Introduction to Supply Chain and

Logistics Management
 Supply Chain

 The sequence or network of organizations, their facilities, functions, and activities that are
involved in producing and delivering a product or service to the target markets.
 Sometimes referred to as value chains
 Supply Chain

 The sequence or network of organizations, their facilities, functions, and activities that are
involved in producing and delivering a product or service to the target markets.
 Sometimes referred to as value chains
Dependent Demand and Independent Demand

1. Independent demand - demand for a finished product, such as a car, computer, a bicycle,
or a pizza
• Independent demand, are managed with sales order process and supply chain management
processes and are based on sales forecasts
2. Dependent demand - demand for component parts or subassemblies.
e.g. microchips in the computer, car or bicycle wheels, or the cheese on the pizza.
• Dependent demand for raw materials and components to manufacture the finished goods
is managed through MRP -Material Resources Planning or ERP
• Managing Raw Material Inventories involves analyzing and co-coordinating delivery
capacity, lead times and delivery schedules of all raw material suppliers, coupled with the
logistical processes and transit timelines involved in transportation and warehousing.
Importance of supply chain
1. Proliferation in product line - Variety in SKUs, HUL about 12000 and Food world 6,000
2. Shorter product life cycle
• e.g mobile phones, laptops, softwares have life cycles as short as six months
• Obsolescence and writing off excess inventory
• Difficult to forecast demand
3. Higher level of out sourcing
• Managing vertical integration is difficult and costly e.g. cars, laptops, telecom services
• Out sourcing makes supply chains vulnerable, need to be balanced
4. Shift in the power structure in the chain
• Organizations closer to customers are becoming more powerful
• e.g.Wal-Mart demands suppliers for daily replenishment of supplies based on actual sales
• Availability shelf space compared to variety is generally insufficient that needs responsive
suppliers
5. Globalization of manufacturing
material flow

information flow

Funds flow
Supply Chain Management

 Designing and operating the material, information and funds flow system of a focus
company, (brand having higher stake)
 Supply chain begins with a Focus Company and extends its flow in up and down streams
 The strategic coordination of business functions of an organization and its partners for the
purpose of integrating supply and demand management
a). Supply chain design is a strategic decision
1. What should be the core activities?
2. What activities should be carried out by focus company and what activities should be out
sourced?
3. How to select partners to perform outsourced activities?
4. What should be the nature of relationship – transactional or long term?
5. What should be the capacity of the facility and where the facility should be located?
Supply Chain Management

b). Supply chain operational decisions

• Tactical or short term decisions ranging from three months to one year
• Operational decisions which could range from day- day - to a months operations
 Operational decisions (functional activities) involve
1. Demand forecasting
2. Procurement planning and control
3. Production planning and control
4. Distribution planning and control
5. Inventory management
6. Transportation management
7. Customer order processing / customer service
8. Risk and Relationship management with customers in supply chain
9. Reverse supply chain management
Efficient vs Responsive Supply Chain
• Efficient supply chain works best where demand is highly predictable, such as
grocery stores or demand for packaged delivery service
• Responsive supply chains are designed to react quickly to hedge against uncertainties
in demand
• Responsive supply chains work best when firms offer a great variety of services or
products and demand predictability is low
a. Efficient Supply Chain – example
• Make-to-Stock (MTS): Product is built to a sales forecast and sold as finished goods
• Customer has no individual inputs into configuration of the product and typically
purchases from retailer
• MTS Supply chain is an efficient service, material, monetary, and information flow;
• Longer product life cycle, high volume - low variety, low contribution margins,
competitive priority, low cost operations.
Efficient vs Responsive Supply Chain
b. Responsive Supply Chain – i). Assemble to Order, ii). Make to Order, iii). Design to
Order
i). Assemble to Order (ATO) : The product is built to customer specifications from a stock
of existing components,
• Customers can choose among various standard components in their product, however
they do not have control over the design of the components.
• Modular design and Postponement
ii). Make to Order – The product is based on the standard design, component production
and manufacturing of the final product is linked to the customer’s specifications
iii). Design to Order – The product is designed and built entirely to the customer’s
specifications
c). Mass Customization – Mass customization has competitive advantage, ex.
• Managing Customer Relationship
• Eliminating Finished Goods Inventory
• Increasing perceived value of product or service
Make or Buy decision in Supply Chain
• Organizations choose to produce the products or services based on their core competency
and outsource or buy the other items or services.
• Make decision can give control on product quality, cost structure, timely delivery, HR,
Equipment and space.
• Outsourcing is one means to acquire processes a firm lacks or is unwilling to perform.
• Vertical Integration – Firm purchases the processes it needs.
• It is attractive if the firm has relevant skill and views the processes that it is integrating as
particularly important to it
• Excessive vertical integration may lead to loss of focus for the firm
a). Forward Integration – Firm acquires more channels of distribution, ex. warehouses,
retail stores, business customers.
b). Backward Integration – Firms move towards the source of raw material, parts, and
services through acquisition, ex, A major grocery store chain invest in own plants to
produce house brands of ice cream, frozen pizza dough, and peanut butter.
Inventory Management

• A supply chain consists of multiple items and stock points and at every stock point
there is a customer and a supplier.
• Depending on demand and supply the decision maker at stock point decides how
much to order and when to order
• Since most of the organization have real time inventory information in place a
continuous review technique is generally used instead of periodic review
 Effective inventory management
• Keep Track of items in inventory
• Make decisions on how much and when to order
• Reliable forecast of demand
• Knowledge of lead time and lead time variability
• Reasonable estimate of inventory holding costs, ordering cost and shortage costs.
Types of Inventory
• Inventory can be broadly classified into six types
1. Cycle Inventory – The inventory resulting from the production or purchase in batches
is called cycle stock
• Companies have a choice of ordering frequently and incurring large ordering cost or
ordering less frequently and incurring significant inventory cost
• Apart from economic considerations, sometimes quality considerations may force firms
to produce large batches
2. Safety stock – Stocks that are maintained as a safeguard against uncertainties of
demand and supply
• Since the loss of customer due to non availability of product is likely to result in
significant cost, firms end up carrying a large safety stock
3. Decoupling stock – Are inventory decisions made at organizational and departmental
levels to provide flexibility needed by each decision maker to manage its operations
independently and to optimize its performance
Types of Inventory
4. Anticipation Inventory – Anticipation inventory consists of stock accumulated in
advance of expected peak in sales or a special event
a. Seasonal stock - Requirement of an item varies with time (paints, ACs,), it may be
economical for the firm to build inventory during low demand season to take care of
peak season demand
• Companies may not like to work with varying production rates to avoid labor and
supplier implications
b. Speculation stock - Is an inventory that is held as a preventive measure against an event
that may or may not happen
• Firms may hold inventor in anticipation of price increase, or may hedge the price or
make forward contract
• As the speculation is for a specific eventuality, after the temporary phase firms will not
hold inventory on this account
 Types of Inventory

5. Pipeline inventory (work in progress inventory) – consists of material being actually

worked on moving from one location to another in the chain
• Pipe line inventory can be reduced by moving goods by air rather than sea
• by reducing manufacturing lead time or work in progress inventory by small lot
production
6. Dead Stock – Is the inventory that is unlikely to be of not any further use in supply chain
operation or market
• Dead stock includes, items that have become obsolete due to changes in customer taste,
design or production process
• Ideally, firms should dispose off dead stock on a periodic basis, even if it means loss
• Higher the accumulation of dead stock tougher it becomes to dispose off.
• Slow moving items can be identified and offered on discount or routed to other firms
Inventory related costs
 Three types of costs are important for inventory related decisions
1. Ordering cost
2. Carrying cost
3. Stock out cost
1. Ordering cost – Ordering costs are fixed costs that do not vary with the size of the order
• Administrative cost involved in placing the order
• Transportation cost
• Receiving cost
• all fixed costs that are associated with the ordering should be included in the ordering
cost
2. Inventory carrying cost – Captures all the actual and opportunity costs that are incurred
because of holding inventory
• Financing cost / borrowing cost / opportunity cost-directly proportional to value of items
• Storage and handling cost
Inventory related costs

3. Stock out cost – Economical consequences of running out of stock

• These costs are intangible and difficult to measure
• lost sales cost – In lost sales a company loses potential sales because of the non
availability of finished goods, and the cost incurred in the opportunity of making profit
• apart from being lost opportunity, it may affect the goodwill of the firm and future sales
• Back order cost – cost incurred in a situation where the customer is willing to wait for
the order to be filled.
• Back order may result in additional administrative costs, transportation cost and
handling cost when the material is rushed through to meet the situation
Inventory counting system
• Periodic inventory system – B2B
• Two bin system - Manufacturing
• Perpetual inventory system – Retail, real-time / POS data.
• Universal Product Code (UPS) / RFID system
Inventory Management system
1. ABC Classification
2. Cycle stock / Economical Order Quantity (EOQ) Model for inventory
3. Economic Production Quantity Model
4. Quantity Discount Model
5. Re-order Point
6. Variable Demand with Re-Order Point
7. Re-order point with Safety Stock
8. Order Quantity for Periodic System
9. Fixed period model with variable demand
ABC Classification
 Class A items
•5 – 15 % of units
•70 – 80 % of value

 Class B items
•30 % of units
•15 % of value

 Class C items
•50 – 60 % of units
• 5 – 10 % of value

Copyright 2011 John Wiley & Sons, Inc.

Example 1 - ABC classification
The parts inventory, unit cost and annual consumption are as follows. The department
manager wants to classify the inventory parts according to ABC system to determine which
stock of parts should most closely be monitored
Part No. Unit Cost $ Annual Usage Qty. Nos

001 60 90
002 350 40
003 30 130
004 80 60
005 30 100
006 20 180
007 10 170
008 320 50
009 510 60
010 20 120
1,000
 Total % of Total % of Total
Part No Value Value Qty. % Cumulative
009 $30,600 35.9 6.0 6.0
008 16,000 18.7 5.0 A 11.0
002 14,000 16.4 4.0 15.0

001 5,400 6.3 9.0 24.0

004 4,800 5.6 6.0 B 30.0
003 3,900 4.6 10.0 40.0

006 3,600 4.2 18.0 C 58.0

005 3,000 3.5 13.0 71.0
010 2,400 2.8 12.0 83.0
007 1,700 2.0 17.0 100.0

$85,400 1,000
Class Item % of total Value % of total Quantity
A 9, 8, 2 71.0 15
B 1, 4, 3 16.5 25
C 6, 5, 10, 7 12.5 60
Cycle Stock Inventory Model

200

1st June 1st July 1st Aug

Lead time = 15 days

Economic Order Quantity (EOQ) Models

1. Basic EOQ model - optimal order quantity that will minimize total inventory costs
(ordering cost plus carrying cost)
2. Production Quantity Model - optimal order quantity that will minimize total production
costs (set-up cost plus carrying cost)
3. Quantity Discount Model - Assumptions of Basic EOQ Model
• Demand is known with certainty and is constant over time
• No shortages are allowed
• Lead time for the receipt of orders is constant
• Order quantity is received all at once
 EOQ Cost Model

Annual
cost ($) Total Cost
Slope = 0

CcQ
Minimum Carrying Cost =
2
total cost

CoD
Ordering Cost =
Q

Optimal order Order Quantity, Q

Qopt
EOQ Cost Model
Uc = Unit cost
Co - cost of placing order D - annual demand

Cc - annual carrying cost per unit Q - order quantity

Co D
Annual ordering cost =
Q
Cc Q
Annual carrying cost =
2
Co D Cc Q
Total cost = + = Annual ordering cost + Annual carrying cost
Q 2
 EOQ Cost Model

Proving equality of costs at optimal point

CoD CcQ
=
Q 2
2CoD
Q2 =
Cc

2CoD
Qopt =
Cc
Q
Optimal time between orders (LT) = D
D
Number of Orders Per Year =
Q
Re-order point = demand in time units x average lead time
 Example 2
A local distributor of a tire company expects to sell approximately 9,600 tires of R64 model.
Annual carrying cost is Rs 16 per tire and ordering cost is Rs 75. The distributor operates
288 days a year.
a. What is the EOQ
b. How many times per year does the stores re-order
c. What is the length of an order cycle
d. What is the total annual cost if the EOQ is ordered.

Given
Demand - D = 9,600
Carrying cost - Cc = 16
Ordering Cost - Co = 75
No of working days = 288
Example 2
2Co D 2(75x9,600) Given
a. EOQ = Qopt = = = 300 Demand - D = 9,600
Cc 16
Carrying cost - Cc = 16
Ordering Cost - Co = 75
Order Quantity = 300 tires
No of working days = 288
b. How many times per year does the stores re-order

No of orders per year = D/Q = 9,600 / 300 = 32 Orders

c. What is the length of an order cycle
Order cycle = No of working days / orders = 288/32 = 9 days
d. What is the total annual cost if the EOQ is ordered.
CcQ 16 x 300 Rs 2,400
= =
Annual carrying cost = 2
2
CoD 75 x 9,600
Annual ordering cost = = Rs 2,400
Q = 300

Total cost =
CcQ CoD
= Rs 2,400 + Rs 2,400 = Rs 4,800
+
2 Q
Example 3 -EOQ Model
A machine manufacturer supplies replacement parts with expected annual demand of 750
units, machine set up cost (order cost) is $50, and it takes 1.5 weeks to set-up and make
parts, parts carrying cost is 25% per year and part is valued in the inventory at $37 each.
a. What is the EOQ for the parts
b. What is the optimal time between orders (lead time)
c. What are the optimal number of orders per year
d. What is the re-order point

2 (50 x 750)
a. = 90.04 = 90.0 units
= 0.25 x 37
Q 90
b. optimal time between orders (LT) = = = 0.12 orders per year = 0.12 x 52 weeks
D 750
= 6.4 weeks or about 45 days (6.4 x7)
Example 3 -EOQ Model

2 (50 x 750)
a. = 90.04 = 90.0 units
= 0.25 x 37
Q 90
b. optimal time between orders (LT) = = = 0.12 weeks per order = 0.12 x 52 weeks = 6.4
D 750 weeks or 7 weeks

D 750
c. optimal number of orders per year = = = 8.3 or 8.0 orders per year
Q 90

d. Re-order point = demand in time units x average lead time = (750 /52) x 1.5 = 14.42 x 1.5 = 21.6 units
Example 4 -EOQ Model
Using the following data, obtain
(a) the EOQ and
(b) the total cost associated with policy of ordering quantities of the size that,
Annual demand = 20,000
ordering cost = Rs.150 per order
Inventory carrying cost = 24% of average inventory value

2 (150 x 20,000)
a. = = 5,000 units
0.24

b. TC = Annual ordering cost + Annual carrying cost

CoD CQ
+ c
Q 2
150 x 20,00 0.24 x 5000
+ = 1,200
5,000 2
Bullwhip effect
Occurs when slight demand variability is magnified as information moves back upstream
The Bullwhip Effect
 Variations in demand cause inventory fluctuations to fluctuate and get out of control
 Inventory fluctuation can be magnified by
• Periodic ordering
• Reactions to shortages
• Forecast inaccuracies
• Order batching
• Sales incentives and promotions
• Liberal product return policies
 Results in
• Higher costs
• Lower customer satisfaction
Factors that contribute to uncertainty in Supply Chain
• Inaccurate demand forecasting
• Long variable lead times
• Late deliveries
• Incomplete shipments
• Product changes
• Price fluctuations and discounts
• Inflated orders
• Strikes and labor problems
• Natural disasters
• Local politics
Supply Chain Partners Relationship
 Supplier Management
• Choosing Suppliers
• Supplier Audit
• Supplier Certification
• Supplier Relationship Management
• Supplier Partnership
• Arms length relationship
• Collaborative relationship
• Share demand forecast information,
• Joint planning of production and inventories,
• Joint cost reduction and product configuration,…..
• Collaborative Planning, Forecasting and Replenishment (CPFR)
Supply Chain Partners Relationship

• Strategic relationship
• Long term relationship
• Asset specificity
• Channel strategy
• Customer service strategy,
• Operations strategy, balancing the capacities,
• Alignment with partner’s business strategies
Introduction to Logistics
Logistics

An efficient, effective forward value chains

and reverse flow and storage of
goods and related information
between the point of origin to
the point of consumption
Logistics
 An efficient, effective forward and reverse flow and storage of goods and related
information between the point of origin to the point of consumption
a. Design and administration of systems to control the flow of material, work in
progress, and finished inventory to support business unit strategy
• Integration of information, transportation, inventory, ware housing, material handling
and packaging.
b. Operating responsibility of logistics is – Geographical positioning of raw materials,
work-in-progress and finished inventories where required at the lowest possible cost
c. For individual firms, logistics expenditure typically range from 5 to 35% of sales
depending on the type of business, geographical area of business, and weight/volume
ratio of product and material.
 The overall goal of the logistics – Achieve a targeted level of customer service at the
lowest possible total cost.
Activities of logistics department
1. Packaging – Unitization, Palletization and Containerization
2. Warehousing
3. Inbound and outbound transportation (Air, Rail, Road, Water and Pipeline)
4. Fleet management
5. Materials handling
6. Order fulfillment
7. Managing facility network
8. Inventory management
9. Managing Damage Claims / Salvaging and scrap disposal
10. Return good handling (reverse logistics)
11. Management of third party logistics service providers
12. Insurance
13. Import Export Documentation and follow-up
 Integrated Logistics
 Logistics can be viewed as the competency that links an enterprise with its customers and
suppliers through inter related efforts of
• (I) Inventory flow and
• (II) Information flow

I). Inventory flow – The logistics flow is concerned with movement and storage of materials
and finished products
1. Physical Distribution – Concerns movement of a finished product to customers (out bound)
2. Manufacturing support - The area of manufacturing support concentrates on managing
work –in – process inventory
3. Procurement - Procurement is concerned with purchasing and arranging inbound
movement of materials, parts and / or finished inventory from supplier to manufacturing or
assembly plants.
Inventory

 A sound inventory management is based on five aspects of selective deployment;

• Customer segmentation – Inventory priorities are designed to support core customers.
• Product requirement – Product line profitability must be considered when developing
inventory policy.
• Transport integration – Stock sufficient products at a warehouse to be able to arrange
consolidated shipments
• Time based requirement – Time based programs tend to reduce shipment sizes, frequency
and cost of shipment
• Competitive performance – Inter relationship between facility, network, transportation and
inventory
II. Information Flow
• Information flow identifies specific locations within a logistical system that have
requirements.
• The primary objective of information sharing is to reconcile differentials on the
information on size of the order, availability of inventory, and urgency of movement.
• Without accurate information, the efforts involved in the logistical system can be wasted
• Logistical information involves two major types of flows;
a. Planning and Coordination Flows – Strategic objective, capacity, Material Requirement
Planning (MRP), Master Production Schedule (MPS), inventory, fore casting..
b. Operational flows – Order management, order processing, distribution, inventory,
transportation, inventory and procurement,
 Activities of logistics department

1. Packaging – Unitization, Palletization and Containerization

2. Warehousing – Is temporary storage point of products at and between point of origin
and point of consumption for value adding or value enhancing activities such as
3. Fleet management - managing vehicles and warehouse handling equipment used in the
movement of goods, minimizing overall costs of resources such as vehicles, fuel, parts,
4. Material Holding / Postponement – Hold the material to meet delivery schedule / VA
a. Break-bulk and packaging - Bulk is divided into small shipments for delivering
b. Consolidation - Aggregating the small lots of materials at a central point for
combining, repacking and sending into large shipment
c. Cross docking - materials received from different suppliers into warehouse are mixed
in required lots, re-packed and distributed to the retailers as required
Activities of logistics department

Unitization, Palletization and Containerization

Activities of logistics department
2. Warehousing – Is temporary storage point of
products at and between point of origin and point
of consumption for value adding or value
enhancing activities such as

3. Fleet management - managing vehicles and warehouse handling equipment used in the
movement of goods, minimizing overall costs of resources such as vehicles, fuel, parts,
4. Materials handling – Conveyor system, Forklifts, industrial trucks, underground system,
unit handling, bulk handling and liquid handling system, manual, automated systems
 6. Distribution Network type
1

1. Point-to-point network
Retailer Point
2. Multiple delivery points Point of 2
origin
3. Trans-shipment points Retailer Point Point of
Destination
4. Nodal network
3
5. Hub and spoke network
Port
Trans-
Terminal
shipment
Multiple Point
pickup 4
Road
Terminal DC DC
Rail Terminal 5
Air
Terminal
Hub
How many of each type of facilities needed, their geographic DC DC
locations, and work to be performed at each facility ? outsourced to service ?
Activities of logistics department

4. Materials handling – Conveyor system, Forklifts, industrial trucks, underground

system, unit handling, bulk handling and liquid handling system, manual, automated
systems
5. Order fulfillment – Checking the stock availability, arrange shipment, arrange
insurance, replenishment, manage customer returns, collecting payment in advance
or credit
6. Designing and managing distribution network - the steps taken to move and store a
product from the supplier stage to the customer stage in a supply chain.
Depends on the objective of total low cost or high responsiveness
7. Inventory management – Demand forecasting, demand uncertainty, Fill rate,
product life cycle, product obsolescence, inventory ordering, carrying and stock-
out costs
8. Port and Marine Operations
9. Air Cargo operations
 Activities of logistics department

10. Management of logistics service providers -

a. 1st Party Logistics - Anyone having goods moved from their place of origin to their new
place is considered to be first party logistics provider
b. 2nd Party Logistics - A second-party logistics provider (2PL) is an asset-based carrier
which actually owns the means of transportation.
• Truck companies which own or lease their trucks
• Shipping lines which own, lease or charter their ships
• Airlines which own, lease or charter their planes and
c. 3rd Party Logistics (3PL): A firm which provides multiple logistics services for use by
customers. Preferably, these services are integrated or “bundled” together by the provider
• transportation, warehousing, cross-docking, inventory management, packaging and freight
forwarding
 Activities of logistics department

d. 4th Party logistics (FPL or 4PL) - is an emerging new outsourcing concept.

• A supply chain integrator who assembles and manages the resources, capabilities, and
technology of its organization with those of complementary service providers to
deliver a comprehensive supply chain solution".
• which combines the capabilities of management consulting, IT technology and TPL-
providers.
 Transportation

 Transportation positions inventory geographically.

 Transportation requirements can be accomplished in three basic ways,
• Private Transport - A private fleet of equipment is used
• Contract Transport - Contracts may be arranged with transport specialists
• Common Carriage - Company may engage the services of a wide variety of carriers that
provide services on an individual shipment basis
• Three factors that are fundamental to transportation are;
• Cost - The payment for movement between two geographical locations and expenses
related to administration and maintaining in transit inventory.
• Speed – Balance between speed, cost & service.
• Consistency – Maintaining the inventory and safety stocks to protect service breakdown
Intra Model Transport
 Return good handling (reverse logistics)

• Reverse logistics: Process of retrieving the product from consumer for the purposes of
capturing value or proper disposal
• Inspection & disposition
• Reconditioning
• Distribution & sales
 Customer Service
• From logistics perspective any delivery destination is a customer – consumer’s home,
retail shop, wholesale, docks, a firm’s manufacturing plant or a warehouse.
• In some cases the customer is a different organization or individual who is taking
ownership of the service being delivered or different facility of the same firm or
business partner at some other location.
• Essentially, logistics must ensure that the product or service is available when and
where desired by customers
• To implement a basic service platform, it is necessary to specify what will be the basic
service provided in terms of
a. Availability,
b. Operational performance and
c. Reliability for all customers.
Factors impacting logistics management

1. Nature of products – Bulk, liquid, gas, equipment and parts, parcel, document
2. Facility locations – Regional, national or international
3. Availability of infrastructure – warehouses, cold chain, storage and retrieving systems,
material handling equipment, access to railways, and sea ports
4. Modes of available transportation – Road, Rail, Sea, Air and inland water ways and
pipelines
5. Government policies – Packaging and loading regulations, restricted goods, import
export policies, customs duty, taxes, environmental norms
Factors impacting growth of logistics

• Rising petroleum prices

• Stringent environmental norms and restrictions on the transportation volumes
• Technological advancement
• Adoption of new management practices like JIT
• Growing consumerism
• Growth in the retail industry