROI = profit/assets
Thus, to increase returns on our investment, it is required to increase profit. However, in a
competitive market, we can not expect an increase in profit.
Therefore
Considering profit as constant, the above expression becomes
ROI  1/Assets
Now, there are two types of assets - Fixed and Current assets. Thus,
ROI  1/[ Current Assets + Fixed Assets ]
Considering fixed assets i.e. land building, machinery, etc. constant K the expression becomes
ROI  1/[ K + Currents Assets ]
Thus, the return on investment mainly depends on current assets i.e. material. In this way, if the
current assets are kept minimum, we can maximize the ROI. One of the important goals of materials
management is to minimize expenses on current assets.

Thus, materials management is significant for the organization.

60% of the investment of a company is towards materials. The following table shows average material
expenditure:

Industry group average material

expenditure
Cotton yarn, earthmovers, sugar, wool, jute, commercial 70
vehicles
Cotton textiles, bread 65

Engineering, non-ferrous 60

Shipbuilding, chemicals, tires, machine tools, cement, 58

electricity
Pharmaceuticals 55

Steel, newspapers, fertilizers, aircraft 55

Overall percentage 60.5

As shown in the above table, more than 60% of expenditure is towards materials.

10 Crore company has 6 Crore current assets and a profit of 1 Crore. To increase profit by 3 crores he
has to -
I ] increase sale by 30%, which is difficult
II ] to reduce expenditure on inventory by 5 % which is easier

3.7 INVENTORY CONTROL ORGANIZATION

Usually, the head of the inventory control department is a manager. The structure of an inventory
control organization is triangular, as shown below.
3.8 DUTIES OF INVENTORY CONTROL DEPARTMENT

The Inventory Control department has to perform the following duties.

• To conduct inventories – annual, perpetual, or on spot.
• To maintain an uninterrupted supply of material/spares to a production floor.
• To coordinate with other departments such as stores, production, purchase, etc.
• To ensure optimum usage of material. To avoid overstocking or understocking of material.
• Preparation of reports such as EOQ, ABC Analysis, etc, and implementing the results.

3.9 CONDUCTING INVENTORY – [ METHODS OF INVENTORY CONTROL ]

There are three types of carrying out inventory control - perpetual, annual, and on spot inventory
control.

Perpetual or Continuous Inventory

This type of inventory control is carried out throughout the year. Hence it is also called continuous
inventory control. The batch comprising of persons from engineering, materials management,
accounting departments, etc is formed. This batch carries out inventory continuously throughout the
year. This type of inventory control is suitable for large organizations.

Advantages
• The batch that carries inventory control comprises persons from various fields like
engineering, materials management, accounting, etc. Hence the inventory control is carried
out very effectively.
• Irregularity, if any, can be detected quickly unlike annual inventory.
Disadvantages
• A separate unit is to be formed for carrying out perpetual inventory. Therefore, the
organization has to bear administrative expenses towards salary, dearness allowance,
traveling allowance, etc.

• This type of inventory control is suitable only for large organizations where large numbers of
store transactions take place.

Annual Inventory
This type of inventory control is carried out once a year. The committee of persons belonging to the
same organization but outside materials department is formed for the period for which the inventory
is to be carried out. These people are outside the materials department. Therefore, they are impartial
in carrying out inventory. This batch carries out inventory for a financial year. This type of inventory
control is suitable for small or medium organizations.

Advantages
• People are deputed for a short period for carrying out annual inventory. Therefore, these are
saving in administrative expenses.
• People carrying out inventory are outside the materials department. Therefore, they are
impartial in carrying out inventory.

Disadvantages
• People do not belong to the materials department. As such they may not be conversant with
inventory systems. Therefore the inventory may not be effective and fast.
• Irregularity, if any, can be detected late, after one year, unlike perpetual inventory.
• This type of inventory control is suitable only for small or medium organizations.

In the case of an organization have a large number of transactions, perpetual inventory is more
suitable.

On Spot Inventory
This type of inventory has a limited scope. The inventory is carried out only when the material is
received. Therefore, it is checked only as per the packing list. It does not take into account earlier
consignments.

3.10 SELECTIVE INVENTORY CONTROL

The selective inventory control is carried out by implementing techniques. The main techniques of
selective inventory control are discussed below.
ABC Analysis
ABC Analysis, popularly called Always Better Control is widely used for controlling inventory. It is
based on the value of the material. According to this technique, the items are classified as A-type, B
type, and C type items.

Type items are costly items but less in quantity. Being very costly, the A-type items require a high
degree of control. The examples of A type of items are golden tips or platinum contacts. On the other
hand, B type items are medium valued items and medium in quantity. B type items require a
moderate degree of control. Examples of B type items are machines, computers, instruments, etc.
The third type of item is a C type. These items are less in cost but more in quantity. Such items require
lesser or no control. For example, nails, nut bolts, etc. are C type items.

% cost

A B C

% item

Let us understand how to conduct an ABC analysis from the following example.
The company uses the following items. The annual consumption and unit rate is given.
01 ] name of the item, its quantity, and rate are given. Find the amount for each item.
02 ] For simplicity, convert the amount into Rs thousand.
03 ] Give the ranking of each item as I, ii, iii…. x in descending order.
04 ] Prepare another table by taking ranks I, ii, iii…. x as serial numbers.
05 ] State respective item code, item name, and amount in the table.
06 ] Find the cumulative cost of each item [ running total ]
07 ] Considering the cumulative cost of the last item as 100, find % cumulative cost of each item. [
%cost ]
08 ] Consider the last item as 100 find % quantity of each item. [ % item ]
09 ] Mark items under 0-30% range as A items, 31-60% as B type item, and remaining items as C
items.
10 ] Plot % item on X-axis and % cost on the y-axis.
Item Name Of Item Quantity Rate Amount Amount in Rank
code thousands
a MS Washers 10000 1 10,000 10 x
b MS nutbolts 10000 2 20,000 20 ix
c Welding Rods 5000 5 25,000 25 viii
d Gas Leak Detector 1 100000 1,00,000 100 iii
e Harmonic Analyzer 2 100000 2,00,000 200 ii
f Thermovision Camera 3 200000 6,00,000 600 i
g 16 bit microprocessor 5 10000 50,000 50 vii
h Oscilloscope 5 12000 60,000 60 vi
i Drilling machine 10 7000 70,000 70 v
j Digital Multimeter 10 8000 80,000 80 iv

S Item Item name a c %c %i abc

code
i f Thermovision 600 600 49.38 10 A
Camera
ii e Harmonic Analyzer 200 800 65.84 20 A
iii d Gas Leak Detector 100 900 74.07 30 A
iv j Digital Multimeter 80 980 80.65 40 B
v i Drilling machine 70 1050 86.42 50 B
vi h Oscilloscope 60 1110 91.35 60 B
vii g 16 bit 50 1160 95.47 70 C
microprocessor
viii c Welding Rods 25 1185 97.53 80 C
ix b MS nut bolts 20 1205 99.17 90 C
x a MS Washers 10 1215 100 100 C

Conduct ABC analysis from the following data.

Symbol Item Annual Price per

Consumption Unit
[ Units ] Rs
A Benzyl Penicillin 5000 10
B Dexamethasone 650 10
C Mannitol 1800 18
D Chlovxylenol 4200 1
E Ampicillin 60 8
F Gentamymycin 6500 6
G Tetracycline 2500 5
H Trifluoperazine 4200 1
I Imipramine 50 10
J Diazepam 100 7
K Streptopenicillin 100 35
L Oxytetracycline 50 8
M Phenobarbitone 2000 0.25
N Analgin 20 10
O Prednisolone 30 6
P APC 80 0.15
Q Sulphone 200 0.50
R Vitamin C 750 4
S Aluminium Hydroxide 300 7
T Aspirin 20 10

Symbol Item U[ Units ] R Unit/Rs U[Rs] Rank

A Benzyl Penicillin 5000 10 50000 1
B Dexamethasone 650 10 6500 5
C Mannitol 1800 18 32400 3
D Chlovxylenol 4200 1 4200 6
E Ampicillin 60 8 480 14
F Gentamymycin 6500 6 39000 2
G Tetracycline 2500 5 12500 4
H Triflyperazine 4200 1 4200 7
I Imipramine 50 10 500 12
J Diazepam 100 7 700 11
K Streptopenicillin 100 35 3500 8
L Oxytetracycline 50 8 400 15
M Phenobarbitone 2000 0.25 500 13
N Analgin 20 10 200 16
O Prednisolone 30 6 180 18
P APC 80 0.15 12 20
Q Sulphone 200 0.50 100 19
R Vitamin C 750 4 3000 9
S Aluminium Hydroxide 300 7 2100 10
T Aspirin 20 10 200 17

Symbol U [ Rs ] Cumulative U Cumulative U % Item % ABC

A 50000 50000 31.12 5 A
F 39000 89000 55.39 10 A
C 32400 121400 75.55 15 A
G 12500 133900 83.34 20 B
B 6500 140400 87.38 25 B
D 4200 144600 89.99 30 B
H 4200 148800 92.61 35 C
K 3500 152300 94.79 40 C
R 3000 155300 96.66 45 C
S 2100 157400 97.96 50 C
J 700 158100 98.40 55 C
I 500 158600 98.71 60 C
M 500 159100 99.02 65 C
E 480 159580 99.32 70 C
L 400 159980 99.57 75 C
N 200 160180 99.69 80 C
T 200 160380 99.82 85 C
O 180 160560 99.93 90 C
Q 100 160660 99.99 95 C
P 12 160672 100 100 C

Thus the principle of ABC analysis is that degree of control on stock items and amount of safety stock
carried out should vary directly with the consumption value [ i.e. cost of item X number of items ]

Advantages of ABC analysis

• Effective control
• elimination of clerical work
• easy to implement

Limitations of ABC Analysis

• The cumulative cost of one A item [ eg. Golden tip Rs 1, 00,000 ] may be sometimes equal to
some C items [ e.g. 10,000 no.s of nut bolts cost Rs 10 each ] Under such circumstances, the C
type items like nut bolts will be treated as A-type items like Golden tips.
• The data is required to be updated frequently due to the addition and deletion of items.
• The ABC analysis is purely cost-oriented. It ignores the VED feature of the item.

Applications of ABC analysis

The main advantage of conducting ABC analysis is that it gives manager direction to exercise control
and focus his attention on a few items which are having a high cost. Every item gets the right attention
at the right time by using ABC analysis. The following are some of the applications of ABC analysis.

Degree of control
The degree of control is decided by applying ABC analysis. Higher control for A items, moderate for B
items, and a lower degree of control for C type items can be exercised.

Ordering Procedure
The strict ordering procedure is required to be followed for A type of item. Care should be taken that
there is no overstocking of A type of item. The ordered quantity is carefully verified before placing an
order. The moderate order practice is followed in respect of B type of items. The purchase order is
placed usually once in three months.

The C type items may be bought in bulk quantity say for a year.

Stock Records
To exercise tight control over A type of items, stock records of such items are maintained carefully.
This includes records of receipts, inspection, storage, and issue. Good and accurate records are
required to be maintained for B type of items.
No such detailed records are necessary for C type of items.
Priority treatment
For all stares activities from receipt to disposal, VIP treatment is required to be given to A type of
items. A moderate treatment for B type is less priority is given to C types of items.

Safety Stock
The following can be a safety stock for ABC items.

Category Safety stock

A ½ months stock
B 1 months stock
C 2 months stock

Sores Layout
The layout of stores should be designed by considering points. Usually, items are fast-moving.
Therefore these items should be placed near the point of issue of material, with proper security .B
type of items are usually active. The second location should be reserved for C type of items. The c type
of items should be kept near accessible locations.

Value analysis
A value analysis of A-type items is usually carried out on priority.

Annual ABC analysis

The annual ABC analysis is prepared at the end of the year. A type of item is further subdivided into A1
and A2. B types are not subdivided. The C type of items is subdivided into C1 and C2. The analysis is
carried out for each type of material, as shown in the following table.

Sr. item A type B type C type Total

No A1 A2 Total A Q A C1 C2 Total C Q A
Q A Q A Q A Q A Q A Q A
1
2
Total

In the above chart, Q stands for quantity, and A stands for the amount. The subdivision of A and C
can be done as per our convenience. For example
A = above Rs 1 lac
A1 = between Rs 1 lac to 10 lacs
A2 = above Rs 10 lacs
B = above between Rs 10,000 to 1 lac
C = upto Rs 10,000
C1 = upto Rs 3000
C2 = between 3000 to 10000.
Other techniques
The Other techniques of conducting selective Inventory Control are discussed below-

HML Analysis
The HML analysis is similar to ABC analysis except it takes into consideration a unit cost of the item.
Thus the limitation of cumulative cost as in the case of ABC analysis is eliminated.

XYZ Analysis
Like ABC and HML analysis, the VED analysis is also based on the cost factor. However, it also takes
into consideration the aging of the material.

Different age groups are formed and the items are classified as per % cost Vs age group. The aging of
the product is ignored by ABC and HML analysis.

VED analysis
VED Analysis is aimed at the classification of items as Vital, Essential, and desirable. According to VED
analysis, the items are classified into the following three categories.

Vital
Vital are spares without which the system will not work. For example, the spark plug in the automobile
can be considered vital. The scooter will not run in absence of a spark plug. In stores, vital spares are
kept separately for easy identification and handling.

Essential
The spares are required for a system but the system can continue to work in the absence of such
spares. For example, break light is essential for an automobile from a safety point of view. However,
the vehicle can be driven even in the absence of brake light.

Desirable
These spares are neither vital nor essential. We can use such spares as per our desire. For example,
the seat cover for the vehicle is a desirable item. Generally, desirable items are used for comfort.
These can also be used for ornamental purposes.

SOS Analysis
The spares can also be classified as seasonal or off seasonal. For example, some fruits like mango are
seasonal. On the other hand, fruits such as banana are off seasonal.

GOLF Analysis
Under this category, the spares are classified as Government, Ordinary, Local, and foreign. The items
supplied by government suppliers come under the government.
Similarly, items supplied by non-government suppliers come under non-government Items available
locally are called local. Imported items are called foreign.

FSN Analysis
This analysis is based on the consumption pattern of the material. Some materials have a higher
demand and thus consumed fast. Such items are called Fast Moving Items. Some items do not have
higher demand and the consumption pattern of such items is lesser. Such items are called Slow-
moving items.

On the other hand, some items do not have any demand and are not consumed at all. Such items are
called non-moving items. The reasons for items becoming non-moving are as follows.
• Change in taste of people
• Change in fashion
• Other similar products are available at lesser rates
• defective and obsolete items become non-moving

SDE Analysis
This inventory control technique is based on the availability of material.
Scares items are not available at all.
Difficult items are difficult for making available.
Easily available items are available at ease, as the name indicates.

Integrated Selective Inventory Control

Various types of inventory control techniques are discussed above. Each technique differs from the
other in certain aspects. For example, ABC analysis is cost-oriented, while SDE analysis is availability
oriented.
For making inventory control more effective, two or more techniques are combined. Such a
combination is called integrated selective inventory control.

3.11 INVENTORY MANAGEMENT IN INDIA

• Inventory management is in existence in India in both the public sector and private sector
organizations.
• JIT philosophy could not fully reach in India.
• In India, mostly there is a seller’s market. Hence generally the raw material is not easily
available at lower rates. This leads to hoarding, which ultimately results in inflation.
• Due to custom policies, imported spares are not available easily. It is not possible to
implement an import substitute in every case. The cost of clearance of imported items rise the
inventory cost.
• In Indian organizations, the inventory control techniques such as ABC, VED analysis,
standardization, codification are generally used.
The following graph shows an increase in the usage of engineering materials in India.

3.12 INVENTORY RATIOS

The ratio gives a comparative view of two parameters at a glance. Inventory ratios give the position of
various types of parameters used in Inventory Control Management. The
The benefits of using inventory ratios are as follows.

i ] Inventory ratios provide the position of Inventory Control Management at a glance, without going
into details. The top management can immediately come to know the position of inventory control.
ii ] Inventory ratios can be easily constructed.
iii ] Inventory ratios are simple and easy to understand.
iv ] Inventory ratios can also be expressed in terms of percentage.
v ] The multiplication of two ratios can also be expressed as a ratio. For example:-
ROI = profit /Sales X Sales/Assets
vi ] The financial institutions insist submission of Inventory ratios for sanctioning loans and advances
to the company.

The general position of the business is shown in the following graph.

From the above graph, we can form the following ratios:-

CAI = Current Assets/Inventory

FAI = Fixed Assets/Inventory
TAI = Total Assets/Inventory
SAI = Sales/ Inventory

Inventory ratios are also formed according to the status of material as Raw material, WIP material,
and Finished material, as follows:-

RMI = Raw material / Inventory

WIPI = WIP material / Inventory
FPI = Finished product/Inventory
OMI = Other material / Inventory

It should be noted that the sum of these ratios is always unity, as follows:

RMI + WIPI + FPI + OMI =

Raw material / Inventory+ WIP material / Inventory+ Finished product/Inventory+ Other material /
Inventory
= [ Raw material + WIP Material + Finished product+ Other material ] / Inventory
= inventory/inventory
=1

The other inventory ratios are discussed below:-

Week’s inventory on hand = material in stock/weekly consumption

Week’s inventory on order = ordered quantity /weekly consumption
Importance [ numbers ] = no of A class items / total no of items
Importance [ value ] = value of A class items / total no of items
Out of stock = no of items out of stock/no of times requisitioned
Production loss due to stockouts =
Hours of production lost due to non-availability of material/scheduled hours of production
Spare part turnover = spare parts consumed/ spare part inventory

Inventory turnover ratio –

This ratio is very commonly used in Inventory management. It is specified in terms of times and days.
Inventory turnover ratio [ times ] = material consumed/average inventory
Where , material consumed = Opening Stock + Purchases – Closing stock
average inventory = [Opening Stock + Closing stock ] /2

It is desired that the Inventory turnover ratio [ times ] should be higher. This will indicate a higher
consumption pattern. Therefore the item would be a fast consuming item. The Inventory turnover
ratio [ days ] is computed from the Inventory turnover ratio [ times ] as follows:-

Inventory turnover ratio [ days ] = 365/ Inventory turnover ratio [ times ]

3.13 SERVICE LEVEL, UNDERSTOCKING AND OVERSTOCKING COSTS

The concept of service level is based on probability theory.

The service level F(s) is defined as follows:

F(s) = 0s F(x) dx

Where F(s) is the service level. s is balance stock in hand.

F(x) is a probability distribution function. X is the quantity issued or required.

Understocking cost:
The understocking cost Ku is the cost of items that are out of stock. It includes the cost of the last
production during the period of stock out [ s ] to extra cost required in emergency [  ].
Total understocking cost, X=unserstocking cost per unit X number of units out of stock
= understocking cost per unit * [number of units required - number of units available]

X = KU * [ x – s ]
Considering the probability of understocking,
X = KU * [ x – s ] * probability factor of understocking
The probability factor of understocking is given by F(x), that is a probability distribution function, as
follows:
X = KU * [ x – s ] *s F(x) dx

Let s is stock in hand and F(x) is probability distribution function. Then

X = s KU (x-s) F(x) dx ……………. I

Thus the understocking cost is given by

X = s KU (x-s) F(x) dx

Thus the understocking cost will be zero at x=s. In other words, if balance stock s is available in the
store, overstocking will not exit.

Overstocking cost:

The cost of material in hand is overstocking costs. Thus overstocking cost is a carrying cost. It is
denoted by Y.

Total overstocking cost, Y=overstocking cost per unit X number of units in stock
= overstocking cost per unit * [number of units in hand - number of units issued ]

Y = KO * [ s – x ]

Considering the probability of understocking,

Y = KO * [ s – x ] * probability factor of understocking
The probability factor of understocking is given by F(x), that is a probability distribution function, as
follows:-
Y = KO * [ s – x ] *s F(x) dx

Let s is stock in hand and F(x) is probability distribution function. Then

Y =0s KO (s-x) F(x) dx ……………. II

Thus overstocking cost is given by

 Y =0s KO (s-x) F(x) dx

Thus the overstocking cost will be zero at x=s. In other words, if all quantity is issued, overstocking will
not exit.

Adding I & II above we can find the total cost, C.

Total cost = Understocking cost + overstocking cost

C=X+Y
= s KU (x-s) F(x) dx +  0s KO (s-x) F(x) dx

According to the condition of minimum, the total cost c will be minimum at DC/ds=0.
Therefore differentiate the above equation with respect to s,

dC/ds=0 = s KU (0-1) F(x) dx +  0s KO (1-0) F(x) dx

= - s KU F(x) dx +  0s KO F(x) dx

 s KU F(x) dx =  0s KO F(x) dx
 s KU F(x) dx = KO  0s F(x) dx
 s KU F(x) dx = KO F(s)
KU [ 1-  0s F(x) dx ] = KO F(s)
KU [ 1- F(s)] = KO F(s)
KU - KU F(s) = KO F(s)
KU = KU F(s) + KO F(s)
KU = F(s) [ KU + KO ]
Thus F(s) = KU / [ KU + KO ]

F(s) = KU / [ KU + KO ]

If the above equation is compared with the equation of line y=mx+c, it gives the straight line parallel
to the x-axis.
3.14 SUMMARY

Inventory is the stock of material required for a particular process. For example, the scooter has a
spare wheel which is very useful in the event of failure of scooter due to tyre puncture. Inventory is
the ‘money’ stored in from of spares. Inventory control is a phenomenon of controlling the
expenditure on inventory. For example, the use of raw material for a particular process is monitored
continuously and balance material remaining from the process is reused. This results in saving on the
raw material. The inventory control management is that branch of management that involves
appropriate control on inventory.

Inventory Control Management is significant on account of Increasing returns on our investment,

controlling material expenditure, and increasing profitability.

The inventory is classified as Raw Material Inventory, Work in progress [WIP] Inventory, and
Finished product inventory. There are three methods of conducting inventory - perpetual, annual,
and on spot inventory control.

Selective inventory control techniques are ABC Analysis, HML Analysis, XYZ Analysis, FSN Analysis,
VED Analysis, SDE Analysis, SOS Analysis, GOLF Analysis

3.15 KEYWORDS

Inventory, ABC, HML, VED, GOLF, SML, Annual, perpetual, on-spot inventory
Service level, overstocking cost, understocking cost
UNIT 4 ECONOMIC ORDER QUANTITY

Objectives
After going through this unit, you should be able to:

• define the concept of lead time;

• define the term reorder point;
• learn Economic Purchase Quantity;
• learn the application of standard deviation in SCM;
• define the terms carrying cost and procurement cost;
• illustrate the concept of Economic Order Quantity [ EOQ].

Structure

4.1 Introduction
4.2 The Economic Order Quantity [ EOQ ]
4.3 The derivation of EOQ.
4.4 Standard deviation
4.5 Practical Inventory Systems
4.6 Methods of computation of EOQ
4.7 Cost sensitivity Analysis
4.8 Integrated EOQ-ABC Analysis
4.9 Economic Purchase Quantity
4.10 Practical considerations of EOQ in terms of rate of receipt and rate of usage
4.11 Additional problems on EOQ
4.12 Summary
4.13 Keywords

4.1 INTRODUCTION

The ordered quantity has always been a matter of concern in the organization. To avail discount, the
purchasing department tends to place an order at a higher quantity. This may lead to overstocking of
the material. On the other hand, if the order is placed at a lesser quantity, there may be a shortage of
material. The Economic Order Quantity [ EOQ ] is a solution to this problem. EOQ is the ordered
quantity at which it is economical to place the order. In this unit, we are going to study EOQ and its
implications in SCM. EOQ is a powerful cost-reduction technique widely used in Inventory Control
Management.
4.2 THE ECONOMIC ORDER QUANTITY [ EOQ ]

As mentioned above, EOQ is the ordered quantity at which it is economical to place the order.
In the beginning, when the entire ordered quantity is received, let Q. As per the consumption trend,
the ordered quantity reduces concerning time.

Standard Order Quantity – Q

The ordered quantity of the purchase order is called Standard Order Quantity. The Standard Order
quantity should be an EOQ. Initially, the value of Q is maximum. As consumption continues over the
number of days, there is a reduction in quantity. The time arrives at which the quantity becomes zero.
It takes time to procure the material. This time is called lead time. During the lead time, due to the
unavailability of material, the working is stopped. Machines are standstill, workers are sitting idle. This
leads to loss of machine-hours and manpower hours. Ultimately, revenue is adversely affected.

Therefore, this position of lead time is not desired. To, procure the material before the existing stock
is exhausted, the reorder point is introduced by shifting lead time at the left-hand side as shown in the
following figure.

The reorder point is the point at which, the purchase proposals are initiated so that the material is
available before the existing stock is exhausted. The time taken for the procurement of material is
called lead time. Lead time is the time required for the following activities:-
Indenting the material, conducting a market survey, flouting inquiry, processing purchase order,
manufacturing as per order, transportation of ordered material, an inspection of the ordered material,
storage, issue. Although the lead time is set as per consumption pattern, it should be as minimum as
possible.

In addition to the reorder point, the care is taken that the material is available as a spare stock.
Hence the reserve or safety stock is added at the minimum level, as shown below.

In some organizations, the additional stock called buffer stock is added below the reserve stock to
maintain the reliability of availability.

In this way, the concept of reserve stock is opposite to the concept of JIT. This is discussed in the
following comparison.

Reserve stock concept JIT concept.

Origin US Japan
Examples of implementation at Ford, GEC Toyota

Reserve stock Maintained Not maintained

Is Procurement cost
considered? Yes Yes
Is carrying cost considered?
Yes No
Total inventory Procurement cost+carrying cost Procurement cost
Cost =
Expenditure on inventory
More Very less

Procurement Cost – The administrative expenses towards the procurement of materials is called
procurement cost. The procurement cost includes the following expenses:
 • Calling quotations
• Processing purchase order
• Placing purchase order
• Inspection
• Office rent
• Salary and wages
• Stationary
• Postage, telephone, telegram, fax, email, etc.
• Traveling expenses
• Entertainment & refreshment
• Legal expenses

It should be noted that the procurement cost is stated in terms of ‘ per order ‘. As the quantity
increases, the procurement cost reduces, as shown in the following figure.

Carrying cost: is stated in terms of per item per year. It varies directly with the quantity. The carrying
cost covers the following expenses.
- rent
- wages of staff
- cost of depreciation
- loss of store through pilferage
- obsolescence cost
- tax on stock
- insurance
- stationary

Total inventory cost – It is the sum of procurement cost and carrying cost.
The quantity corresponding to the minimum total cost as shown in the above figure is called
Economic Order Quantity [ EOQ ].

Advantages of EOQ
EOQ is one of the important techniques used widely in inventory control systems. It offers the
following advantages:-
1 ] EOQ is an effective cost reduction technique.
2] It is simple and easy to implement.
3] use of the computer makes EOQ more accurate.
4] The costs are annual costs which cover price fluctuations.
5] The curve at the minimum total inventory cost is flat. Hence we can round off the EOQ.
4.3 THE DERIVATION OF EOQ

Let us suppose that

U – annual usage. [ i.e quantity required for one year ]
P – procurement cost per order.
C- carrying cost per item per order.
Q – EOQ i.e quantity to be ordered

Number of purchase orders placed in a year = annual usage/EOQ = U/Q

Total procurement cost = Procurement cost for one order X number of orders
= P X U/Q
Thus

TPC = UP/Q
………. I

Now average quantity over year = Q/2

Total Carrying cost = average quantity X carrying cost per order per year
= Q/2 X C
Thus

TCC = QC/2

….. II

Total Inventory Cost = Total Procurement Cost + Total Carrying cost

= TPC + TCC
= I + II
Thus,

T = UP/Q + QC/2

………. III
According to the theorem of minima of differential calculus, the total inventory cost T will be minimum when
T/Q = 0

Therefore differentiate equation III concerning Q,

T/Q =/Q [ UP/Q + QC/2] = 0

This yields the following expression for EOQ

EOQ =  2UP/C
4.4 STANDARD DEVIATION

It is seen in many cases that the monthly consumption is fluctuating. The deviation in consumption is
found by the method of standard deviation. Standard deviation is a root mean square deviation of
individual observation from the mean. The standard deviation is found out by the following
procedure.

01 ] The monthly consumption for the last 24 months is given below.

Month Monthly consumption

1 26
2 26
3 25
4 26
5 25
6 28
7 32
8 33
9 26
10 35
11 30
12 27
13 36
14 23
15 32
16 31
17 36
18 27
19 31
20 31
21 39
22 32
23 25
24 38

02 ] Find the total consumption for 24 months. Find the arithmetic mean by formula sum/months. This
comes out to be 30.
03 ] Find deviation 30-x. It comes out to be as follows.

Month Monthly
Consumption Xav- Sqr
x x
1 26 -4 16
2 26 -4 16
3 25 -5 25
4 26 -4 16
5 25 -5 25
6 28 -2 4
7 32 2 4
8 33 3 9
9 26 -4 16
10 35 5 25
11 30 0 0
12 27 -3 9
13 36 6 36
14 23 -7 49
15 32 2 4
16 31 1 1
17 36 6 36
18 27 -3 9
19 31 1 1
20 31 1 1
21 39 9 81
22 32 2 4
23 25 -5 25
24 38 8 64

04 ] Find the square of deviation 30-x. It is worked out in the above example.
05] Find the sum of squares. It comes out to be 476.
06 ] Standard deviation =  sum of squares/n-1 where n is no of observations
= 476/24-1 = 4.6
Thus there is a demand variation of 4.6 every month.
4.5 PRACTICAL INVENTORY SYSTEMS

If the lead time consumption is more than EOQ, make lead time consumption as ordered quantity and
EOQ as a reorder point. If lead time consumption is 60 days [ for 60 days ] and EOQ is 30 [ over 30
days ], the pattern will be as follows.

Solved Problems

1 ] Find the inventory carrying cost from the following data:-

Stock Value = 12,50,000
Interest on tiedown value = 12%
Cost of storage space = Rs 30 p.a. per sq.mtr for 50 sq.mtr
Insurance charges = Rs 3750
Spoilage breakage = Rs 6250
Obsolescence = Rs 12500

Solution
Interest on tiedown value = ……………………… 12%
Cost of storage space =
… Rs 30 p.a. per sq.mtr X 50 sq.mtr = 15000 …………… 1.2%
Insurance charges = Rs 3750 ……………………………….. 0.3%
Spoilage breakage = Rs 6250 ……………………………….. 0.5%
Obsolescence = Rs 12500 …………………………………… 1%
Total Carrying Cost ………………………………………… 15%
2 ] Find saving in procurement cost from the following data.

S.N. Expense category Monthly 3000 orders per year 5000 orders per year
Salary No of people No of people
1 Chief Purchase Officer 20000 1 1
2 Purchase Engineer 12000 3 5
3 Purchase Assistant 10000 2 3
4 Follow up persons 9000 1 2
5 Clerks 9000 3 4
6 Typists 8500 2 3
7 Suppliers 500 LS - -
8 Receiving Clerks 8000 2 3
9 Receiving Supplies 300 LS - -
10 Accounts Clerks 10000 3 4
11 Accounts Supplies 450 LS - -

Solution

S.N. Expense category Monthly 3000 orders per year 5000 orders per year
Salary No Salary Amt No Salary Amt
1 Chief Purchase Officer 20000 1 20000 1 20000
2 Purchase Engineer 12000 3 36000 5 60000
3 Purchase Assistant 10000 2 20000 3 30000
4 Follow up persons 9000 1 9000 2 18000
5 Clerks 9000 3 27000 4 36000
6 Typists 8500 2 17000 3 25500
7 Suppliers 500 LS - 500 - 500
8 Receiving Clerks 8000 2 16000 3 24000
9 Receiving Supplies 300 LS - 300 - 300
10 Accounts Clerks 10000 3 30000 4 40000
11 Accounts Supplies 450 LS - 450 - 450
Total Monthly Expense 176250 255250
Total Yearly Expense 2115000 3063000
Procurement Cost /Order 705 612.60
3 ] The annual demand for a particular item by a company is 10,000 units. This item may be obtained
from either an outside supplier or subsidiary company. The relevant data for the procurement of the
item are given below.

Costs From outside From the subsidiary

supplier, Rs company, Rs
Cost per unit 12 13
Cost of placing an order 10 10

Cost of receiving an order 20 15

Storage and all carrying costs including 2 2
capital cost per unit per item.

a ] What purchase quantity and from which source would you recommend to procure?
b ] What would be the minimum total cost in that case?

Ordering cost = cost of placing + receiving an order.

Given that U=10,000

C=2
A ] Outside supplier
Given that P = 30 , R=12
Therefore , EOQ = /2*10000*30/2 = 548
Total inventory cost = [ 548/2]*2+ [10000/548]*30 = 1095
Amount = 10000 * 12 = 1, 20, 000
Total expenditure = 1, 20, 000 + 1095 = 1,21,095

B ] Subsidiary P=25 , R =13

Eoq = /2*10000*25/2 = 500

TIC = [ 500/2]*2+ [10000/500]*25 = 1000
Amount = 10000 * 13 = 1, 30, 000
Total expenditure = 1, 30, 000 + 1000 = 1,31, 000
4 ] The purchase manager places order each time for a lot of 200 units of a particular item. From the
available data, the following results are obtained –
Inventory carrying cost = 40%
Ordering cost per order = Rs 600
Cost per unit = Rs 40
Annual demand = 6 orders each of 200 units.
Find out loss to the organization due to his ordering policy.

Given C= 40% of 40 = Rs 16
U = 2 X 600 = 1200
P= 600

i ] Q = 200
TIC = [ 200/2 ] * 16 + [ 1200 / 200 ] * 600 = 5200
ii ] Q = EOQ = /2*1200*600/16 = 300
TIC = [ 300/2 ] * 16 + [ 1200 / 300 ] * 600 = 4800

Loss = 5200-4800 = 400

4.6 METHODS OF COMPUTATION OF EOQ

There are three methods of computation of EOQ: Formula, Table, and Graph methods. We have seen
how to calculate EOQ from the formula. The table method and Graph method are explained below.

Given : Annual usage U = 120 units

Procurement cost P = Rs 20 per order
Cost of material = Rs 100
Carrying cost = 12%

From formula the EOQ is the computer as 20, as follows :

EOQ =  2UP/C =  (2X120X20)/12 = 20

 Table Method

Now let us apply the table method. Prepare the following chart.

POs U Q=U/POs Total Average Total Total Minimum

Procurement Quantity= Carrying Inventory Total
Cost = P X POs Q/2 Cost Cost = Inventory
=C. Q/2 TPC+TCC Cost
I II III =II/I IV = 20 X I V=III/2 VI=V. 12 VII =IV+VI VIII
1 120 120 20 60 720 740
2 120 60 40 30 360 400
3 120 40 60 20 240 300
4 120 30 80 15 180 260
5 120 24 100 20 144 244
6 120 20 120 10 120 240 Minimum
7 120 17.14 140 8.57 102.84 242.84
8 120 15 160 17.5 90 250
9 120 13.3 180 6.5 78 258
10 120 12 200 6 72 272

The quantity against the minimum total inventory cost is 20. This is the EOQ.

Graph Method
Use the above table to plot Quantity Q [ X-axis ] against Total Inventory Cost [ Y-axis ]. Also, plot total
procurement costs and total carrying costs. Locate you at the minimum of total inventory cost or
intersection of total procurement costs and total carrying costs.
4.7 COST SENSITIVITY ANALYSIS

This analysis gives a % change in Total inventory cost caused due to change in Procurement cost or
carrying cost. For this purpose, the constants w1 and w2 are found out corresponding to
Procurement cost and carrying cost respectively. The values of w1 and w2 are shown in the following
table.

W1 [ Procurement Cost ]
0.50 0.75 1.00 1.75 1.50 2.00
W2 0.50 0% 2% 6% 11% 15% 25%
C.C. 0.75 2% 0% 1% 3% 5% 12%
1.00 6% 1% 0% 1% 2% 6%
1.25 11% 3% 1% 0% 3% 5%
1.50 15% 5% 2% 3% 0% 1%
2.00 25% 12% 6% 5% 1% 0%

The table is used in the following manner.

Earlier data :- U=20 ,000 units ; R= Rs 20 per unit ; P = Rs 100 per order; C=20%
So that C=20X20/100=4 and eoq = 1000
Let us suppose that the procurement cost changes from 100 to 200 per corer. Similarly carrying cost
changes from 20% to 10%. Eoq becomes 2000.
Thus w1.100 = 200 and w2.20=10
Therefore w1=2 and w2 =0.5
From the above table, the value against w1=2 and w2=0.50 is 24%. This indicates that there is a 25%
rise in total procurement cost.
Total inventory cost in the first case, when P=200 and C=10 at eoq=1000.
TIC= TPC + TCC
= UP/Q + CQ/2
= 20000.200/1000 + 2 . 1000/2
= 2000 + 1000
= 5000
Total inventory cost in the second case, when P=200 and C=2 at eoq=2000.
TIC= TPC + TCC
= UP/Q + CQ/2
= 20000.200/2000 + 2 . 2000/2
= 2000 + 2000
= 4000
Thus change in inventory cost = [5000-4000]/4000 X 100 = 25% which tallies with the cost given in a
table.
4.8 INTEGRATED EOQ-ABC ANALYSIS

We have derived that EOQ is given by formula Q =  2UP/C. The total inventory cost is given by
EOQ =  2UP/C
Thus EOQ   U as P and C are constants.

Now at EOQ , TPC = TCC

UP/Q = CQ/2
nod . P = CQ/2 where nod = number of orders
therefore nod = C/2P . K’  U
Since P and C are constants
Nod = K .  U
Thus Nod   U

These formulae are illustrated in the following example.

Problem: A company purchases three items A, B, and C. Their annual demands are unit rates are
tabulated below:-. 12 orders are placed in a year per item.

Item Annual Demand [ nos ] Unit rate Rs

A 1,20,000 3
B 80,000 2
C 600 96

The annual consumption is worked out as follows:-

Item Annual Demand Unit Annual U

[ nos ] rate Rs Consumption U
A 1,20,000 3 360,000 600
B 80,000 2 160,000 400
C 600 96 57,000 240

As derived above , Nod = K .  U where nod = number of orders

It is given that 12 orders are placed in a year per item. Therefore for three items A,B and C , nod =
3X12 = 36
Nod = K .  U
36 = K [ 600+400+240]
K= 36/1240 = 0.029
Item Annual Demand U Q=AD/N QAV Rate Inventory
[ nos ] Nod=K od Investment
U Rs
A 1,20,000 600 17.4 6896 3444 3 10332
B 80,000 400 11.6 6896 3444 2 6888
C 600 240 7.0 85.71 42 96 4333
TOTAL 36 21353

Using the normal method, the inventory investment is calculated as follows.

Item Annual Demand Q=AD/1 QAV Inventory

[ nos ] 2 Rate Investment
Rs Rs
A 1,20,000 10000 5000 3 15000
B 80,000 6666 3333 2 6666
C 600 50 25 96 2400
TOTAL 24066

Saving in inventory investment = 24066 – 21353 = 2713

Problem – Find EOQ and number of orders from following given values of annual usage. It is given
that the unit cost of the product is Rs 1, carrying cost 20% and procurement cost is Rs 90 per order.

ANNUAL USAGE
100000
40000
10000
8100
4900
1600
900
100
50
25

Given :- P=Rs 90 per order C = 20% = 20/100 = 0.2

EOQ =  2UP/C =  (2XUX90)/0.2 = 30U
 Thus the EOQ and number of orders are shown in the following table.

ANNUAL EOQ Number of Orders =

USAGE ,U = 30U U/EOQ
100000 9480 10
40000 6000 7
10000 3000 3
8100 2700 3
4900 2100 2
1600 1200 1
900 900 1
100 300 1
50 210 1
25 150 1

4.9 ECONOMIC PURCHASE QUANTITY

The EOQ has the following limitations.

1 ] If annual usage is small and the rate of the product is large, the supplier would find it uneconomical
to supply the material.
2 ] EOQ may change as per actual transport conditions. It may not be possible to supply full material as
per EOQ in one single consignment. If the EOQ is large, the manufacturer may not produce all the
items at one time.
3 ] In case of perishable items, EOQ may be required to be revised.
4 ] EOQ may change as per price fluctuations in the unit rate.
5 ] EOQ may be affected by seasonal considerations.
1 ] EOQ may be affected by imported items.
2 ] Discounts on bulk purchases may affect EOQ.

Given the limitations discussed above, the EOQ may be required to be revised to what is called EPQ
i.e Economic Purchase Quantity.

Problem:- In a leading biscuit manufacturing company, the annual demand for corrugated boxes is
20,000. The cost of placing the purchase order is Rs 100 and the inventory carrying cost is 20%. The
price per box is Rs 10. The supplier offers a 1% discount if 4000 boxes or more are procured and a
3.5% discount if 10000 or more units are procured. What should be the ordering quantity and would
you accept a discount?
Given : U=20,000 P=100 C =20% of 10 = 2
A ] Without discount :-
EOQ =  2UP/C =  (2X20000X100)/2 = 1440 units
No. of orders = U/Q = 20000/1440 = 13.88
Therefore IPC = U/Q . P = 13.88 X 100 =1388
Qav = 1440/2 = 720 Units
Therefore , ICC = Qav . C =720 . 2 =1440

B ] With discount of 1% at quantity of 4000 boxes

Consumption amount = 20000 X 10 = 200,000
1% discount results in saving of 200000X1/100 = Rs 2000
[ 100 : 200000 : 1% ]
now Q= 4000
Therefore , IPC = U/Q . P = 20000/4000 X 100 =500
Thus the procurement cost is lesser than in 1388 when the discount of 1% is given.

Saving in procurement cost :- 1388 – 500 = 888

Therefore , total saving = discount + saving in procurement cost
= 2000 + 888 =2888
Now , ICC = Qav . C = 4000/2 . 2 = 4000
Thus carrying cost is more [ than 1440 ] when a discount is given

Therefore extra carrying cost = 4000 – 1440 = 2560

The expenditure of 2560 is lesser than saving i.e. 2888. Thus there is a gain of 2888-2560 = Rs
328. Hence it is recommended to avail of a discount of 1 %.
B ] With a discount of 3.5 % at the quantity of 10000

Consumption amount = 20000 X 10 = 200,000

1% discount results in saving of 200000X3.5/100 = Rs 7000
[ 100 : 200000 : 3.5% ]
now Q= 10000
Therefore , IPC = U/Q . P = 20000/10000 X 100 =200
Thus the procurement cost is lesser than 1388 when the discount of 3.5% is given .
Saving in procurement cost :- 1388 – 200 = 1188
Therefore , total saving = discount + saving in procurement cost
= 7000 + 1188 =8188
Now , ICC = Qav . C = 10000/2 . 2 = 10000
Thus carrying cost is more [ than 1440 ] when the discount is given
Therefore extra carrying cost = 10000 – 1440 = 8560
The expenditure of 8560 is more than saving i.e. 8188... Hence it is recommended NOT to avail a
discount of 3.5 %.
 4.10 PRACTICAL CONSIDERATIONS OF EOQ IN TERMS OF RATE OF
RECEIPT AND RATE OF USE

An EOQ model is based on the assumption that all the quantity is received instantaneously as
shown in the following diagram.

This assumption may not be true in actual practice. Usually, the consignments are received on day
by day basis instead of an instantaneous receipt. The actual pattern may be as follows:-

As shown in the above figure we neglect the rate of usage x, as a result, we operate first characteristics.
To make EOQ mode more realistic, we have to consider two parameters in the existing EOQ model [ EOQ =  2UP/C ]. These
parameters are the rate of use [ x ] per day and the rate of receipt [ y ] per day.
Now y = rate of receipt per day
Therefore , no. of days required to receive entire order = Q/y
No. of units received during the receipt period = [ Q/y ] . x = Q [ x/y ]
Therefore actual quantity = Q - Q [ x/y ] = Q ( 1- [ x/y ] )
Therefore , average quantity = Q( 1- [ x/y ] )/2
Therefore , inventory carrying cost ICC = QC( 1- [ x/y ] )/2
Now , Inventory Procurement cost , IPC = Procurement cost per order X no of orders
= PU/Q

At the condition of EOQ,

Inventory Procurement cost = inventory carrying cost
IPC = ICC
PU/Q = QC( 1- [ x/y ] )/2
This yields , Q =  2UP/C[1-(x/y)]
The actual EOQ is given by the following relation.

Q =  2UP/C [1-(x/y)]
4.11 ADDITIONAL PROBLEMS ON EOQ

1] ABC Chemicals Ltd estimates that they need chemicals of Rs 10000/- per year. The accountants
have determined that the ordering cost is Rs 25 per order and carrying cost is 12.5 % of average
inventory. Find by table method how many purchase orders can be placed during the year.
No of orders TPC U Q QAV ICC TIC
1 25 10000 10000 5000 625 650
2 50 10000 5000 2500 313 363
3 75 10000 3333 1666 208 283
4 100 10000 2500 1250 156 256
5 125 10000 2000 1000 125 250
6 150 10000
7 175 10000
8 200 10000
12 300 10000 833 417 52 352
The student is expected to enter the blanks left incomplete.
Solved Problems
1 ] Given the following data find – 1 ] EOQ 2 ] Total inventory cost 3 ] Safety stock with the risk of stock out.
Given the factory of safety = 2.
Price of item = Rs 30/- each
Total ordering cost = Rs 1,64,000
No of orders per year = 8200
Carrying cost = 20%
Annual consumption in Rs = Rs 14,40,000
Lead time = 1 month

P = 164000/8200 = 20
U = 1440000/30 = 48000
Carrying cost C= 20% of Rs 30 = Rs 6

EOQ =  2UP/C =  2X48000X20/6 = 566 units

TIC = TPC + TCC = 48000/566 * 20 + 566 /2 * 6 = 53394

Let D is demand during lead time

D/Lt = U/T
D/1 = 48000/12
D =4000
Safety stock = K D = 2 4000 = 127

2 ] The weekly demand for a certain item is given over 10 weeks.

 Weeks 1 2 3 4 5 6 7 8 9 10
Units 20 30 25 15 28 20 25 18 22 44

The ordering cost is Rs 20 per order and the carrying cost is Rs 10 paise per item per week.
Find EOQ and reorder level. The lead time is one week. Factory of safety K = 3.

Weekly consumption U = [20+30+25+…..+24 ] / 10 = 23

P = 20
C= 0.10 per item per week
EOQ =  2UP/C =  2X23X20/0.10 = 96 units

The standard deviation [  ] is calculated as follows:-

Weeks 1 2 3 4 5 6 7 8 9 10 Total
Units 20 30 25 15 28 20 25 18 22 44 227
x
[x-] -3 7 2 -8 5 -3 2 -5 -1 1
2 9 49 4 64 25 9 4 25 1 1 191
[x-]

Mean value  = 227/10 = 22.7 =23 units

standard deviation [  ] = [x-]2/(n-1) =  191/(10-1) = 4.6

Buffer stock = standard deviation X Factory of safety =  X K = 4.6 X 3 = 14 units

Lead time consumption , D -> tan  = 227/10 = D/1 thus D = 23

Reorder level = Lead time consumption + Buffer stock = D + BS = 23 + 14= 37 units

4.12 SUMMARY

The ordered quantity has always been a matter of concern in the organization. To avail discount, the
purchasing department tends to place an order at a higher quantity. This may lead to overstocking of
the material. On the other hand, if the order is placed at a lesser quantity, it is possible for a shortage
of material. The Economic Order Quantity [ EOQ ] is a solution to this problem. EOQ is a powerful cost-
reduction technique widely used in Inventory Control Management. It is the ordered quantity at
which it is economical to place the order.
4.13 KEYWORDS

Inventory, EOQ, Procurement Cost, Carrying Cost, lead time, reorder point, economic purchase
quantity, standard deviation.
UNIT 5 STORES MANAGEMENT AND SUPPLY CHAIN

Objectives
After going through this unit, you should be able to:

• define corporate policy for stores;

• learn various types of stores;
• illustrate the concept of integrated store management;
• define the features of ideal stores;
• illustrate various layouts of the store;
• learn store safety measures.

Structure
5.1 Introduction
5.2 Duties of the store officer
5.3 Interdepartmental relations
5.4 Corporate policy and stores management
5.5 Types of stores
5.6 Warehouses
5.7 Store Organization
5.8 Store Layouts
5.9 Features of good storekeeping
5.10 Safety Measures
5.11 Training
5.12 Summary
5.13 Keywords

5.1 INTRODUCTION

The organizations are broadly classified as commercial, transport, manufacturing, agricultural, public
utility, and government. Stores Management is associated with all such types of organizations. The
main job of the store is to store various types of material properly and issue the same as and when
required. Thus store management mainly deals with the receipt, storage, and issue of materials. The
store management is closely related to the supply chain.

5.2 DUTIES OF THE STORES OFFICER

The store officer or store manager is responsible for the overall working of the stores. He has to
perform the following duties:
• to ensure uninterrupted supply of material to a user
• to carry out effective material control
• inspection of materials
• material handling and transportation within store premises
• storage and warehousing of materials
• allocation and issue of material to various departments
• to coordinate with other departments such as purchasing, inventory control, manufacturing,
etc.
• proper allocation of work to the staff working in the store
• appropriate manpower planning
• overall checking of material to detect damages, defects
• ascertaining material account by verification /counting
• disposal of scrap, obsolete and unserviceable material

5.3 INTERDEPARTMENTAL RELATIONS

We have studied earlier that one of the main functions to be performed by the store manager is to
maintain proper coordination with other departments. He is required to keep cordial relations with
other departments such as Production, R&D, HRD, Sales & Marketing, Finance, and even with Top
Management. The interaction taking place between these departments is outlined as hereunder.

Production Department
• receipt position of materials in store.
• delay in receipt of material to reschedule production activities.
• performance of material to take up the matter with supplier/manufacturer.
• details of defective material to take up the matter with supplier/manufacturer

R&D Department
• Specifications of materials available in stores
• receipt of new material in stores for conducting research

HRD Department
• Personnel matters in respect of store staff such as promotion, transfer, claims, etc.
• The allocation of materials like uniform cloth, gumboots, stationary, etc is generally given by
the HRD department. The receipt position of such material in stores reviewed by the HRD
department.
• Training to be given to the store staff.
Sales and Marketing Department
• FSN analysis of finished products.
• Receipt position of finished products in the stores.

Finance Department
• Position of funds for releasing suppliers’ payments.
• Payment of insurance, taxes, etc in respect of stores.

Top Management
The store manager is always required to be in touch with the top management. He has
to submit the following matters.
• Monthly position – receipt of important materials [ Class A ]
• Orders not executed by suppliers.
• Slow-moving class A items.

5.4 CORPORATE POLICY AND STORES MANAGEMENT

The targets of store management are set according to the general policy of the corporation. Generally,
the corporate policy is based on MBO [Management by Objectives]. As seen earlier, the MBO concept
emphasizes to set an objective before the work is started. For example, a firm has to decide whether
to make a profit or reduce prices. Because if the prices are lowered, more profit cannot be expected.
The stores and other departments have to set their goals as per MBO of the company.

To set the general objectives of a company, SWOT analysis is carried out. The term SWOT stands for
strengths, weaknesses, opportunities, and threats. For example, the company may have SWOT
parameters as follows.

Strengths - more reserve capital, more goodwill, advanced infrastructure

Weakness - labor problem, lack of expertise.
Opportunities - emerging prospective consumers
Threats - strike, tool down, recession

By evaluating the above parameters, the objectives of the company are formed. For example, an
increase in sales, increase in ROI. the store's department may have associated goals such as curtailing
expenditure on inventory. This can be achieved by implementing inventory control techniques such as
EOQ, ABC analysis, etc.

This is shown in the following layout.

Policy Manual
To communicate the corporate policy of the company to the staff members, the policy manual is
formulated usually by the top management. The policy manual may comprise of the following points.

• Every material when purchased should be invariably routed through stores.

• The store manager should conduct inventory:- Annual, perpetual, on spot
• The selective inventory control would be carried out by store manager:- ABC, VED, HML
• disposal of scrap, obsolete material will be arranged by store office by auction, quotations,
distribution method.
• Allocation of material to various departments will be given by the store’s manager.
• FSN analysis should be conducted by the store's department to detect slow-moving items.

5.5 TYPES OF STORES

Depending on various factors, the stores are classified as follows:-

Geographical Locations

Centralized And Decentralized stores: the stores are mainly classified as Centralized And
Decentralized stores, depending on geographical locations of organizational activities.

Centralized stores: In the case of centralized stores, all the store activities i.e. receipt, storage, and
issue are centered under one roof. It is suitable for the organization having activities centered in the
limited geographical area. For example, Bajaj Auto Ltd.

The advantages of centralized stores are as follows.

• Since all the activities are concentrated in one place, control is easier and effective
• Since all the activities are concentrated at one place, Optimum utilization of manpower,
resources, and placer
• Capital investment in-store is lesser
• Better security arrangement provided

The disadvantages of centralized stores are as follows.

• centralized storage concept may not be economical if the users are situated at longer
distances. This will add to the transportation cost and delay in receiving material.
• The conditions like force majors may stop working in centralized storage which may affect
user's activities.
• It is not convenient for organizations covering large geographical areas.

Decentralized stores
This concept is based on the principle of delegation of authority. In the case of decentralized stores, all
the store activities i.e. receipt, storage, and issue are distributed over several stores. It is suitable for
organizations having activities distributed over a wide geographical area. For example, FCI godowns
are situated all over the country. The advantages of decentralized stores are as follows.

• The centralized storage concept would not be economical if the users are situated at longer
distances. This will add to the transportation cost and delay in receiving material. Under such
circumstances, it is better to go for the decentralized concept.

• The conditions like force majors may stop working in centralized storage which may affect user's
activities. This would not happen if stores are decentralized.

However, decentralized stores offer disadvantages as follows.

• Since all the activities are distributed, control is difficult.
• Since all the activities are distributed, Optimum utilization of manpower, resources, and place may
not be appropriate.
• Capital investment in decentralized stores is lesser.
• There is an extra expenditure on security arrangements.
Store [ East ] , Store [ west ], Store [ North ] , Stores [ South] are decentralized.

Working Of Centralized Stores

The working of centralized stores is shown in the following figure. The working takes place as follows.
• The user sends indent to the purchasing department indicating specifications and quantity of
required material.

• Accordingly, the purchasing department floats inquiry or quotations.

• The quotations are submitted by suppliers and the contract is awarded to the selected
supplier. The purchase department communicates these details to the Inspection wing.

• The inspection wing conducts stage inspection of the material at the supplier's works.

• If the inspection is satisfactory, the material against ordered quantity is supplied by the
supplier to the main stores.

• Before receipt, the RST [ Random Sample Testing ] is carried out at the main store. If the
material fails in RST, the lot is rejected. In such cases, the store officer rejects the material by
issuing Store Rejection Note.

• If the material passes in RST, the lot is accepted. In such cases, the store officer accepts the
material by issuing Store Receipt Note. Usually, the supplier gets 90% payment against Store
Receipt Note. Balance 10% is released after 60 days if the performance of the material is
satisfactory.
 • The received material is stored and entries are written in-store books. The users lift the
material from the main stores against requisition.

Working Of Decentralized Stores

The working of decentralized stores is explained in the following figure. The working takes place as
follows.

• The users send indent to the central purchase agency [ CPA ], indicating specifications and
quantity of required material. Although the stores are decentralized, there is only one
purchase department called CPA.

• Accordingly, the purchasing department floats inquiry or quotations.

• The quotations are submitted by suppliers and the contract is awarded to the selected
supplier. The purchase department communicates these details to the Inspection wing.

• The inspection wing conducts stage inspection of the material at the supplier's works
• If the inspection is satisfactory, the material against ordered quantity is supplied by the
supplier to various stores.

• Before receipt, the RST [ Random Sample Testing ] is carried out at each store. If the material
fails in RST, the lot about that store is rejected. In such cases, the store officer rejects the
material by issuing Store Rejection Note.

• If the material passes in RST, the lot about that store is accepted. In such cases, the store
officer accepts the material by issuing Store Receipt Note.
 • 7 ] The received material is stored and entries are written in-store books. The users lift the
material from the main stores against requisition.

Integrated Stores Management

The concept of Integrated Stores Management is oriented from decentralized stores.
As per this concept, each department in the organization is provided a separate store. All such
‘ departmental stores ‘ are controlled by the main stores. For example, the material often required by
production work is kept in a store that is attached to the production department. On similar lines,
separate stores are formed for R&D, Sales, Marketing, HRD, and finance departments. These stores
are controlled by main stores.
Advantages of Integrated Stores are as follows
• There is better accountability of material.
• The material about a particular department is allocated t a respective
• department. Hence sorting is simplified.
• The queuing is highly eliminated. Hence time required to receive material is reduced.

Transactions: Depending on transaction stores are classified as Major Stores, Minor Stores, Stores
Center, and Custody. The quantum of the transaction is decided by the concerned organization.

The following table shows a comparison between Major stores and Minor stores.

Parameter Major stores Minor stores

Material Transaction More [ usually above 10 Cr] Lesser [ usually up to 10 Cr]
Headed by rank Manager Deputy Manager
No of staff members Usually 25 Usually 100
Mode of transport Railway and Road Usually Road
Custody is an unmanned store. In custody, the items are kept in lock and key. The store is opened as
when required.

Status of Material: Depending on the status of material, the stores are classified as raw material
Stores, in-process material Stores, finished goods Stores to facilitate classification.
Stores are also classified as per state of material such as Stores [ liquids ], Stores [ Gaseous Material
], Stores [ Solids].

In some organizations, stores are classified according to the type of engineering material such as
Stores [ Civil ], Stores [ Electrical ], Stores [ Mechanical ]
In all the cases discussed above, the type of material is taken into consideration.

Other types
SOS stores - i.e. Seasonal and Off Seasonal Stores. To identify seasonal material such as fruits,
stores are classified as Seasonal and Off Seasonal

Dry Stores – Such types of stores are movable. Hence these stores are also called Mobile stores. Such
type of store is accommodated in a lorry or trailer. The benefit of such stores is the store can reach
the user for his needs.

Selective Inventory Control - In some organizations, stores are classified according to selective
inventory control. For example based on ABC analysis stores are classified as Stores [ A-type ], Stores
[ B type ], Stores [ C type ]. The advantage of such types of stores is the classification is done as per
the value of the item. It is therefore easier to control the items as per their ABC status.

Imprest Stores – The working of imprest stores is similar to the petty cost system.

If the normal consumption for some items is 2000 per week, the store officer will arrange to have
2000 numbers at the beginning of every week. If there are 100 numbers balance in the store, the store
officer will issue a requisition note for balance 1900 numbers to bring the stock level up to the
required amount.

Tools Stores – As the name indicates tools stores are used to store tools, spares, and accessories.
These materials when received at main stores are taken to tools stores. The tool stores are formed at
the organizations where tools are regularly required.

5.6 WAREHOUSES

Warehouses are godowns for storage of commodities. The broad difference between stores and
warehouses is that the stores usually accommodate engineering material, on the other hand,
warehouses preserve commodities like food grains, fruits, etc. Secondly, stores accommodate various
types of materials. In the case of Warehouse, usually, one type of material is stored in a bulk quantity.
For example, timber warehouse stores only timber materials.
Warehouses are generally located outside the municipal area but nearer to Railway station or harbor.
The facilities such as road transport, loading, and unloading should be available nearby a warehouse.
The significance of the warehouse is outlined below.
 • Many commodities are not manufactured regularly however are required at any time. Such
commodities are preserved in warehouses.
• Grains, cotton, sugar are produced in a particular season, however, their demand is there for
all the seasons. Such commodities are preserved in warehouses.
• Commodities like fruits, eggs, vegetables require cold storage. Such commodities are
preserved in warehouses.
• Some commodities have irregular demand. Such commodities are preserved in
warehouses.

Classification of warehouses
Depending on several factors, warehouses are classified as follows.

Type of material – Based on the type of material, the warehouses are classified as glossary warehouse,
clothing warehouse, timber warehouse, furniture warehouse, etc.

Type of ownership- Based on the type of ownership, the warehouses are classified as the private
warehouse and public warehouse. Private warehouses have private ownership such as a private
person or private organization.

On the other hand, public warehouses are owned by public undertakings, government, or dock
authority.

The advantages of public warehouses are as follows.

• public warehouses can accommodate a wide quantum of commodities.
• public warehouses offer 24 hours service.
• Due to the availability of adequate capital, the number of facilities is provided to public
warehouses.
• Proper security arrangements are provided at public warehouses.
• The rates of warehousing are lesser.

Bonded Warehouse – the warehouse for storage of imported items is called a bonded warehouse. A
Bonded Warehouse is licensed to accept imported goods for storage before the payment of customs
duties. The Bonded Warehouse is authorized by customs authorities to accommodate an imported
material till the import due on it is paid. The customs authorities can inspect a bonded warehouse at
any time.

The advantage of Bonded Warehouse is that the goods can be sold directly from Bonded Warehouse
to the outside customers subject to payment of customs duty.

5.7 STORE ORGANIZATION

The general organizational structure can be described in the form of management Triangle -
• At top of the triangle, there is only one person who acquires topmost posts such as MD or
CEO.
• At the bottom of the triangle, some maximum people acquire the lowest post such as Helper
or worker.

Comparison is given below:

TOP Middle Base
I ] Nature of duty Conceptual Supervision Operation
II ] Remuneration High Medium Low
III ] Quantity one lesser more
IV ] Educational
Qualification - Higher Lesser
V ] Responsibility Sole Partial Lesser

The organization of stores is based on the above triangle. Usually, at the top, General Manager [
Stores ] or Controller of Stores is posted. He is followed by managers, Assistant/Deputy managers,
supervisors, assistants, helpers, etc.

5.8 STORE LAYOUTS

To ensure maximum efficiency, the location and layout of stores should be carefully planned.
Selection of New Stores and Layout:-
The following factors are taken into consideration while selecting the location of the new store.
• Nearness to Consumer/user of the material so that the handling charges are lesser.
• Nearness to the high way for the convenience of transportation.
• Nearness to the Railway station for the convenience of transportation.
• Availability of Water, Electricity and tea, food, etc.
• The separate road for material and men.
• Beyond municipal corporation limits.
• Building – Following factors are to be taken into consideration while constructing a new
building for stores

- Proper lighting and ventilation should be ensured.

- Electrical lighting, wiring, earthing should be appropriate.
- Provision for cold storage, heating equipment, air conditioners, testing machinery
- etc should be made.
- Provisions for protection against fire hazards should be made. [ Fire fighting
- equipment, fire alarm systems, etc. ]
 - Provision against Security arrangements such as watchmen cabin, fencing barbered wires.
- provision for safety appliances should be made.

Layout- Following factors should be taken into consideration while designing a layout for new stores
• The path for movement of material and men.
• The separate road for heavy vehicles transporting material and light vehicles of people.
• Easy identification of storerooms and material yard.
• Heavy items storeroom should be situated near rail tracks so that material is loaded
/unloaded conveniently.

Ideal Layout Of Major Stores

The following diagram shows an ideal layout for major stores.

The main features of the layout are as follows.

 • There is a separate road for material and men.
• The heavy material store is adjacent to the railway line and main road so that loading,
unloading, and handling is easier.
• The store yard is provided to warehouse outdoor material. It is adjacent to the railway line
and main road so that loading, unloading, and handling is easier.
• There are three gates. Security guards should be provided at all three gates. It is
recommended to provide guards at Material Yard also.
• F indicates the location of fire fighting equipment.
• The store premises are surrounded by fencing walls or barbered wires.

Ideal Layout Of Minor Stores

The above diagram shows an ideal layout for minor stores. The main features of the layout are as
follows.

• There is a separate gate for material and men.

• The heavy material store is on the ground floor and lighter material at upper floors so that
loading, unloading, and handling are easier.
• The store yard is provided to warehouse outdoor material.
• There are two gates. Security guards should be provided at all these gates. It is recommended
to provide guards at Material Yard also.
• F indicates the location of fire fighting equipment.
• The store premises are surrounded by fencing walls or barbered wires.

Ideal Layout Of Small Stores

The above diagram shows an ideal layout for small stores. The main features of the layout are as
follows.

• There is only one gate [ main entrance ] for material and men. It is provided with a collapsible
shutter.
• Various storage systems viz. racks, bins, cupboards, wrenches are provided with proper space
for movement, indicated by arrows.
• The cabin is provided to the storekeeper. It is situated at a higher distance from the ground
and made up of glass so that he can observe store activities.
• Separate room with lock and key is provided for A-type items.

Layout Of Centralised Stores

5.9 FEATURES OF GOOD STORE KEEPING

According to the society of materials managers, Features of good Store Keeping

are as follows.
• Assign a place for the item and keep the item at its place.
• Maintenance of proper store records.
• Easy and prompt services i.e. receipt, storage, and issue of materials.
• Avoid misplacing or mixing of materials.
• Protect against damage/pilferage.
• So far as possible, the material should be issued as per FIFO basis.
• Assign appropriate and scientific methods for identification.
• Regular inspection and store verification.
• Conduction of annual or perpetual inventory.

Storing Practices

Spiegel and Lansburgh have remarked that poor control of the material is frequently accompanied by
poor storeroom administration.
The essentials for successful store management are as follows.

Objectives
The store's management should have the following objectives
• Maximize utilization of available space in the store
• Maximize utilization of available manpower in the store
• Maximize utilization of equipment in the store
• Accessibility to all the items
• UV protection to all the items in the store

Professionalism – The store staff should have a professional attitude. They should not consider the
store as a necessary evil but an important component in material flow.

measurement – The store manager should set certain standards and compare performance with these
standards. For example, if in ABC analysis the standards set are 15% [ for A ], 25% [ for B ], and 60% [
for C ], he should follow these standards with actual classified values.

Consumer awareness - The store staff should know the requirements of users.

Operational Planning – the activities such as unloading, storing, loading, etc should be performed in a
planned manner. There should be integration in activities.
Public warehousing - The store staff should be more cautious and vigilant in the case of public
warehousing.

Centralization – If possible, the preference should be given to centralized stores than a decentralized
store.

Pace – The attempts should be made to reduce lead time and increase the inventory turnover ratio.

Flexibility – the store's transactions should be flexible so far as possible and not rigid.

Uncertainty - there should not be any type of uncertainty in making material available in the store for
users.

Inventory accuracy – the desired to maintain appropriate inventory accuracy.

Records – the store records should be properly maintained.

Housekeeping should be excellent.

The lifting of material should be proper and scientific. The techniques of motion studies should be
applied.

Human Relations – the store officer should maintain good human relations with staff working under
his control. They should be motivated for performing optimum work.

Teamwork should be implemented for a big job.

Automation- so far as possible use of automated and sophisticated equipment should be made in the
stores. The heavy works to be performed by robots should not be entrusted to the workers.

The store staff should perform a good quality of service.

Annual inventory should be carried out by deputing the people outside the materials management
department. This would limit/detect malpractices if any.

5.10 SAFETY MEASURES

Stores should be given security against the following

• Security Against Fire Hazards
• Security Against Theft
• Security against damage, obsolescence
Protection against Fire Hazards

The protection must be provided against fire hazards. The probable causes of fire hazards may be as
follows.
• Electric short circuit
• Smoking by staff members/visitors
• Electric Sparking
• Combustion due to accident

Fire extinction theory is based on the following principles.

Starving: Removal of unburnt combustibles so that fire is abolished.
Cooling: The temperature of the fire is lowered by cooling below the ignition temperature.
Smothering: Through suffocation, oxygen is separated from fire. As a result, fire is abolished.
Quenching: by water or sand.

The fire hazards may result in greater loss due to the burning of material kept in the stores. It is,
therefore, necessary to take the following steps against fire hazards.

• Risk against hire hazards should be covered by fire insurance.

• Fire fighting equipment should be installed as per IS 2/90/ Factory act provisions.
• Periodic maintenance and refilling of Fire fighting equipment should be carried out.
• A computerized Fire Alarm system should be installed.
• Optimum care should be taken in respect of A-class items.
• The training on operation and maintenance of Fire fighting equipment should be imparted to
store staff.
• Pulley belt system should be provided for escaping from a fire.
• Combustible items should be marked with color code and the mark of identification.
• Testing/demonstration of fire fighting equipment should be carried out once in a quarter.

The following types of fire fighting equipment are commonly used in stores.

firefighting equipment Application

Fire buckets [ Sand Buckets ] sand is used to quench the fire.
CO2 gas cylinder Against fire due to short circuit.
CCl4 gas cylinder Against fire due to short circuit
Soda Acid Against cooling of fire.
Foam Type It is used to quench fire on oil.
Water Pumps Fire is quenched by water jet.
Fire Buckets – are filled with sand. The color given to the buckets is red. The word FIRE is painted on
such buckets. The fire buckets are placed on wooden or MS stand. The sand is used to quench the fire.
For the fire in carbide stores, make use of sand.

CO2 gas cylinder- the CO2 gas cylinders of various capacities are available. It is used against fire due to
a short circuit. CO2 gas is a non-conductor of electricity.

CCl4 gas cylinder- Like CO2 gas, CCl4 gas [ carbon tetrachloride ] is a bad conductor of electricity.
Hence it is used against fire due to short circuit. The CCl4 gas cylinders of various capacities are
available

Soda Acid Extinguisher – The soda acid is used for cooling purposes. The fire can be abolished by
lowering down its temperature. This is done by Soda Acid Extinguisher.

Foam type Extinguisher – is used to quench fire due to oil. For the fire in oil, never use water for
quenching. Make use of the foam-type extinguisher. The foam spreads a non-combustible layer of
CO2.

Water Pumps – In this type, a Fire is quenched by water jet. However, water should not be used
against fire due to electric short circuit or sparking, because water is a conductor of electricity. Use
water freely when the fire is due to oxygen gas.

Precautions while using fire fighting equipment

Following precautions should be taken while using fire fighting equipment
• For the fire in carbide stores, never use water for quenching. Make use of sand.
• For the fire in oil, never use water for quenching. Make use of the foam-type extinguisher.
• The foam spreads a non-combustible layer of CO2.
• Use water freely when the fire is due to oxygen gas.
• CCl4 gas [ carbon tetrachloride ] is a bad conductor of electricity. Hence it is used against fire
due to short circuit. First, switch off electric supply and then apply CCl4.

Water is the conductor of electricity. Hence do not use water for abolishing fire.

Protection against Theft

The store officer should take the following measures as protection against theft.
• Periodic stock verification should be carried out. The stock verification of A type of items
should be done minutely.
• At the time of closing of stores, the store's officer should ensure that all the gates and locked
properly.
• Seals should be provided in respect of locks of storerooms and cupboards.
• A computerized security alarm system should be installed.
Such systems should be kept in the ON position.
• Security guards should be placed at the main locations in the store premises. The watchmen
should be asked to carry out patrolling every hour at store premises.
• Yard Lighting - Adequate yard lighting should be provided. The HPSV [High-Pressure Sodium
Vapor ], HPMV [High-Pressure Mercury Vapor ], or neon lamps of 250 to 500 Watt capacity
should be used. The store office should ensure every week that these lamps are working
properly.
• The tube lights used in-store building, staircase, etc. should also be in working condition.
• The name of the organization should be embossed on the items so that the same could be
identified easily.
• Locked bins should be used in case of important items.
• Compound walls with barbered fencing should be used.
• In the case of large stores, searchlights should be used.
• Locking arrangement should be provided at the rooms, cupboards where important materials
such as class A materials are stored. Lots of good quality should be used.
• The windows should be covered by wire mesh so that nothing can be taken out from the
window.
• The number of gates should be restricted to have a proper degree of control.
• Proper identification:
- Identity cards should be issued to staff working in the store.
- Names of visitors should be entered in the register. The purpose of the visit should be
mentioned in the register. They should be given a visitor’s slip.

Custody Keys- Custody keys are very important given malpractices that may probably occur in the
stores. There are hundreds of keys to gates, rooms, cupboards, etc. It is, therefore essential to have
proper administration in handling the keys.

The record of keys should be maintained in the following format:

Store Room No. Cupboard No. Make of the Key Key Number

Keyboard – the keys should be fixed on the keyboard. The layout of the keyboard is given below. The
following points should be noted.
• Locking arrangement should be provided to the board.
• The keyboard should have a glass door to observe the position of keys – whether issued or
not.
• The location of the key should indicate room no, cupboard no, etc.
 Glass door

RoomNo1 RoomNo2 RoomNo3

Cupboard No Cupboard No Cupboard No
Cupboard No Cupboard No Cupboard No
Cupboard No Cupboard No Cupboard No
Lock
RoomNo4 RoomNo5 RoomNo6
Cupboard No Cupboard No Cupboard No
Cupboard No Cupboard No Cupboard No
Cupboard No Cupboard No Cupboard No

While issuing the keys following entries should be made in the key movement register

Date Name of Designation Store Key Signature Date Signature

& Person Room No. no. & time of
time receipt

In case of any malpractice, the responsibility can be fixed based on the above records.

5.11 TRAINING

Various tasks to be performed by staff working in the store are highly technique-oriented.

They are required to operate modern storage and material handling equipment, work on materials
management software, create a database of inventory items, work on ABC analysis, and whatnot. To
develop skills and expertise in these areas, it is essential to impart training to the store staff.

The training for store staff should be designed carefully. The following points should be taken into
consideration.

• Knowledge of safe load and operating methods.

• Managerial skills – control, coordination, planning, directing, staffing, etc.
• Readiness to recognize and correct mistakes.
• Remembering proper sequence for every operation.
• Ability to judge the height and position of forks, cranes, and other equipment.
• Computer and management techniques.
Broadly, two types of training are given to the store staff. :- Operational Training and Management
training.
Operational Training is designed for operational staff like Store Superintendents, Store supervisors,
Stores assistants, etc. The main contents of this training are as follows.

• Operation and maintenance of material storage and handling equipment such as

• EOT cranes, JIB, mobile cranes, fork trucks, conveyor belts, roller conveyors, etc.
• Safety measures – how to perform safe operations.
• data entry of store material in computer systems.
• Operation and maintenance of fire fighting equipment and fire alarm systems.

The training should be conducted in regional languages such as Marathi. So far as possible the training
literature should be also issued in regional language.
On the other hand, Management Training is designed for managerial staff such as Store Manager,
Deputy Manager [Store ], Store Engineers, etc. The main contents of this training are as follows:
• management training – application of new materials management techniques.
• computer training – installation and operation of materials management software,
• RDBMS, MIS, ERP, E-Commerce, etc applicable to stores.
• HRD training – manpower planning, job evolution, merit rating, etc.

5.12 SUMMARY

The organizations are broadly classified as commercial, transport, manufacturing, agricultural, public
utility, and government. Stores Management is associated with all such types of organizations. The
main job of the store is to store material properly and issue it as per requisition. The store officer is
responsible for the overall working of the stores. Depending on various factors, the stores are
classified in different ways. Warehouses are godowns for storage of commodities. Spiegel and
Lansburgh have remarked that poor control of the material is frequently accompanied by poor
storeroom administration. Stores should be given security against 1 ] Security Against Fire Hazards, 2 ]
Security Against Theft, and 3 ] Security against damage, obsolescence.

5.13 KEYWORDS

Store, warehouse, custody, bonded warehouse

UNIT 6 STORES IN SUPPLY CHAIN

Objectives
After going through this unit you should be able to:
• realize the consequences of poor storekeeping;
• learn various store systems;
• illustrate various types of records;
• illustrate the disposal of material from stores;
• define surplus material;
• learn replacement analysis.

Structure
6.1 Introduction
6.2 Care of materials
6.3 features of ideal Storage Equipment
6.4 The storage Equipment
6.5 The Store Records
6.6 The Store Reports
6.7 The Store Ratios
6.8 The Store Audit
6.9 Disposal
6.10 Replacement Analysis
6.11 Summary
6.12 Keywords

6.1 INTRODUCTION

Store keeping refers to the safe custody of all the items in the store for which the store officer is a
trustee. It is required to maintain proper housekeeping of the store. The consequences of poor store
keeping are as follows.

• Proper storage is essential for keeping the production process running smoothly.
• Poor store keeping leads to disorder and chaos.
• Misplaced or mixed material may cause accidents.
• Poor store keeping would demotivate store staff and this would adversely affect their
efficiency.
• Misplaced or mixed material increases the chances of theft and pilferage.
• It becomes difficult to carry store verification in case of misplaced or mixed material
 • The store mainly deals with the receipt, storage, and issue of materials. Misplaced or mixed
material may cause difficulties in performing these duties.

6.2 CARE OF MATERIALS

Various types of materials are received at stores. Some materials are to be stored with precautions.
The following precautions should be taken in respect of some sensitive materials.

Acids - Keep acids away from papers, woods, etc. Use hand gloves and goggles while handling acids.
Acetylene – cylinder covered with coir should be used. Material handling especially unloading should
be done carefully.
Carbide – keep it away from fire and artificial light. The license is required to keep more than 12.7 kg
carbide.
Castings – ensure that it does not rust. Keep non-ferrous castings inside the shed.
Battery Cells – Damp and humid atmosphere deteriorate battery cells. Hence proper care should be
taken. Dry cells have a limited life. Hence these should be delivered as per FIFO.
Cement – Keep it away from water and humidity.
Cloth – keep them away from moisture and water to avoid deterioration.
Rats and white ants are destructive agents. Hence store them in the steel cupboard.
Electrical cables and wires – Keep away from oil and acid.
Firebricks – store inside a shed. Absorption of ware would cause disintegration.
Glass steel and plates:- keep away from direct sunlight. Do not store above the other
Leather goods- keep away from moisture. Store in a dry room.
Machine Parts - Keep them away from water and humidity. Apply grease to threaded portions and
holes.
Oil – Oil is stored in a barrel. Use a hand-operated pump to extract oil from the barrel. Keep oil away
from dust and dirt. Watch against leakage is essential.
Oxygen – It is stored in a cylinder. Watch against leakage is essential. Ensure that cock is properly
tightened. Keep oxygen away from combustible materials.
Paint, varnish, and enamel- These are affected by climatic conditions. Hence store these items
properly. The paint tends to oxidize and thicken. Hence do not store it for more than 12 months.
Paper - Keep them away from water and humidity.
Petrol – Under petroleum rules, separate godown is needed to store petrol. Keep it away from fire.
Storage above 25 liters requires a license.
Rubber goods – store at low room temperature in darkness.
Tools - Apply grease to cutting surfaces.
Timber planks- free ventilation is essential.

6.3 FEATURES OF IDEAL STORAGE equipment

A wide verity of equipment such as bins, racks, panes, cupboards, etc is available. The store manager
has to select appropriate equipment for a particular material. The features of ideal storage equipment
are discussed below.

Ease of handling – The storage equipment should allow the handling of stored material with ease and
convenience.
Suitability – The storage equipment should be suitable for the material stored.
Preservation - The storage equipment should be able to properly preserve the material in good
condition for a long time.
Strength- The storage equipment should have enough strength to accommodate the material and
provide protection to the material against damage.
Security – the lock and key arrangement should be available for the storage of expensive class A items.
Tidy storage – the design of equipment should allow tidy storage of goods.
Flexibility - The storage equipment should be flexible enough to allow modifications, shifting, etc.
Safety - The storage equipment should be safe in operation. It should not be prone to accidents.
Fire precaution - The storage equipment like a steel cupboard should offer resistance to the fire
hazards.
Cost – Cost of storage equipment should be reasonable.

6.4 STORAGE equipment

The Storage equipment used commonly in stores is discussed below.

BAYS OR Aisle - is the clearance to be maintained in store for proper movement of Men, Equipment,
and materials. It is a passage between two rows of racks or almirahs in the storeroom. The dimensions
are shown in the following table.

Sr. No Aisle Width Description

1 Min 75 cm 2 persons to pass

2 Min 75 cm 2 wheels hand trucks to pass [ without

turn]
3 50 CM + width of truck For stock truck
4 1 mtr + 2*width of truck For stock truck where other trucks or
Workers pass.
5 1.5 – 2.5 mtrs For hand-operated goods truck

6 2.5 – 3.0 mtrs For 2 MT fork truck

7 Min 1 mtr Stationary stock

Bins: bins are small boxes for keeping items. Bins are made up of wood or steel.
Usually, single bins are in common use. However, two-tier, three-tier, double bins are also available
for storage to occupy more items in lesser space.
Specifications of bins are given below.

Upright Angle 5X5 meter lot

Tod facility

Side & back 20 SWG

Bin fronts 20 SWG
Base 18 SWG
Dividers 18-22 SWGs
Tops 18 SWGs
Cardholder 18 SWGs
Bin Width 1 meter

Racks
The rack consists of shelves with front and backside open. The rack may have its back closed. The
dimensions of racks can be decided as per requirement. The various type of racks are as follows:-
Steel Racks – are made up of sheets of mild steel. These are durable and occupy more space. Hence
steel rack is a commonly used storage equipment.
Slotted Angle Racks – are made up of slotted angles of mild steel. These are durable and occupy more
space. The main advantage is that the space is adjustable. Hence this rack is a commonly used storage
equipment.
Bar Racks – are made up of bars of mild steel.
Vertical and horizontal racks – these racks provide storage to be done vertically or horizontally as per
requirement.
Wooden Racks – are made up of wood. These are not as durable as steel racks but cheaper. Hence this
rack is a commonly used storage equipment.
Concrete Racks – are made up of cement concrete. These racks are built-in walls. This type of rack is
commonly used for the storage of heavy material.
Bar Racks – are used for storage of bars, pipes, flats, angles, channels, and rails. These are made up of
mild steel. These are durable and occupy more space. A barrack may have six to sixteen arms on its
one column. These arms are provided with pipes inside which we can store bars and other such
material. There are three types of barracks.

Horizontal racks – for horizontal placement of bars.

- Vertical racks – for vertical placement of bars.
- Pigeonhole racks

Cupboards And Almira's

Cupboards – are very commonly storage equipment. Due to the locking facility, cupboards can be used
for the storage of A-type items. Cupboards are made up of either MS Steel or wood. Although costlier
than wood the steel cupboard is preferred because of good appearance, fire-resistant. Cupboards can
be fabricated as per the desired dimensions and can be easily shifted and transported from one place
to another.

Almira's and Cabinets- Almiras are similar to cupboards. However, these are larger in dimension. Due
to locking facilities, like cupboards, almirahs can be used for the storage of A-type items. Almira's are
usually made up of wood.
Cabinets are smaller in size as compared to Almira. They are provided with a drawer. Cabinets are
used for keeping files, tools, instruments, etc. Due to locking facilities, like cupboards, cabinets can be
used for storage of A and B type items.

Shelving- Steel shelvings are an open type of Almira's without the door. These are used for storage of
material having larger dimensions that can not be stored in racks or cupboards. For example, castings
can be stored on shelving. The dimensions of shelving can be decided as per requirement. Wooden
shelving is used for the storage of books, cloth, and other materials for retail sale.
Shelf Trolley - it is a handy and movable shelf for hospital and production floor use.

Trays– are used for keeping loose items. These are made up of metal or plastic. This type of
equipment is suitable for random storage.
Tote panes - are used for keeping tiny items like pins, clips, bearing, etc. These are usually made up of
plastic. Like trays, these are suitable for random storage.
Crates – are boxes made up of plywood. These are used to store C type materials like nut bolt
washers, nails, etc.
Gunny Bags – are used for the storage of commodities like cement.
Cylinders – are used for storage of gaseous material like oxygen, SF6, nitrogen gases, etc. Watch
against leakage is essential. Ensure that the cock is properly tightened. Keep items like oxygen away
from combustible materials.
Tanks- are used for the storage of oil, petrol, etc. Proper marking on tanks is required to be provided.
Watch against leakage is essential. Tanks are usually made up of mild steel, aluminum, etc.
Barrels - are used for the storage of oil, acids, and other liquids. Proper marking of barrels is required
to be provided. Watch against leakage is essential. Barrels are usually made up of mild steel,
aluminum, etc.

6.5 THE STORES RECORDS

Record keeping is one of the important tasks to be performed by the Stores Management. To have
good control over material transactions, it is necessary to maintain appropriate records. The following
points should be noted for maintaining proper store records.

Timely entries – the entries of transactions should be done immediately as the transaction takes place.
Delay in making entries may result in inaccuracy. Day to day entries is required to be made.
Arithmetic Accuracy - The records should be mathematically accurate. Calculations such as average,
total, percentage, etc should be accurate. The numbers may be rounded off in cases where it is
allowed.
Clarity – the records should be as clear as possible. There should not be any type of overwriting. If the
figure is to be overwritten, the person should sign near the overwritten number.
Entries regarding date, time, type of material, type of account, etc should be appropriate.
In case the record is transferred from one book to the other, the source of the record should be
mentioned.
The records should be signed by responsible persons.
Wherever necessary, references for the purchase order, release order, budget sanction, etc should be
given.

Indent
The requirement of material is given by the user in Indent. Thus indent is a base document for
processing purchase orders. Indent is forwarded by the user [ say production department ] to the
purchasing department. A copy of the indent is given to stores for confirming whether the spare stock
is available in the store. The general contents of indent are as follows –
indent number and date
From:- Name of the department forwarding the indent.
Name of the scheme under which the material is required.
Budget sanction no. –
Description of material – detailed specifications of material should be specified.
Quantity – The quantity should be mentioned in numbers and words both.
the estimated amount of material indented.
name of the store where the material is to be supplied –
certification:- 1 ] material is required hence indented 2 ] Spare stock not available.
Signatures of persons forwarding the indent.

Requisition
The store officer issues material to the user against requisition. The user fills up requisition and
submits it to the store. The contents of material requisition are as follows:-
• requisition number and date
• name of the department submitting requisition.
• purchase order no.
 • release order no.
• Description of material.
• Quantity – The quantity should be mentioned in numbers and words both.
• Signatures of persons submitting requisition.

The comparison between indent and requisition is stated below.

Parameter Indent Requisition

Purpose Placing purchase order Drawing material from store
Submitted to Purchase department Stores
Issued by Head of the department The person authorized to draw
material
Reference quoted The scheme, Budget provision purchase order & release order no.
Specifications Detailed specifications required Only a general description required

Gate pass
Gate pass is a basic but very important record. The material is issued through the gate pass.
The main contents of the gate pass should be as follows:-

• gate pass number and date

• From:- Name of the store issuing the material.
• To- name of the department receiving the material.
• vehicle no. – through which material is being transported.
• description of material – so far as possible maximum details about the material should be
specified.
• Quantity – The quantity should be mentioned in numbers and words both.
amount of material issued against the gate pass.
• Requisition number and date – reference of requisition given by the user should be
mentioned.
• Purchase order no. and date
• Release order no and date.
• Signatures of persons receiving and issuing material with name and designation.

Usually, four copies of gate pass are formed forgiver, receiver, watchmen gate, and one as spare.
In case the item is excisable, a separate excise gate pass is issued by the excise department.

Store Journal

The daily entries in receipt and issue of materials are made in stores journal in chronological manner
.i.e. in a sequential manner.
The example of entries in receipt and issue of materials in stores journal is given below:-

date Particulars Order no. Requisition Gate

Qty no pass no

1-8-02 Received meters from M/s Duke 100 T-1004 - 1022

1-8-02 Received meters from M/s ABB 250 T-1004 - 234
2-8-02 Issued meters to the maintenance dept. 150 T-1004 12232 01
2-8-02 Received meters from M/s L&T 200 T-1004 - 902
3-8-02 Issued meters to the maintenance dept. 100 T-1004 12233 02
4-8-02 Returned defective meters to M/s Duke 5 T-1004 - 03
4-8-02 Received meters from M/s L&T 905
5-8-02 Received meters from M/s ABB 20 T-1004 - 245
Store Ledger

We have seen that daily entries in receipt and issue of materials are made in stores journal in
chronological manner .i.e. in a sequential manner. These entries are posted in a proper account head
in a book of account called the ledger. The store ledger gives the position of each account at a glance.

In the example of entries in receipt and issue of materials, the posting is made in stores ledger as
follows.

the entries in the ledger should be done immediately. Delay in making entries may result in
inaccuracy. Day to day entries is required to be made.

RSI report
The RSI report has given the overall position of receipt, balance storage, and issue at a glance. Usually,
the RSI register is maintained on per order basis. The general format is as follows:-

Order No:- T-1004

Name of material – material
Supplier and L/F Receipt Balance storage Issued Balance to
Ordered quantity be
supplied
Duke

ABB

L&T

Bin card
The bin card indicates the position of contents of the bin.
The bin card is attached to each bin and a copy of the bin card is filed in a record file.
The general format of bin cards is as follows.

Card No
Bin No
Name of item
Supplier Order no
Date Date Date Date Date
Qty received/issued Qty received/issued Qty received/issued Qty Qty
received/issued received/issued

Balance qty in the bin Balance qty in the bin Balance qty in the bin Balance qty in Balance qty in the
the bin bin

Material Inward Register

It is similar to the material journal. However, only daily chronological entries are recorded. The format
is as follows.

date Particulars Order no. Inward no Gate pass

Qty no no

1-8-02 Received meters from M/s Duke 100 T-1004 1 1022

1-8-02 Received meters from M/s ABB 250 T-1004 2 234
2-8-02 Received meters from M/s Duke 150 T-1004 3 01
2-8-02 Received meters from M/s L&T 200 T-1004 4 902
3-8-02 Received meters from M/s L&T 100 T-1004 5 02
4-8-02 Received meters from M/s ABB 5 T-1004 6 03
4-8-02 Received meters from M/s L&T 905
5-8-02 Received meters from M/s ABB 20 T-1004 7 245

Stores Receipt Note

Store receipt note is issued to the supplier after confirming that the material is supplied in good
condition and as per order and specifications. Before releasing the SR note, the store officer is
required to check the material in minute details. Usually, 90% of payment is released against the SR
note. The SR note is issued to the supplier with a copy to the purchase and finance department. The
contents of the SR note are as follows.

• Store Receipt Note number and date

• name of supplier with address
• purchase order no.
• Description of material
• Ordered and received Quantity – The quantity should be mentioned in numbers and words
both.
• amount of material received
• name of the store where the material is supplied
• certification: 1 ] material is received in good condition
• material is received as per order and specifications
• Signatures of store officer issuing SR Note

Stores Rejection Note

Store rejection note is issued to the supplier after confirming that the material is NOT received by the
store. The reason may be the material is not supplied in good condition or not as per order and
specifications. The Store Rejection note is issued to the supplier with a copy to the purchase and
finance department. The contents of the Store Rejection note are as follows:-

• Store Rejection note number and date

• name of the supplier with the address.
• purchase order no.
• Description of material
• Ordered, accepted, and rejected Quantity – The quantity should be mentioned in numbers
and words both.
• amount of material received, accepted and rejected
• name of the store where the material is supplied
 • reason for rejection
• Signatures of store officer issuing Store Rejection Note

On receipt of the store rejection note, the store officer has to lift the rejected lot from the store and
replace or rectify it. He has to return the replaced or rectified material within the stipulated period as
mentioned in the purchase order. The payment is not released to the supplier unless he received
Store Receipt note.

Credit note
A credit note is issued by the authorized person declaring that the material is scrap, obsolete, and
liable for disposal. Such material is credited to stores to take up the disposal. The contents of the
credit note are as follows:-
• Credit Receipt Note number and date
• Description of material
• History of material: name of supplier with address, purchase order no. , quantity

Details of material being credited to stores for disposal:-

• Quantity – The quantity should be mentioned in numbers and words both

• amount of material as per purchase order
• Name of store where the material is credited
• Certification: the material is scrap, obsolete and liable for disposal
• Signatures of an officer authorized to issue credit Note

Packing list
The packing list is issued per pack. It indicates a list of items with quantity enclosed inside the package.
The contents of the packing list are as follows:-

Sr. No. List of items available inside the package Quantity

The store officer has to confirm that the material is received as per the packing list.

Lorry Receipt / Railway Receipt/bill of lading /Air Way Bill

The Lorry receipt / Railway Receipt/bill of lading /airway bill is issued by transport, railway and
dockyard authorized indicating that the material is received by that for transportation.
The consignee has to submit the LR/RR/BOL/AWB to lift the material from receiving end godown.
The following charges are applicable:-
• Fright to pay- freight charges are to be paid by the receiver.
• fright paid – freight charges are paid by the sender
• damrage – rent of using the premises of transporter.
• Warfare - delay charges in lifting the consignment from the premises of transporter.

Delivery Challan - is the list of items along with quantity dispatched by the sender. Main contents of
delivery challan are as follows
• List of items
• quantity of each item
• Delivery challan no. and date.
• Purchase order reference.

Invoice – invoice covers the amount of material supplied / to be supplied by the supplier.
The layout of the invoice is as follows.
Invoice No. Date
Purchase Order No.
S.N. Item Quantity Rate Amount Remarks

If the payment is to be released against the delivery of material, the supplier gives the proforma
invoice in advance. The receiver has to keep payment ready for receiving the material.

6.6 THE STORE REPORTS

The reports on store activities are required to be submitted every month to the top authorities. The
copies of reports are forwarded to the purchase and finance department. The commonly used reports
are discussed below.

Material Receipt Position

The position of receipt of materials in the store is submitted every month. The general format of
receipt of material is as follows.

Month
Purchase Supplier item Qty Qty received Balance remarks
Order No Ordered Up to During Total To be
Last The Receipt Supplied
month Month
1 2 3 4 5 6 7=5+6 8=4-5 9

BILL OF MATERIAL
The bill of material is a document indicating quantity per assembly. From the bill of material, the total
no of items required against the ordered quantity is determined. These quantities are compared with
the actual quantity supplied. From these values, shortage or excess of items supplied is determined.
This is shown below.

Unit Quantity Consignment Consignment Total Short/excess

Member quantity For 10 I II Receipt
Qty Kg/no Qty Kg Qty Kg Qty Kg Qty Kg Qty Kg

a 8 1 40 38
b 4 2 15 15
c 4 2 20 50
nbw 9 0.5 40 45
Total

From the above data, calculate short supplied material.

Stock Verification Report

The stock verification gives the position of receipt, utilization, and balance material available. The
quantity received R should tally with the sum of quantity issued I and balance quantity B. Thus the
relation [ R-(I+B)] should be ideally zero. However, practically due to pilferage or theft or leakage in
the case of materials like oil, this relation does not tally. Therefore, loss in terms of units, Rs. And % is
found out. The following formula is used to compute loss.

% loss = [ R-(I+B)]/R X 100

Item Rate Unit Receipt R Issue of material Qty Loss

Qty Prod. Maint. R&D Total I Balance % Rs
Amt Q A In-store B
Oil Gr I 1000 KL 500 200 100 50 148
Acid 800 KL 400 300 50 20 25
Gr I
SF6 1000 Kg 100 80 10 5 4
gas
Total

If the loss is more, steps should be taken to detect the cause of higher loss.

6.7 THE STORE RATIOS

Stores Ratios
The ratio gives a comparative view of two parameters at a glance. Store ratios give the position of
various types of parameters used in Stores. The benefits of using store ratios are as follows.

• ratios provide the position of working of the store at a glance, without going into details. The
top management can immediately come to know the position of working stores.
• These ratios can be easily constructed.
• These ratios are simple and easy to understand.
• Store ratios can also be expressed in terms of percentage.
• The multiplication of two ratios can also be expressed as a ratio.

For example
ROI = profit /Sales X Sales/Assets

• The financial institutions insist submission of store ratios for sanctioning loans and advances
to the company.

The commonly used store ratios are discussed below.

store efficiency
store efficiency = no of requisitions delivered in time/total number of requisitions
Store Loss
Store Loss = value of material lost/total value of material

Obsolescence
Obsolescence [ nos ] = no of non moving items in store/ total no of items in store
Obsolescence [ value ] = value of non moving items in store/ total value of items in store

Scrap disposal
Scrap disposal = value of scrap disposed/ total value of the scrap in the store
SUSA [ Space utilized Space available ]
SUSA = Space utilized in-store /Space available in store
Space utilized also includes space for men and material.

inspection ratio
inspection [ nos ] =
no of defective items rejected during inspection/ Total no of defective items
inspection [value ] =
value of defective items rejected during inspection/ Total value of defective items

value analysis
value analysis = saving made in value analysis/ total material cost

6.8 THE STORE AUDIT

The store audit involves the inspection of material at the store. The team of experts visits the store for
conducting audits. The list of checkpoints is prepared as shown under the ‘category ‘ in the following
table. The target rating out of ratings 1,2,3,4,5 is set. Marks per rating are also set. Accordingly, the
target score is calculated. The marks are given by the auditors against the target score. The total
marks obtained by the store and its percentage are calculated. Thereafter, the grading is done as
shown in the table.
Sr. Category rating Target Marks Target Actual Remarks
No. rating score score
1 Customer service 12345 5 40 200 120
2 Control systems 12345 5 30 120 120
3 Inventory accuracy 12345 5 30 150 150
4 Space utilization 12345 5 20 80 60
5 Labor productivity 12345 5 20 100 80
6 Layout 12345 5 20 100 100
7 Equipment methods 12345 5 10 50 30
8 Equipment utilization 12345 5 10 50 50
9 Building facilities 12345 5 10 50 50
10 Housekeeping/safety 12345 5 10 50 40
Total 950 800

In the above example, the checklist comprises 10 items. From the rating 12345, the target rating
marks per point are set as per requirement. For example, the target rating and marks per rating for
serial no 1 ( customer service) are set as 5 and 40 respectively, thus the total target marks would be
200. Depending on performance, the marks obtained under this category would be 120. Accordingly,
for all categories, total marks obtained by the store are 800 out of total targeted marks of 950 i.e 84%.
From the following table ( grading ), the store is placed under category B.
 Grading
Grade Meaning % range
A+ Excellent 95-100
A Very good 90-94
B Good 85-89
C Average 80-84
C- Below average 70-79
D poor Below 70

6.9 DISPOSAL

It is observed during FSN analysis that some of the material is non-moving. Such material is called
surplus material. There are several reasons for material becoming surplus. The main reasons can be
stated as follows.

Aging – if the material has already completed its useful service life, it becomes obsolete. The proposal
for the disposal of such materials is prepared by using the economy statement.
Defective material –The defective material becomes obsolete as it can not be used.
Change in technology – The material may become surplus because of a change in technology.

• For example, earlier slide rules were being used by engineers for making calculations. In the
advent of electronics, fast, accurate, and cheap digital calculators came into the market. This
resulted in slide rules becoming non-moving items.
• The second example is of pagers. Pagers were based on one-way communication. When the prices
of mobile phones came down, the usage of pagers is decreasing day by day. If the cost of a pager
and cellular phone is on par, people would prefer to buy cellular phones as these provide two-
way communication. Today, pagers are gone out of the market.
• Audio and Videocassettes were popular during the early days. These are now being replaced by
Audio and Video CDs.

• Change in taste of people – Materials also become obsolete due to changes in the taste of people.
For example, the Rubik cube was very popular among youngsters when it was introduced. But
later on, the craze of Rubik cube declined.
• Change in fashion – Many times, the material becomes obsolete because of a change in fashion.
For example, in the early days, bell-bottom pants were popularly used. Later on, the fashion was
changed and demand for bell-bottom pants diminished.
• Unplanned purchasing – sometimes the purchasing is not done in a planned manner. This results
in overstocking of material. If the material is perishable, it becomes obsolete.
• Unnecessary purchasing – If the items are purchased without any necessity, these are likely to
become obsolete due to laying for more period. If the material is perishable, it becomes out of
use.
• Improper Purchasing – Sometimes purchasing is not done as per specifications.
• Waste products arising from the manufacturing process.
• Unavailability of spare parts – This usually happens in the case of imported machinery. The spare
parts may not be available in India. This results in the non-use of a machine. Secondly, in case the
manufacturing of machinery is stopped, the spares may not be available. This may result in the
non-use of that machine.

The obsolesce caused due to the above reasons can be reduced by taking the following measures.
• The proposal for the disposal of materials which have already completed its useful service life
is prepared by using economy statement. In the economy statement, it should be inferred that
the replacement of old material by anew material would be economical.
• The supplier should be followed up for attending defects in the material. If the material
supplied is within a guarantee period, it should be got replaced by the supplier free of cost.
• So far as possible, a new technology product should be used.
• Planned purchasing –Purchasing should be done in a planned manner. Unnecessary
purchasing should be avoided. For this purpose, the following guidelines should be followed:-
- Before initiating purchase proposals, it should be ensured that no material is available.
- It should be ensured that the indent received from the user is realistic i.e. the material
is required.
- The specifications should be appropriate.

Waste products arising from the manufacturing process should be reused. The examples of reuse are
as given below.

• In thermal generating stations, coal is used as a raw material. During the process of generation of
electricity, tons of ash is created as a by-product. This ash is used in the manufacturing of cement,
fertilizers, etc. It is also used in precipitators.
• By-products created from the manufacturing of sugar and distilleries can be used for the
generation of electricity.
• In garment manufacturing, a considerable amount of cloth is wasted. This cloth can be reused at
other places such as pockets, collars, etc.

• in case of the unavailability of spare parts, the sourcing should be carried out for a substitute. In
the case of imported material, an import substitute should be developed.

• the scrap should be disposed of off as early as possible by auction or another method of disposal.

Case Study: Denim Jeans

Denim Jeans is a well-known garment factory in the USA. As of today, the company has a turnover of
more than 465 Crore dollars. There are branches all over the world in 80 countries. The net profit of
the company is 22 Crore thousand. In the early days, there was a problem of wastage of cloth after
cutting. 20% of the cloth used to be waste. The company studied this fact on computer graphics and
multimedia presentations. From this analysis, they developed a method of scientific cutting. For
example, one cut piece of garment [say for trouser leg ] could be reused at other places [ say lapel of
coat ]. By implementing the method of scientific cutting the company reduced wastage from 20% to
6%.

Methods of scrap disposal

The following are the methods of disposal of scrap.

Scarp Consultant – the consultant is appointed who would undertake disposal. In Pune, Dastane
Ramchandra and Co. are famous scrap consultants. They undertake the scrap disposal of big
organizations. The procedure for disposal is decided by them.

Public auction notice- the scrap is disposed of by a company through auction. The notice is displayed
in newspapers and the company’s notice board. The time and place of conduction auction are
mentioned in the notice.

Inquiry to limited parties – Quotations are invited from limited agencies. The contract is awarded
based on a comparative statement.

Distribution among employees – As a welfare measure, the material like old furniture is distributed
among employees.

Reuse in the same company – Some waste products can be reused in the company.

Selling to other companies as raw material – the waste product can be sold as raw material to other
companies.

Returning to the supplier – the waste material is returned to the supplier.

Contracts for scarp disposal

There are three types of contracts awarded for disposal of scrap.
Fixed price contract – prices are fixed for a contract usually one year.
Variable price contract – The short orders are placed during the year having different prices.
Negotiations – prices are fixed on negotiations with agencies.

Problem – The cost of a transformer when purchase in 1982 was Rs 1,00,000/-. Assuming the life of
the transformer to be 25 years, find its today’s cost.

Original cost C = 1,00,000

Residual cost [ Scrap value ] = 10% of C = 10,000
Life of transformer N = 25 years
Depreciation per year = [C-R]/N = [ 100,000-10000 ]/25 = 90000/25 = 3600
Depreciation for 20 years [ as on 2002 ] = 20 X 3600 = 72000
Today’s cost = 1,00,000- 7200 = 28000

6.10 REPLACEMENT ANALYSIS

Replacement analysis is an effective tool in the process of decision making whether to repair or
replace. Many times, it is not clear whether to repair the defective equipment or to go for
replacement. If the equipment is beyond the economic repairs, it is always better to replace it.
Replacement analysis comprises techniques that suggest to us regarding repairs or replacement.
There are different methods of conducting replacement analysis. One of the methods is illustrated in
the following example.

The machine was purchased for Rs 1500. Today the market value of this machine is Rs 10000.00. The
other data is given in the following table. Conduct replacement Analysis. Recommend whether to
replace or repair this machine.

Particulars Existing New

Sl.No.
1 Market Value 1500 10000
2 Scrap Value 500 1000
3 Rate of interest of depreciation 10% 10%
4 Operational expanses per year 5000 3888.9
5 life 1 year 9 years
a Depreciation 1500-500=1000 10000-1000=9000
b Interest @ 10% 100 *5400
c Operational expenses 5000 35000
Total 6100 49400
Expenditure per year 6100 5489

The expenditure on a new machine is lesser. It is therefore proposed to go for the procurement of a
new machine.
Computation of interest for a new product:
Year 1 2 3 4 5 6 7 8 9 Total
Value 10000 9000 8000 7000 6000 5000 4000 3000 2000 -
Interest 1000 900 800 700 600 500 400 300 200 5400
@ 10%

6.11 SUMMARY
 A wide verity of pieces of equipment such as bins, racks, panes, cupboards, etc is available in the
store. The store manager has to select appropriate equipment for a particular material. Various
features of ideal storage equipment are ease of handling Suitability, Preservation, Strength Security,
Tidy storage, Flexibility, Safety, and Fire precaution, and the Cost of storage equipment. Record
keeping is one of the important tasks to be performed by Stores Management. To have good control
over material transactions, it is necessary to maintain appropriate records. The following points
should be noted for maintaining proper store records:- Timely entries, Arithmetic Accuracy, and
Clarity. It is observed during FSN analysis that some of the material is non-moving. Such material is
called surplus material. The methods of disposal of scrap are Scarp Consultant, Public auction notice,
inquiry to limited parties, distribution among employees, reuse in the same company, and selling to
other companies as raw material and returning to the supplier.

6.12 KEYWORDS

Bins, racks, store audit, replacement analysis, disposal, surplus

UNIT 7 IT ENABLED SUPPLY CHAIN

Objectives

After going through this unit, you should be able to:

• learn the implication of information technology in SCM;

• define the concept of SRM and CRM concerning SCM;
• illustrate e-business and the Supply Chain;
• learn the concept of e-sourcing;
• explain the working of Bar Code and RFID in the supply chain;
• define the concept of Garbage-in Garbage Out ( GIGO).

Structure
7.1 Introduction
7.2 Types of SCM software
7.3 Macro-processes CRM, ISCM and SRM
7.4 Transaction management with EDI
7.5 Supply Chain IT in practice
7.6 E-business and Supply Chain
7.7 e-Sourcing
7.8 Data requirements from SCM
7.9 Legacy Systems
7.10 Summary
7.11 Keywords

7.1 INTRODUCTION

In the fast-paced world with growing customer demand, local and global competition, and
increased pressure to remain profitable, there is a need to change from the old ways of
working. Companies need to reinvent themselves so that the entire chain of sourcing and
procurement, production, materials management, ordering delivery selling, and customer
care is integrated into a unified entity. For this, the suppliers, manufacturers, distributors, and
resellers have to work together more closely and effectively to increase sales, reduce costs,
and make full use of resources. This is done by having smooth information flow along the
entire life cycle of the product and by reducing redundancy of data stored in each point in the
cycle. And not only there should be a close integration between the different steps the
individual steps of the chain should have more automation and easy access to the related
information.

IT applications are tools that allow the company to implement strategies. Broadly, speaking
the IT requirements of manufacturing organization can be broken into two parts – First is
related to the management of material right from when it enters the company in raw format
to when it leaves the shop floor as a finished product. This entire chain of procurement,
manufacturing, and supply can be clubbed under the term SCM. The steps covered in SCM do
not make a product successful. There are some more things left to be done such as
marketing, sales, and customer satisfaction. All these processes can be combined under CRM.

SCM provides a platform on which the suppliers, manufacturers, and distributors can talk to
each other and analyze and decide what material is to be made available at which location
and at what time. This reduces the problem of excess or shortage of staff which brings in
inefficiencies and reduces profits. CRM is a multi-faced solution. It collects and analyses
customers buying patterns, profiles, etc. It also equips the marketing people with the user
data analysis to target their marketing campaigns. CRM also helps sales personnel by
providing a single window of organizational data irrespective of their geographical locations.
In this unit, we will cover these two aspects of SCM and CRM. While many packaged
commercial solutions are in the market for SCM – CRM, many organizations prefer developing
their applications tailor-made to their needs.

The supply chain in business starts with the procurement of raw materials at one end and
ends with the delivery of finished products to the customer on the other. Depending on the
nature of the business, managing the supply chain can get quite challenging and complex.
SCM includes business processes, info flow, info processing, and closing loop between raw
material and finished product.

SCM aims to increase sales reduce costs and make full use of assets by streamlining the
interaction and communication of all participants along with the supply chain. This way,
suppliers, distributors, manufacturers, and retailers can work together more closely and
effectively and it cuts down on data redundancy and improves efficiency allowing one to
share timely information about the market demand, minimize inventory, enhance quality and
increase profitability. Not only SCM enables collaboration with suppliers and customers, but it
also makes it possible for different functional departments within the company to share and
work on a single set of data.
7.2 TYPES OF SCM SOFTWARES

The SCM software is available in 3 types – supply chain planning software, supply chain
execution software, and specialized sourcing and planning software. Some products also
combine all these functions into an integrated solution. S.C. planning software used advanced
mathematical modeling and forecasting methods for planning. The software takes into
consideration, the five parts of the supply chain – buy- produce-move-store-sell. The supply
chain execution software automates different steps along the supply chain which will
primarily include the manufacturing and distribution cycles. An SCM solution for
manufacturing and distribution can connect through the internet in close conjunction with
each other. This improves inventory control, raw material control, and information flow in
production, assembly, and distribution units.

Key Elements of Manufacturing and Distribution Systems:-

• Production and distribution-related data sharing among departments within the company
and suppliers.
• Inventory of products, raw materials, and consumables used in manufacturing.
• Manufacturing, resource planning, and resource availability.
• Distribution warehouse management.
• Delivery tracking.

A manufacturing and production management solution administers the manufacturing

process from the time raw materials and sub-components enter the manufacturing plant, to
when a finished product leaves the plant to the distribution warehouse where the products
are stored before passing them to dealers and re-sellers.

IT is the only ‘ non-physical ‘ driver of the supply chain. The Information [ data ] must possess
the following attributes:-

• Accuracy – The information should be accurate.

• Easily available – the information should be easily available
• Correctness – false or incorrect information should not be given.
• Relevancy –the information should be relevant and meaningful.

Garbage in Garbage Out ( GIGO ) – the concept of GIGO is very important in IT management.
It states that if incorrect, irrelevant, or inaccurate information ( called garbage ) is inputted to
the computer system, the output would be also incorrect, irrelevant, and inaccurate. There
are system programs that check garbage. however, some garbage is not detected by the
system. Care should be taken that no garbage is fed to the computer system for processing.

7.3 MACRO PROCESSES – CRM, ISCM, AND SRM

We have already seen that the three macro-process in SCM are CRM, ISCM, and SRM. Let us
study these micro-processes in detail.

CRM [ Customer Relationship Management ]

Operational Customer Relationship Management

All the ‘front office ‘business processes are taken care of by the Operational Customer
Relationship Management Tasks resulting from these processes are forwarded to the
employees responsible for them as well as information necessary for carrying out the tasks
and activities with customers are documented for future reference.

The three basic functions that OCRM provides are as follows.

• SalesForce Automation
• Customer Service and support
• Enterprise marketing automation

Analytical Customer Relationship Management

In ACRM, the data gathered in OCRM are analyzed to segment customers or to identify cross
and up-selling potential.

- Ideally, business decisions are refined over time, based on feedback from
earlier analysis and decisions.

Collaborative Customer Relationship Management -

• CCRM facilitates interactions with customers through all channels like personal, letter,
fax, phone, web, e-mail as well as support coordination of employee teams and
channels.
• Of Siebel systems, SAP, Oracle, People soft are the leaders in CRM software and ERP.
Internal Supply Chain Management

ISCM manages the internal operations of the company. It involves various functions viz.
• Strategic planning
• Planning demand
• Planning Supply
• Order Fulfillment
• After Sales Services

The ISCM is the macro process that aims to fulfill the demand generated by CRM macro
process. Thus there must be a strong interaction between the two macro processes – ISCM
and CRM.

The leading software providers for ISCM are i2 technologies and Manugistics.
SAP also has released ISCM software.

Supplier Relationship Management [ SRM ]

• Design collaboration
• Source
• Negotiations
• Buy
• Supply Collaboration

7.4 TRANSACTION MANAGEMENT WITH EDI

The transaction management with EDI has numerous significant features. Some are listed
below.

• Reduced paperwork
• Accuracy due to reduced manual processing
• Quick transaction of orders and other data
• Reduced clerical job work
• Proactive contribution from employees due to reduced clerical work
• Improved information availability
• Reduced workload due to easy linkage with bar codes and electronic fund transfer
usage.
 • Reduced placement and processing and handling order codes.
• Reduced inventories due to improved accuracy and reduced-order time.
• Saves time

EDI requires the use of various Data acquisition equipment to maintain accurate inventory,
trace product flow, maintain stocks at warehouses track orders, etc.
• Barcodes
• Radio Frequency Identification [ RFID ]
• Voice Technology
• Optical Character Recognition [ OCR ]

Bar Code

Bar code plays an important role in Logistics management. It is a code comprising of white
and blank lines. The bar code was developed by Woodward in 1949. However, the scope of
the bar code was limited at that time. In a later period, with the advent of the evolution of
computer technology, bar code became vital in materials management. In 1980, the code
UPC [ Universal Product Code ] was developed. This code was a 12 digit code. This code was
developed to codify grocery items. Later in 1985, the EAN code [ i.e. European Article
numbering ] was developed. This code was a 13 digit code covering the various type of items.
Today there are 300 bar codes out of which 20 codes are standardized.

The significant features of the bar code are as follows.

It is an effective tool for variety reduction i.e. codification, standardization, classification, and
simplification.

The bar code is easy to develop and use.

It is an important tool to avoid duplication of items.

If the code is destroyed or the paper is torn, the error message is generated during checking
of the code by computer.
There are different types of bar codes. For example, bookland is a bar code for books, Postnet
and Maxicode is a code for grocery items. The general bar codes are EAN-13, Code 2of5, code
128, etc.

The bar code comprises of white and blank lines. The sun emits rays which detect each type
of line according to color and thickness. The rays are incident on a code. The subsequent
reflection of rays is taken to the decoder. The decoder finds a number assigned to a particular
product. This number is fed to computer memory. From the computer, detailed specifications
about the code are obtained. The laser gun starts checking of code from the * mark provided
on the extreme side of the code.

Code 39 is a commonly used bar code. It comprises of following:-

Total 9 black and white lines.
Out of 9 bars, 3 are thick.
Out of 9 bars, 5 are black and 4 are white.
There are 26 letters are a to z, 10 numbers from 0 to 9 and symbols such as $,! Etc.
For example, a particular item has the following code,
Thick black
Thin White
Thin black
Thin White
Thin black
Thick White
Thin black
Thin White
Thick black

RFID
The term RFID stands for Radio Frequency Identification. For reading bar code the object is
required to be brought near the bar code reader. In the case of RFID, the reader reads the
RFID card from a distance of about 10 meters.

The RFID comprises an Integrated Circuit which is either self-powered or powered externally.
The self-powered RFID card is costly but more powerful. The card is provided on the front side
of the lorry. The details such as item, quantity, consignment no, date, time of arrival, etc are
stored in the card. As the lorry arrived at the Distribution Center there is an exchange of
signals between card reader provided at Distribution Center and RFID card through the
transponder. The card reader received the information about the arrival of the consignment.
The information is passed on to other exchanges such as supplier, stockiest, customer, etc.

In short, the significant features of RFID are as follows-

• RFID is dedicated short-range communication ( DSRC ) technology.
• It uses radio waves to identify objects such as goods in the supply chain.
 • It is used to track goods in the supply chain RFID tag attached to the object.
• It is similar to bar codes but uses radio frequency to transmit product information to
the receiver
• It eliminates a need for manual counting and bar code scanning.
• The SCM forms a major part of retail business and RFID systems play a key role by
managing updates of stock, transportation, and logistics of the product.

However, there are certain limitations of RFID-

• High cost as compared to barcode technology.
• Chance of security and privacy violation.
• As RFID is based on the concept of radio frequency, it can be interfaced with
other radio transmitters.

7.5 SUPPLY CHAIN IT IN PRACTICE

There are several factors that supply chain managers need to keep in mind before making any
supply chain-related decisions. These factors are:

Selection of IT concerning the Company’s success factors – very important for the firm to
select IT that can give the firm an advantage in these areas that affect the company to a
great extent.

Measure Value- companies, instead of installing IT systems throughout the supply chain
need to go step by step.

Sophistication - select the most appropriate IT.

Support decision making and not make decisions – use DSS. The system should support
decision making and should not make decisions. The management effort in decision
making should not be reduced because of DSS. Management must keep the focus on
changing demand and customer preferences which require corresponding changes in the
supply chain.

Think ahead – keep the future state of business in mind while making decisions. This
should be accounted for by IT systems.
7.6 E-BUSINESS AND THE SUPPLY CHAIN

• e-Business is the term used to describe business run on-demand on the internet or
utilizing internal technologies to improve the productivity or probability of the
business.
• IBM in 1997 was one of the first to use the term e-business.

• e-business is the easiest way to reach out to the people involved in the supply chain.

• e-business enables the customer to place an order at any place, ant time.

• e-business helps in saving time

• e-business is easy to operate and deal with. However, it is a very effective tool to
control business.

• e-business provides advantages or variety as the customer can view various types of
commodities available with different companies. He can compare prices,
specifications, and buy products according to his choice.

Role of e-business in the supply chain

• E-business allows the flow of all supply chain transactions involving the
transfer of information, products, and funds through the internet.
• E-business performs the following functions:-
• Provides information on products to all the participants of the supply chain.
• Allows placing orders with suppliers.
• Allows customers to place orders.
• Filling and delivering orders to customers.
• Receiving payments from customers.
• Transactions are now performed more efficiently and quickly thereby providing
a high level of responsiveness.
• Filling up forms for exams, making payments for the exam fees by transferring
funds from your bank account to the institute’s account has now become very
quick and the hassle of making DDs and pay orders is all over.
 • B2C and B2B are two important modes of E-business.

It is very important to understand the framework of e-business so that the supply chain
managers can identify where the value lies. The magnitude of values and how the value
provided by e-business can be best extracted after considering the effect involved in
developing e-business.

e-business framework

e-business plays an important role in the functions of supply chain viz. marketing, sales,
logistics, R&D, etc.
General Values
• Exchange and share data across the world
• Send messages faster and cheaper
• Introduce collaborative working
• Update employees instantly with new policies and procedures.
• Hold web meeting [ data conferencing ]
• Take advantages of time differences
• Send out e-mail automatically
• Use the internet to improve business administration
• Train employees on the web
• Replace fax machine and save money [the concept of paperless office ]

Research and development value

• speed upmarket and product research
• trade intellectual assets on the web

Marketing value
• Look bigger
• Use the internet to deliver products and services
• Provide an extensive business profile and online info center
• Track response on the internet
• Send e-newsletters to customers and save time, postage, and packaging.
• Position your business.
Sales value
• Introduce another channel to market
• Automate intensive business processes
 • Lower the cost of order processing
• No physical space limitations
• Buy and sell quicker
• Boost sales and exports
• Close sales faster
• Use a website for direct and indirect selling.

Procurement value
• Cut procurement costs and improve efficiency.

Logistics value
• Optimize inventory levels
• Provide info by self-service
• Enable suppliers to give their pre-delivery advice
• Empower customers to do their order chasing
• Let suppliers see the inventory they supply.
• Bring customers and suppliers closer to the inventory.

Improve supply chain efficiency

Scorecard to implement e-business

CRITERIA RATING
Direct Sales
Round the clock Access
Large Product portfolio
Quick market entry
Flexible pricing, promotions
Price discrimination
Quick fund transfers
Lower shortcuts
Automated process
Impact on inventory
Impact on facilities
Impact on transportation
Gathering information

Rating
++ very positive
 + positive
= neutral
- negative
- -- very negative

e-business Parameters
B2B e-business and B2C e-business
• B2B e-business is the e-business between companies.
• About 80% of e-business is of B2B type.
• It is expected that B2B will continue to grow faster than the B2C segment.
• B2B has two primary components:- e-infrastructure and e-market.
• e-infrastructure is the architecture of B2B.
• e-markets are websites where buyers and sellers interact with each other.

Benefits of B2B business in developing markets – there are 4 important benefits –

• transaction costs
• disintermediation
• transparency in pricing
• economics of scale and network effects.
B2C business
• It is the business between the company and the consumer. It involves customers
gathering info, purchasing physical goods [ tangible goods – books, camera, etc ] or
information goods [ Intangible goods e.g. software, e-books, etc ].
• B2C reduces transaction costs [ particularly search costs ] by increasing consumer
access to info and allowing consumers to find the most competitive price for a product
or service.
• B2c reduces market entry barriers.
• Saving in the additional cost of physical distribution network.

Practicing e-business
The following points should be taken into consideration.
integration of the internet with the existing physical network:- e-business should be
integrated with other channels of distribution to gain a maximum advantage because no
physical network can alone take the burden of running the business.

device shipping pricing strategies that reflect costs

 • when companies are selling products online they must charge shipping to the
customers adequately
• they must specify the shipping costs to the customers based on their orders
• different orders will have different shipping based on the total volume of the order,
the size, and place of destination of the order.
• Thus proper shipping strategies must be devised to run a business on the internet.

Optimizing e-business logistics

• Optimizing e-business logistics means that the companies should be able to deliver the
smallest of packages to their customers cost-effectively
• Increase consolidation and reduce transportation costs.
• Bundle en entire customer order into a single package rather than multiple packages.

Designing the e-business supply chain to easily handle returns

• makes a lot of difference when the customer is buying a product online or from a
retail outlet.
• the returns should be planned.

Keep the customers informed throughout the order fulfillment process:

• the status of execution of the PO should be informed to the customer if he
desires
• PO execution is going smooth and there are no interruptions, should be
informed to the customer if he desires.

Thus keeping customers informed about the order being processed is important so that the
customer feels that he is provided good service from the company.

7.7 E- SOURCING

The third type of SCM software is sourcing and procurement software. Procumbent or
sourcing involves purchasing of product components, raw materials, and other supplies
needed to carry business operations. e- Sourcing is a purchasing process conducted over the
internet. It is a B2B model where buyers and suppliers interact and finalize the purchase and
delivery deals online. This process can also take various forms starting from single on-line
transactions to full-scale e-markets where several buyers and suppliers take part
simultaneously. A simple solution will involve you and your suppliers aligning online and
sharing information on order placement and confirmation, payments, etc. In the order,
scenario one can join several e-marketplaces or create ones from its marketplace for online
purchases. The market brings in buyers, brokers, and sellers, together which increases
competition and provides buyers access to a bigger customer base. A company looking for a
particular material can place its material requirements on the market and then various
suppliers provide the price for supplying the material. This leads to reverse auctioning where
the supplier bidding for the lowest price offer will eventually bag the order. The benefits of
this are dynamic pricing, price visibility across the suppliers, and getting multiple suppliers for
saving on procurement costs for the raw material. This whole process is automated and
online.

7.8 DATA REQUIREMENTS FROM SCM

Supply chain software depends on external inputs such as customer orders, sales data, stock
positions, at warehouses, and the like internal inputs that come in from various functional
systems such as finance, purchase, marketing, etc. Any SCM solution works over a database.
The database is the central repository where all information is entered and stored. The SCM
software’s job is to analyze that the data is present in the required format and provide data
interchange with other applications.

SCM Spans geographical boundaries

Supply Chains extend beyond the boundaries of the organizations to suppliers and
distribution partners. SCM software, therefore, has to cover the entire spectrum of the
extended enterprise. To provide this functionality all the SCM solutions available are web-
enabled. This way, organizations can connect their global supply chain using a single SCM
system and also with their partners. The value of SCM lies in the ability to access up-to-the-
minute information across the supply chain. An internal department or an external business
supplier or partner may require the information. Sometimes, the information has to travel
through the public network before it reaches the suppliers. VPNs [ virtual private networks ]
provide the required level of data security and integrity required for data transaction over a
public network and is also more cost-effective than private networks.

7.9 LEGACY SYSTEMS

Any organization has several legacy systems working on non-standard data formats. These
businesses may want to utilize their legacy system and may or may not go for upgrades. SCM
solution should be able to co-exist with such a legacy system or provide a way of upgrading
the legacy system and converting their data to a standard format. For data standardization,
any SCM solution would support the open standard XML data format to combine data from
diverse sources. XML is an open format that makes it possible for different systems to talk to
each other by interchanging data in XML format.

7.10 SUMMARY

The SCM software is available in 3 types – supply chain planning software, supply chain
execution software, and specialized sourcing and planning software. Some products also
combine all these functions into an integrated solution. IT is the only ‘ non-physical ‘ driver of
the supply chain.

Bar code plays an important role in Logistics management. It is a code comprising of white
and blank lines. Today there are 300 bar codes out of which 20 codes are standardized. The
term RFID stands for Radio Frequency Identification. For reading bar code the object is
required to be brought near the bar code reader. In the case of RFID, the reader reads the
RFID card from a distance of about 10 meters.

The macro Processes in SCM are CRM, ISCM and SRM EDI require the use of various Data
acquisition equipment to maintain accurate inventory, trace product flow, maintain stocks at
warehouses track orders, etc.

e-Business is the term used to describe business run on-demand on the internet or utilizing
internal technologies to improve the productivity or probability of the business. E-business
provides advantages or variety as the customer can view various types of commodities
available with different companies. He can compare prices, specifications, and buy products
according to his choice.

E- Sourcing is a purchasing process conducted over the internet. It is a B2B model where
buyers and suppliers interact and finalize the purchase and delivery deals online. This process
can also take various forms starting from single on-line transactions to full-scale e-markets
where several buyers and suppliers take part simultaneously.

7.11 KEYWORDS

e-business, e-sourcing, B2B, B2C, C2C, Legacy systems, CRM, SRM, ISCM, RFID, Bar Code
UNIT 8 MATERIAL HANDLING AND TRANSPORTATION

Learning Objectives
After going through this unit you should be able to:

• Realize how MHT has been evolved;

• Illustrate the significance of MHT;
• Learn the functions of MHT Department;
• Define the features of the ideal Material Handling System;
• Learn various MH Ratios;
• Define the principle of Unit Load;
• Define the principle of Containerization and Palletisation.

Structure
8.1 Introduction
8.2 Significance of MHT
8.3 Functions of MHT Management`
8.4 Factors influencing transport decisions
8.5 Various modes of transport
8.6 Design options
8.7 transportation during trade-offs
8.8 Routing and scheduling
8.9 Material Handling
8.10 Material Handling Ratios
8.11 Principle of unit load and the concept of containerization and palletization
8.12 Containerization
8.13 Transportation techniques
8.14 Material Handling equipment
8.14.1 Advantages of Material Handling Systems
8.15 Traffic Management
8.16 Total cost of transport
8.17 Insurance Management
8.18 Summary
8.19 Keywords

8.1 INTRODUCTION
Material Handling and Transportation ( MHT ) is a branch of SCM that deals with the study of
techniques of improvement methodologies in handling and transportation of materials. It covers the
statistical and simulation techniques, study of laws, rules, and regulations, methods of MHT, and new
developments in the advent of computerization.

Material handling is as old as a human being. During the stone age, man developed a technique of
transporting logs of wood. This let to the revolutionary invention of the wheel. The invention of the
wheel resulted in effective means of transportation. Transportation management is observed in some
historical events. Greek mathematicians like Archimedes developed some techniques for the lifting of
material. Taj Mahal was built up from marbles that were not available nearby Agra. To transport
these marbles from a long distance, great planning and coordination were involved. However, the real
scientific concept of MHT was put forward by the Scientific School of Management. Taylor and his
followers made a lot of contributions to MHT management. The work-study and time measurement
techniques gave a scientific approach for MHT. Several techniques of operations research,
numerical programming, CPM, PERT, etc were developed for improving and economizing MHT. Today
the MHT is in the advanced form of Supply Chain Management and Logistics in the advent of
computers.

8.2 SIGNIFICANCE OF MHT

MHT management is extremely significant for an industrial or commercial organization. This is

explained in the following lines:-
• Generally, the cost of packing & forwarding is 2% of the cost of material, cost of insurance is 3%,
the cost of transportation is 2%, freight charges are 1%, toll/octroi/escort charges are 2%. In this
way, the total cost of handling and transportation is of the order of 10% of the value of the
material.
• MHT management provides economic ways of handling and transporting the material. The
techniques such as Flow Process Charts, Vogel’s Method are developed for economizing the MHT
• MHT management also provides safety measures for men, material, and equipment. Rules and
regulations regarding the safe handling of material, proper operation of handling equipment are
developed.
• MHT management suggests measures of improving efficiency and productivity of the system so
the operations are speedy and result oriented.

8.3 FUNCTIONS OF MHT MANAGEMENT

MHT management is responsible for the following functions:-

 a. Appropriate planning of transportation is required so that the material is readily available
without overstocking or understocking. This involves the preparation of schedules for
transporting the material. The manager has to ensure that the schedule is implemented
properly.
b. The MHT involves several activities such as loading, unloading, handling, winching,
transportation. The MHT has to provide a proper degree of control over these activities.
c. MHT management has to coordinate with the activities of other departments such as
production, sales, etc. The MHT manager has to make the material available to Production or
Sales departments as per their schedule.
d. The MHT manager is responsible for effective manpower planning. This involves the allocation
of duties to the staff in such a manner that no employee is overloaded or underloaded. The
allocation should be made as per the expertise developed by the employee.
e. The MHT manager is also responsible for effective resource planning. He is expected to make
optimum utilization of resources such as trucks, cranes, pulling and lifting equipment, belts,
conveyors, etc He should ensure that 1 ] all such equipment is in good working condition 2 ]
All such equipment is utilized 3 ] Optimum capacity of the equipment is utilized.
• Transportation involves the movement of goods from one location to another making its way
from the beginning of the supply chain to the end customer.
• Place utility and time utility are taken into consideration
• Determines how fast and how consistently products move from one place to another.
• Transportation is the significant component of the cost most supply chains incur.

8.4 FACTORS INFLUENCING TRANSPORTATION DECISIONS

A ] factors affecting decisions of carriers.

B ] Factors affecting shipper's decisions of carriers.

A ] factors affecting decisions of carriers.

1 ] Vehicle-related costs – a cost that carrier incurs for the purchase or lease of a vehicle that is used
to transport goods.
2 ] Fixed costs – costs that are going to be incurred by the carrier whether or not the vehicles are
operating or not.
3 ] Trip related costs – including the price of fuel and labor incurred on each trip.
4 ] Quantity related costs – these include costs associated with loading, unloading, and fuel spent to a
certain extent.
5 ] Overhead costs – all the costs related to planning and scheduling a transportation network as well
as any investment in technology infrastructural development.

B ] Factors affecting shipper’s decision

 ✓ Transportation cost – includes the total cost that the shipper spends on transporting the
products to customers.
✓ Inventory cost – is the cost associated with holding inventory by shipper.
✓ Facility cost – is the cost of various facilities of the shipper's supply chain network.
✓ Processing cost – is a variable cost associated with loading and unloading of orders.
✓ Service costs – occur due to the non-fulfillment of delivery of products to the customers at the
right time.
8.5 VARIOUS MODES OF TRANSPORT

The various modes of transport are as follows-

❑ Truck
❑ Packing carriers
❑ Railways
❑ Water
❑ Air
❑ Pipeline
❑ Intermodal

8.6 DESIGN OPTIONS

The various design options are as follows-

▪ Direct shipping
▪ Direct shipping with milk runs
▪ Shipments via DC
▪ Shipments via DC using milk runs
▪ Customized tailor network

8.7 TRANSPORTATION DURING TRADE OFFS

A ] transportation cost and inventory cost trade-off

B ] Transportation cost and customer responsiveness trade-off.

A ] transportation cost and inventory cost trade-off

• Choices of transportation mode
• Inventory aggregation

B ] Transportation cost and customer responsiveness trade-off.

 ❑ The transportation cost a supply chain incurs is related to the degree of responsiveness the
supply chain aims to provide.

8.8 ROUTING AND SCHEDULING

❑ Routing and scheduling of deliverers are important decisions related to transportation in the
supply chain.
❑ The load factor is defined as a ratio of the amount of used space in the transport vehicle to the
amount of space available. [ SUSA ]
❑ Some of the widely used Transportation Software or Transportation Management systems
used by large transportation and shipping companies are as below:-
- transportation analysis
- traffic routing and scheduling
- freight rate maintenance and auditing
- vehicle maintenance

Tailored Transportation
• customer density and distance
• size of the customer
• product value and demand

Transportation in practice
✓ align transportation strategy with competitive strategy
✓ keep in mind – in house & outsourced transportation
✓ compatible with e-commerce
✓ use of technology
design flexibility in the transport network

8.9 MATERIAL HANDLING

Material handling in the Indian industry accounts for nearly 40% of the cost of production. No value is
added to the value of the end product through material handling. However, poor material handling
may be leading to a delay in planned schedules. Nearly 50% of production cycle time in many
industries is spent on material handling.

Material handling is defined as a function dealing with preparation, placing, and positioning of
materials to facilitate their movements or storage. Thus MH includes every consideration for a
product except the actual processing operation. In many cases, handling is included as a part of the
process. Through scientific MH, a considerable reduction in the cost, as well as production cycle time,
can be achieved.

Material handling can not be viewed in isolation. Many factors such as plant layout, processes,
nature of raw materials, and products influence the material handling system. Therefore an integrated
approach is required to be taken in case of material handling.
The effectiveness of the material handling system depends on tailoring the layout and equipment to
suit specific requirements.

MH operations encompass suppliers, stores, inspection, manufacturing, packaging, warehousing, and

transport to consumers. Therefore, the objective should be to obtain maximum overall effectiveness
in MH.
Layout decisions are taken normally on technological considerations. In very rare cases, such
decisions are taken in consultation with materials management and the MH department. It is essential
to study the MH from receipt of raw material to dispatch of the finished product. Effective MH
systems can be designed through work measurement and time study techniques such as flow process
charts, string diagrams. There are two types of MH equipment:- fixed path equipment and variable
path equipment. Belts, conveyors, etc are fixed path equipment. On other hand trucks, trolleys,
mobile cranes, etc are variable path equipment.
Elecon engineering company ltd have a conveyor system of 1800 and 2000 mm belt widths and 15
KM length. This system is capable of handling the 11000 MT burden per hour. This system is used in
open cast mines.
The selection of MH equipment involves several factors such as investment cost, labor cost,
anticipated service hours per year, utilization, unit load-carrying ability, loading and unloading
characteristics, operating costs, and size requirements. Other factors such as source power, working
conditions, technical specifications are also taken into consideration. The choice of MH equipment
should be made in light of the above factors.
As discussed above, work-study techniques should be implemented for selecting MH equipment. The
ratio of operating time to loading time is improved through palletizing, avoiding duplicative
movements, etc. It is necessary to replace obsolete equipment with efficient equipment.

8.9.1 Ideal Material Handling system

As an ideal material handling system posses the following features:-
i. So far as possible, MH activities should be minimum at maximum output. Ideally, there
should not be any handling at all.
ii. Sequential operations are planned logically so that handling is unidirectional and smooth.
iii. The gravity is used wherever possible as it results in the conservation of power and fuel.
iv. The MH equipment should be standardized as it involves interchangeable usage, better
utilization of handling equipment, and lesser spares holding.
v. There should be regular preventive maintenance of MH equipment so that the downtime is
lesser.
 vi. In the selection of MH equipment, a criterion of versatility and adaptability is a governing
factor. This will ensure that investment in MH equipment is kept at a minimum .
vii. The weight of the unit load must be maximum so that each handling trip is productive.
viii. Work-study aspects such as the elimination of unnecessary movements and a combination of
processes should be considered while installing a material handling system.
ix. Non-productive operations in handling such as slinging, loading, etc should be kept at a
minimum through appropriate design of handling equipment. Magnetic cranes for scrap
movement and loading in furnaces, the combination of excavators and tippers for ore
loading, and unloading in mines are the examples in this respect.
x. The location of the stores should be as close as possible to the plant which uses material.
This avoids handling and minimizes investment in the MH system.
xi. Application of OR techniques such as queuing can be very effective in the optimal utilization
of MHT equipment.
xii. The system designed should be simple and safe to operate.
xiii. Wasteful movements should be avoided so far as possible.
xiv. Ensure proper coordination through judicious selection of equipment and training of
workmen.

The efficiency of material handling depends on the following factors:-

i. The efficiency of handling methods employed for handling a unit weight through unit distance.
ii. The efficiency of layout which determines the distance through the material has to be
handled.
iii. Utilization of handling facilities.
iv. The efficiency of the speed of handling.

8.10 MHT RATIOS

The effectiveness of MH can be ascertained from the ratio of time spent in handling to the total time
spent in operation. This determines the time factor. Thus,

Time ratio = time spent in handling / total time spent in operation.

The cost factor is determined from expenses incurred per unit weight handled.
The equipment utilization ratio judges the material handling systems. this ratio is computed and
compared with similar firms or in the same firm over some time. It is given by the following form:-

Equipment utilization ratio = number of MH equipments in use/ Total no of MH equipments

SUSA
- These should be the maximum utilization of space. This is given by Space occupied space available
ratio, as follows:-

SUSA = Space occupied / space available

Ideally, this ratio should be unity.

MHL ratio –
To the total effort needed for moving materials, the MHL ratio [ Material handling labor] is computed.
It is specified as follows:-

MHL = personnel assigned to material handling/total operating workforce

DLHL ratio - To ascertain whether the handling system delivers material to work centers with
maximum efficiency, the DLHL ratio is used. It is defined as follows:-

DLHL ratio = material handling time lost by direct labor/total direct labor time

Movement operation Ratio:- is given by the following formula

Movement operation Ratio = a total number of moves / total number of productive operations.

This ratio indicates whether workers are going through too many motions because of poor routing.

Some commonly used ratios in MHT are given below:-

Insurance index = value of uninsured items/value of insured items

Handling cost index = total handling cost/total value of material received & issued.

Handling loss index = total value of losses due to handling / total value of material received & issued

Freight ratio = lowest rate bid for freight/rate paid

Vehicle usage index = actual trucking hours/total trucking hours available.

Vehicle capacity utilization index = total load shipped/(capacity X no of trips )

Vehicle maintenance index = total time spent on maintenance/total trucking hours available

Capacity index = total shipments by company truck / total shipments

Economic index for vehicles = cost/ton by own shipments / cost/ton by freight carriers

Carrier rating index = no of shipments delivered on time/total no of shipments

Delivery schedule index = no of orders delivered on time/total no of deliveries

Cost/mile/ton = total cost of transport department /[ weight shipped X mile shipped ]

Distribution loss index = distribution cost / sales value of items distributed

Goods in transit inventories index = average value in transit/average value of inventory

Goods in transit = average value in transit/ total sales value of shipments over a period.

8.11 PRINCIPLE OF UNIT LOAD AND CONCEPT OF CONTAINERIZATION AND

PALLETISATION

According to the principle of unit load, it is easier and faster to move a hundred small parts by
grouping them in one unit than moving them individually one by one. The principle of unit load can be
explained like this. If the bearer of a hotel removes cups, plates, and another crockery from a table by
placing them in a tray, it is called material handling by the unit load. He would have spent more time
and effort in removing all crockery one by one or one plate at a time.
By using available machines [ like one for strapping steel around cotton bales ], forklift trucks, skids,
and pallets, it is easy to handle materials in unit loads and stack them neatly and properly thereby
reducing space requirements.
Depending upon types of items to be transferred, a suitable pallet can be designed. For example,
items irregular in shape and liable to be damaged by crushing utilize post pallet whereas small jobs
can be placed in a wire mesh box.
Containerization uses the principle of the unit load. In this system, big metal containers have several
small products filled in them. These containers are placed on trucks or trailers. Afterward, the
containers can be unloaded on railway trailers and can be taken to places from where with the help of
cranes, they can be shipped. Items like refrigerators, air-conditioners, or television can be sent to
distant places using the principle of containerization. This system is much safer and involves a lot of
saving.
In this way, the advantages of the principle of unit load, containerization and palletization can be
summarized as follows:-
01 ] It is economical to transport the material using the principle of unit load, containerization, and
palletization.
02 ] The martial is safely transported without any damages or pilferage in transit.
03 ] The time required for transportation is lesser.
04 ] there is optimum utilization of resources.
05 ] The labor hours are reduced, thus reducing wages and fatigue.
06 ] The requirements for storage space are reduced.
07 ] The operation is easier and simplified.

8.12 CONTAINERIZATION

There is a difference between the unit load and the container. a unit load is a quantity designed to be
picked up, transported, and stored in a single mass. The container is the one that accommodates the
unit load. One container may be a unit load or it may take many containers to build up the load into a
readily handled economic unit.
Containers range in size from small manually handled boxes or trays used at the workstation
Or stored in bins to the mighty 40 feet long servants used in overseas shipping. One may hold grams of
the product whereas the other may carry many tons. The containers are made up of wood, steel,
aluminum , plastic, corrugated boxes, and wire mesh.
Container Programs –
Some considerations in developing a plant container program are as follows:-
i. Limit the number of container sizes and configurations based upon the part sizes and volumes.
ii. Keep in mind the need for flexibility.
iii. Keep in mind the need for increasing turnover.
iv. Design the containers for maximum utilization.
v. There should be proper identification of containers.
vi. Place tare weights on containers.
vii. Develop purchase specifications for containers
viii. Inspect containers at least on a sample basis, if not 100%, as they come to your plant from the
fabricator.
ix. Periodically count all the containers by category i.e. at least annually.
x. Keep your containers clean and painted.
xi. Consider color-coding containers by function.
xii. Consider arrangements with suppliers and/or customers so that containers may be used for
shipping, thereby eliminating or minimizing some of the requirements for packaging.
xiii. Consider the stacking features of rigid containers, nesting features of others and if collapsible
containers are used, determine what kind of longevity you expect to obtain before purchasing
any large quantity.
xiv. Wire mesh containers are self-cleaning and are to be preferred to solid steel containers,
especially where noise is the factor, depending on the type of the wire mesh containers used,
 noise levels maybe 5 to 15 decibels lower when parts are dropped into the container
compared to solid-state containers.

Structural relationships to be considered –

There are structural and carrier spatial relations that must be resolved by the material handling
manager. These are discussed below:-
a. Floor load limits of building or storage area [ this is so whether the area is indoors or outdoors.
Some soils upon which concrete slabs are poured may have very low shear resistance and
poor load-bearing capacity. This is mainly the case with alluvial soils, marshy locations, and
former river bottomlands – land that in prehistoric times may have been covered with water
and has retained many of its former, poor load carrying characteristics.
b. Building bay size and column spacing [ take the center to center column spacing and include
the width of columns ].
c. Door size i.e. height and width of the entrance.
d. Elevator sizes and capacities, whether the unit or container is transported by an industrial
power truck or other transporting means.
e. Dock ramps and ramps inside the buildings that must be traversed.
f. Stacking heights within the building. In other words, how many tiers can be safely stacked
upon itself or must it be placed in tiering racks or storage racks?

Objectives of container program:-

The ultimate objectives of the container program at manufacturer’s plant should be as follows:-

1. To use the same standard container that has come from the [ raw or purchased finished ]
material supplier at the first point of use within the plant.
2. to store in-process materials in the same standard container and transport materials within
the plant without rehandling or changing them to a different container.
3. to ship interplant or the customer in the same standard container.

8.13 TRANSPORTATION TECHNIQUES

Transportation Techniques provide a statistical approach to determine the economic cost of

transportation between two stations. For this purpose, different methods such as Vogel’s Method,
North-West corner Methods are used.

Transportation Matrix -
The transportation matrix is prepared between the source to a destination specifying quantity
required and capacity. The elements of the matrix are unit rates of transportation. This explained by
the following example:-
Example:-
ABC company has a contract to move 115 truckloads of sand per week among 3 sand washing plants
W, X, and Y, and three destinations A, B, and C. Cost and volume information is given below:-

Destination Requirement/week Plant Capacity per week

A 45 W 35
B 50 X 40
C 20 Y 40
Total 115 115

Cost information:-

Cost per truckload [ Rs ]

From To destination A To destination B To destination C
Plant W 5 10 10
Plant X 20 30 20
Plant Y 5 8 12

Using the above data, the transportation matrix is prepared as follows:-

From/To Dest A Dest B Dest C Capacities

Plant W 5 10 10 35
Plant X 20 30 20 40
Plant Y 5 8 12 40
Requirement 45 50 20 115/115

Vogel’s Method
This is another method of transportation. Although it is complex as compared to the other methods, it
provides more economic cost of transportation.
Procedure to find the cost of transportation by Vogel’s Method:-
1 ] Prepare the transportation matrix.
2 ] Find the difference between the two smallest elements of each row and column.
3 ] mark the largest difference. If two or more row/columns have the same largest difference, select
anyone.
4 ] Allocate the quantity against the largest difference at the lowest cost of transportation.
Eliminate a row or column whose quantity is exhausted.
5 ] Continue the above process until all rows and columns are eliminated.
6 ] Find the cost of transportation.
Let us solve the above example by Vogel’s method
From/To Dest A Dest B Dest C Capacities
Plant W 3 6 4 10
Plant X 2 5 7 5
Plant Y 4 6 8 7
Requirement 6 8 8 22\22
Solution
From/To Dest A Dest B Dest C Capacities
Plant W 3 X1 6 X1 4 X8 10
Plant X 2X5 5 7 5
Plant Y 4 6 X7 8 7
Requirement 6 8 8 22\22

Transport cost= 3 X1 + 2 X 5 + 6 X1 + 4 X8 +6X7 = Rs 63

8.14 MATERIAL HANDLING equipment

Various types of material handling services are required to be performed during production processes
such as Lifting, holding, dropping, positioning, moving, stacking, etc. all these services can be
performed manually. various types of NH equipment can be classified as follows:-
1 ] Cranes and hoists 2 ] Conveyors 3 ] Chutes 4 ] Trucks, tractors and trailers 5 ] Rails
6 ] Ropeways and cableways 7 ] pipelines
Types of services are:- 01 ] lifting 02 ] moving 03 ] positioning 04 ] stacking

Nature of materials handled:- 01 ] packages can be corrugated boxes, wood boxes, drums, bagged
materials, etc. packages are specified in terms of weight, shape, and dimensions. it is necessary to
mention the contents of package viz toxic, non-toxic, flammable, inflammable. 02 ] loose materials
e.g. granules 03 ] pieces and parts 4 ] bulk 5 ] boxes 6 ] barrels 7 ] liquids 8 ] bulk materials –
such as granule substances,
Crushed rock, flours, sand, cement, slurries, etc. The bulk materials are described in the following
manner:-
• By density or weight
• By average dimensions mesh or grade
• By angles of repose or cohesion
• By other characteristics such as shape or nature of particles
9 ] hazardous materials -such as petrol, kerosene should be specified with marks. Systems having
liquid halogen under pressure and quick-acting sensors are developed to prevent accidents. The liquid
halogen mixes with hazardous materials and converts them into non-hazardous.
Space for movement of equipment:- 01 ] on the floor 02 ] above the floor 03 ] overhead 4 ] beneath
the ground

The relative mobility of equipment – 01 ] travel between fixed points 2 ] travel over wide areas

Advantages of efficient material handling systems –

Following advantages are availed from efficient MH systems –
i. A good material handling system minimizes the movement of materials, moves them
continuously, and at the maximum rate. This is followed by the following advantages:- a ]
shorter operating cycle b ] reduction in handling cost
ii. It eliminates unproductive handling of materials like backtracking, rehandling, etc.
iii. It reduces idle machine capacity thus ensuring a better turnover of investment.
iv. It reduces idle time of labor- workers are required to keep pace with the production process
supported by a good handling system. Moreover, they are freed from the physical work of
moving and positioning materials.
v. It eliminates factory hazards and thus increases the safety of operators.
vi. Quality of materials is maintained through minimum human touches, elimination of
breakages, etc.
vii. The factory area is used most effectively. unproductive overhead and floor areas are used
most productively.
viii. It avails a greater economy in the storeroom and facilitates material issues.
ix. It helps in maintaining effective production control.
x. It helps in providing better customer services due to:-
✓ Reduced operating cost
✓ Better quality of products and
✓ Timely production

The important MH equipment are explained below:-

Cranes and Hoists

They move and lift loads of various sizes. The lifting capacity is subject to limitations. The service is
available between fixed points. They are operated hydraulically. pneumatically or electrically. The
important types of cranes and hoists are as under:-
i. Overhead bridge crane
ii. Jib crane
iii. Mobile crane
iv. Gantry crane
v. Electrical hoists
Conveyors – conveyors primarily perform the movement of uniform load between the fixed points.
There may be fixed or portable conveyors, straight or circular ones. The materials are fed to conveyors
through some other source at the start. They are carried by conveyor to the point of destination. They
are dropped or fed to another conveyor with or without any change in direction of the flow of
material. These are most suited where the flow of control is continuous. The conveyors along with the
movement of materials also perform additional services like regulation of pace of production of
adjacent operations, positioning of material during handling, and temporary storing of materials
between injection and ejection points. These are driven with the help of power or without power by
using gravity.
The important types of conveyors are as follows:-
1 ] Belt Conveyors – it may be flat or elevated with an upward or downward flow of material. the
material of the belt should be suitable for the materials to be moved. Generally, rubber covered
canvas, steel plain fabric perforated sheets, or woven wires are used as belts. The fixed or portable
belt conveyors are used as per the requirement of the production process and systems.
Troughed belt conveyors comprise pulleys or end drums.
Flat belts or slider belts – are used to handle bulk materials. These belts run on slider tables, hence
also called slider belts. Rollers are also provided for these belts. these belts are fitted with side flanges
to retain the material. Material is discharged by using plows. These plows are adjustable so that the
material can be arranged at any point along the conveyor.
Steel slat conveyor- are suitable for high-temperature applications These are made up of carbon and
stainless steel. The width of the slat is very wide, of the order of 12 feet. These conveyors are useful
for handling hot, acidic, sticky, and wet materials. The slats can operate at a temperature of 5000 F or
more. These are used in food, chemical, and metal fabricating industries.
Woven wire belts- these conveyors are fitted with mesh belts, woven from stainless steel, mild steel,
Monel metal, and other metal. These are used for carrying materials through ovens and quenching
baths. As the hot air can be passed through the mesh, these can be applied to washing and drying
plants.

2 ] Roller conveyors – are circular, flat, or spiral. They are driven through gravity. Generally, materials
having flat bottoms are moved, otherwise, boxes or pallets are used. These are low-cost conveyors
that cover a wide range of loads. Non-powered roller conveyors are used based on gravity. Gravity
roller conveyors are made up of steel or aluminum.
3 ] Bucket conveyors – are used to moving granular, powdered, or liquid materials. The movement
may be vertical or flat. The vertical movement may be continuous wherein buckets are hooked in a
sequential circular manner or discrete where buckets are hooked for lifting. This handling equipment
is generally power-driven. The lift is the special type of bucket conveyor with discrete vertical
movement . generally they are used for processes housed in a multistoried building. They are also
used in superstructure building construction. Generally, detachable trolleys are used in which the
materials are moved. The trolleys are hooked in the lift for lifting or delighting. The movement may be
made using ropes or chains.
4 ] Apron Conveyors- are composed of pair of parallel, endless roller chain chains running on tracks
supported by conveyor framework and carrying overlapping or interlocking plates or pans to form
continuously moving conveyor. Such conveyors are rugged, relatively heavy, and slow running [ 75
feet/minute] These can handle large quantities of heavy, lumpy, abrasive, or hot materials and can
accept impact loading that would be quite unsuitable to belt conveyors. This type of conveyor is
frequently used on the outlet of hoppers and feeders and can operate up and down slopes.
5 ] Screw Conveyors – are composed of a screw or worm in the form of a helix, rotating in the tube.
The material is moved by using screws. These conveyors can handle wet, hot materials. Screws
conveyors can operate in horizontal, vertical, or slanted slope. Various types of materials such as fine
power, animal feeds, coals, slurries, etc can be handled in screw conveyors. The speed of this
conveyor is 40 RPM to 160 RPM. High-speed conveyors called auger conveyors are designed to handle
free-flowing and non-abrasive materials. These conveyors operate at a very steep angle. However,
these are suitable for intermittent or light duty applications. These are used to handle shelled corn
and silage for placement in bins or silos.
6 ] En Masse Conveyors – is composed of an endless chain carrying series of flights at pitched
intervals. The whole assembly moves through an enclosed duct. The flights are in skeletal or solid
form. These flights slide along the metal duct [ or over the layer of material lying in the duct ] and
propel the mass of the material along. The ducts can go around bends and follow slops when changing
planes and can be designed to follow the vertical or horizontal path. The duct is dustproof and gas-
tight
7 ] vibrating conveyors – there are two types of vibrating conveyors –
I]vibrating conveyors with high-frequency waveform usually imparted by electromagnets or
unbalanced pulleys.
Ii ] oscillating conveyors operating at slow speeds with pulsations imparted by the crankshaft.
These types of conveyors have metal through which may have the top cover or maybe in the form of a
tube. The length of one section of vibrating conveyors is 10 feet. The number of such sections can be
fastened together to form a complete conveyor. It is possible to cause the material to travel up slopes
of about 10-inch maximum and spiral vibratory conveyors are also available to elevate the particular
type of materials.
8 ] Gravity bucket conveyor – comprises of freely swinging buckets carried between pair of parallel,
endless chains that can follow any path from vertical to horizontal. The buckets are loaded by the
specially designed feeder and are tipped or inverted to discharge.
The device that causes buckets to discharge can be set at any point along a horizontal run of a
conveyor. It can be controlled remotely.
It is a slow speed conveyor having a speed of about 50 feet/minute. It is rugged and capable of giving
trouble-free service. The buckets being made of steel can carry hot, abrasive material or material that
can compact and cling together. These conveyors are used widely in coal-fired power stations for
feeding coal into each of the number of buckets and for handling hot ashes.

Chutes-
These equipment are static. They handle materials between fixed points. They move light materials
and small jobs that can slide down under gravity. The previous process feeds the materials to the
chutes which are sliding down under gravity. The chutes may be straight or spiral ones. When the
sliding down process tends to be slow, the vibrating chutes are used where the materials are moved
downwards through vibrations.
Coal chute is a simple straight section of cold-rolled steel with the edges turned up several inches. The
ready mix concrete truck has a concrete chute to deliver its mix at the site. Chutes can be large or
small curved or straight. these are made up of steel, wood, or plastic. Due to gravity, heavy packages
travel at high speed and light packages at a small speed.

Drag Chains – can pull or drag parts, assemblies, chassis, or massive components from fixed point to
fixed point in a plant-usually in a manufacturing environment. Drag Chains comprise of steel forgings
that can pull loads measured in terms of metric tons.

Trucks, tractors, and trailers –

The trucks are used to move heavy materials through varying paths. They are either hand-driven or
power-driven. Generally, 2 wheelers, 3 wheelers, 4 wheelers or more wheeler trucks are used to move
heavy materials. The forklift truck is widely used by industrial organizations. In the forklift truck, the
fork is attached to the column on the truck . on the flat base of the fork, the boxes or pallets are
stacked. the fork generally moves vertically through the height of 4 to 5 feet. The stacked pallets move
along with the truck . the operator operates the truck as well as the fork till the materials are
unloaded.
Tractors perform the same function as that of trucks. Tractors containing materials are attached to the
trucks or tractors and move along with them. Tractors are detachable. trailers are generally 2
wheelers. they are nothing but large-sized pallets or buckets. Dumpers are special types of trucks with
a flexible base. The base is elevated to unload the materials generally they are more suited for the
granular type of materials.

Rails- for transportation of heavy materials inside the plate area, locomotives are used as materials
handling equipment. They are two fixed points joined by railway tracks. The wagons or trolleys
containing the materials are moved by the locomotives between two fixed points. These handling
equipment are popularly used in steel industries where the materials to be handled are heavy and
where the processes are located over the vest area.

Ropeways and cableways

Like railways, the materials are moved with the help of rope or cable tracks. the trolleys are handled
on the ropes and moved vertically between two fixed points. It is the overhead device and is used in
the hilly areas. Where space can not be spared on the floor for the movement of MH equipment, the
overhead movement of materials with the help of ropeways or cableways can solve the problem.

Pipelines
Pipelines are material handling devices popularly use for the movement of granular or liquid materials.
Pipelines of various sizes are used for moving the liquid materials between the processes Generally,
galvanized metal pipes, glass-lined or stainless steel pipelines are used according to the characteristics
of materials to be passed through them. Pipelines are installed between two fixed points. They are
canceled inside the floors or walls or are exposed or installed on overhead space where storage tanks
are mounted on ceiling area. Then the liquid materials may first be pumped in the storage tank and
then are distributed by gravity flow to the point of use. The consumption can be controlled through
the installation of meters. For example, if sending end meter indicates that 100 KL of water is sent and
receiving end meter indicates 98 KL, there will be loss of [100-98 ]/100 X 100 = 2 KL. Pipelines can also
be located inside the machines. These are popularly used in a dairy, oil refinery, fertilizer industry,
waterworks, etc.

Cranes
Bridge cranes -
Depending on work to be performed, the bridge cranes are classified as follows:-
1. Light Duty- hand-propelled and very lightweight up to 5 MT capacity.
2. Medium duty – for general use in factories and warehouses from 5 to 10 MT capacity.
3. heavy Duty – for foundry work and large magnet work, 20 to 50 MT capacity.
4. Extra heavy-duty – dockside and steel mill use for loads over 50 MT capacity.

There are two main types of bridge cranes – top running and bottom running. The bridge crane has
the following attachments:-
Grabs and Hooks Magnets Vacuum lifting pads
Counterbalanced Chooks

Electric power supply to bridge crane is usually 400 Volts AC, 3 phase, 50 cycles.
The large bridge cranes are provided with overtravel and collision protection. The overtravel stops and
spring-loaded or hydraulic overtravel protection systems are used like bumpers used on the railroad ,
team track stops.
When two or more cranes are used on a common runway, there is a danger of collision. This can be
avoided by using a radio-controlled or radar type sensor that limits the travel of each crane to the next
one by a safe margin.
Jib Cranes, Wall or Column Cranes:-
These cranes are used at workstations, shops.
Gantry Cranes –
These cranes are constructed using lightweight gantries. Such cranes can be used for both – indoor
and outdoor works. These are commonly used in manufacturing, service, and dockside use.

Lifting Rigs, Chains And Slings

These are used to grab and attach materials to be lifted. The specifications of lifting rigs, chains, and
slings are mentioned in OSHA. Hooks and chains must be inspected at specific intervals and certain
records must be kept.
Pallet Slings – This type of pallet is open wing type having size 4’X 6’. It is used basically for ship
loading and unloading on the dock.
Drum handling sling – it is used for picking up drums or barrels. It is designed for shipboard loading but
can be used with a crane for any drum or barrel handling operation. The sling may be of chain type
which is a series of chain loops and sliding hooks. Or it may be of frame type which is a steel bar from
which series of sling hooks are suspended.
Spreader with slings – it comprises of automatic grab hook The mobile crane handles cable drums
employing spreader bar.

8.15 TRAFFIC MANAGEMENT

Transportation of materials from different parts of the country to the user’s plant is very important in
the field of materials management. The cost of transportation accounts for about 10 to 20 percent of
the cost of materials purchased. This percentage will be on the higher side if suppliers are located in
remote areas and the industry depends on heavy imports. In some cases such as ores, the cost of
transportation is higher than the cost of ores.
The important aspects of traffic and transportation management are choice of mode of transport,
route selection, rate verification, management of claims and lost shipments, application of OR
techniques.
There are three basic modes of transport – shipping, rail, road, and air.
Shipping transport – this generally resorts to imports. The terms used in shipping transport are given
in the following table:-

Term Meaning
FOB Free onboard
Sellers responsibility:- a. place goods in carrier b. obtain the bill of lading from carrier
c. answerable for losses & damages till the goods are placed in carriers & bill of lading
has been furnished by the carrier
Buyers' responsibility:- a ] movement of goods once they are on board.
b ] payment of transportation charges to destination. c] responsible for demurrage
and storage charges. Once the carrier is loaded then the title passes to the buyer.
CIF Cost, insurance & freight
Here the responsibility of the seller exists till the goods get to the port of destination
and the selling price includes ocean freight and insurance up to the point of
destination.
C&F Cost and freight –
Responsibilities are similar to CIF the buyer is to pay for insurance.
FAS Free alongside
Seller is to pay all the costs till the goods are delivered to the wharf alongside the
carrying vessel

This mode of transport is within the country. For example, material transported through the sea from
Mumbai Port to Chennai port. It is economical to transport the material through the sea. Therefore,
this mode of transport is used to transport bulk materials. The coal is moved from Kolkata Port to
Chennai Port. The companies such as BPT [ Bombay Port Trust ], Mazgaon Dock are established for
such transport. The present system of MHT at ports need the following improvements:-
1. It is always required to have more number of berths to effectively handle the material by
calling more number of ships.
2. the time required for unloading the material is more. It is because the existing MH
equipment is old and outdated. Many of the equipment have already completed their useful
service life. It is essential to renovate and modernize the MH equipment.
3. Adequate storage facilities should be provided.
4. It is necessary to reduce the administrative lead time required for custom regulations and
formalities for the clearance of materials.

Rail Transport – Indian railway network is Asia’s largest and world’s fourth-largest network. There has
been continuous modernization of track, locomotives, signaling systems, and other devices for
monitoring control. The Indian railway has a tradition of transporting goods for more than 100 years.
The materials such as coal, ore, steel, raw materials are transported by rail transport. This mode of
transport is economical for a long distance of over 500 Km. The freight rate structure of Indian
railways is lowest in the world as it is based on social obligations and not economic considerations.
However, the trend is found in favor of road transport rather than rail or sea.
Indian railway has developed following need-based transport packages:-
Quick Transport Service- is used for express delivery of material. The surcharge is levied for the
service. However, if the material is not delivered within a stipulated period, the surcharge is refunded.
This service is provided on the main routes connecting big cities. Efforts are being made to make this
service available at other routes also.
Container Service – under this scheme, the door to door delivery is given by combining road-rail
transport. Indian Railway has introduced road-cum-rail facility by providing containers of 5 MT
capacity. Presently, this scheme is restricted to a limited number of cities.
Freight Forwarder Scheme – the main disadvantage of rail transport is the wagons loaded with smalls
are repacked at various good sheds. The Freight Forwarder Scheme involves collection agency which
ensures that the single wagon is loaded with smalls of various consumers for a single destination thus
eliminating reroute repacking with possible loss and damage
Luggage expresses – there are two methods of transport by rail – the parcel, and luggage. Parcel
service involves booking of material at goods train. This transport is a delayed transport The other
method is the luggage. Under this scheme, the passenger can carry the material along with him on a
passenger train. A separate luggage wagon is provided on the passenger train. Quick delivery is the
main advantage of this scheme.

Road transport
The commonly used mode of transport is road transport. This mode is suitable for transporting goods
weighing 5 MT to 15 MT over a distance of 300 km to 500 km.
Several factors are hindering the road mode of transport. These factors are octroi, toll, escort
charges, high cost of fuel, interstate permits, checkpoints, etc. The government of India has issued
more than 10000 national permits so far.

The other modes available are pipeline, air , waterways, etc. these can be fruitfully used depending on
the type of operation, urgency, and location. For instance, crude oil from the ports to the refinery is
normally conveyed through pipelines.

Route Selection - a selection of routes is generally left to the suppliers. However, under FOB, the user
has a right to select a route. The rates payable depend on the volume of freight handled, type of
material, discount aspects, space requirements, distance to be covered, special services. terms such as
FOB, CIF also influence the final rate per MT. It is necessary to have continuous monitoring of these
rates. This would minimize costly penalties and demurrages. the demurrage charges are kept to
ensure that the wagons are not utilized as warehouses
Lost shipments and claims – when a vast freight is transported, it is likely that some consignment is
lost or damaged. Attempts must be made to search for lost consignment.
Proper filing of claims would eliminate wasteful correspondence. The documents such as LR, RR, bill of
lading should be maintained carefully so that it would be easier to lodge a claim.

Significance Of traffic management

i. it aims to have an economic rate of transportation through a selection of the mode of

transport, negotiation of the rate , tracing & expending of shipments, filing & negotiations
of claims for lost and damaged shipments & audit of freight bills. Thus traffic matters of
greatest concern are as follows:- a ] negotiations of rates b ] selection of the mode of
transport and career c ] audit of freight bills. d ] tracing and expediting of shipment e ]
filing and negations of claims for lost or damaged shipments f ] minimize transport cost.
ii. transportation charges are added in the vendor’s quotation and work order.
iii. transportation services are third important followed by first material cost and second labor.

Factors deciding transportation rates

The basic principles underlying the determination of transportation rates are quite simple and such
principles if applied in practice can lead to a considerable reduction in transportation cost. These
principles are as follows:-
 1. value of the product-the cost of transportation is directly proportional to the value of a
product. The higher the value of the product, the higher is the cost of transportation. This
implies that the transportation of gold is costlier than that of iron, coal, or steel.
2. density – density of the product is related to mass and volume. Thus carriers can obtain
complete load in terms of weight and dimensions. Denser the product, it is easier to load-
carrying vehicle completely and lowers the transportation cost.
3. packaging requirements – if more packing is required, the cost of transport is more.
4. space required- if the commodity is a bulky one, requiring more space and weighing less, the
transportation rates are higher as they are based on space required for such items. This is the
reason why transportation of cotton bales is a more costly
5. volume of traffic moved- quantity discounts are accepted universally. The full load truck would
prove to be extremely cheap in comparison to retail or quarter load or half load.
6. destination at which goods are to be transported- if the goods are to be transported to the
small city or town from where there is no likelihood of getting return shipment, the rates are
naturally higher.
7. special services required-special services such as inspection during transit result in increased
cost of transport.
8. competition – there are two types of competitions – a ] depending on the mode of transport –
e.g. railway Vs road. B ] intra industry – e.g. no truck lines owned by certain industries.

Carrier alternatives
There are mainly three types of carriers – common carriers, contract carriers, and private
carriers. Common carriers provide services to all types of materials. The contract carrier is an
independent carrier who operates under individual contracts. He usually provides specialized services
for selected commodities to a limited number of shippers. The private carrier provides transportation
for his commodities in company-owned or leased vehicles.

Picking the carrier

The number of options for picking the carrier i.e. selecting the mode of transport is available with the
supplier. The most commonly selected modes are rail and road. In the case of material like crude oil,
pipeline transport is available. However, there is a wide difference in freight charges. trucks are more
expensive than railways and pipelines are the cheapest. The reason for such a wide difference is
oblivious. The rate per km per MT is not the same for all types of materials. A trucker who hauls a ton
of household goods for one km may get about 100 times as much as pipelines may get for moving the
same quantity of crude oil over the same distance.
The company should buy transportation services just as it buys any other commodity-based on quality,
price, and service. It should select that carrier which provides prompt delivery with a minimum of lost
or damaged shipments, cooperates readily in tracing and rerouting, makes minimum errors in
invoicing and so on
There are some of the criteria which the company should consider while selecting types of carriers
that charge identical rates when the market is competitive .two norms – price and service should be
taken into consideration. Usually, it is found that the price and services are inversely proportional. If
the price is lesser, services are poor and vice versa. For example, shipment over water is cheap but
slow. the pipeline is a cheap but efficient mode of transport. However, all types of materials can not
be moved along a pipeline.
Rail freight charges are lower as compared to road charges. sometimes rail charges are competitive
oversea charges. But these are never lesser than pipeline charges.
For most commodities rail transport for wagonload, quantities are economical. However, if quantity is
lesser than wagon load, sometimes, it is better to ship it by truck.

Air shipments – the rates of air traffic are two to ten times higher than railroad charges. Despite this
fact, air shipments offer the following advantages:-
1. Fast delivery of material.
2. this mode of transport is convenient where there is the perishability of certain items as
needed for production.
3. damages are lesser through air transport.
4. losses of material are lesser as quantity to transported is lesser.
5. This permits the buyer to carry lower inventories. As it is speedier than other modes, the
buyer gets material in time. Thus he need not invest in storage. This leads to a concept of JIT.
As a consequence, carrying costs and procurement costs are lesser.

Sea transport – unlike air shipment, it is usually the cheapest and slowest mode of transport. So the
shippers of bulky, relatively inexpensive raw materials ship by water or pipelines wherever possible as
the transportation cost is at a minimum. This is the reason why most of the chemicals, aluminum,
steel, and power plants are located at deepwater parts or on inland waterways to reduce the cost of
inbound raw materials. Thus water shipment is slow but cheaper.

Transportation by trucks –
Road transport is a commonly used mode of transportation. Usually, rules and regulations for rail and
road transport are similar. There are certain differences which one has to study before making the
selection. The purchaser should keep the rates of transportation by various companies. Such rates are
always fluctuating due to the change in demand and supply in the market. If there is a rush in booking
on the route Mumbai to Delhi, the rates would normally shoot up. At the same time, the rates for
return journey i.e. from Delhi to Mumbai would be either the same or lesser depending upon demand
for such carriers. The rates for the down trip would be lower because there is glut for such carriers.
Therefore the purchaser should take maximum advantage of such ups and downs. The purchaser
should select limited no of road transporters. Too many numbers of transporters may create
congestion and chaos at his plant.

Routing Incoming shipments:-

Routing the incoming shipments is not always favored. Sometimes the purchaser may do it better if he
does not insist on his right to route the shipment and permits the seller to select the route. If there are
carrier shortages, the best interests of the purchaser may be served if he permits a vendor to use his
judgment in selecting a carrier. At the time the material is ready for shipment, the vendor is in a better
position to know which of the carriers are available. Furthermore, the vendor is more likely to be
conversant with unfavorable traffic conditions such as floods, accidents, labor difficulties, etc. which
make it inadvisable to use a particular route at a time.
However, companies with professional traffic managers are found to give their carriers precise routing
for each shipment . in most cases responsibility rests with the firm that is purchasing the materials
rather than the suppliers. Routing becomes a standard part of the purchase order and the supplier’s
traffic department follows his customer's instructions.

Tracing – The supplier’s traffic department may trace the shipments for its customers. Typically the
buyer follows up with the supplier’s sales department to determine why a particular shipment is not
received. the supplier’s sales department may then discover that the item has been shipped It might
give an appropriate bill of lading or waybill number to a buyer to enable his traffic department to trace
the shipment or else the seller may do the tracing for the customer.
Thus tracing is a traffic function that is resorted to after the shipment has sufficient time to reach its
destination but has not arrived.
Whatsoever it may not synonymous with spending. Expediting commences at the time of placement
of the order. Part of it consists of selecting the most direct route given prevailing traffic conditions.
Also to expedite shipment, the carrier has to be informed in advance that a particular shipment is
urgently needed. Finally, a shipment may be expedited by keeping in touch with representatives of the
carrier to make sure that the purchaser is being given the best possible service.
It should be obvious that to expedite or trace all or nearly all shipments lessens the effectiveness of
expediting and tracing. Carriers soon get to know habitual tracers and their requests for tracing
receive little attention.

Truck shipments - tracing truck shipments is quite simple. The information required for tracing
truckload shipments is the truck number and whether it is moving directly to the final destination or is
to be delivered to an intermediate line.
LTL shipments can be traced by getting the information regarding the date of shipment, the number of
packages and pieces, weight of the shipment, waybill number [ equivalent to invoice ], the truck
number, and to what transfer point the vehicle was directed.

Other Shipments –
Since express shipments do not keep a record of transfers of shipments from one truck to the other,
or from one depot to the other, there is no possibility of tracing express shipments.
Airlines operate in the same manner as trucking companies in tracing shipments. so they can tell a
shipper the location of his shipments between points of origin and shipment.

Damage claims
In the ordinary course of transit, the goods are shuffled back and forth a good deal. And so there is
good deal damage. Even if the reimbursed in full, damaged shipments cause production delays and
the processing of claims is a huge burden on a typical firm’s traffic department.
For such damages, both parties are at fault. The shipment would certainly not have been damaged if it
had been handled with sufficient care. At the same time, it can be argued out that there would not
have been any damage had the merchandise been packed more carefully in costlier containers. Traffic
departments spend a great deal of time investigating damaged shipments and making claims against
carriers. They also work with their own companies packaging engineers and others on the way to
reduce damages. The shipper is becoming increasingly conscious of the simple truth that they are
losers on damaged shipments even if they are reimbursed in full by carriers.
The procedure for claiming damages is fairly straight forward. The shipper presents the carrier claim,
bill of lading, the paid freight bill, and the copy of suppliers’ invoice or other evidence that establishes
the value of damaged merchandise. Naturally, carriers must include an allowance for damage claims in
their tariffs and it is easy for everyone’s benefit to help minimize such claims.

Cost reduction opportunities

Rate structures can be compared with the constitution. It is so complex that there always exists a
loophole. So one of the functions of the purchaser is to save his company’s funds by finding out such
loopholes that permit shipments to be made at lower tariffs and also by stopping errors that carriers
make in computing charges. The audit of freight bills can help a lot in this respect.
Sometimes large amounts can be saved with the help of a systematic explanation of freight bills
because there is a separate rate for each commodity and each point of origin and destination. Thus a
traffic department in a large organization may be working with so many rates and therefore, errors
are likely to creep up. Therefore, purchasers' job will be to find out such errors and take maximum
advantage of such errors for curtailing the transport cost.

Auditing freight bills –

Auditing freight charges may revel the overcharges paid off to the carriers they must be recovered to
reduce the cost of transportation. Such auditing should be a continuous process rather than an ad-hoc
one. 99% of bills are correct but the discrepancies lie in the rest 1%. Such discrepancy should be
avoided.

Charter truck –
Switching on the private charter truck from common carriers has been a sure-fire cost reduction
technique for many traffic departments. Firstly because common carriers charge rates much their true
cost for some shipments to offset losses on other shipments. Secondly, the charter rates are regulated
by the competition prevailing in the market.
The traffic manager should route trucks in such a way they expand the maximum amount of time
traveling with payloads. One way to do this is to use trucks on pick up materials from suppliers after
they have made deliveries to customers in the same area.
Tighter scheduling
When the shipper controls his fleet, he can more easily regulate the relative priorities of various
shipments. sometimes he also can offer prompter service to the customer and reduce his in-transit
inventories.
Packaging and Material Handling-
An easy way to curtail costs is to equip the carrier with special racks or other material handling
devices. The most obvious example is of campa-cola . It had its fleet of trucks well equipped with such
material handling devices. Modern bakeries have also adapted this system.
Goodwill and Convenience
A company-owned truck with company name and trademark painted on its sides is a rolling
advertisement. Secondly, it creates a favorable impression if the delivery is made by a company truck
instead of a common carrier.
Classification charge:-
Sometimes if the shipper is successful in persuading the carrier to accept a new classification for the
item, he can reduce the costs. The only thing he has to do is to convince the carrier that his product is
unique and should get a lower rate because it either costs less to ship or its worth less than other
products in the same rate class.

Reducing demurrage charges:-

Demurrage charges penalties assessed by carriers on vehicles assessed by the company for a
consigner or consignee beyond a stipulated free time provided for loading and unloading. Normally,
one day’s free time is permitted before demurrage charges are levied. However, in railways, only 5
hours are allowed as free time for the wagon load shipments. It is calculated per hour per quintal basis
whereas wharfage which is a penalty for goods which occupy space in the godown is calculated per
day per kg basis.
In many cases, the purchaser can reduce demurrage substantially by carefully scheduling shipments so
that the unloading facilities are never overtaxed.
Sometimes it pays to incur extra demurrage charges than have an unloading crew work at premium
rates or during production peak period rather than to invest in the additional storage space that would
be required to eliminate.

8.16 TOTAL COST OF TRANSPORT

We have seen how to compute the cost of transport by using techniques such as Vogel's Method.
However, it is also required to compute the total cost of transport. The total cost of transport mainly
depends on two costs – the cost of operation Cop and the Cost of capital investment, Cap. Thus

C = Cop + Ccap

The cost of operation Cop comprises of following components:-

Cost of transportation, Caltrans – it is specified based on per KM per MT. This cost depends on the
cost of fuel.
Cost of traffic – Traffic – This cost comprises of charges payable such as Octroi, escort, toll, demurrage,
wharfage, dummy wagon charges, etc.
Cost of administration Cadm– comprises administrative expenses such as salary, wages, overtime,
office rent, etc.
Cost of facilities maintenance – Cfm – involve expenditure towards maintaining facilities such as road,
platform, yard, etc.
Cost of equipment maintenance – Cem - involve expenditure towards maintaining material handling
equipment such as cranes, hoists, conveyors, etc.

Cop = Ctrans + Ctraffic + Cadm + C fm + Cem

8.17 INSURANCE MANAGEMENT

In the early 1950s, one was hardly knowing anything about insurance cover against loss or damage of
goods. But thereafter, there was rapid industrialization. This led to materials management as an
interdisciplinary branch and there was an increasing awareness in recovery against loss, theft, or
damage. Around 1965 insurance and claim wind came into existence under the finance department.
In 1970, it was taken under stores. Today, the insurance and claim department is under a materials
management division. In the 90s , project insurance became a part of materials management.
The input cost of any product is mainly martial i.e. the cost of raw material. This material cost varies
from 50% to 80% of the product cost. Therefore insurance is related to materials management rather
than finance or any other management.

General Insurance and its purpose

The insurance premium paid against marine, cargo fire, theft, etc add to the inventory cost of the
material. But advantage can be understood only when there is a loss of consignment due to theft, fire,
damage, pilferage, etc.
There are two types of insurance policies – fire and cargo as explained below:-

Type of insurance policy Coverage

Fire All materials and machinery require cover
under fire. extensions are possible for
explosion, earthquake, flood, storm, etc.
Premium is different for each item like wood,
electrical items, electrodes, etc
Cargo Cover transit insurance for I ] import &
export shipments [ including inland water ]
 Ii ] inland transit by rail, road, etc.

The types of insurance covers explained above are specific policies, open policies, and open cover.
These are voyages or time policies.
Procedures for getting insurance cover are simple. Temporary slips or hand receipts known as cover
notes are issued. The Insurance company [the insurer ] studies the working and movement flowchart
of materials.

8.18 SUMMARY

Material Handling and Transportation ( MHT ) is a branch of SCM that deals with the study of
techniques of improvement methodologies in handling and transportation of materials. It covers the
statistical and simulation techniques, study of laws, rules, and regulations, methods of MHT, and new
developments in the advent of computerization. According to the principle of unit load, it is easier
and faster to move a hundred small parts by grouping them in one unit than moving them individually
one by one. Containerization uses the principle of the unit load. In this system, big metal containers
have several small products filled in them. These containers are placed on trucks or trailers.
Afterward, the containers can be unloaded on railway trailers and can be taken to places from where
with the help of cranes, they can be shipped. Transportation Techniques provide a statistical approach
to determine the economic cost of transportation between two stations. For this purpose, different
methods such as Vogel’s Method, North-West corner Methods are used.
Various types of material handling services are required to be performed during production processes
such as Lifting, holding, dropping, positioning, moving, stacking, etc. all these services can be
performed manually. various types of NH equipment can be classified as- Cranes and hoists,
Conveyors, Chutes, Trucks, tractors and trailers, Rails, Ropeways, and cableways and pipelines.

8.19 KEYWORDS

Unit load, containerization, palletization,

UNIT 9 STRATEGIC FIT
Objectives
After going through this unit you should be able to:

 define Competitive Strategy;

 learn Supply Chain Strategy;
 define Strategic Fit;
 illustrate Demand Uncertainty;
 define Major Drivers Of Supply Chain;
 illustrate how Decision making in a supply chain is done.

Structure
9.1 Introduction
9.2 Implied demand uncertainty.
9.3 Understanding the capabilities of supply chain
9.4 Other issues affecting the strategic fit
9.5 Drivers and Obstacles
9.6 Decision making in Supply Chain
9.7 Designing Supply Chain Distribution Network
9.8 Design patterns of distribution network
9.9 Summary
9.10 Keywords

9.1 INTRODUCTION

Competitive Strategy of the Company is defined as products and services offered by the company to
satisfy the needs of customers. For example, Reliance Infocom boasts its competitive strategy to be the
country’s cheapest and quickest mobile service provider.

The company has to prepare its competitive strategy based on the following.
 Developing the product to be launched.
 Marketing the product launched.
 Operations and production of products or services offered.
 Distribution of the product to customers and information from the customer to the firm.
 Providing after-sales service.

These steps need to be followed by every company to undertake a sale and the chain is referred to as ‘
value chain ‘.
Supply Chain Strategy of the company includes the procurement of raw material, manufacturing,
transportation, distribution, and after-sales service.

Strategic Fit – The company is said to be strategically fit when its competitive strategy and supply chain
strategy coincide. [ i.e. competitive and supply chain strategy has the same goal ].

9.2 IMPLIED DEMAND UNCERTAINTY

The Implied demand uncertainty can be defined as the uncertainty that exists because of that part of
the demand that a supply chain is required to fulfill.

The demand uncertainty is the uncertainty of demand for a particular product. On the other hand,
Implied Demand Uncertainty is only for that part of the demand the supply has to fulfill keeping in view
the attributes of the customer.

The following table shows the impact of customer needs on Implied Demand Uncertainty.
Table:- the impact of customer needs on Implied Demand Uncertainty.

Customer needs Implied Demand Uncertainty

Product quantity increases
The decrease in lead time
Variety of product increases
Increase in the distribution
channel
Increase in the rate of
innovation
Increase in the level of services
Increase due to variance in demand.
Increase because of less time to react for order fulfillment
Increase because more demand for a particular product
Increase because of change in demand over different
channels.
Increase because uncertain demand for new products
Increase because the company now has to handle ups and
downs in the demand

Impact on the level of uncertainty due to fluctuations in the supply chain capability.
The following table shows the impact on the level of uncertainty due to fluctuations in the supply chain
capability.

supply chain capability Impact on the level of uncertainty

Frequent breakdowns Increases
Low yields Increases
Poor quality Increases
Limited Supply Increases
Inflexible supply capacity Increases

9.3 UNDERSTANDING THE CAPABILITIES OF SUPPLY CHAIN

The supply chain responsiveness is described as the supply chain’s ability to respond to the following:
 Range in the quantity demanded
 Meet short lead times
 Handle a large variety of products
 Introduce innovative products
 Meet high service levels

The supply chain is highly responsive when it meets the above conditions.
The responsiveness of the supply chain is not ‘ free’. It involves ‘costs ‘. For instance, responsiveness
would be more if customer demand is more. The rising demand can be satisfied by increasing
production capacity, for which cost would be involved. Thus

Responsiveness  cost

As shown in the following graph, the responsiveness would be more at a high cost.

Supply Chain Efficiency - is the cost involved by the company in making and delivering the product to
the customer. This cost is incurred in the cost of the product. Therefore, if the cost is more S.C.
efficiency would be less. Thus
Supply Chain Efficiency  1/ cost
Therefore,

Responsiveness  cost  1/ Supply Chain Efficiency

The implied demand uncertainty is proportional to the responsiveness of the supply chain. Therefore,
greater, the implied demand uncertainty, more would be the
Responsiveness. See the figure. The midpoint is taken as a Zone of Strategic Fit

To achieve a strategic fit, functional strategy should be combined with supply chain strategy and the
responsiveness should be increased and should be matched with the implied demand uncertainty.
With an increase in demand for a large variety of products and the need for quicker availability of the
products and services, companies now provide a large number and types of products, which are
prepared specially for different market segments and are supplied to customers as per requirements on
time.
The following figure shows the fit between the functional strategy and competitive strategy of a
company.

9.4 OTHER ISSUES AFFECTING STRATEGIC FIT

a large number of products and market segments.

Product life cycles

The demand for a particular product and the needs of various market segments tend to change as the
product goes through its life cycle:-

Beginning stage
 Uncertain demand and therefore unpredictable supply.
 Higher Margins and Quick delivery
 Product availability necessary for capturing the market
 Costs are not a priority.
Diminishing Stage
 Certain demand and predictable supply.
  Less margin due to increased competition.
 The price of the product is a significant factor for customer purchase.

Time-related competitive charges.

9.5 DRIVERS AND OBSTACLES

Major Drivers Of Supply Chain – drivers are needed to deliver supply chain strategy. Sometimes, they
even alter competitive strategy. These drivers are:

 Facilities [ e.g. Production Unit ]

 Inventories [ e.g. Stock of goods ]
 Transportation [ e.g. modes and roots ]
 Information [ e.g. Customer Demand ]

Facilities: where the product is stored, assembled, or manufactured. The main facilities are as follows:-
 Location
 Capacity
 Flexibility
 Information
 Facilities closer to the customer are more responsive and less efficient.

Inventories: comprise of all raw materials, work in progress, and finished goods.
The larger inventory costs are not desirable, but they meet customer requirements more responsively.

Transportation: transportation involves the following parameters.

  Moving inventory from one point to another.
 Modes of transport - road, rail, sea, pipes.
 Routes and networks
 Quicker transportation is more responsive and less efficient due to the rise in the costs of
transportation.

For example, FedEx /TCI/DHL/

Information
 Data and analysis regarding facilities, inventory, transportation & customers.
 Greater sophistication
 More responsive.

9.6 DECISION MAKING IN A SUPPLY CHAIN

To decide on the supply chain we need to have a framework within which the supply chain needs to
exercise itself to achieve a strategic fit. This framework is called the supply chain decision-making
framework. The framework is shown in the following figure.
The above figure should be viewed from top to bottom beginning from the company’s competitive
strategy, then the supply chain strategy which is determined on basis of responsiveness and efficiency,
followed by supply chain structure comprising of the drivers of the supply chain.

The role played by each of the drivers informing supply chain strategy, competitive strategy, and its
components.

Facilities:
 Where inventory is passed along
 Location – macroeconomic factors, cost, and quality of workers, infrastructure availability,
proximity to workers, tax.
 Capacity – large is flexible but costly.
 Operations methodology – function or product based.
 Warehousing methodology – stock-keeping unit storage, Job Lot Storage, Cross-docking.
Inventory
 Exists because of mismatch between supply and demand. Material flow time has a
significant impact on inventory.
 Cycle – average inventory to satisfy demand between receipts.
 Safety stock – in case of demand exceeds expectations.
 Seasonal – to counter predictable variability.
 e ] Sourcing

I= DT
Where I = Inventory , D = Throughput T = Flow Time

Transportation: Moves products between different stages. It involves

- role of transportation in the supply chain

- role of transportation in competitive strategy
- components of transportation decision

 Modes air, rail, road, sea, pipeline.

 Route and network selection.
 In house or outsource

Information
 The connection between various stages to maximize profitability.
 Crucial for normal functioning.
 Components for informational decisions.
 Push versus pull
 Coordination
 Forecasting and aggregate planning.
 Pricing and revenue management
 Enabling technologies
 EDI, Internet, ERP, SCM.
Example EDI

The various components of information decision are as follows:-

 Push versus pull
 Forecasting and proper planning
 Information sharing and coordination
 Pricing and managing revenue
 technology
Obstacles in strategic fit achievement
 Increase in product variety
 Increase in demanding customers
 Smaller product life cycles
 effect of globalization
 Difficulties in the execution of strategies

9.7 DESIGNING SUPPLY CHAIN DISTRIBUTION NETWORK

The step that the company takes to move and store products from the supplier stage to the customer
stage in any supply chain is called ‘distribution’.

Factors affecting distribution network design

The two major factors that deeply affect the distribution network design of any supply chain are –

 Meeting Customer’s Timely needs

 Costs involved in meeting customer’s needs

Various components affect both – customer service and distribution networks at large. These are:
 Response Time
 Product Variety
 Product availability
 Customer Experience
 Order visibility
 Returnability

Response Time -is the difference between the time the customer places an order and the time he
receives delivery of it.

Product variety – is the number of different products and different configurations that an organization
offers or customer desires from the company’s distribution network.

Product availability – is the probability of a product being available in stock when the customer order
arrives.

Customer Experience – is the ease with which a customer places an order and receives the products
ordered.
Order Visibility – is the ability of customers to track the order placed from the time of placing the order
the time he receives it.
Returnability – is the ease with which a customer may wish to return unwanted merchandise and the
ability of the supply chain network to handle such returns.

Relationship between the number of facilities and the desired response time
Companies that target customers requiring longer response time require a lesser number of facilities.
These facilities may be situated far away from customers with larger stocks. On the other hand,
companies aiming at higher responsiveness towards its customers shall have a large number of facilities
located closer to the customer and they would be large in number with lesser stocks. Thus the
relationship between the number of facilities and the desired response time is inverse.

number of facilities  1 / response time

Effect on the inventory and inventory costs –

As the number of facilities in the supply chain increases, the inventory, and the resulting inventory costs
increases. Thus

number of facilities  inventory costs

To reduce inventory costs, companies try to reduce the number of facilities and consolidate them to
limit the number of facilities and thereby control their excess costs.

Effect on transportation costs - The transportation costs are of two types – inbound transportation
costs and outbound transportation costs.

The cost incurred towards bringing material into the company is inbound transportation costs. On the
other hand, the cost incurred towards sending material outside the company is the outbound
transportation cost. The inbound costs are lower because the raw material is transported to the
company in bulk. The outbound costs are higher as the finished product is transported in small lots at
different locations.

Effect on the facilities costs

Facilities cost is the cost incurred in setting up a facility. This cost increases with the number of facilities.
Total Logistics cost

The total logistics cost is calculated from facilities cost as follows:-

Total Logistics cost = inventory costs + transportation costs + facilities costs

The total logistics cost of the company decrease with an increase in the number of facilities. But this is
true only to a certain minimum point after which every addition to the number of facilities or rather an
increase in the number of facilities leads to an increase in the logistics costs.

9.8 DESIGN PATTERNS OF DISTRIBUTION NETWORK

Designing of a supply chain network depends upon following two factors

 Whether the product is delivered or shall be picked up from some specified site.
 Whether the product flows directly to the customer or flows through some intermediary.
After the company is clear about these two factors, they can choose the basic framework of any of the
six most important designs of the distribution network. these are:
  manufacturer storage with direct shipping
 manufacturer storage with direct shipping and in-transit merge
 distributor storage with package carrier delivery
 distributor storage with last-mile delivery
 manufacturer/distributor storage with customer pick up
 retail storage with customer pick up

Manufacturer storage with direct shipping

The characteristics of drop shipping or direct shipping network design are as follows:
 inventory
 product customization
 transportation
 facilities.
 Information

The above points are concerning cost factors. The points related to service factors are as follows:

 Response time
 Product availability
 Customer experience
 Returnability

.
Manufacturer storage with direct shipping and in-transit merge

It involves a combination of different pieces of an order that come from different manufacturers from
different locations so that the customer gets a single delivery
Various characteristics of this type of design are as follows:-
Cost factors
 inventory
 transportation
 facilities and handling
 information

service Factors
The service factors are as follows-
 Response time
 Product variety and product availability
 Customer experience
 Returnability

Distributor storage with package carrier delivery

It involves the storage of products with trailers or distributors in their warehouses and not with the
manufacturers as was in case of direct shipping and in-transit merge design network. Also, there is a use
of package carriers who transport goods to customers.
Cost factors
The cost factors are as follows-
 inventory
  transportation
 facilities
 information

service Factors
The service factors are as follows-
 Response time
 Product variety and product availability
 Customer experience
 Returnability

Distributor storage with last-mile delivery

The ‘last-mile delivery’ means distributor or retailer provides delivery of the demanded product up to
the customer’s place. This delivery is made without using a carrier. Therefore it is required to have
warehouses nearby customers.

Cost factors
The cost factors involved in this type are as follows-
 inventory
 transportation
 facilities
 information

Service Factors
The service factors involved are as follows.
 Response time
 Product variety and product availability
 Customer experience
 Returnability

Manufacturer/distributor storage with customer pick up

In this option, the manufacturer or distributor holds inventories at their warehouses but the customers
place their order by phone, or on the internet and then come to a designated place to collect products
ordered for. The products ordered by the customers are shipped from the storage to the pick-up places
where customers are required to pick up their products.

Cost factors
Various cost factors under this category are as follows-
 inventory
 transportation
 facilities
 information

service Factors
The service factors are as follows.
 Response time
 Product variety and product availability
 Customer experience
 Order visibility
 Returnability

Retail Storage With Customer Pick Up

In this option, the inventory is stored at retail outlets. Desirous customers come to these retail outlets
and purchase the desired products.

Cost factors - Various cost factors under this category are as follows-
 inventory
 transportation
 facilities
 information

service Factors the service factors are as follows-

 Response time
  Product variety and product availability
 Customer experience
 Returnability

9.9 SUMMARY

Competitive Strategy of the Company is defined as products and services offered by the company to
satisfy the needs of customers. Supply Chain Strategy of the company includes the procurement of raw
material, manufacturing, transportation, distribution, and after-sales service. The company is said to be
strategically fit when its competitive strategy and supply chain strategy coincide. Implied Demand
Uncertainty - can be defined as the uncertainty that exists because of that part of the demand that a
supply chain is required to fulfill. The demand uncertainty is the uncertainty of demand for a particular
product. On the other hand, Implied Demand Uncertainty is only for that part of the demand the supply
has to fulfill keeping in view the attributes of the customer. The supply chain responsiveness is escribed
as the supply chain’s ability to respond to the following: Range in the quantity demanded, Meet short
lead times, Handle a large variety of products, Introduce innovative products and Meet high service
levels. Major Drivers Of Supply Chain are Facilities, Inventories, Transportation, and Information.

After the company is clear about these two factors, they can choose the basic framework of any of the
six most important designs of the distribution network. these are:
 manufacturer storage with direct shipping
 manufacturer storage with direct shipping and in-transit merge
 distributor storage with package carrier delivery
 distributor storage with last-mile delivery
 manufacturer/distributor storage with customer pick up
 retail storage with customer pick up

9.10 KEYWORDS

Competitive Strategy, Supply Chain Strategy, strategic fit, Implied Demand Uncertainty, demand
uncertainty, supply chain responsiveness
UNIT 10 NETWORK DESIGN IN A SUPPLY CHAIN

Objectives
After going through this unit, you should be able to:

 illustrate Designing Supply Chain Distribution Network;

 define Factors affecting network design;
 learn Demand Forecasting;
 illustrate various Methods of forecasting;
 define sourcing.

Structure
10.1 Introduction
10.2 Factors affecting network design
10.3 A framework for network design decisions
10.4 Taking supply chain decisions under uncertain conditions
10.5 Forecasting Demand
10.6 Methods of forecasting
10.7 Role played by aggregate planning
10.8 Action Plan
10.9 Strategy
10.10 Aggregate planning implementation
10.11 Managing the supply
10.12 Implementing Solutions
10.13 Sourcing
10.14 Summary
10.15 Keywords

10.1 INTRODUCTION

The basics of network design are the determination of facility location and capacity allocation to the
facilities.

Effective network design should be able to answer the following questions.

 What roles do facilities play and processes performed by them?
 Where must these facilities be located?
 Which markets shall these facilities serve?
 How much capacity shall these facilities be allocated to perform consistently?
The supply chain manager needs to keep in mind the following points before selecting any network
design option:
 Consideration of product characteristics
 Requirements of network

The Role played by Distributors, an Indian perspective is as follows.

 add significant value to the supply chain.
 improve the performance of the supply chain.
 help in the reduction of inventory costs.
 stabilize the flow of replenishment orders to the manufacturers.
 reduce the response time.

10.2 FACTORS AFFECTING NETWORK DESIGN

The following are the factors affecting supply chain network design.
 strategic
 technological
 economic
 political
 infrastructural
 competitive
 operational
Let us discuss these factors in detail.

Strategic Factors – have a significant impact on network design decisions in any supply chain
depending on the goal or objectives that accompany wishes to satisfy. The various facilities are as
follows.

- Offshore Facility comprises of the following

source for products to be supplied outside the country
for export promotion
low-cost facility

- Source facility
comprises of the following
- low-cost facility for global production.
- Skilled labor is there
- Low costs and better infrastructural developments.
- Specializes in a particular source of product for the entire globe.

- Server facility
 comprises of the following
- Called as a local facility
- Supply only to the market where it is located.
- Tax incentives, tariff barriers, and high logistics costs to supply the region from places.

- Contributor facility
The contributor facility is general:
- Is more than a server facility
- Serves the market where it is located.
- Bears the responsibility for product development and customization, the improvements and
modifications.

- Outpost facility
comprises of the following
- Put up due to the availability of skill and knowledge in that area.
- Put up if the costs are high
- Advantages of research and development. Main knowledge center.

- Lead facility
comprises of the following
- Process technology and product development for the entire network are provided by this
facility.
- The objective is to provide access to the skilled workforce and technological resources.

Technological factors
Comprise of the following
- Network design decisions are largely affected due to currently available production
technologies.
- Flexibility in production technology is very essential for the proper functioning of the supply
chain.
- The flexibility of facilities helps the consolidation of production of different and customized
products required by different markets in the company.

Economical Factors – comprises of the following

- Tax incentives
- Tariffs
- Exchange rates
- Political

Political Factors – evaluation of political factors in any country is a must for any company investing
abroad.
infrastructural Factors
Comprise of the following
- Proximity to transportation
- Availability of sites
- Cheap labor
- Proximity of ports
- Rail and other local utilities
- Availability of good infrastructure
- Poor infrastructure will add to the costs of operations.

Competitive Factors
Comprise of the following
- Collection of a large number of firms
- Called as positive externalities.
- Collection of number of firms so that it benefits all of them
- Competitors locate their facilities close to each other.
- Shopping mall
- Increases the demand for the opening of more stores in these malls.

 Locating to split the market

comprises of the following
- Done when companies want a larger share of the market.
- When they want to locate close to the customer, they will be located closer to each
other’s competitors and not compete in terms of the price of the product or service
rendered.
- When they want to locate far from the customer and split the market, charge high but
complete in price and earn greater profits.
- e.g. hospitality industry

Operational factors – the two important factors to be kept in mind while deciding upon the
operational factors are as under.

- Customer response time and local presence

comprises of the following
- Customers who desire quick availability of products and shorter delivery time should be
provided locations of facilities near them
- Facilities far away from customers require quick transportation
- In contrast, products costing larger amounts may be showcased in malls for which even the
customers would travel a long distance to purchase
Logistics and facility costs
Mainly comprised of the following.
- Change concerning the number of facilities, their locations, and the capacity allocation
at each of these facilities.
- The type of product produced also largely affects the logistics costs.
- The total logistics costs are the sum of the inventory, transportation, and facility costs.

10.3 A FRAMEWORK FOR NETWORK DESIGN DECISIONS

Maximizing the company’s profits is the main objective of any company along with providing
customers satisfying goods and services both in terms of demand and responsiveness.
 Defining supply chain strategy
 Defining the regional facility configuration
 Selection of desirable sites
 Making location choices

Network design in practice – critical points

 Not to underestimate the life span of a facility
 Beware of cultural implications
 Not to ignore the quality of life issues
 Pay attention to taxes and tariffs in selected locations.

Network Design in an uncertain environment

Uncertainty means something that we are not sure of.

It is important to determine the uncertainty in the demand and financial uncertainty over the period
when the designing of the supply chain takes place.

The impact of uncertainty on network design

 Decisions relating to investments made by the company.
 These decisions are important because they can not be altered in a short time
 Proper analyses of these decisions are made before execution.
 Market situations are never stable
 The demand and price of products and exchange rates are the three most important factors
that affect the change in supply chain network design.
 Competitive environment as well as a major factor affecting the supply chain network design.
 Companies to review trends in the demand and price fluctuations taking place in the market.
 Uncertainty of demand and prices of the product help the companies to manage their
production facilities as well.
  It would configure its flexible production facilities to fulfill the demand and earn maximum
profits.
 This helps companies to overcome uncertainties in the demand, price, and exchange rate and
production to earn maximum profits.

Evaluation of network design using decision trees

 The decision tree analysis helps the supply chain manager to break complex problems into
manageable smaller parts.
 with the help of a decision tree diagram, the supply chain manager can organize the problem’s
alternatives, risks, and uncertainty involved.
 There are five steps involved in decision tree analysis.

- Determination of possible alternatives and risks associated with the situation.

- Calculation of monetary or financial consequences of each of these alternatives.
- Determination of uncertainty associated with each of these alternatives.
- Preparation of tree diagram.

Determination of best possible alternative

Represents an activity point

Represents an event point

10.4 TAKING SUPPLY CHAIN DECISIONS UNDER UNCERTAIN CONDITIONS

The following points should be kept in mind before taking any decision under uncertain conditions.

 Combination of strategic and financial planning

- To prepare for future uncertainties
- Use of quantitative analysis or assuming a well-defined future.
- A combination of both these plannings is what helps the company to earn larger profits, the
reason being accuracy involved.
- Prepare a portfolio of strategic options
- These factors need to be evaluated concerning the future uncertainties and that is why the
combination of strategic and financial planning is necessary.

 The use of financial analysis is input to decision making and not as the decision making process.
- The most important tool for decision making in the quantitative view is financial analysis.
 It provides an answer backed by the quantitative data.
- Gathering inputs may be time-consuming and inaccurate.
- Other factors that are difficult to quantify should also be included in the analysis as well.
- Alone does not provide a complete picture of alternatives.

The use of multiple statistical measures is

 always beneficial for a supply chain manager to examine network design decisions using
multiple statistical measures or metrics.
 profits, supply chain profits, customer service levels, and response times.
 Multiple views of the metrics shall provide a difference between strategic choices to be made
as they will become clearer.

Use of estimates
 Inputs are very difficult to list down and maybe time-consuming and inaccurate.
 Making process very long
 Must make use of inputs to speed up the whole process and arrive at the correct decision.
 Easier to come up with arrangements for input than to come up with a single point.

10.5 FORECASTING DEMAND

Forecasting helps managers to have a proactive approach and respond to the fluctuations in demand
and supply.

The aggregation of demand forecasts of each department in a firm is called collaborative forecasting
which helps the company to enhance decision making.

The role played by forecasting in the supply chain

Collaborative forecasting in the following departments
 HR – Manpower planning
 Marketing- promotions, sales force allocation, and new product introduction
 Production - purchasing, scheduling and inventory management
 Finance - investments and budgeting

Characteristics of a forecast
 Forecasts are usually wrong
 Accuracy of forecasts
 Information distortion

Forecasting components and various methods of forecasting

The various forecasting components are:
 - The past demand
- The lead time involved in the product
- Economy
- Advertising decisions
- Discounts offered
- Competitors

10.6 METHODS OF FORECASTING

Quantitative
 Highly subjective
 Deeply rely on human judgment
 Used when there is very little historical data available.

Time series
 Use of available historical data
 Appropriate when the demand is stable and does not vary much year to year.
 Assumes that the past results are a good indicator of future demand as well.

Casual
Assumes that the demand forecasts are correlated with certain environmental factors like economy or
market rates.

Simulation
These methods intimate customer choices that give rise to demand at a particular forecast.
Combining time series method and casual methods, to arrive at a forecast.
Creating combining forecasts is most appropriate than using a single method for forecasting.

Steps involved in demand forecasting

 forecasting objective
 demand planning and integration throughout
 customer segment identification
 factors influencing demand forecast
 forecasting method determination
 establishing performance and error measures.

Time series forecasting

Time-series forecasts may be of two types

Static Method
  Assumes that the level, trend, and seasonality within the systematic components do not vary
as new demand is observed.
 Estimation of level and trend is undertaken.
 Before we de seasonal the demand data which will represent the demand that would have
observed in the absence of seasonal fluctuations.
 Estimation of seasonal factors is undertaken.

Adaptive method
 The estimation of level, trend, and seasonality is updated after each demand observation.
 It comprises level, trend, and seasonal factors when the systematic component has a mixed
form.
Adaptive methods are of three types.
 Moving average
 Simple exponential smoothing
 Trend corrected exponential soothing

Practicing forecasting – The three basic requirements are as follows.

 Be collaborative
 Maintaining data
 Distinguishing between demand and sales

Aggregate Planning and Managing Predictable variability

10.7 ROLE PLAYED BY AGGREGATE PLANNING

 The process by which the company determines levels of capacity, production subcontracting,
inventory, stock-outs, and pricing over a specified time horizon is called aggregate planning.
 The goal of aggregate planning is to maximize profit.
 It is required to specify operational parameters over the time horizon :
- Production rate
- Workforce
- Overtime
- Machine Capacity level
- Subcontracting
- Backlog Inventory on hand
- All supply chain stages should work together on an aggregate plan that will optimize supply
chain performance.
-
10.8 ACTION PLAN
The action plan can be prepared as follows.
For demand forecast for a planning horizon, determine production level, inventory level, and capacity
level for each period that maximizes the firm’s [ supply chain’s ] profit over the planning horizon.
 Specify planning horizon [ typically 3-18 months ]
 Specify the duration of each period
 Specify key information required to develop an aggregate plan.

Information needed for an aggregate plan

 Demand forecast in each period
 Production costs
- Labor costs, regular and overtime
- Subcontracting costs [ per hour on per unit ]
- Cost of changing capacity, hiring or layoff [Rs/worker] and cost of adding or reducing
machine capacity [Rs/machine]
 Labour per machine [ hrs / unit ]
 Inventory holding cost [ Rs / Unit / period ]
 stock out / backlog cost [Rs / Unit / period ]
 Constraints – the limit on overtime, layoffs, capital available, stock-outs, and backlogs.

The output of the aggregate plan

 Production quantity, number of workers and purchase level
 Inventory held, how much space for warehouse and working capital is needed.
 Backlog/stock out quantity: used to determine what customer service level will be.
 Machine capacity: if the new production quantity is needed.
 A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity.

10.9 STRATEGY

The trade-off between capacity, inventory, backlog / lost sales would be as follows.
 Chase capacity using capacity as a lever
 Time flexibility from workforce or capacity strategy – using utilization as the lever.
 level strategy – using inventory as the lever.

Chase Strategy
 The production rate is synchronized with demand.
 By varying machine capacity or hiring and laying off workers as the demand rate varies.
 In practice, difficult to vary capacity workforce on short notice
 Expensive if the cost of varying capacity is high.
 Negative effect on workforce morale.
 Results in low levels of inventory.
  Should be used when inventory holding costs are high and the costs of changing capacity are
low.
Time flexibility from workforce or capacity strategy
 Can be used if there is excess machine capacity.
 The workforce is kept stable, but the number of hours worked is varied over time to
synchronize production and demand.
 Can use overtime or a flexible work schedule.
 Requires a flexible workforce, but avoids moral problems of the chase strategy.
 Low level of inventory lower utilization.
 Should be used when inventory holding costs are high and the capacity is relatively
inexpensive.
Level Strategy
 Maintain stable machine capacity and workforce levels with a constant output rate.
 Shortages and surpluses result in fluctuations result in fluctuations in inventory levels of
overtime.
 Inventories are built up in anticipation of demand or blockage are carried over.
 Better for worker morale.
 Larger inventories and backlogs may accumulate.
 Should be used when inventory holding and blocking costs are relatively low.

10.10 AGGREGATE PLANNING IMPLEMENTATION

The successful implementation of an aggregate plan involves the following-

 keeping the entire supply chain in need.
 make plans flexible because forecasts are always wrong.
 return the aggregate plan with new data being available.
 use aggregate planning when capacity utilization increases.

Predictable variability in a supply chain-

Predictable variability is defined as the change in demand for the product or service which can be
forecasted.

10.11 MANAGING THE SUPPLY

Capacity management – [ production and operations department ]

 workforce time flexibility
 seasonal workforce
 dual facilities usage
 subcontracting
 merging product flexibility in the production process.
 workforce time flexibility- firm makes use of flexible working hours provided by the
workers to manage the capacity to meet the demands.

seasonal workforce – the company makes use of the seasonal workforce. Hiring more
employees is done during peak periods of demand. If there is increased demand for the
products being produced, the company may increase the workforce by adding seasonal
workers to match the rise in demand.

dual facilities usage- means using facility both as a dedicated facility and as a flexible one.
This type is essential when companies are required to produce high volume stable
products over the period in the most efficient manner possible and varied products in
wider volumes having high unit costs.

subcontracting – is done usually during the peak season of the product, where the
concerned company gets the products made from the sub-contractor. Order to maintain
interval production and not to overburden it with more orders so that internal production
remains cheap.

merging product flexibility in the production process.-a the firm may have flexible
production lines whose production rates can be varied easily.

Thus, in this approach, the production can be altered concerning the demand. A workforce and
machine are made to achieve such flexibility.

Several production lines for different product groups can merge the production flexibility into the
production process by shifting the workforce from one production line to another and thereby varying
the rate of production.

If the production machinery being used is flexible and can be changed from producing one product to
another, then also production flexibility can be achieved.

Managing inventory – involves the following factors

 Use of common components
 Develop inventory by highly demanded products

Use of common components

The approach involves the manufacturer to design common components that can be used in multiple
products, which have a predictably variable demand that results in overall constant demand for the
components.
Develop inventory by highly demanded products
- for products that are highly demanded or those that have a highly predictable demand, the
approach of use of common components is of no use.
- As far as products having uncertain demand are concerned, the production of these goods should
take place when the peak season is close and there is more accurate information available on
demand for these products.

Managing demand – involves the following factors

 Market growth
 Stealing share
 Forward buying

Market growth – means an increase in the consumption of goods by old customers or an increase in
the number of new customers consuming the products.

Stealing share – with the help of price promotion, customers begin to substitute the firm’s products
for a competitor’s product.

Forward buying – means moving future purchases to the present.

10.12 IMPLEMENTING SOLUTIONS

Planning and coordination across the supply chain

 every department of the firm or all the enterprises in the supply chain must work together
with a common goal.
 Difficult to get these different functions within a firm to work collaboratively.
 Incentives can be provided.
 Revenue for the marketing department and the costs of the production department.
 Formation of joint teams and support from the organization are required to combat the
traditional procedures of working and increase the overall profitability of the firm.

Considering predictable variability before taking any decision

Decisions regarding building new facilities, types, and pricing of products regarding the company are
the strategic decisions taken by the firm.
These help to determine the success or failure of these strategic decisions.

Preempt predictable variability and do not react to it

 It is often observed as a tendency of companies on reacting to predictable variability.
 Managing both – demand and supply provide the best result for predictable variability.
 Pricing and promotion of goods are related to the marketing department and have an impact
on the demand due to predictable variability.
  A collaborative effort by both the production and marketing departments is required.
 Plan the predictable variability together well before the peak period of demand is observed.

10.13 SOURCING

Sourcing is the process of finding a source of supply of material. Stages in the sourcing process are as
follows.

The role played by sourcing is as follows.

 Supplier Scoring and Assessment means rating the supplier performance
 Supplier selection is done to identify appropriate suppliers.
 Supplier contracts need to be formulated and negotiated with the supplier. Here it is
important to keep in mind that the primary objective of the supply chain is to maximize
profitability and benefiting both buyer and supplier.
 Once contracts are signed, product design needs to be prepared with the help of the supplier.
Thus the product design collaboration takes place.
 Suppliers who supply material in the lowest possible cost and within the delivery period of the
PO should be proposed.
 Sourcing planning and assessment – involves identification of cases where the overall cost of
product decreases.
The sourcing decisions involve the following action.

 Aggregation of orders in ‘economy ‘

 The decrease in overall costs.
 Better forecasting and planning due to better SRM.
 Help to decrease inventories.
 Distribution of risk with better coordination.
It is important to evaluate the performance of the supplier. The following parameters are taken into
consideration for the performance evaluation of the supplier.
 Supply quality
 Transportation costs
 Pricing
 Coordination of information
 Product design capability
 Exchange rates, taxes, and duties
 Supplier visibility

Supplier selection and contracts

 Decide whether to go for single supplier sourcing or multiple supplier sourcing
 Supply Chain Manager has to answer the following questions.
- What would be the impact on profitability?
- Whether the benefits mentioned in the contract would attract any distortion?
- How would the contract influence supplier performance?
- Would it increase supply chain performance as a whole?

Contracts - the contracts are of following three types

 Buyback or return contract.
 Revenue sharing contract
 Quality flexibility contract. [ in this case, the buyer is allowed to modify the PO within certain
limits as notified by the supplier ]

Some other contracts usually structured by the supplier are as follows.

 Contracts for supply chain cost coordination [ it is a quantity discount contract. This may lead
to a high lot size and a higher level of inventory . ]
 Increase in agent effort contract – this includes two types of pf contracts

- 2 part tariff contract. [ offer right incentives for the dealer ]

- Threshold contracts – the dealer is offered an increase in the margin of sale exceeding
a certain threshold [ limit [.
- Performance improvement contract – of the performance of the supplier is improved,
he is given incentives.

Product design collaboration

The cost of the product can be reduced by manufacturer-supplier collaboration during the design
stage.
Using designed collaboration, the cost of purchased material and logistics costs can be reduced.
The manufacturer can become a design collaborator by providing product information to all the
parties involved in the supply chain.
The manufacturer is required to keep a database of products manufactured by him earlier.
Design for logistics attempts to reduce transportation, handling, and inventory costs.
Inventory costs can be reduced by keeping postponement and customization in mind.

SCM and JIT

The time, cost, and WIP inventory can be reduced by implementing the JIT concept. In JIT
manufacturing, queue lengths, and waiting time of partially completed products at work centers in
manufacturing. The basic idea of JIT is simple. Drastically reduce work in progress inventories
throughout the production system. In this way, products flow from supplier-production- customers
with no or little delay. The manufacturing lead time is reduced by reducing WIP. This results in
smooth, interruption less flow of small lots of products throughout production. Most successful JIT
applications are observed in repetitive manufacturing operations where batches of standard products
are produced at high speeds and high volumes with materials moving in continuous flow. In the
process, certain changes to the factory and the way it is managed must occur before can be realized.
To implement JIT based SCM, following changes are desired:

 Stabilize production schedule – The master production schedule for a

 particular month is to be maintained such that the entire MPS covers one
 year. The production schedule should be the same for each day of the
 month. This means that the same products are produced in the same
 quantities in the same sequence every day of the month.
 Make factories more focused –specialized factories should be focused on.
 Increase production capacities of manufacturing work centers – This
 can be done in two ways – I ] increasing production rates and II ]
 reducing set up times.
 train workers so that they can be multi-skilled and competent in
 several ways.
 reduce equipment breakdowns through preventative maintenance.

Elements of JIT manufacturing:-

 Eliminating waste
 Enforced problem solving and continuous improvement.
 People make JIT work
 Total Quality Management
 Parallel processing
Vendor Managed Inventories [VMI]
VMI involves suppliers to take decision makings about product inventories at the retailer’s outlet. Thus
all the decisions relating to replenishment now moves to supplier, from retailer.
The VMI is possible only when the retailer shares demand information with the supplier. The
manufacturer plans production accordingly.

VMI helps managers to improve forecasts. It matches production with customer demands.
The major drawback in VMI is that the retailers often sell products taken from competing
manufacturers, theta re substitutes in customer’s minds.

The retailer may be better positioned to decide on the replenishment policy.

The demand data can be shared with the manufacturer responsible for implementing policy.

Achieving Optimal level of product availability in practice

Use of analytical framework
 Avoiding preset levels
 Keep in mind the appropriate and not the exact costs.
 Estimate the range for the cost of stocking out.

10.14 SUMMARY

The basics of network design are the determination of facility location and capacity allocation to the
facilities. The effective network design should be able to answer the following questions –What roles
do facilities play and processes performed by them? , Where must these facilities be located? Which
markets shall these facilities serve ?, How much capacity shall these facilities be allocated to perform
consistently?

Uncertainty means something that we are not sure of. It is important to determine the uncertainty in
the demand and financial uncertainty over the period when the designing of the supply chain takes
place.

The decision tree analysis helps the supply chain manager to break complex problems into
manageable smaller parts. with the help of a decision tree diagram, the supply chain manager can
organize the problem’s alternatives, risks, and uncertainty involved.

Forecasting helps managers to have a proactive approach and respond to the fluctuations in demand
and supply.

The aggregation of demand forecasts of each department in a firm is called collaborative forecasting
which helps the company to enhance decision making.
Sourcing is the process of finding sources of supply of material.

The time, cost, and WIP inventory can be reduced by implementing the JIT concept. In JIT
manufacturing, queue lengths, and waiting time of partially completed products at work centers in
manufacturing. The basic idea of JIT is simple. Drastically reduce work in progress inventories
throughout the production system. In this way, products flow from supplier-production- customers
with no or little delay. The manufacturing lead time is reduced by reducing WIP. This results in a
smooth, interruptionless flow of small lots of products throughout production. Most successful JIT
applications are observed in repetitive manufacturing operations where batches of standard products
are produced at high speeds and high volumes with materials moving in continuous flow. In the
process, certain changes to the factory and the way it is managed must occur before can be realized.

VMI involves suppliers to take decision makings about product inventories at the retailer’s outlet. Thus
all the decisions relating to replenishment now moves to supplier, from retailer.

10.16 KEYWORDS

JIT, Sourcing, VMI, Forecasting, Aggregate Planning

 UNIT 11 MANUFACTURING AND SUPPLY CHAIN MANAGEMENT

Objectives
After going through this unit you should be able to:

 Learn the graphical method for assembly line design.

 Learn how Logistics is related to the product life cycle
 Define the concept of item management
 Illustrate various functions under item management
 Illustrate how Kanban Systems are used in Manufacturing Supply Chain?
 Learn the concept of pull sequence

Structure

11.1 Introduction
11.2 Product life cycle
11.3 Item management
11.4 Kanban Systems
11.5 Assembly line
11.6 Basic MRP logic
11.7 Summary
11.8 Keywords

11.1 INTRODUCTION

So far we have studied the general form of the supply chain, from a raw material supplier to the end-
user of the product. However, the supply chain may also exist at the manufacturing plant or shop
floor. The concept of Assembly line was put forward by F.W. Taylor based on which the
manufacturing of cars was taken up at Ford Motors. As studied in unit 1 the implementation of
Taylorism was made by Henry Ford. Henry Ford established the Ford motor company in 1903. The
manufacturing of cars [ Model T ] was based on the principle of the assembly line and mass production
conceptualized by Taylor.
In this unit, we are going to learn how manufacturing supply chain works and how different
components are associated with it.

11.2 PRODUCT LIFE CYCLE

Logistics is closely related to the product life cycle. The product life cycle is shown in the following
figure.
Concept & Design:- Note that revenue is negative during the design and development stage. The
investment made in design and development is lesser as compared to revenue in later stages. This is
observed usually, but not in each case.

Launch:- the product is made available to the user. Supply chain and distribution channels are planned
as per the demand forecast. Successful launching depends on the appropriate forecasting of demand.

Growth:- expand your capacity to meet growing need Accordingly supply chain is designed.

Maturity:- concentrate on improving margins by cutting costs.

Maintain/Decline:- either cut costs and allow products to die slowly or invest heavily in production
anticipating the decline phase and try to prolong the maturity phase as much as possible.

11.3 ITEM MANAGEMENT

Item master organization is an inventory organization that holds the definition of items that are used
in your system. Organizations that use items defined in the master organization are called children
organizations. The item is defined using the master item window of the master organization. We can
create a template for our item. The templates can be copied. A template consists of a list of item
attributes with predefined values.

Item attributes are additional information about items e.g. method of planning, shipping, etc. There
are two types of item attributes, status attribute and item defining attributes:-
Status attributes:
 BOM allowed
 Build on WIP
 Customer order enabled
 Internal order enabled
 Invoice enabled
 Transactable
 Purchasable
 Stackable

Item defined attributes are as follows:

Functional area Item defining attributes

Inventory Inventory item
Procurement Purchased or internally ordered items
Planning MRP planned method
Costing Costing enabled
Engineering Engineering item
Order management Customer ordered items
Service Support service or serviceable product

Item Relationships: comprise of two sections – substitute and related. Substitute items are
replacement items. Related items indicate the relationship of that item with the main processor
assembly.

Cross-reference is the breakpoint between various processes.

Item revisions: allow modifications to be made in the specifications, functions, quantity, etc of the
item. This should be accommodated in ASCII format.

Item Catalogues: you can use a catalog to help locate items to avoid duplicating parts that already
exist.

You can use the item catalog to implement a variety reduction program at your company. For
example, you can have a group called screw which has thread pitch, length, etc as attributes. When an
engineer wants to use a screw in his design, he can search a screw catalog and if possible, can use a
screw that already exists rather than creating another item for the same specifications.

11.4 KANBAN SYSTEMS

Kanban system is a self-regulating, decentralized materials management system. The Kanban system is
generally used for managing items that have relatively stable demand.

The inspiration behind this technique is a replenishment system used by grocery stores in the US. The
quantity stored in racks is calculated considering replenishment interval and forecast demand. The
racks are continuously replenished from the storage area at predetermined intervals.

‘Kanban ‘ is a Japanese word that means sign or signal. In management prospective Kanban is a visual
indicator- sometimes a card, sometimes empty bin or rack that triggers replenishment of item. The
main purpose is to streamline manufacturing and procurement processes rather than relying on
computer simulation to suggest when to order. Kanban replenishment triggers orders based on
operator signaling that more material is required.

Kanban replenishment does not depend on MRP systems to launch replenishment orders. Effective
use of Kanban replenishment systems requires proper sizing. If a Kanban size is too small, there will be
an understocking. On the other hand, if it is too large, there will be an overstocking. Softwares like
Oracle provide Kanban planners to size Kanbans and resize when necessary.
Kanban setup prevents you to release orders from planner workbench. For this purpose of planning,
Kanban setup involves defining all pull sequences which specify a source of replenishment and
planning parameters for Kanban planned items.

Kanban size – how much material is required each time for replenishment when Kanban is signaled
For example if you elect to employ a simple two-bin replenishment system, you would specify two as
number of Kanbans. Planning would create how much material is required in each bin to keep the line
flowing smoothly and efficiently.

Several cards:- each bin card is specified with several items from which total Kanban size can be
determined.

Minimum Order Quantity:- is specified for each item that can be over.

Lead Time:- is the time to replenish Kanban from its source.

Lot Multiplier:- use this if it makes sense to replenish material in fixed multiples. For example, if the
item has a natural lot size.

Allocation percent:- indicates percent distribution of demand for a particular item across multiple
locations.

Safety Stock days:- number of days of safety stock you want to maintain.
Different Kanban Source Types

Kanban Calculations:
Kanban planning calculates the required number or size of Kanban. This is based on planning
methods. It determines how much material or how many Kanbans are needed to supply that demand.

Pull Sequence:- Kanban items have many pull sequences that represent series and supply points and
usage points that model actual replenishment network from final consumption point to source of
supply. Specify supply source type for Kanban items at specific locations. Also specify Kanban size or
number of Kanbans, Lead time for obtaining Kanban item, percent allocation, etc.

Kanban Source type identifies the type of replenishment required to fulfill material requirements
generated by Kanban. The source types supported are production, intra-org, inter-org, supplier as
shown in the figure. Finished goods area stores finished goods on the pallet. The production Kanban is
attached to the pallet. When the pallet is empty, the Kanban card is sent to the assembly line. The
assembly line restores the pallet within the allowed lead time and sends it back to the finished goods
area.

Similarly, the assembly line sends signals to various matching cells for spares and gets restocked. Note
that the two Kanbans- Kanban from finished goods area and Kanban from the assembly line need not
wait until it receives Kanban [ message: stock over ] from finished goods area to sends its Kanban to
matching cell. This may be possible if the lead time for matching cells is less than the difference
between lead time allowed for assembly cell and lead time for assembly.
For example, let the lead time for assembly cell is 36 hours per Kanban quantity and the lead time for
assembly is 6 hours. If the matching cell needs less than 30 hours of lead time to deliver Kanban
Quantity for the assembly cell, these two Kanbans can be synchronized.

The assembly cell can pull purchased components from sub-stores that serves this cell. The subsite
gets replenishment from Central stores which is intra-org Kanban. You can also communicate the
material requirement to other organizations or suppliers using intra-org Kanban or supplier Kanban
respectively.

Components of pull sequence:- first identify user point. Then identify the supply point. Choose source
type from four possible values- intra-org, inter-org, production, and supplier Kanban. Based on source
type, you have to provide additional information as given in the figure.

The Kanban planning process does not calculate both – Kanban size and number of cards for a given
pull sequence. You have to specify either Kanban size or cards for a given pull sequence.

The average daily demand is calculated as shown in the following figure The demand source is
provided to Kanban planning. For a given component, the average demand for assembly is calculated.

The average daily demand is multiplied by the component’s quantity in the assembly. This calculation
is done based on all assemblies where the component has specified Kanban location as a default
supply locator.
In the above fig. , M80 is a component used for calculating average daily demand for items in a
location.

There are three assemblies M55 [ 2 nos ], M03 [ 4 nos ], and M93 [ 2 nos ].In all these three cases, the
default supply location for this component is 33-12-65. When a pull sequence is defined for M80 with
33-12-65 as Kanban location, the average daily demand for M80 will be 1600.

The allocation percent allows you to specify the percentage of independent demand that is serviced
from Kanban location. There may be many pull sequences for one item and planning processes
determine how to allocate this demand to these pull sequences based on the allocation percent. In
the above example, let us assume that the component M80 has also got an individual demand [ say
spare parts ] of 250 from the demand source. If this particular pull sequence was demand source. If
this particular pull sequence was defined with an allocation of 50%, 125 [ i.e. 50% of 250 ] will be
added to the dependent demand that was already calculated. So any daily demand for M80 at locator
33-12-65 will be 1600+125= 1725.

Calculation of Kanban Size

The Kanban size is calculated using the following formula.

Kanban Size = [Designed daily rate X component qty X replenishment lead time in
 hrs]/Replenishment hours per day.

Problem:- The designed daily rate of product M32 is 100. Component M45 is used in the production of
M32. The required quantity is one per assembly. The lead time for replenishment are as follows:

1 ] Subsite to line = 1 hour

2 ] Stores to subsites = 1 day
3 ] Supplier to store = 5 days.
The system operates for 20 hours a day.

Pull sequence Calculation of Kanban size Value

Substore to line [ 100 X 1 X 1 ] / 20 5
Stores to substores [ 100 X 1 X 20 ] / 20 100
Supplier to store [ 100 X 1 X 5 X 20 ] / 20 500

As shown in the above table, the Kanban size for subsite to the line is 5. The plant needs to build 100
assemblies per day which translate into 5 per hour. As replenishment lead time is 1 hour between line
and subsite, the hourly consumption rate itself is the Kanban size.

Kanban Cards:- are based on pull sequence and are created for a combination of items, sub-inventory,
and locators. The card is recognized by a unique identifier . You can generate Kanban cards from a pull
sequence or manually. The card is provided with a replenishment flag. The flag indicates whether to
replenish the item or not.

If the pull sequence is changed, you have to manually delete existing cards and create a new card. If a
pull sequence is changed, you have to manually delete existing cards and create new cards.

Card Status – allows you to manage the availability of a card. A card is available if its status is active. If
you want to pull out a card temporarily, the card indicates ‘hold ‘ status. For permanent removal of
the card, the status ‘ Cancel ‘ is indicated. It should be noted that only canceled cards are deleted.

Card Supply Status:- is ‘new’ by default. To trigger replenishment, the card is required to be switched
to empty.
The above flow chart shows different flowchart statuses during the process of replenishment. Internal
replenishment indicates intra-org and production Kanbans, whereas external replenishment indicates
inter-org and supplier Kanban. Once supply status becomes full, you can again signal replenishment by
sending card status to empty.
Kanban Supply types and corresponding replenishment cycles

Kanban Supply What happens when supply status becomes When does the supply status
type empty? become full?
Intra-org Move order is created to move material When a move order is
from source sub-inventory to Kanban completed.
location.
Production A flow schedule/discrete job /repetitive When a flow
schedule is completed. schedule/discrete job
/repetitive schedule is
completed into Kanban
Location.
Inter-org An internal requisition is created. Receipt of material into
inventory. The receipt needs
to specify the Kanban card
number.
Supplier APO requisition is created. Receipt of material into
inventory. The receipt needs
to specify the Kanban card
number.
11.5 ASSEMBLY LINE

Assembly Line Performance

Two factors gauge the performance of the assembly line. These factors are the line flow rate and line
linearity. Line flow rate is used to gauge the hourly performance of a line, whereas line linearity is
used to gauge performance over days.

Line Flow Rate:- is monitored by comparing actual line output per hour against planned output. The
monitoring of line flow rate is indicated in the following table:-

Valve line Total

Hours 1 2 3 4 5 6 7 8 9 9
Flow Rate 23 23 23 23 23 23 23 23 23 207
Actual Rate 22 23 9 14 22 23 23 23 23 182

Line Linearity:- the planned production is completed with an actual plan at the end of the production
period. Suppose a line produces 10 units everyday and the actual production is
5,6,6,7,7,13,13,14,16,13. The difference between planned and actual production on each of these
days is –5,-4,-4, -3,-3,3,3,4,6,3 which represents the deviation from the plan.

At the end of the 10th day, if you measure total deviation by summation, you will get 0 results. This
indicates that the line performed well during a period despite a daily deviation. The line linearity index
considers an absolute deviation.

Line linearity index = [ 1- ( sum of absolute deviation /total planned production)]X100

In this example ,
Line linearity index =[ 1- ( sum of absolute deviation /total planned production)]X100
=[ 1- ( 38 /100)]X100
= 68%.
The goal is to improve the line linearity index by minimizing deviation from the planned production
rate. We can create a user control chart as shown in the following figure. It tracks actual linearity
against targeted linearity.
Graphical Method For Assembly Line Design

The manufacturer makes two products X and Y which contributes a profit of Rs 20 and 40 respectively.
These products are processed from raw material to a finished product over an assembly line through
three sections s1,s2, and s3. For processing through section s1, x and y require 1 hour and 4 hours
respectively. Further for processing through section s2, x and y require 3 hours and 1 hour
respectively. Finally, for processing through section s3, x and y require 1 hour each. The plants in
sections s1, s2, and s3 can not be used for more than 24, 21, and 8 hours respectively. Find quantities
of products x and y to maximize profit.

Let quantities for products x and y are x and y respectively. Let z be the maximum profit. Then the
following equations can be stated.
Z=20x + 40 y

x+4y <= 24
3x + y <=21
x + y <= 8
x,y >= 0

thus
x+4y = 24 ……… s1
3x + y =21 ……. s2
x + y = 8 ……….. s3

plot the lines s1, s2 and s3 assuming x and y coordinates 0 respectively as follows:-

Line Equation The first point of the line 2nd point of the line
X coordinate Y coordinate X coordinate Y coordinate
S1 x+4y = 24 0 6 24 0
S2 3x + y =21 0 21 7 0
S3 x+y =8 0 8 8 0

Inscribe polygon ABCDEF.

Find profit z at A, B, c, D, E, and F, Profit is maximum at B [ Rs 266 ]. Draw the profit line.

S2

s3

A B

s1

D
F E

Product Life Cycle and Logistics

11.6 BASIC MRP LOGIC

It involves recognition of demand and requirements, netting of these requirements, against available
quantities, and generation of recommendations to meet these requirements. In a manufacturing
environment, the proceeds top-down through the Bill Of Material so the recommendation at one
level from the basics of requirements on the next level of components and so on, as shown.

11.7 SUMMARY

Logistics is closely related to the product life cycle. The product life cycle undergoes through these
stages- Concept & Design, Launch, Growth, Maturity, and Maintain/Decline.

The item is defined using the master item window of the master organization. We can create a
template for our item. The templates can be copied. A template consists of a list of item attributes
with predefined values. Item attributes are additional information about items eg method of planning,
shipping, etc. There are two types of item attributes, status attribute and item defining attributes.
You can use the item catalog to implement a variety reduction program at your company.

Kanban system is a self-regulating, decentralized materials management system. The Kanban system is
generally used for managing items that have relatively stable demand.

Kanban setup prevents you to release orders from planner workbench. For this purpose of planning,
Kanban setup involves defining all pull sequences which specify a source of replenishment and
planning parameters for Kanban planned items.

The Assembly Line Performance is evaluated based on online flow rate and line linearity.
Line Flow Rate:- is monitored by comparing actual line output per hour against planned output. Line
Linearity:- the planned production is completed with an actual plan at the end of the production
period. The goal is to improve the line linearity index by minimizing deviation from the planned
production rate. Basic MRP Logic involves recognition of demand and requirements, netting of these
requirements, against available quantities, and generation of recommendations to meet these
requirements.

11.8 KEYWORDS

Assembly line, MRP, Kanban, Pull sequence, line flow rate, line linearity
 UNIT 12 CHANNELS OF DISTRIBUTION

 Define the main functions performed by the channel

 Illustrate the main categories in which services are provided
 Learn the concept of Pre-Sales service
 Define Direct/Indirect Distribution Channels
 Learn the concept of Vertical Marketing Systems [ VMS ]

Structure

12.1 Introduction
12.2 Functions performed by distribution channel
12.3 Services to the customer
12.4 Vertical Marketing Systems [ VMS ]
12.5 Horizontal Marketing Systems [ HMS ]
12.6 Multi-Channel Marketing Systems [ MMS ]
12.7 The Internet
12.8 Distribution Channel Design
12.9 Factors affecting the choice of distribution channel
12.10 Summary
12.11 Keywords

12.1 INTRODUCTION

Channel works as a means of moving goods from producers to consumers. It overcomes time, place,
and possession gaps and provides goods and services to people who want them.
Oliver & Webber have stated in the theory of SCM that –

 SCM views the supply chain as a single entity.

 It demands strategic decision making
 It views the balancing of inventories as the last resort.
 It demands system integration.

The channels of distribution play an important role in the above tasks.

12.2 FUNCTIONS PERFORMED BY DISTRIBUTION CHANNEL

The main functions performed by the channel are as follows:

1 ] Information gathering - information about potential and current customers, their behavior,
competitors, and other forces that affect the business are gathered by channels.

2 ] Consumer Motivation:-Channels develop and distribute persuasive communications to motivate

consumers in buying the product. Being in direct touch with the consumer, they know what turns
consumers on and what turns them off.

3 ] Bargaining – they reach agreement on price and other terms with the customer on behalf of the
producer so that transfer of ownership takes place.

4 ] Placing Orders:- intermediaries place orders with producers on behalf of customers for the
products they need. Later they sell these products to customers on terms and conditions acceptable
to the producers. Thus they bridge the gap between producers and customers who are extremes.

5 ] financing:- intermediaries finance investments at different levels of marketing channels. They

provide funds to producers by decreasing the time required to convert inventory to cash.

6 ] Risk bearing:- intermediaries also share risks connected with carrying out channel work, thereby
reducing the burden on the producer.

7 ] Inventory management:- intermediaries also provide successive storage facilities and movement of
physical products to the producers This enables a producer to redirect their limited factors of
production towards other systems.

8 ] services:- intermediaries offer specialized services including repairing service to the customers on
behalf of producers.

12.3 SERVICES TO THE CUSTOMER

The two main categories in which services are provided are as follows:

Pre-sales services:- channel members reduce the number of contacts a manufacturer needs to make
with the customer before the sale of his goods. Intermediaries
can perform various activities for products like pricing, packaging,
grading, or assembling products to suit the requirement of end consumers. See the
following figure.
Sales channel: - This is used to perform motivational, informational, bargaining, and finance functions.

Delivery Channel:- It involves the transfer of physical products i.e. possession of products.

Service channel:- This channel performs after-sales service. This concept is best explained by the
example of e-brand [ amazon.com]. Amazon uses telephone and internet as a sales channel, express
mail services as a delivery channel, and local offices as a services channel.

Channel Structure:- consists of the number of outlets that may be adopted in moving goods from
manufacturers to customers. This shown in the following figure:-

Each can be analyzed in the following sections.

Direct/Indirect Distribution Channels:

A company may undertake to distribute its goods to customers or retailers without involving any
intermediaries. This is referred to as a direct channel that constitutes the shortest channel in the
distribution process. Manufacturers in this case do not rely on intermediaries. They directly reach
their customers to sell their products. Examples are catalog, direct mail, Avon, Tupperware, B2B.

Avon, amazon.com, new pig, Amway, and service master are some of the B2B exchanges that indulge
indirect distribution [ DDC ].

Alternatively, goods may pass through one or more intermediaries such as wholesalers or agents. This
is an indirect distribution channel [ IDC ]. Most of the FMGG manufacturers have indirect distribution
channels. There may be a very large department or discount stores to transact goods from
manufacturer to customer.

Sometimes, there may be small retailers who rely on wholesalers for the number of goods, to be sold
to customers requiring smaller quantities at retail outlets. Here, the channel constitutes.

For some goods like farm products, the channel, is like this
Where the agent mediates between farmer and wholesaler. Direct and indirect distribution channels
can be as shown below.

The distribution channel does not remain standstill. In the dynamic environment of today, new
wholesaling and retailing outlets emerge and thus new channel systems evolve.

12.4 VERTICAL MARKETING SYSTEMS [ VMS ]

One of the most significant developments is the rise of Vertical Marketing Systems [ VMS ]. In
conventional channel which comprises of direct/indirect distribution methods, none of the channel
members has complete or substantial control over the other members. In other words, the
independence of the channel was more important in those channels.

A VMS on the other hand includes various parties like wholesalers, producers, and retailers acting as
unified systems. It is a tightly coordinated distribution channel designed specifically to improve
operating efficiency and marketing effectiveness. In VMS there is nothing as one marketing function
gaining more importance over the other. Instead, each function is performed at its best in unity.
VMS arose as a result of one stronger channel member attempting to overpower other weaker
members to avoid conflicts that arise when the channel pursue individual goals. Kotlar points out that
VMS has become a dominant distributional channel in the US, 70% to 80% of the total market. There
are three types of VMS:- corporate, administered, and contractual.

1 ] Corporate VMS:- a firm at one level of channel owns firm at the next level or subsequent levels or
it may own an entire channel. VMS here combines successive stages of production and distribution
under single ownership. Vertical integration of operations gives a higher degree of control to the
manufacturer. For example, Sears obtains over 50% of the goods it sells from companies that it partly
or wholly owns. Goodyear and Sherwin Williams own retail outlets. Similarly, certain manufacturers of
food items have their raw material supplying firms. The following figure shows how corporate VMS
works.

2 ] Administered VMS:- this channel coordinates distribution activities through the market and gains
economic power from one channel member or the shared power of two-channel members i.e.
coordination is through the size and power of one of the members as shown in the following figure.
Manufacturers of dominant brands will be able to secure strong trade cooperation and support from
the sellers.

For instance, Kodak, Gillette, Pepsi Coke, and HLL can command a high level of cooperation from their
intermediaries in terms of display shelf space, pricing policies, and promotion strategies. This can be
attributed to a high degree of brand equity and power enjoyed by these companies.
3. Contractual VMS:- Under this system, independent producers, wholesalers, and retailers operate on
a contractual basis specifying how they will try to improve the effectiveness and efficiency of their
distribution. See the following figure:-

Contractual VMS are further of three types as shown below:-

A ] Wholesaler sponsored Voluntary chain:- Wholesalers organize voluntary chains of independent
retailers to help them compete with large organizations. This organization helps them compete with
large companies based on economies that arise as a result of the standardization of selling practices
and buying economies.

B ] Retailer cooperatives:- retailers take initiatives and organize a new business entity to carry on
business.

C ] Franchise organization:- in this, a member called franchisee inks himself to one of the stages in the
product distribution process, for example, Dominos Pizza. Franchise organization can further be
divided into the following three categories:-

1 ] manufacturer-sponsored retailer franchise:- for example Ford and Chrysler which license dealers to
sell its cars.

2 ] Manufacturer sponsored Wholesaler Franchise:- for example Coke and Pepsi license bottles in
various markets who buy its syrup concentrate and then carbonate bottles and sell it to retailers in
local markets.
3 ] Service firm-sponsored retailer franchise:- in this, the service firm organizes a whole system for
bringing its service efficiently to customers. For example McDonald’s, Burger Kings, and Pizza Hut.

12.5 HORIZONTAL MARKETING SYSTEMS [ HMS ]

In this channel, two or more unrelated companies join together to have pooled resources to exploit an
emerging marketing opportunity. This system takes place when the company lacks capital and the
know-how of production and/or marketing resources and is afraid of taking risks or venturing out
alone A good example is departmental stores /hotels having arrangements with local banks to offer
in-store banking. Bath and bodywork [ a range of personal care products launched by Victoria’s street.
] are distributed by Open Secrets and LifeStyle Pvt Ltd. [ a 50:50 joint venture of ITL group and
Danabhai Jewelers ] says a report in A&M. The components might work together on a temporary or
permanent basis or create a joint venture company. See the following fig.
12.6 MULTI-CHANNEL MARKETING SYSTEMS [ MMS ]

In the past, many companies sold to a market through a single distributional channel. Today’s more
and more companies have started adopting multichannel marketing systems. Multi-channel marketing
occurs when a company uses different to reach the same/different market segments. This is done to
ensure the availability of the right product at the right time to the right customer. Multichannel is
used when:
 The same product is sold to different markets, for example, computers to business and
customer markets.
 Unrelated products are sold within a single market when

- The size of buyers varies greatly, for example, hotels sell packages directly to the travel
department of large MNC’s but use travel agents to reach small businesses and consumers.

- The geographic concentration varies across different parts of the market, for example, the
company may use the direct channel to sell products in a concentrated market area while
indirect distribution channel to cater to a sparsely populated area.

The multi-channel system is thus nothing but a channel that is adopted and changed according to the
characteristics of the consumers to ensure maximum satisfaction to the customers. Though there are
main types of distribution channels, advances in information technology have opened up the virtual
world, where distribution channels are completely different. This needs to be considered.

12.7 THE INTERNET

Electronic markets allow consumers to directly have access to manufacturers. As a result, distribution
channels are undergoing rapid change. Days are long over when large orders of high valued products
‘slept’ in the warehouse. In the context of web or www, the meaning of disintermediation is extended
to indicate the ‘extinct’ of a middleman and evolution of a more perfect commercial world where
customers deal directly with providers, weeding out cost disparities and inefficiency. All the more,
customers have started appreciating the convenience and cost savings associated with direct sales.
Two business models of electronic marketing need an understanding.

 Business to business [ B2B ]:- businesses are findings that the internet helps in cost-saving and
is more convenient for customers. Several of these electronic B2B merchants are well known
for their internet operations. Cisco Systems Inc gets just under 60% of its revenue from its
website – about 1000 orders and more than $11 million sales in a day. DELL computers and
Compaq computer corporations boast of $5 million or more from daily internet sales. Many
corporate buyers can earn paybacks on their investments in under a year. The procedures for
filling out requisitions, sending forms, and logging information into the ledger can be
automated, saving business postage, labor, and processing costs. Some companies have noted
substantial cost savings from their online efforts. The sources of their savings include
automation of inventory, customer service, product distribution, supply chain, and order
fulfillment functions. Automation is particularly valuable when suppliers have a broad array of
products with functioning inventory levels and prices. Networking equipment maker Cisco
saves about $360 million per year by automating its sales, marketing, and technical support.
Their product documentation is the size of an encyclopedia while the cost of shipping is
numerous. Business customers appreciate convenience and self-service and typically know
what products they want ahead of time. Many prefer using the low costing Internet to check
whether the products are in stock- 24 hours a day, seven days a week. this ease of use is why
the web has quickly attracted more interest than EDI [ Electronic Data Interchange ]. As we
have studied earlier, EDI, a software system for reliably exchanging information, traditionally
required employing a private network and learning difficult software. Until recently it was a
primary way business conducted electronic commerce but the high cost of implementation
has kept many small businesses from installing it. Take, for example, Federal Express [ FedEx ]
and other technology-driven package delivery services like United Parcel Service [ UPS ],
Airborne Express, or the US postal service which deliver products ordered on the web. These
firms can track products with amazing precision and ship them with lightning speed. FedEx
defines itself as an information intense network of express transportation, logistic services,
and solutions. Its features include tracking shipments in transit and telling the shipper what’s
in the box.

 Business-to-Consumer [ B2C ]:- Shopping is one of the most popular activities on the Internet
and the number of people who shop and buy products on the Internet is growing. For
example, LL bin, the world’s largest catalog retailer of outdoor specialty products can reach
new customers who have never purchased from them before. It ‘discovered ‘ them on the
Internet. UPS and FedEx are taking aggressive steps to make their services an essential part of
e-commerce. UPS has integrated its software with clients web sites to allow purchases to
arrange for shipments of goods at the same time electronic purchases are made. Customers
also can track the progress of their shipments through the merchant’s sites rather than
logging on to UPS sites. FedEx has launched FedEx ship, its electronic network that allows
businesses to print mailing labels and arrange it for shipment of orders. FedEx has a service to
 help companies set up web sites with an online catalog on the FedEx internet server. The
system allows clients to process orders and arrange for shipment, with FedEx as a default
shipper.

Thus it can be highlighted that if the characteristics of customers are the same then the distribution
channel of two companies should be the same.

12.8 DISTRIBUTION CHANNEL DESIGN

Sometimes firms in similar businesses have different types of distribution channels. This is so because
the company wants distribution channels to achieve maximum customer satisfaction and acquire a
competitive edge. An efficient distribution channel can be planned based on the following four steps:-

1 ] Specifying the role of distribution channel:- channel strategy has to be proportional to a company’s
marketing objectives, its mission statement, and roles assigned to the marketing mix. A company must
decide whether the distribution will be used defensively or offensively. Under a defense approach, a
firm will strive for a distribution that is as good as a competitor but not necessarily better than the
competitor. But in an offensive strategy, a manufacturer will try to gain an advantage over the
competitor by having a more efficient channel.

2 ] Selecting the type of channel:- once the role of distribution is agreed, the next step involves
determining the most suitable type of channel for companies need to decide if it wants to use
middleman or not. The choice is between a direct distribution channel or an indirect distribution
channel.

3 ] Determining the intensity of distribution:-

The next decision relates to the intensity of distribution, or in other words, the number of middlemen
used at wholesale and retail levels in a particular territory. The target market’s behavior and product
capture have a direct bearing on this decision. There are three main degrees of intensity possible, as
shown in the following diagram:-
A ] Intensive Distribution:- under this distribution, the producer sells his products through every
available outlet in the market. If the nature of the product is a convenience product, then intensive
distribution is preferable. For example, Colgate sells its dental hygiene products in supermarkets, drug
stores, and other retail outlets.

B ] selective Distribution:- producer sells his products through multiple retailers and wholesalers The
intensity of sale lies midway between exclusive and intensive distribution.

C ] exclusive distribution:- supplier agrees to sell his products only to a single wholesaling middleman
and/or retailer in a given market. At the wholesale level, such an arrangement is termed as
distributorship and at the retail level, it is called the dealership.

The degree of exposure to all these can be illustrated from the following example:-

Level of example degree of exposure

intensities
intensive Coca Cola Even sold in a boat on the Nile
Selective General electric In a few select places
Exclusive Ford You can not buy just anywhere

4 ] Choosing specific channel members:- If a manufacturer has decided to sell a music product
through IDC, then he can choose between two-channel members – departmental or specialty stores
The manufacturer has to choose between departmental stores like Ebony, Wal-Mart, Kay-Mart and so
on or specialty stores like Planet M or music world. The selection of specific demands upon the
market, the product, the company, and the middlemen. This process helps in designing an efficient
distribution channel, increasing coordination between various components of the marketing mix.

The sequence of decisions can be expressed in the form of a diagram as follows:-

12.9 FACTORS AFFECTING CHOICE OF DISTRIBUTION CHANNELS

The choice of distribution channel is affected by consumer’s buying patterns. The nature of the
market, therefore, should be a key factor in the management choice of channels. Other considerations
are the product, the middlemen, and the company itself.

Market Considerations

A logical starting point is to consider the target market – it's needs, structure, and buying behavior in
the following order:-

Type of market:- The characteristics of the ultimate consumer are different from business users, thus
different distribution channels are used to reach different types of markets. For example, Hewlett
Packard may approach institutional users directly, while consumers through IDC. Oyzterbay Jewelers
launched in June 2000 in India is distributing products through signature outlets across the country,
shop-in-shop counters in mega lifestyle stores, and also retailing it through e-commerce enabled
website.

Number of potential consumers:- A manufacturer with low potential may use its own sales
force to sell directly to ultimate consumers, Boeing uses this approach while Reebok relies on
numerous middlemen to market its footwear.
 The geographic concentration of the market:- when most of the firm’s perspective consumers
are concentrated in a few geographical areas, a direct sale is practical and vice versa.

Order size:- when either size or total volume of business is large, direct distribution is
economical. Thus food product manufacturers would sell directly to large grocery areas.

Product Considerations

Numerous product-related factors are affecting the choice of distribution channel. The following listed
are the most important ones.

Unit value:- the price attached to each unit of a product affects the number of funds available
for distribution. For example, a company can employ its staff to sell a product that costs Rs
10,00,000 but it would be illogical to sell directly a ball pen worth just Rs 5 to the consumer,
on a unit basis. However, if the order size is large, then even in this case the DC is feasible.

Perishability:- some products have a very short shelf life and have to be sold through short
distribution channels.

Technical Nature of product:- A highly technical business product is often distributed directly.
In such a case, the manufacturer’s sales force must provide considerable pre and post-sale
services. For example, Sony has become prominent in the market for low priced CD players.
This is due to the development of pre-packaged players that could be sold through mass
retailers. This reduces the burden of after-sales services on the sales force, as sales clerks with
a low degree of technical know-how could also handle the customers.

Middlemen Considerations

Why should we consider a need to have a middleman? The reasons may be as follows:-

Services provided by a middleman:- each producer should select middleman offering those
marketing services which the producer is either unable to provide or can not perform
economically. For example, a firm wanting to enter the Indian market commonly utilizes
industrial distributors because they furnish needed capabilities such as market coverage, sales
contacts, and storage of inventories.

Availability of desired middlemen:- the middlemen preferred by the producer may not be
available. They may be involved in completing products and as a result, not want to add
another line. For example, Famous Amos Chocolate chip Cookie Corp faced this challenge in
the early 1990s. The company was unable to get its products on shelves of a sufficient number
of supermarket chains. Thus it boosted its sales by using warehouse clubs and vending
machines as its alternate channel.
 The attitude of middlemen towards producer’s policies:- when middlemen are unwilling to
join the channel because they consider a manufacturer policies to be unacceptable, the
manufacturer has fewer channel options.

Company Considerations

Before choosing a distribution channel of a product, a company should also consider its situation i.e.
conduct a SWOT analysis of its resources.

Desire or channel control:- some producers establish direct channels because they want to
control the distribution of their products even though a direct channel may be more costly
than an indirect channel. By controlling the channel, producers can achieve more aggressive
promotion and full use of the marketing mix. In 1992, IBM experimented with the mail-order
sale of its personal computers to improve customer satisfaction.

Services provided by the seller:- Some producers make decisions about their channels based
on the distribution functions desired by middlemen. For example, a producer with a high
profiled advertising campaign will go for IDC, as retailers satisfied with the services of
manufacturers would be ready to stock products. Examples of this kind are Pepsi and Coke.

The ability of management:- Marketing experience and management capabilities of a

producer influence decisions about which channel to use. Many companies lacking marketing
know-how turn the distribution job over to middlemen.

Financial Resources:- a business with adequate finance can establish its own sales force, grant
credit to its customers, and/ or warehouse its products, while a financially weak firm uses
middlemen for the same purpose.

12.10 SUMMARY

Channel works as a means of moving goods from producers to consumers. It overcomes time, place,
and possession gaps and provides goods and services to people who want them.
Intensive Distribution:-producer sells his products through every available outlet in the market. ,
selective Distribution:- producer sells his products through multiple retailers and wholesalers,
exclusive distribution:- supplier agrees to sell his products only to a single wholesaling middleman
and/or retailer in a given market.

Choosing specific channel members:- If a manufacturer has decided to sell a music product through
IDC, then he can choose between two-channel members – departmental or specialty stores A logical
starting point is to consider the target market – it's needs, structure, and buying behavior in the
following order:- Type of market, Number of potential consumers, Geographic concentration of the
market, and Order size.

Numerous product-related factors are affecting the choice of distribution channel. The following listed
are the most important ones - Unit value, Perishability, and Technical Nature of product. The reasons
to have a middleman are:- Services provided by a middleman, Availability of desired middlemen and
Attitude of middlemen towards producer’s policies.

Before choosing a distribution channel of a product, a company should also consider its situation i.e.
conduct a SWOT analysis of its resources. The various parameters are Desire or channel control,
Services provided by seller, Ability of management and Financial Resources

12.11 KEYWORDS

Distribution Channels, Vertical Marketing Systems [ VMS ], Horizontal Marketing Systems [ HMS ],
Multi-Channel Marketing Systems [ MMS ]
UNIT 13 INTERNATIONAL LOGISTICS

Objectives
After going through this unit you should be able to:
 learn Various terminologies used in International Logistics;
 define various types of ships for International Logistics;
 illustrate how ocean transport development took place;
 define organizations for the international shipping industry;
 illustrate the difference between linear and tramp.

Structure

13.1 Introduction
13.2 International Shipping
13.3 Multimodal transport
13.4 Air Transport
13.5 Summary
13.6 Keywords

13.1 INTRODUCTION

Perhaps the most prominent factor is the increase in the number of companies in the international
marketplace. This necessitates a broader perspective than when operating as an international
company which includes attributes such as global branding, global sourcing, global production,
centralization of inventories, and centralization of information. All these aspects lead to the added
difficulty of operating effectively in the global environment. Logistics and supply chain networks have
become complex. It is therefore required to study International Logistics.

13.2 INTERNATIONAL SHIPPING

The Ship
Ocean transport is one of the important modes of international transport. It is economical to transport
material through sea medium as compared with the air medium. The various components of the ship
are as follows-
Hull – is a shell including the superstructure. In larger vessels, it is mostly divided into sections – holds
or tanks.

Machinery – includes engines, auxiliary equipment serving electrical installations, etc. For shippers,
the type of machinery is very important because it influences the operating cost of the vessel.

LOA [ Length Overall ] – LOA is the overall length of the ship from foremost to aftermost part.
Keel – is an important part of the ship because it carries a large part of the weight. It is, in fact, the
backbone of the ship on which ribs are fixed in the form of floor plates and frames.
Frames – form ribs of the ship and are curved in such a manner that these give shape to the ship.
Deck – divides the ship into several floors and carry cargo & accommodation.
Hatch –is the opening of the ship’s deck. Hatches are used for lowering and taking over large objects
into/out of cargo hold of the ship.
Hold- storage space provided under the deck of merchant ships where cargo is stowed.
Tanks – are installed to carry bunker oil, ballast water, and liquid cargo.
Superstructure – part of the ship that finds space above the uppermost complete deck and comprises
of deckhouses, masts, winches, funnel, etc.
Masts – consist of the cylindrical stem of rolled or welded plates. It supports derricks used for loading
and carries navigational lights, deck lighting, aerials, and many other gadgets.
Rails – are placed around decks of the bridge house and deckhouses and are made up of steel.
Ramps – are slopping passages connecting two different levels.
Tackle – ship’s gear to load/unload cargo.

Basic Types of ships

The following types of ships are generally used in international ocean transport.

1 ] Single Deck Vessels – have one continuous deck which means easy access with one hatch for each
hold. Many single-deck ships have very large hatches and some are known as “self trimmers “ because
of provision for the cargo to flow into all corners of the hold. These types of vessels are suitable only
for heavy bulk cargos to flow into all corners of the hold. These types of vessels are suitable only for
heavy bulk cargoes like grain, iron ore, coal, etc.

2 ] Twin Deck Vessels – have additional decks [ twin decks ] below the main deck, all running the full
length of vessels. These vessels are similar for general cargo. Space divided into separate tiers and
decks eliminate the risk of cargo damage by preventing too much weight to be put on the cargo at the
bottom.

3 ] Shelter Deck Vessels – have an additional deck above the main deck i.e. shelter deck that provides
more under deck space for carrying light cargos. The shelter deck vessels are again of two types – the
closed and open. The diffidence relates to the measurement of the ship.
4 ] Unitized Cargo Ships and specialized vessels – include pallet vessels, large carriers, RO/RO and
LO/LO ships, container ships, OBOs, Oos, gas carriers, wood carriers, car carriers, oil tankers,
refrigerated ships, etc.

5 ] Cellular Ships – have holds designed to form a series of cells into which the containers are placed.

6 ] Panamax – the bulk carriers with breadth which can pass through the Panama Canal [ 106 feet wide
] are described as Panamax type. Such bulk carriers carry up to 80,000 MT of cargo and are popular as
the handysize bunkers with 10,000 to 40,000 dwt.

7 ] The Bulker/ Container Carrier – is also known as conbulkers. They carry bulk containers.

8 ] VLCCs / ULCCs [ Very Large Crude Carriers / Ultra Large Crude Carriers ] – VLCCs have a capacity to
carry 200,000 to 300,000 dwt . The ULCCs have a carrying capacity above 300,000 dwt.

Ocean Transport Development

The various types of ships are categorized in the following table-

Passenger Liner Conventional Cargo Unitized Cargo Ships Specialized vessels

Ships
Cruize Liners - tramp 1 ] Pallet vessel 1 ] Tanker
with the - cargo liner 2 ] Barge Carrier 2 ] Oil Carrier
highest - passenger 3 ] LASH 3 ] Chemical Carrier
standard of /Cargo liner 4 ] SEABEE 4 ] Product Carrier
luxury is 5 ] RO-RO 5 ] LPG / LNG Carrier
available in the 6 ] Container Ship 6 ] Bulk Ore Carrier
world for high- 7 ] Grain Carrier
end users. 8 ] Oil / Bulk/ Ore [
OBO ]
The
following types of ships have been in operation in the carriage of seaborne trade-
1 ] Tramps –those ships which are designed to carry no specific types of cargo and travel anywhere in
the world. They are often run on charter to carry bulk cargo or general cargo. The bulk carriers have
been taken over much of tramps business in recent times.

2 ] Cargo Liners – are designed to carry a variety of cargo between specific ports on fixed schedules.
They generally carry general cargo both semi-manufactured and manufactured items packed in
different types of packings. Many of these ships have refrigerated compartments for transportation of
perishables like meat, flowers, fish, etc.
3 ] Passenger / Cargo liners – are similar to cargo liners except for the accommodation [ including
lounges and recreational facilities ] usually of a very high standard is provided for passengers.

4 ] Pallet Ships – such types of ships are equipped with large twin batches, side ports, and cranes to
allow pallets to be loaded or discharged through the side ports and by crane. The pallets are moved by
forklift trucks in between the upper decks and lower holds.

5 ] Barge Carriers – there are two types of barge carriers – LASH and SEABEE. The advantage of barge
carriers is they do not require special port facilities. But because of the high cost of barge and other
operational difficulties, such ships are being phased out.

6 ] Roll-on-Roll-off [ RO-RO ] vessels – such types of vessels were developed initially for short sea
transportation of containers but have since gained the reputation of being an economic system for
ocean transport. These ships require relatively little special port facilities and offer the potential of
truly door-to-door service.

7 ] Container ships – have been designed to carry maximum containers within the designed length and
breadth of the ship. Cellar container vessels are fitted with certain guides that are capable of
withstanding dynamic [ accelerating ] forces due to rolling, pitching, and heaving.

8 ] Tankers – are used to carry bulk liquid cargo, most common being oil. Their sizes range from the
very small coastal tankers to about 700, 000 MT.

9 ] Bulk Carriers – are single-deck vessels designed for the carriage of single commodities such as
grain, sugar, and ore in the bulk. The deadweight capacities of such ships range from smaller to
150,000 MT.

10 ] Oil / Bulk / Ore [ OBO ] – have a cross-section similar to the general bulk carrier. The structure
however significant stronger because bulkheads must be oil-tight and double bottom must withstand
the high-density ore load. The special feature of these types of vessels is that they are designed for
flexibility of operation and can transport any one of several bulk cargos on any one voyage.

Organization of the shipping industry

International Shipping
Linear Tramp
 Salient Features Salient Features
1 ] General Cargo – 1 ] Bulk Cargo
2 ] Break Bulk Cargo 2 ] Dry bulk or liquid bulk
3 ] Regular sailing schedule 3 ] No schedule
4 ] Regular routes / ports 4 ]Follow demand
5 ] Tariff rates 5 ] Rates negotiable
6 ] Bill of lading 6 ] Charter party
7 ] Liner [ Berth ] terms 7 ] Free-in-out
8 ] Booking of space 8 ] Fixation of the vessel through agents
Usually through shipping agents
9 ] Conferences / outsiders 9 ] No conference / cartel

Liners – provide service by calling regularly at specific ports irrespective of the quantity of cargo
available. Such ships usually carry general cargo i.e. an accumulation of small load belonging to many
shippers. Each user pays the freight following tariffs based on volume, weight, or value of cargo.

Conference – is an association of 2 or more liner shipping companies in a well-defined trade, plying fix
route or routes within certain geographical limits who agree to operate on basis of common freight
rates and tariffs as well as the conditions of carriage.

Tramps – are those ships that are usually developed for transportation of homogenous cargo moving
in bulk e.g. grain, coal, ore, phosphates, sugar, timber, etc. on single or consecutive voyages or on time
charter basis. The rates in the tramp market [ also called charter market ] are determined purely by
the free interplay of forces of demand and supply.

Charter Party - is the document of the agreement made between a character and a shipowner. It
normally contains the details of the ship, ports of call, routes, methods of cargo handling, etc.

13.3 MULTIMODAL TRANSPORT

Multimodal transport means the transport of cargo on a door-to-door basis i.e. from the premises of
the shipper to that of the consignee by more than one mode of transport under a single contract
evidenced by a single transport document and through freight rate and liability.
In such cases, the Multimodal Transport Operator [ MTO ] assumes the responsibility for the
execution of the contract. He makes all intermediate arrangements for the movement of goods from
origin to destination. He also assumes liability for loss or damage to the goods as well as delays in the
delivery.
Goods moving by Multimodal transport are usually containerized since the same ensures greater
protection to cargo against damage, pilferage, and contamination and obviates the need to unpack
and re-pack goods at the transshipment points.
Advantages of Multimodal transport – are as follows:-
 loss of time and risk of loss due to damage, pilferage, and contamination incidental to
conventional segment transport is reduced to the minimum.
 The faster movement of goods reduces the disadvantage of distance from the market and
capital being tied up from the trader’s point of view.
 The burden of documentation and other formalities associated with segmented transport is
reduced to a minimum.
 The resultant cost saving tends to reduce the through freight rates and the cost of cargo
insurance.
 The consigner has to deal with only one agency viz MTO in all matters relating to the
movement of goods including settlement of claims.
 The rates offered by MTO make it easier for the exporter to negotiate sales contracts with
foreign buyers based on delivered prices.
 The MT document issued by MTO at an inland point enables the exporter to negotiate it with
the bank and release the money for his exports more quickly.
 The use of Multimodal transport helps to reduce the cost of export and improve their
competitive position in the international market.

13.4 AIR TRANSPORT

Air transport is the youngest member of the transportation system. It is modern, quickest and the
latest mode of transport. About 20-22% of the world trade in value terms, moves by air mode of
transport. Air transport mode supports JIT and TDC [ total distribution cost ] concepts.

Currently, not only perishables and highly valuables but may products move by air, such as machinery
parts, electronic/electrical components, textiles, ready-made garments, leather, handicrafts, agri-
products, travel goods, toys, hand tools, etc.

The important international organizations engaged in the development of air transport include – ICAO
[ International Civil Aviation Organization ], IATA [ International Air Transport Association ], and FIATA
[ International Federation of Freight Forwarders Association ].

The history of civil aviation in India began in the year 1912 with the opening of the first domestic air
route between Karachi and Delhi. Before independence, 9 air transport companies were operating
both passenger and cargo services. In 1948, Govt Of India and Air India [ earlier Tata airline ]
established a joint sector company namely Air India international Ltd with a capital of Rs 2 crore.

Over a period a commodity-based economy changed to a manufactured based economy for export
products. This resulted in the expansion of air-borne cargo. Today the share of air-borne cargo is 27 to
36%.
The following documents are used in carriage of goods by air:-
o Airway bill
o Master Airway Bill / House Airway Bill
o The shipper’s letter of instructions
o Commercial invoice
o Shipper’s declaration for dangerous goods
o Shipper’s certification for live animals
o Shipper’s certificate for Arms and Ammunition

Air Waybill (AWB)

The Air Waybill (AWB) is the most important document issued by a carrier either directly or through its
authorized agent. It is a non-negotiable transport document. It covers the transport of cargo from the
airport to the airport. By accepting a shipment an IATA cargo agent is acting on behalf of the Carrier
whose air waybill is issued.

AWBs have eleven digit numbers which can be used to make bookings, check the status of delivery,
and current position of the shipment. The number consists of:

 1. The first three digits are the airline prefix. Each airline has been assigned a 3-digit number
by IATA, so from the prefix, we know which airline has issued the document.
 2. The next seven digits are the running number/s - one number for each consignment
 3. The last digit is what is called the check digit. It is arrived at in the following manner:

The seven-digit running numbers are divided by 7, by using a long division calculation. The remainder
becomes the check digit. That is why no AWB number ends with a figure greater than 6. Air waybills
are issued in sets of different colors. The first three copies are classified as originals. The first original,
blue in color, is the shipper’s copy. The second, colored blue, is retained by the issuing carrier. The
third, colored orange, is the consignee’s copy. A yellow copy acts as the delivery receipt or proof of
delivery*. The other copies are all white.[1]

There are several purposes that an air waybill serves, but its main functions are:

 Contract of Carriage. Behind every original of the AWB are conditions of contract for carriage
 Evidence of Receipt of Goods

Air cargo services in India made a beginning in 1975 with setting up of first air cargo terminal at Dum
Dum [ Kolkata ]. Subsequently, the air cargo terminals were set up at the Gateway International
Airports at Delhi, Mumbai, Chennai, and Thiruvananthapuram and also at inland airports like Jaipur,
Varanasi, Amritsar, Ahmedabad, Banglore, Madurai, Cochin. Presently, 3/4th of air freight traffic in the
country in terms of value is handled together by the four metropolitan terminals.
Air cargo Tariffs containing rates, rules, and procedures are published in the publication TACT [ The Air
Cargo Tariff ] which is jointly issued by the airlines participating in the publication.

The basics of IATA rates are 1 ] actual gross weight if cargo is small and heavy 2 ] volume weight [
volumetric unit ] if the cargo is light and bulky.

Type of IATA tariff consists of General Cargo rates [ GCR ], Minimum Charges [ M ], Specific
Commodity Rates [ SCR ], Class Rates or Commodity Classification Rates, Freight All Kind [ FAK ] rates,
Container rates and miscellaneous rates like Unit load Devices [ ULD ], Differed Cargo Rates, Unified
Cargo Rates, Group Rates, and Charter Rates.

Carriage by Air Act

Legal aspects about carriage by air are governed by certain international conventions e.g. Warsaw
Convention of 1929, Hauge Protocol of 1955 supplemented by the Guadalajara Convention 1961,
Guatemala City Protocol, 1971, and Montreal Air Law Conference, 1975.

The Indian Carriage by Air act 1934 contained rules related to international carriage by air. This act is
based on the Warsaw Convention of 1929.

This was replaced by Carriage by Air Act 1972. It has two schedules –
Schedule I – contains rules of the Warsaw Convention and applies to International Carriage by Air of
countries.
Schedule II – contains amended rules [ as per Hauge Protocol of 1955 ], High Contracting party,
International Carriage. The rights, responsibilities, and liabilities of various parties are also covered.
The liability of the carrier is based on ‘ Presumed fault ‘ in the event of loss of cargo or damages
occurring during carriage by air.

International Air Transport Association [ IATA ]

IATA [ International Air Transport Association ] is the International trade Association established in
the year 1945 with a purpose to represent, lead, and serve the airline industry. It has headquartered
in Montreal, Canada. As in 2011, 240 airlines are the members of IATA. Currently, IATA is present in
150 countries around the world and has offices at 101 locations.

IATA airlines for convenience divided the world into three 3 traffic conference areas namely – IATA
Traffic Area 1, IATA Traffic Area 2, and IATA Traffic Area 3.

IATA Traffic Area 1 – comprises of North America, Central America & South America
IATA Traffic Area 2 – comprises of Europe, Middle East, and Africa
IATA Traffic Area 3 – comprises of Asia and southwest Pacific [ Australia, New Zealand, and Pacific
Islands ]

www. Iata.org is the official website of IATA.

FIATA

FIATA, in French "Fédération Internationale des Associations de Transitaires et Assimilés", in English

"International Federation of Freight Forwarders Associations", in German "Internationale Föderation
der Spediteurorganisationen", was founded in Vienna/Austria on May 31, 1926.

FIATA, a non-governmental organization, represents today an industry covering approximately 40,000

forwarding and logistics firms, also known as the "Architects of Transport", employing around 8 - 10
million people in 150 countries.

FIATA has consultative status with the Economic and Social Council (ECOSOC) of the United Nations
(inter alia ECE, ESCAP, ESCWA), the United Nations Conference on Trade and Development (UNCTAD),
and the UN Commission on International Trade Law (UNCITRAL).

It is recognized as representing the freight forwarding industry by many other governmental

organizations, governmental authorities, private international organizations in the field of transport
such as the International Chamber of Commerce (ICC), the International Air Transport Association
(IATA), the International Union of Railways (UIC), the International Road Transport Union (IRU), the
World Customs Organization (WCO), the World Trade Organization (WTO), etc.

In summary, FIATA is the largest non-governmental organization in the field of transportation. Its
influence is worldwide.

International Civil Aviation Organization [ ICAO ]

The International Civil Aviation Organization was formed in 1947 under the auspices of the United
Nations, and it established Flight Information Regions (FIRs) for controlling air traffic and making
airport identification simple and clear.

The ICAO airport code or location indicator is a four-character alphanumeric code designating each
airport around the world. These codes are defined by the International Civil Aviation Organization and
published in ICAO Document 7910: Location Indicators.

ICAO codes are used by air traffic control and airline operations such as flight planning. They differ
from IATA codes, which are generally used for airline timetables, reservations, and baggage tags. For
example, the IATA code for London's Heathrow Airport is LHR and its ICAO code is EGLL. Most
travelers usually see the IATA code on baggage tags and tickets and the ICAO code which is used
among other things by pilots, air traffic control, and flight-tracking services such as FlightAware. In
general IATA codes are usually derived from the name of the airport or the city it serves, while ICAO
codes are distributed by region and country.

ICAO codes are also used to identify other aviation facilities such as weather stations, International
Flight Service Stations, or Area Control Centers, whether or not they are located at airports.

13.5 SUMMARY

Basic Types of ships are Single Deck Vessels, Twin Deck Vessels, Shelter Deck Vessels, Unitized Cargo
Ships and specialized vessels, Cellular Ships, Panamax, Bulker/ Container Carrier and VLCCs / ULCCs [
Very Large Crude Carriers / Ultra Large Crude Carriers ]. The following types of ships have been in
operation in the carriage of seaborne trade- Tramps, Cargo Liners, Passenger / Cargo liners, Pallet
Ships, Barge Carriers, Roll-on-Roll-off [ RO-RO ] vessels, Container ships, Tankers, Bulk Carriers, Oil /
Bulk / Ore [ OBO ]. The organization of the shipping industry comprises of - Liners, Conference, Tramps,
and Charter Party.

Multimodal transport means the transport of cargo on a door-to-door basis i.e. from the premises of
the shipper to that of the consignee by more than one mode of transport under a single contract
evidenced by a single transport document and through freight rate and liability.

Air transport is the youngest member of the transportation system. It is the modern, quickest and
latest mode of transport. About 20-22% of the world trade in value terms, moves by air mode of
transport.
The important international organizations engaged in the development of air transport include – ICAO
[ International Civil Aviation Organization ], IATA [ International Air Transport Association ], and FIATA
[ International Federation of Freight Forwarders Association ] in the event of loss of cargo or damages
occurring during carriage by air.

13.6 KEYWORDS

uses on derive from previous trade negotiations, especially from the Uruguay Round (1986–1994).
UNIT 14 ADVANCED TOPICS IN SUPPLY CHAIN MANAGEMENT

Objectives
After going through this unit you should be able to:
 Learn the implication of information technology in SCM;
 Define the concept of SRM and CRM concerning SCM;
 Illustrate E-business and the Supply Chain;
 Learn the concept of sourcing;
 Learn the concept of EDI [ Electronic Data Interchange ];
 Illustrate the working of eSCM [ electronic SEM ].

Structure
14.1 Introduction
14.2 Customer Relationship Management ( CRM )
14.3 Electronic Data Interchange ( EDI )
14.4 Business Telecommunication
14.5 Electronic Supply Chain Management ( eSCM )
14.6 Supply Chain Software
14.7 Digital Content Management
14.8 Business Process Reengineering ( BPR )
14.9 Decision Support Systems and SCM
14.10 Summary
14.11 Keywords

14.1 INTRODUCTION

Advance technology and its use in organizations and across the supply chain have become a
determinant of competitive advantages. The advanced technological trends such as bar code, RFID,
CRM, eSCM, Web services, Virtual Supply Chains, Electronic commerce, and Decision Support systems
help improve supply chain efficiency. The basic concept of CRM as a major macro processor has been
studied by us in Unit 7. Now, let us study the same in detail.

14.2 CUSTOMER RELATIONSHIP MANAGEMENT [ CRM ]

The success of your product largely depends on your relations with the customers, the caliber of sales
personnel, and the effectiveness of your marketing campaign. CRM is used to know your customer
inside out, his behavior, buying patterns, and then turning your sales and marketing efforts to attract
the maximum customer base. It would be required to equip the sales and marketing teams with
automated tools that will help them to work more effectively. All this helps in increasing revenue and
attending high levels of customer satisfaction.
What does it take to implement CRM?
Successful implementation of CRM needs the soundness of three key elements - people, process, and
technology. All the employees from top-level management to lower-level management should be
ready to support CRM. They should also know how things work. Then you need to revamp the process
of your company keeping the customer in mind. Your process should be designed to serve the
customer better. Choose the right technology to implement CRM. It should be good enough to run
your process smoothly. It should provide high-quality data to your employees and interface should be
easy to operate and acceptable to your employees who are going to use it. Remember that the chain
is as strong as its weakest link. The weakness of any one of these would be a threat to your CRM
implementation.

CRM is implemented across the departments with information at its core which is to be shared by all
the departments. Now, effective CRM comprises of three issues – 1 ] collection information about the
customers from different sources such as the web, telephone, and outlets 2 ] filtering it i.e. presenting
in a meaningful way and 3 ] storing it in a central database from where it can be accessed by the
relevant people.

Types of CRM
Depending upon data covered, CRM can be broadly classified into the following 3 types.

1 ] Transactional CRM – this type of CRM solution covers the issues related to the transactions of
customers and managing data based on it.

2 ] Analytic CRM – after collecting data, you need to analyze it and reach a meaningful outcome.

3 ] Collaborative CRM - this one deals with the GUI of software used in call centers and website
interfaces. You can monitor the customer movement on your website with tools such as clickstream,
which can track his path and tell where he exists. This information can help in developing more user-
friendly sites.

Technological Components of CRM

While implementing the CRM strategy, certain building blocks of CRM can be summarized as follows:
 Marketing Automation
 Sales Automation
 Customer Support Automation
 Product Configuration Automation

Marketing Automation - deals with the marketing process. You should know your customer
individually and this can be done easily using software solutions. Basic marketing software divides the
customer into different segments based on geographical regions and then sets this data against the
product sales data, to get the idea about how a particular product is faring in a particular region. these
results are then used to identify target markets and plan market campaigns or plan how to approach
customers with new products.

Sales Automation – idea of sales automation is to have a coordination of activities among all
departments involved in selling, be it a person sitting in the office, a guy in the field, or a call center
executive. All of them should have a single view of all the activities. To achieve all this, the
organization should have a strong backbone of a communication system with telephone, mobile, LAN,
or WAN. Another issue is of a central database that is being updated regularly. All this helps in
contracting the sales cycle and thus improving speed and revenue.

Customer Support Automation

This CRM application deals with call centers and helps desk applications. It automates functions such
as order tracking and accounts status checks, receiving and tracking customer requests, for products,
and calls for support. Customers can interact with the organization in several ways such as through
telephone, e-mail, interactive voice response system, text-based chat, or online FAQs.

Product Configuration Automation –

Info about the product consists of product catalogs. These catalogs can be simple and complex
depending upon the product and choices available. For example, buying a computer involves several
choices and combinations. So there lies a need to automate product catalogs which will come handy
for staff dealing with the consumer directly. It will help them to check the different combinations and
tell the customer if a particular configuration is available in stock or not and thus serving him in a
much better way.

All these solutions of CRM can be implemented as apart of a single suite from large vendors and you
can also have custom made industry-specific solutions. You can also have the option of developing
your application.
How ERP Packages are helpful in SCM?
Enterprise Resource Planning [ ERP ] systems are enterprise-wide information systems used for
automating all activities and functions of the business. These are transaction-based information
systems that are integrated across the whole business. They allow for data capture for the whole
business into a single computer package which gives a single source for all the key business activities,
such as customer orders, inventory, and financials.

The main ERP vendors are SAP AG, BAAN, Qad, IFS, Ramco Systems, etc. the SCM designed is based
on ERP Package. Today, ERP Systems become ‘ enterprise-wide transaction processing ‘ tools that
capture data and reduce manual activities and tasks associated with the processing of financial,
inventory, and customer order information. ERP systems achieve a high level of integration by utilizing
a single data model. ERP systems utilize a common database as a basis of communication within the
organization with individual information systems accessing data via any type of standard networking
protocols.
Electronic Commerce Initiatives

14.3 ELECTRONIC DATA INTERCHANGE [EDI]

Introduces in the 1970s and popularized in the 1980s, EDI technology has been widely used by the
firms in supply chains to facilitate transactions and information exchanges. EDI is defined as a
computer to computer exchange of structured data for automatic processing. EDI is used by supply
chain partners to exchange essential information necessary for the effective running of their business.
These structural links are usually set up between organizations having long term trading relationships.
Thus, EDI is the electronic exchange of business transaction documents over the computer network.
Purchase orders, bills, invoices, PO acceptance, shortage/excess of supply, etc can be communicated
through EDI at a high speed and lesser cost.

The formats used for EDI are standard. If not, the software is available that translates the company’s
format into EDI format. EDI services are provided by companies like GE Information services, IBM
adventures, Sterling Softwares, etc.

The example of B2B transactions is shown below:-

Benefits of EDI
The advantages of using EDI, direct and indirect, with effective means are discussed in the following
table.

Direct benefits:-
Benefit
Reduction in transaction costs
Improved cash flow
Reduction in inventory levels
Improved information quality
Effective means
Elimination of paperwork, labor-saving
Faster processing and exchange of information
Shorter order cycle, decrease in procurement cost
Improved timeliness, accuracy & accessibility of
information

Indirect benefits
Benefit Effective means
Improved operational efficiency Improved internal operations due to time & cost
reduction, better information management
Better customer services Shorter lead time, more timely information about
transaction status
Improved trading partner Increased trust, increased JIT operations, a lesser
relationships nuisance.
Improved ability to compete Increased ability to reach new markets. Increased ability to
 provide better service at a lesser cost.

14.4 BUSINESS TELECOMMUNICATION

There are four types of telecommunication networks – internet, extranet, intranet, client/server
network, and other networks. There are three systems for establishing communication:- Enterprise
collaboration systems, E-Commerce systems, and internal business systems. The features of these
systems are given below.

Enterprise Collaboration Systems:-

 Email
 Voice mail
 Discussion forums
 Data conferencing
 Video conferencing
 Voice conferencing
 Electronic meeting system

E-Commerce Systems:-
 On line POS [ point of sale ] transaction processing
 Web retailing and wholesaling
 EDI
 Electronic funds transfer
 Electronic banking
 Interactive marketing
 Supply chain management

Internal business systems:-

 Internal transaction processing
 Inquiry processing
 Web publicity
 Workflow systems
 Activity monitoring
 Process control
 Management support systems
14.5 ELECTRONIC SUPPLY CHAIN MANAGEMENT ( ESCM )

eSCM is the supply chain that is managed electronically usually with web technology
eSCM systems are used in large scale organizations like Telco, Asian Paints, TISCO, etc. The advanced
software packages such as Oracle, SAP are provided.

The general layout of the eSCM system is shown in the above figure.

Flow measures the quantity of material that passes through the given network per unit of time. The
goal is continuous and synchronous flow. continuous means without interruption and no unnecessary
accumulation of inventory. Synchronous means parts and components are delivered online in all
process sequences as per requirements.

The success factors of the e-supply chain are as follows-

 The ability of all supply chain partners to view partner collaboration as a strategic
asset.
 A well-defined supply chain strategy
 Information visibility along the entire supply chain
 Speed, cost, quality and customer service
 Integrating the supply chain more tightly.

14.6 SUPPLY CHAIN SOFTWARE

What does supply chain management software do?
Supply chain management software is possibly the most fractured group of software applications on
the planet. Each of the five major supply chain steps previously outlined composes dozens of specific
tasks, many of which have their specific software. Some large vendors have attempted to assemble
many of these different chunks of software under a single roof, but no one has a complete package.
Integrating the different software pieces can be a nightmare. Perhaps the best way to think about
supply chain software is to separate it into software that helps you plan the supply chain and software
that helps you execute the supply chain steps themselves.

Supply chain planning (SCP) software uses fancy math algorithms to help you improve the flow and
efficiency of the supply chain and reduce inventory. SCP is entirely dependent upon information for its
accuracy. If you're a manufacturer of consumer packaged goods, for example, don't expect your
planning applications to be very accurate if you can't feed them accurately, up-to-date information
about customer orders from your retail customers, sales data from your retailer customers' stores,
manufacturing capacity and delivery capability. There are planning applications available for all five of
the major supply chain steps previously listed. Arguably the most valuable (and complex and prone to
error) is demand planning, which determines how much product you will make to satisfy your
different customers' demands.

Supply chain execution (SCE) software is intended to automate the different steps of the supply chain.
This could be as simple as electronically routing orders from your manufacturing plants to your
suppliers for the stuff you need to make your products.

Do I need to have ERP software before I install supply chain software?

This is a very controversial subject. You may need ERP if you plan to install SCP applications because
they are reliant upon the kind of information that is stored in the most quantity inside ERP software.
Theoretically, you could assemble the information you need to feed the SCP applications from legacy
systems (for most companies this means Excel spreadsheets spread out all over the place), but it can
be nightmarish to try to get that information flowing on a fast, reliable basis from all the areas of the
company. ERP is the battering ram that integrates all that information together in a single application,
and SCP applications benefit from having a single major source to go to for up-to-date information.
Most CIOs who have tried to install SCP applications say they are glad they did ERP first. They call the
ERP projects "putting your information house in order." Of course, ERP is expensive and difficult, so
you may want to explore ways to feed your SCP applications the information they need without doing
ERP first.

SCE applications are less dependent upon gathering information from around the company, so they
tend to be independent of the ERP decision. But chances are, you'll need to have the SCE applications
communicate with ERP in some fashion. It's important to pay attention to SCE software's ability to
integrate with the Internet and with ERP or SCP applications because the Internet will drive demand
for integrated information. For example, if you want to build a private website for communicating
with your customers and suppliers, you will want to pull information from SCE, SCP and ERP
applications together to present updated information about orders, payments, manufacturing status,
and delivery.

What is the goal of installing supply chain management software?

Before the Internet came along, the aspirations of supply chain software devotees were limited to
improving their ability to predict demand from customers and make their supply chains run more
smoothly. But the cheap, ubiquitous nature of the Internet, along with its simple, universally accepted
communication standards have thrown things wide open. Now, theoretically anyway, you can connect
your supply chain with the supply chains of your suppliers and customers together in a single vast
network that optimizes costs and opportunities for everyone involved. This was the reason for the B2B
explosion; the idea that everyone you do business with could be connected into one big happy,
cooperative family.

Of course, the reality behind this vision is that it will take years to come to fruition. But considering
that B2B has only been around for a few years, some industries have already made great progress,
most notably consumer-packaged-goods (the companies that make products that go to supermarkets
and drug stores), high technology, and autos.

When you ask the people on the front lines in these industries what they hope to gain from their
supply chain efforts in the near term, they will all respond with a single word: visibility. The supply
chain in most industries is like a big card game. The players don't want to show their cards because
they don't trust anyone else with the information. But if they showed their hands they could all
benefit. Suppliers wouldn't have to guess how much raw materials to order, and manufacturers
wouldn't have to order more than they need from suppliers to make sure they have enough on hand if
demand for their products unexpectedly goes up. And retailers would have fewer empty shelves if
they shared the information they had about sales of a manufacturer's product in all their stores with
the manufacturer. The Internet makes showing your hand to others possible, but centuries of distrust
and lack of coordination within industries make it difficult.

What is supply chain collaboration?

Let's look at consumer packaged goods as an example of collaboration. If two companies have made
the supply chain a household word, they are Wal-Mart and Procter & Gamble. Before these two
companies started collaborating back in the '80s, retailers shared very little information with
manufacturers. But then the two giants built a software system that hooked P&G up to Wal-Mart's
distribution centers. When P&G's products run low at the distribution centers, the system sends an
automatic alert to P&G to ship more products. In some cases, the system goes all the way to the
individual Wal-Mart store. It lets P&G monitor the shelves through real-time satellite link-ups that
send messages to the factory whenever a P&G item swoops past a scanner at the register.
With this kind of minute-to-minute information, P&G knows when to make, ship, and display more
products at the Wal-Mart stores. No need to keep products piled up in warehouses awaiting Wal-
Mart's call. Invoicing and payments happen automatically too. The system saves P&G so much in time,
reduced inventory, and lower order-processing costs that it can afford to give Wal-Mart "low,
everyday prices" without putting itself out of business.

Cisco Systems, which makes equipment to hook up to the Internet, is also famous for its supply chain
collaboration. Cisco has a network of component suppliers, distributors, and contract manufacturers
that are linked through Cisco's extranet to form a virtual, just-in-time supply chain. When a customer
orders a typical Cisco product-for example, a router that directs Internet traffic over a company
network-through Cisco's website, the order triggers a flurry of messages to contract manufacturers of
printed circuit board assemblies. Distributors, meanwhile, are alerted to supply the generic
components of the router, such as a power supply. Cisco's contract manufacturers, some of whom
make subassemblies like the router chassis and others who assemble the finished product, already
know what's coming down the order pipe because they've logged on to Cisco's extranet and linked
into Cisco's manufacturing execution systems.

Soon after the contract manufacturers reach into Cisco's extranet, the extranet starts poking around
the contractor's assembly line to make sure everything is kosher. Factory assemblers slap a bar code
on the router, scan it, and plugin cables that simulate those of a typical corporate network. One of
those cables is a fire hose for Cisco's automated testing software. It looks up the bar code, matches it
to a customer's order, and then probes the nascent router to see if it has all the ports and memory
that the customer wanted. If everything checks out-and only then-Cisco's software releases the
customer name and shipping information so that the subcontractor can get it off the shop floor.

And there you have it. No warehouses, no inventory, no paper invoices, just a very nosy software
program that monitors Cisco's supply chain automatically, in real-time, everywhere, simultaneously.
The chain runs itself until there's a problem, in which case the system alerts some poor human to get
off his duff and fix something. Supply chain software junkies call this "management by exception." You
don't need to do anything unless there is something wrong.

If there's a weakness to these collaborative systems, it's that they haven't been tested in tough times-
until recently. Cisco's network was designed to handle the company's huge growth. Distributed
decision making is great if the decisions have mostly to do with making and selling more things. But
Cisco and its network were caught completely off guard by the recent tumble in the economy. It took
a while to turn all the spigots off in its complex network when demand for its products plummeted
and Cisco and its supply chain partners got stuck with a lot of excess inventory-as did most other big
manufacturers in high technology. Cisco was forced to take a hard look at its supply chain planning
capability. SCP software is much better at managing growth than it is at monitoring a decline and
correcting it.
What are the roadblocks to installing supply chain software?
Gaining trust from your suppliers and partners.

Supply chain automation is uniquely difficult because its complexity extends beyond your company's
walls. Your people will need to change the way they work and so will the people from each supplier
that you add to your network. Only the largest and most powerful manufacturers can force such
radical changes down suppliers' throats. Most companies have to sell outsiders on the system.
Moreover, your goals in installing the system may be threatening to those suppliers, to say the least.
For example, Wal-Mart's collaboration with P&G meant that P&G would assume more responsibility
for inventory management, something retailers have traditionally done on their own. Wal-Mart had
the clout to demand this from P&G, but it also gave P&G something in return-better information
about Wal-Mart's product demand, which helped P&G manufacture its products more efficiently. To
get your supply chain partners to agree to collaborate with you, you have to be willing to compromise
and help them achieve their own goals.

Internal resistance to change

If selling supply chain systems is difficult on the outside, it isn't much easier inside. Operations people
are accustomed to dealing with phone calls, faxes and hunches scrawled on paper, and will most likely
want to keep it that way. If you can't convince people that using the software will be worth their time,
they will easily find ways to work around it. You cannot disconnect the telephones and fax machines
just because you have supply chain software in place.

Many mistakes at first. There is a diabolical twist to the quest for supply chain software acceptance
among your employees. New supply chain systems process data as they are programmed to do, but
the technology cannot absorb a company's history and processes in the first few months after
implementation. Forecasters and planners need to understand that the first bits of information they
get from a system might need some tweaking. If they are not warned about the system's initial
naiveté, they will think it is useless. In one case, just before a large automotive industry supplier
installed a new supply chain forecasting application to predict demand for a product, an automaker
put in an order for an unusually large number of units. The system responded by predicting huge
demand for the product based largely on one unusual order. Blindly following the system's numbers
could have led to inaccurate orders for materials being sent to suppliers within the chain. The
company caught the problem but only after a demand forecaster threw out the system's numbers and
used his own.

That created another problem: Forecasters stopped trusting the system and worked strictly with their
data. The supplier had to fine-tune the system itself, then work on reestablishing employees'
confidence. Once employees understood that they would be merging their expertise with the system's
increasing accuracy, they began to accept and use the new technology.
Many B2B exchanges say they offer supply chain software. Should We use their software or install
my own?

Public (many-to-many) B2B exchanges and private (you to everyone else in your supply chain)
exchanges began with grand promises of auctions and procurement savings for members, but few
suppliers were tempted. Since then, most of these websites have morphed into becoming online hosts
for supply chain software. For small companies that can't afford to buy the software on their own, the
public exchanges will probably be their source. But for now, many of the offerings are immature and
aren't getting much use. Companies that can afford to are building their private connections with their
trading partners online rather than going through public exchanges. But even these companies will
eventually use the public exchanges when they can. Building and maintaining software just isn't a
great deal if there's someone out there willing to do it for you.

The ambitious public exchanges, with their independence and neutrality, hold out the hope of
attracting more buyers and suppliers together in one place, but the level of specificity of a public
exchange's supply chain software will probably never reach the depth that a company could build with
a select few suppliers in a private exchange. So most decision-makers are saying they will use public
exchanges for the generic supply chain connections they make, and build their own for the strategic
deep, supply chain relationships they have.

14.7 DIGITAL CONTENT MANAGEMENT

Value Chain
Michael Porter at Harvard popularized the concept of the value chain. It involves activities that add
value to products and services. See the following figure
The primary activities constitute core components of management. Supporting activities or secondary
activities are important for the successful operation of primary activities.

The primary activities in the value chain include inbound logistics, operations, outbound logistics,
marketing, and sale and services. Each of these activities adds value directly to the firm’s output.
Supporting these primary activities are a firm’s infrastructure, human resource management,
technology development, and procurement.

Primary activities in the value chain consist of the following:

Inbound logistics:- materials receiving storing and distribution to manufacturing premises.

Operations:- transferring inputs into finished products.

Outbound logistics:- storing and distributing products.

Marketing and sales:- promotions and sales force.

After-sales service:- services that maintain or enhance product value.

Support or secondary activities contain the following :

Corporate infrastructure:- support activities for the entire value chain such as general management,
planning, financing, accounting, legal services, and quality management.

Human resource management:- recruiting, hiring, training, and development of human resources.

Technology development:- improving the product and manufacturing process.

Procurement:- purchasing input.

Case study:- Springer Berlin

Springer Berlin is the leading publisher of journals and scientific books. Earlier, they had a value chain
as follows:-

Later they started publishing through the internet.

 The web site offers full coverage to articles for subscribers.
 The web site offers free for a limited number of articles.
  The latest information is available to viewers in a short time.
 This is followed by paperback publishing as a second choice.

Thus they developed the ‘ online first ‘ policy for several journal articles. The value chain is as follows:-

Web content publishing requires much lesser capital investment than the traditional paperback
counterpart. The contents of newspapers or magazines do not have to be printed and delivered to
bookstalls, newsstands, or doorsteps. This saves 30% to 40% on the cost of the product. Once the
content has been created and stored, there is little or no extra cost to send it to one reader or a
thousand readers.
In the digital world, physical assets become less important and are replaced or complemented by
virtual assets, mainly knowledge. While the introduction to color photos on the cover of ‘The New
York Times’ required investment of $350 million, the investment on the web is negligible Readers not
only get photos but video /audio clips also.

In the future, what you will count are not physical assets, but the combination of individual
knowledge, the ability to organize cooperation of people effectively, and the ability to market the
product successfully.

JIT deliveries were implemented to keep inventory low. Lower inventories mean less storage cost and
less capital cost. This also means less outdated stock. When a new product version arrives, JIT was
enabled by EPOS [ electronic point of sales ], usually equipped with a scanner. When customer
checkouts, the bar codes of merchandise are scanned in. The computers, therefore, can maintain an
accurate inventory. Orders are sent to suppliers when the inventory goes below a certain level and
suppliers guarantee that new stock is delivered within a specified time. This system has some
drawbacks- the supplier has to keep his stock ready and maintain inventory.

Similar techniques are used today in business to business transactions in the supply chain. General
Motors, for example, rely on thousands of suppliers. JIT delivery from these suppliers has a substantial
cost-saving effect for the buyer. JIT delivery was certainly one of the driving forces when General
Motors introduced EDI to its suppliers.

While one aspect of SCM is the flow of material, the other aspect is the flow of information. The
follow of information can be effectively monitored by using IT. The non-value-added items are
reduced that results in cost reduction, improved accuracy, and less paperwork.

European study identified the potential benefits of computer-based SCM to be approximately 2.5% of
the retail price. The total logistics costs will be reduced from 10% of the retail price to 7.5 %.
Successful SCM requires that the partners share knowledge and information effectively.
Restrictive information policies towards partners are counterproductive in an SCM scenario. Instead,
companies have to learn to trust their partners. The supply chain that implements strategies of shared
knowledge management and knowledge transfer can better respond to the needs of customers and
changes in the market. Knowledge shared in the market may include information such as analytical
sales data, sales forecasts, and internal logistics figures. Now more qualitative information is available
regarding purchasing behavior, customer requirements, and customer demands.

Now with more and more customers ordering online through the internet, there will be a paradigm
shift. Our heading should rather read ‘ from browser to production line’. JIT delivery will remain for
traditional trade but online trade works differently. On-demand-delivery and on-demand-
manufacturing are the concepts that work. One example is Dell corporation: customers not only select
a PC from an online catalog but also configure the PC as per their specific requirements. After the
customer has placed the order, electronically, the data is sent to Dell’s suppliers who then start
assembly. Three days after the order was placed, the PC is delivered to the customer doorstep. There
is no need to have an inventory of finished goods.

Many manufacturers are in a position to build an end product in a short period. Production processes
are highly flexible and highly integrated, allowing highly customized products. Delays in delivery are
caused more by the fact that administration is not automated and organized as production. For
example, we hear from Daimler Chrysler that in terms of manufacturing, 24 hours would be enough to
build a customer-specified Mercedes Benz. This contrasts with the administrative process which takes
about three weeks. But what are three weeks when the queue for your dream car is 18 months long?

From Supply to Supply Network

VANs [ Value-added networks ] didn’t initially support the concept of business networks. Instead,
electronic business relations were always one to one relations. Examples are traditional EDI solutions.
Many small and medium-sized suppliers are connected to a large manufacturer on one to one basis.
Even when subsuppliers are connected to the supplier we still have a hierarchical supply chain
solution. See the following figure:-
The closed world of the supply chain will continue to exist. But internet-based technology extranets
will change to a world of supply networks. See the following figure.

The example to the above is General Motors Virtual Private Network:-

The ANX network initiated by General Motors is such a network. It addresses the concerns of
enterprises about internet technology [ security, reliability, responsibility, etc. ] by setting up a VPN [
virtual private network ]. relying only on credited and trusted providers and by using a company that
acts as an observer and is responsible for the stability and security of the network. ANX went into
production in 19998, connecting the automotive industry with 15000 trading partners in the US and
50000 worldwide.

The virtual enterprise

Adidas and Nike don’t manufacturer shoes. Similarly, Dell does not produce PCs. However PCs with
Dell label are sold to a value of about $ 50 million per day. The German electronics company Dual is
run only by four people but can look at a palette of 60 innovative products and a turnover of DM 70
million.

What these companies have common is that they follow the concept of a virtual enterprise. Such an
enterprise does not need to own factories, distribution chains, or outlets. What is required is a
relatively small group of dedicated people with mobile phones and laptops and the ability to build
networks of suppliers, distributors, franchisers, etc.

What virtual enterprises are about is the branding of supply networks, marketing, and quality control.
Virtual enterprises don’t outsource. Instead, they tap into the enterprise and the resources of external
partners. In virtual enterprises, lead organizations create alliances with other groups, both internal
and external that possess the best competencies to build specific products or services. Virtual
enterprises may prefer to work in narrow market segments like Boston Beer Company. Their label,
Samuel Adams is brewed regionally all over the US by external brewers. ‘ We want to produce better
beer if we own the brewers or does not matter ‘, says Boston Beer’s owner James Koch.

14.8 BUSINESS PROCESS RE-ENGINEERING [ BPR ]

BPR or Business Process Reengineering is restructuring an organization by applying Information

Technology. BPR is a competitive strategy for improving important parameters related to business
such as cost, quality, speed of work, etc.

The concept of BPR is evolved from the book ‘ re-engineering corporation ‘ by Michel Hammer. In
the early days, the concept of O&M i.e. organizations and methods was developed. It was aimed at
redesigning official works. It was not meant for industries.

The concept of BPR was successfully implemented in a bank-like organization where the earlier
method of sanctioning loans was tedious and time-consuming. To get a loan the applicant had to visit
the number of persons in a bank for getting the blank form, verification of documents, checking filled
form, checking slabs of loan, signing and approving the loan, etc. This procedure was redesigned in the
advent of IT. Only one person is appointed for loan transactions. He checks on the computer, the bank
balance, and other details of the customer and puts up the loan for sanction. The sanctioning
authority sanctions the loan.

The following table shows a comparison between Traditional set up of the organization and BPR
application:-
Parameter Traditional Set Up BPR Application
Decision making By management By decision support systems
Complex tasks are attended by Experts Expert systems
Information is available at Only one place Any place
Place of office working Office building Anywhere with net accessibility
Storage of information Files or registers Disk drives :- HDD , FDD , CDD
Material Handling & Transport Lorry SCM & logistics
Plant and Machinery Traditional Automated: PC or P based
Calculations, reporting Manual Software-based
Pulling, lifting, assembly Manual Robotics

The following table shows a comparison of improvements carried out traditionally and by using BPR.
Parameter The traditional way of business business improvement using BPR
improvement
Definition Incremental business improvement business improvement through
radical redesign & restructure.
Target Any process Strategic processor
Primary task IT + work simplification IT + redesign
Potential payback 10% to 50% improvement . 10 fold improvement
What changes? The same task is made efficient. Redesign task
Risk of failure Low High

14.9 DECISION SUPPORT SYSTEMS ( DSS ) AND SCM

Decision Support Systems ( DSS ) are the specific class of computerized information systems that
support business and organization decision-making activities. The properly designed DSS is an
interactive software-based system intended to help decision-makers complete useful information
from raw data, documents, personal knowledge, and business models to identify and solve problems
and make decisions.
Typical information that a decision support application might gather and present would be as follows-
- An inventory of all current information assets including legacy and information data sources,
cubes, data warehouses, and data marts.
- Comparative sales figures between one week and the next.
- Project revenue figures based on new product sales assumptions
- The consequences of different decision alternatives, given experience in a context that is
described.

In SCM, there is always a likelihood of having disagreements among parties for a certain decision-
making process. This phenomenon gets worse when the business environment becomes more
competitive and turbulent. DSS has been integrating into various means like logistics, inventory
management, facility design.

Bann, a leading ERP vendor unveiled an application, Baan Enterprise Decision Manager for aiding
corporate decision making. Major retailers like Walmart, Sara Lee, Roebuck have increasingly started
using Collaborative Forecasting and Replenishment ( CFAR ) which uses DSS for jointly developing
forecasts. GAF materials corporation, the largest manufacturer of asphalt-based roofing materials in
the US uses a freight management DSS.

State the e-Commerce initiatives that are bringing about a change in SCM

14.10 SUMMARY

CRM is used to know your customer inside out, his behavior, buying patterns, and then turning your
sales and marketing efforts to attract a maximum customer base.EDI is an electronic exchange of
business transaction documents over computer networks. Purchase orders, bills, invoices, PO
acceptance, shortage/excess of supply, etc can be communicated through EDI at a high speed and
lesser cost. eSCM systems are used in large scale organizations like Telco, Asian Paints, TISCO, etc. The
advanced software packages such as Oracle, SAP are provided. Michael Porter at Harvard popularized
the concept of the value chain. It involves activities that add value to products and services.

The primary activities constitute core components of management. Supporting activities or secondary
activities are important for the successful operation of primary activities. Adidas and Nike don’t
manufacturer shoes. Similarly, Dell does not produce PCs. However PCs with Dell label are sold to a
value of about $ 50 million per day. The German electronics company Dual is run only by four people
but can look at a palette of 60 innovative products and a turnover of DM 70 million BPR or Business
Process Reengineering is restructuring an organization by applying Information Technology. BPR is a
competitive strategy for improving important parameters related to business such as cost, quality,
speed of work, etc.

14.11 KEYWORDS

eSCM, Value Chain, CRM, Virtual Enterprise, ERP, DSS