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CHAPTER 1
INTRODUCTION TO LOGISTICS AND
SUPPLY CHAIN MANAGEMENT
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Chapter 1
Introduction to Logistics
and Supply Chain
Management
Learning Objectives After reading this chapter, you should be able to:
Know what is a supplychainand what is supplychain management.
Discuss the process view of a supply chain.
Know what is logistics and what is logistics management. Understand what is meant by integratedsupply chains.
Describe the focus areas in supply chain management.
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Management1.0 Definition
Supply chain management encompasses all activities associated with theflow and transportation of goods from raw materials to the end user, as well
as the associated information flows. Materials and information must
simultaneously flow both up and down the supply chain to leverage strategic
positioning and to improve operating efficiency.
Supply chain management is viewed today, as a critical business activity that
is integrated with the business planning process itself.
Both customers and suppliers today form the integral part of any supply
chain management strategy. World wide what most of the companies arefocusing on today is creation of a new effective value chain.
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ManagementThe supply chain can be analysed in multiple dimensions,
of which the important or major dimensions are :
(i) The knowledge dimension
(ii) The information technology aspect and
(ii) The human interface
(i) The Knowledge Dimension: The company must remain completely informed
about itself, its suppliers and the customers. They need detailed information of thesupplier industry from which they are sourcing.
(ii)The Information Technology Aspect: Companies view Information Technology
as strategically important to supply chain management. With the proliferation of
Information Technology (IT), flow of information is no longer a bottle neck.Customised solution within ERP packages provide necessary critical leverage. ERP
has already revolutionised the way, companies are doing business today. There are
many third-party solution providers for supply chain management, for example,
companies like CSX corp, Camelot IS-2, i2 Technologies etc.
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iii. The Human Interface: Because of the increased IT leverages, there is agradual shift of the human interface with a low transactional level to a much
higher decision making level.
1.1 What is a supply chain
A supply chain refers to the way that materials flow through different
organisations, starting with raw materials and ending with finished products
delivered to the ultimate consumer.
A supply chain is a sequence of suppliers, transporters, warehouses,
manufacturers, wholesalers/distributors, retail outlets and final customers.
Exhibit 1.1a illustrates a typical supply chain for a manufacturing
organisation and Exhibit 1.1b illustrates a typical supply chain for a service
organisation.
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ManagementSupply Chain for a Manufacturing Organisation
Supply Chain for a Service Organisation
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1.2 Importance of Supply Chain Management
Of late, supply chain management is gaining growing importance because of thefollowing reasons:
i. The total time for materials to travels through the entire supply chain can be
quite long (say 6 months to one year or more).
ii. Many companies have drastically improved their internal operations and now
find it necessary to consider relations with external customers and suppliers inthe supply chain to gain further improvements in their operations.
iii. Supply chain thinking is an application of systems thinking and provides a basis
for understanding processes that cut across a companys internal department and
processes that extend outside the company as well.
iv. The goals of supply chain management are to reduce uncertainty and risks inthe supply chain, thereby positively affecting inventory levels, cycle time,
processes and ultimately end-customer service levels. The focus is on
system optimisation.
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1.3 Some definition of supply chain management1.Supply chain management is the integration of the various activities
encompassed by the supply chain through improved supply chain relationshipsto achieve a sustainable competitive advantage.
2.Supplychain management is defined as the systematic, strategic coordinationof the traditional business functions and the tactics across these businessfunctions within a particular company and across business within the supply
chain, for the purposes of improving the long-term performance of theindividual companies and the supply chain as a whole.
3.Supplychain management is the ability to get closer to the customer.
4.Supplychain management encompasses the planning and management of allactivities involved in sourcing and procurement, conversion and all logisticsmanagement activities. It also includes coordination and collaboration with
channel partners, intermediaries, third party service providers and customers.In essence SCM integrates supply and demand management within and acrosscompanies.
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What is Integrated Supply Chain Management?Integratedsupply chain management is a proven business strategy that has
gained wide acceptance in recent year due to increasing customer demands
for quality, delivery and speed. New and radical ways of communicating,
coupled with cost reduction and more interdependent supplier, provider and
customer relationships, have contributed to the emergence of an integratedsupply chain approach.
i. Supply-chain management has become a hot competitive advantage as
companies struggle to get the right stuff to the right place at the right time.
ii. Supply chain management builds a chain of suppliers that focus on both
minimising waste and maximising value to the ultimate customer.
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1.4 Overview of Supply Chain Management
1.4.1 How is Inventory Created? :A basic purpose of supply-chain managementis to control inventory by managing the flow of materials.Inventory is a stock of
materials used to satisfy customer demand or support the production of goods or
services.
Inventories may be held in the form of raw materials and bought out components,
work-in-process (WIP) and finished goods.
1.4.2 Materials Management :One area of operations and logistics playing a
major role in supply chain management is that of materials management, which is
concerned with decisions about purchasing materials and services, inventories,
production levels, staffing patterns, schedules and distribution, either directly or
indirectly.
Traditionally, organisations have divided the responsibility for materials
management among three departments : purchasing, production control and
distribution.
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Many firms have restructured to centralise most materials management
tasks in one department called materials management department,although the name logistics management is also used sometimes. Thisapproach brings together all tasks related to flow of materials, from the
purchase of raw materials to the distribution of finished products orservices.
1.4.3 Supply Chains :A supply chain consists of all stages involved,directly or indirectly, in fulfilling a customers request. It not onlyincludes the manufacturer and suppliers, but also transporters,warehouses, retailers and customers themselves.
A supply chain is dynamic and involves the constant flow ofinformation, product and funds between different stages. Each stage of
the supply chain performs different processes and interacts with otherstages of the supply chain.
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A typical supply chain may involve the following stages :
Customers
Retailers
Wholesalers/distributors
Manufacturers and
Component/raw material suppliers.1.4.4 Objective of a Supply Chain :The objectives are :
(i)To maximise the overall value generated.
(ii) To achieve maximumsupply chain profitability.
(iii)To reduce the supply chain costs to the minimum possible
level.
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1.4. 5 Decision Phases in a Supply Chain
The three decision phases in a supply chain are :(i) Supply chain strategy or design
(ii) Supply chain planning and
(iii) Supply chain operation.
These three phases are briefly described in the following section.
i. Supply Chain Strategy or Design : Strategic or long-range decisions madeby companies include (i)The location and capacities of production andwarehousing facilities, (ii) Products to be manufactured or stored atvarious locations, (iii)Modes of transportation to be made available alongdifferent shipping legs and (iv)Type of information system to be utilised.The companysstrategic objectives must be supported by its supply chainconfiguration.
ii.Supply Chain Planning :The planning phase starts with a forecast for thecoming year of demand in different markets. Supply chain planningincludes decisions regarding the following.
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i. Which market to be served from which locations.
ii. The planned build up of inventories.
iii.The subcontracting of manufacturing.
iv.The replenishment and inventory policies to be followed.
v. Policies regarding back up locations in case of a stock out and
vi.The timing and size of marketing promotions.
iii.Supply Chain Operations : The supply chain operation aims at
implementing the operating policies in the best possible manner. Various
activities involved in this phase are : (i) Allocating individual orders to
inventory or production, (ii) Setting dates for fulfilling orders, (iii)
Generating pick lists at a ware house, (iv) Allocating an order to a
particular shipping mode or shipment, (v) Getting delivery schedules oftrucks and (vi)Placing replenishment orders.
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The design, planning and operation of a supply chain stronglyaffect the
overall profitability and success of a firm.
1.4.6 Process View of a Supply Chain
Two different ways to view the process performed in a supply chain are.
1.Cycle view 2. The push-pull view
1.Cycle View : According to this view, the processes in a supply chain aredivided into a series of cycles, each performed at the interface between two
successive stages of a supply chain. All supply chain processes can be broken
down into the following four process cycles:
(a) Customer order cycle, (b) Replenishment cycle, (c) Manufacturing
cycleand (d)Procurement cycle.
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Chapter 1
Introduction to Logistics
and Supply Chain
ManagementExhibit 1.2 : Supply Chain Process Cycles
The four process cycles in the supply chain are briefly discussed
in the following section :
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Customer Order Cycle : This occurs at the customer/retailer interface
and include customer arrival, customer order entry, customer orderfulfillments and customer order receiving.
(i) Replenishment Cycle : This occurs at the retailer/distributor interfaceand includes all processes involved in replenishing inventory of theretailer. The processes involved in the replenishment cycle include:
Retail order trigger, Retailer order entry, Retail order fulfillment andRetailer order receiving.
(ii)Manufacturing Cycle :This occurs at the distributor/manufacturerinterface and includes all processes involved in replenishing distributor(or retailer) inventory. The process involved in the manufacturing cycleinclude (a) Order arrival from the distributor, retailer or customer (b)
Production scheduling, (c) Manufacturing and shipping and (d)Receiving at the distributor, retailer or customer.
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iv.Procurement Cycle : This occurs at the manufacturer/supplier
interface and includes all processes necessary to ensure that materialsare available for carrying out manufacturing as per the schedule.
2. Push/Pull View of Supply Chain Process :All processes in the
supply chain fall into one of two categories: (i)Push processes and
(ii) Pull processes. Pull processes may be regarded as reactive
processes because they react to customer demand. Push processesmay be regarded as speculative processes because they respond to
forecast (speculative) demand rather than actual demand.
The push/pull boundary in a supply chain helps to separate, push
processes from pull processes.
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1.3 Push/pull Processes for a Personal Computer
Manufacturing Companys Supply Chain
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1.5Nature and Scope of Supply Chain Management
Three important activities involved in supply-chain management are (i)
purchasing, (ii) logistics, (iii) warehousing and expediting. These
activities form the framework for studying the nature and scope of
supply chain management.
1.5.1 Purchasing
Purchasing is responsible for obtaining the materials, parts and supplies
needed to produce a product or provide a service.
Purchasing Interfaces :Purchasing is the link between the
organisation and its suppliers. Operating units constitute the main
source of requests for purchased materials and close co-operation
between these units and the purchasing department is vital if quality,
quantity and delivery goals are to be met.
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Accounting :is responsible for handling payments to suppliers, dataprocessing is handled by the accounts departments which keepsinventory records, checks invoices and monitors vendor performance.
Design and engineering : usually prepare material specifications whichmust be communicated to purchasing.
Receiving : checks incoming shipments of purchased items to determine
whether quality, quantity and timing objectives have been met andmoves the goods to temporary storage.
Suppliers or vendors work closely with purchasing to learn whatmaterials will be purchased and what kinds of specifications will berequired in terms of quality, quantity and deliveries.
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The Purchasing Cycle :The main steps in the purchasing cycle are :
i. Purchasing receives the requisition
ii. Purchasing selects a supplier
iii. Purchasing places the order with the vendor
iv Monitoring orders and
vReceiving orders. Value Analysis : Value analysis refers to an examination of thefunction of
the purchased parts and materials in an effort to reduce the cost and/orimprove the performance of those items.
Outsourcing : Outsourcing refers to buying goods or services from outsidesources instead of making the goods or providing the services within the
firm. The reasons for outsourcing are :
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i. Outside source can provide materials, parts or services better, cheaperor more efficiently (if they are large-scale producers having
economy of scale).
ii. Expertise and knowledge of outside sources.
iii. A supplier may hold a patent on a necessary part/component.
iv. To have the advantage of flexibility.When companies downsize and narrow their focus on core activities.
JIT Purchasing : Just-in-time manufacturing techniques requires just-in-time purchasing. The easy part of JIT purchasing include having to deal withfewer suppliers and forming long-term relationships with suppliers whoemphasise co-operative spirit than low price. On-time delivery is usually the
primary need of JIT manufacturers, followed by small lot sizes.
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Management Suppliers:Good suppliers are a vital link in the supply chain.
Choosing Suppliers : When choosing suppliers, the key considerations
are:i Quality of the products or services and
ii On-time delivery.
Evaluating Sources of Supply (Vendor Analysis)
Vendor analysis is the process of evaluating the sources of supply
in terms of price, quality, reputation and service. The main factors acompany takes into account when it selects a vendor are:
(i)Price :
(ii)Quality :
(iii)Services :
(iv)Location :(v)Inventory Policy of Supplier :
(vi)Flexibility :
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Supplier Audits : Periodic audits of suppliers are helpful in gettingcurrent information on suppliers production capabilities, quality and
delivery problems and so on. Suppliers audits are also an important
first step in the supplier certification program.
Supplier Certification : Supplier certification is a detailed examination
of the policies and capabilities of a supplier. Supplier Partnerships : Nowadays, companies have become
increasingly aware of the importance of building good relationships
with their suppliers. Keeping good relations with suppliers helps in
maintaining a competitive edge. Many companies are adopting a view
of suppliers as partners. Suppliers can be a source of ideas thatcontribute to the competitiveness of an organisation.
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Management1.5.2 Logistics
Logistics refers to the movement of materials within a productionfacility, the shipment of incoming materials from suppliers and theshipment of outgoing products to customers.
Movement Within a Facility :The activities involved in the movementof materials within a production facility are :
(i)Removing materials from incoming vehicles and placing them on the
receiving dock.(ii) Moving materials from the receiving dock to inspections.
(iii) Moving materials from inspection to the warehouse and storing themuntil needed.
(iv)Retrieving materials from the warehouses and delivering them to
production operations when needed.(v) Moving materials between production operations.
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(vi)Moving finished products from final assembly and storing them in the
finished goods warehouse.(vii) Retrieving finished goods from the finished goods warehouse and
delivering them to packaging and shipping departments.
(viii)Moving packaged finished goods to the shipping dock and
(ix)Loading finished goods into outgoing vehicles at the shipping dock.
Incoming and Outgoing Shipments : Overseeing the shipment ofincoming and outgoing goods comes under the heading of trafficmanagement. This function handles schedules and decisions onshipping methods and times.
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Evaluating Shipping AlternativesA situation that arises frequently in some businesses is making a choice
between quicker (but more expensive) shipping alternatives such as
overnight and slower but cheaper alternatives. In some instances, there
is an overriding factor present that justifies sending a shipment by the
quickest means possible, so there is little or no choice involved.However, in many instances, urgency is not the primary consideration,
so there is a choice.
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1.5.3 Warehousing and ExpeditingWarehousing is the management of materials while they are in storage. It
includes storing, dispersing, ordering and accounting for all materials and
finished goods from the beginning to the end of the production process.
Contemporary Developments in Warehousing
Bar Coding : Bar codes are patterns of alternating wide and narrow blacklines and white spaces and numbers and symbols that are seen on everyday
products at supermarkets and retail stores.
The use of EDI linkages with other organisations can be part of a strategy
to achieve a competitive advantage by leveraging logistics performance.
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Distribution Requirements Planning : Distribution requirements planning(DRP) is a system for inventory management and distribution planning.
JIT Deliveries : JIT systems often require frequent deliveries of smallshipments that can make a tremendous burden on the delivery system inseveral respects:
(i) The increased traffic that results.(ii) There is a likely increase in transportation costs per unit.
(iii) Any strike of transport services or postal services affect the deliveryschedules causing disruption of the JIT-based companies.
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1.6 Managing the supply chain
Because supply chain management deals with the complete cycle of
materials as they flow from suppliers to production to warehousing to
distribution to the customer, there are many opportunities to enhance value.
Some of these opportunities are:
Postponement : Postponement means delaying any modification or
customization to the product as long as possible in the production process.
Channel Assembly : Channel assembly is a variation of postponement. It
sends individual components and modules, rather than finished products to
the distributor. The distributor then assembles, tests and ships the product to
the customers.
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Drop Shipping and Special Packaging : Drop shipping means the
supplier will ship directly to the end consumer, rather than to the seller,saving both time and shipping costs.
Blanket Orders :A blanket order is a contract to purchase certain items
from a vendor.
Invoiceless Purchasing :Invoiceless purchasing is an extension of good
purchasersupplier relations. In an invoiceless purchasing environment,there is typically one supplier for all units of a particular product.
Electronic Ordering and Funds Transfer :Transactions between firms
are increasingly done via electronic data interchange (EDI) which is a
standardised data transmittal format for computerised communications
between organisations.
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Stockless Purchasing : Stockless purchasing means that the
suppliers maintain inventory that is delivered directly to thepurchasersusing department rather than to a store for stocking and
using later.
Standardisation : Standardisation means reducing the number of
varieties in materials and components as an aid to cost reduction.
Other Techniques :
a) establishing lines of credit for suppliers
b) reducing the time money is in transit,
c) co-ordinating production and shipping schedules with
suppliers and distributors,
d) sharing market research information and
e) making optimal use of warehouse space.
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1.7 A model of supply chain managementSupply chain management is the systematic, strategic co-ordinationof the traditional business functions and the tactics across these
business functions within a particular firm and across businesses
within the supply chain, for the purposes of improving the long-term
performance of the individual firms and the supply chain as a whole.Exhibit 1.4 shows the supply chain management model. Supply
chain management coordinates the product flows across functions
and across firms to achieve competitive advantage and
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Chapter 1
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(SCM in short) whereas SCM considers additional issues beyond those ofproduct flow. For example, SCM consider manufacturing quality and
product pricing.
1.8 Business Logistics/Supply Chain Management
ActivitiesBusiness logistics/supply chain management process comprises various
activities (activity mix) that vary from firm to firm depending on a firms
specific organisational structure.
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Management1.9 What is Logistics?Logistics is defined as the process of anticipating customer needs and
wants, acquiring the capital, materials, people, technologies, andinformation necessary to meet those needs and wants, optimising thegoods or service providing network to customer requests andutilising the network to fulfil customer requests in a timely manner.
1.9.1 Types of Logistics
Logistics should be viewed as a part of management and hasfour subdivisions :
i . Business Logistics :
i i . M il i tary Logistics :
i i i . Event Logistics :iv. Service Logistics :
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Management1.9.2 What is Logistics Management?
Logistics management is the process of planning, implementing, and
controlling the efficient, effective flow and storage of goods,services, and related information from point of origin to point ofconsumption for the purpose of conforming to customerrequirements.
The definition reflects the need for total movement from point ofmaterial procurement to location of finished product distribution. It
also includes the flow of materials and services in both themanufacturing and service sectors (such as the government, hospitals,
banks, wholesalers and retailers).
Because of the various diverse functions coming under the purviewof logistics management, it is also known by several other namessuch as the following: (i) Business logistics, (ii) Channelmanagement, (iii)Distribution management, (iv)Industrial logistics,(v)Physical distribution management, (vi)Supply management, (vii)Materials management, (viii)Quick-response system, (ix)Logisticalmanagement and (x)Supply-chain management.
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Additional Definitions of Logistics and Logistics Management Logistics is a function or activity concerned with getting products and
services where they are needed and when they are needed or desired.
Logistics involves the integration of information, transportation,
inventory, warehousing, materials handling and packaging.
Logistics integrates materials management with sales and distributionmanagement.
Logistics adds value by creating time utility and place utility.
Logistics management is concerned with creation of value for customers,
suppliers and stakeholders of the firm.
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Management1.9.3 Scope and Importance of Logistics
Management :
Some of the activities encompassed under logistics umbrella areillustrated inExhibit 1.5
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Logistics management adds value when inventory is correctly maintained tofacilitate sales to meet the customer demand. Logistics typically accounts forone of the highest costs of doing business, next only to materials inmanufacturing or cost of goods sold in wholesaling or retailing. Therefore, itmay be inferred that Logistics while vital to business success, is quiteexpensive.
Benefits gained by firms having good logistics management include:
Capability to identify potential operational break downs and taking correctiveaction prior to failure of service to customers.
Performance above industry average in terms of inventory availability as wellas speed and consistency of delivery to customers.
Capability to monitor logistical performance on a real-time basis through
efficient information systems.
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High delivery performance (near perfect orders).
Commitment to continuous improvement.Firms having world-class logistical competency can become attractivesuppliers and ideal business partners.
1.9.4 Logistical Competency
Logistical competency is a relative assessment of a firmscapability to offercompetitively superior customer service at the lowest possible total cost.
The characteristics of firms having superior logistics performance orcompetency are: (i) alternative logistical capabilities, (ii) emphasis onflexibility, (iii) time-based performance, (iv) operational control and (v)commitment to perfect customer service performance.
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1.10 Competitiveness and Competitive Advantage
Competitiveness is a major factor that determines whether acompany prospers, barely manages to survive or ceases to exist sooneror later.
In a broader sense, competitiveness can be defined as thedegreeto which a nation can produce goods and services which meet the test ofinternational markets while simultaneously maintaining or expanding
the real incomes of its citizens.1.10.1 Dimensions of Competitiveness
Competitiveness refers how effectively an organisation meetsthe needs of customers relative to other firms which offer similar goodsand services.
The dimensions of competitiveness that measure the effectivenessof production function of a manufacturing firm are discussed briefly inthe following paragraphs.
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(i) Cost or Price :Price is the amount a customer must pay for the product
or service. profitability is related to the difference between price andcost. Hence most firms focus on lowering cost of goods and services
instead of accepting lower profits as a result of competing on price.
(ii)Quality :Quality refers to the ability of the product or service to meet
the requirements of customers and achieve customer satisfaction for the
firm selling the goods and services.(iii)Product or Service Differentiation : This refers to any special
features (such as design, cost, quality, availability, delivery speed,
convenience of use, warranty etc.) that cause a product or service to be
perceived by the customers as more suitable or attractive than the
product or service offered by the competitors.
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iv.Dependability as a Supplier : A supplier who has a reputation fordependability (i.e., keeping the promised delivery schedule) or who has
the capability to meet customer demand through off-the-shelf availability
of the product has a strong competitive advantage.
v. Flexibility/Service : This refers to the ability of a firm to respond to
changes demanded by the customers. A firm having higher flexibility isable to have a competitive advantage over other firms.
vi.Time :Time to perform certain activities refers to several aspects of an
organisationsoperations such as
(a) how quickly a product or service is delivered to a customer (i.e.,speed
to market or minimum lead time to supply).
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(b) how quickly new products or services are designed,developed and launched to the market (speed to market ofnew products or services).
(c) the rate at which improvements in products and processes
are made.
vii. Customer Service : Service might involve after-sales servicesthat are perceived by customers as value-added,
viii.Employee Productivity and Managerial Expertise :Managers
and workers are the people at the heart and soul of any
organisation. Competent and motivated employees including
managerial personnel can provide a distinct competitive edge bytheir expertise, skills and creative ideas.
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1.10.2 Strategy and Competition
To compete successfully in business, a firm requires a business strategy andseveral functional-area strategies.
The business strategyof a firm includes:
(i) the market in which the firm is to compete.
(ii) the level of investment the firm has to make and
(iii) the means of allocating resources and integrating variousbusiness units of the firm.
The functional area strategies include
(i) the marketing strategy
(ii) the financial strategy
(iii) the manufacturing strategy or the production and operations strategyand
(iv) the logistics and supply chain strategy.
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Three generic or business strategies classified by Michael Porter are:
i. Overall cost leadershipstrategy, (ii)Differentiationstrategy and (iii)
Focusor market segmentation strategy.
1.10.3 Competitive Priorities
There are five basic competitive priorities: They are
(i ) Cost :Providing low cost products.(ii) Quality :Providing high quality products.
(iii)Delivery :Providing products quickly.
(iv) Flexibility :Providing a wide variety of products.
(v) Service :How products are delivered and supported.
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Management1.10.4 Competitive Strategies
Competition is inevitable for all organisations, regardless of size,type or geographic location. Even not-for-profit organisationscompete for resources and customers.
Competitive advantage is defined as what sets an organisation apart- its competitive edge.
Competitive strategies are the strategies that are concerned withhow the organisation is going to compete in a specific business orindustry. The choice of competitive strategy is based on thecompetitive advantage that the organisation is able to develop. Thedesign of competitive strategy is all about-exploiting theorganisations competitive advantage by finding ways to use itsresources, capabilities and distinctive competencies to set itselfapart from competitors.
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Logistics
Logistics can provide the firm with a distinctive competitiveadvantage. Logisticsservices and activities have opportunities to givethe firm an important advantage through (a)supply chain management,(b) quality of service, (c) outstanding information systems and (d)effective time-based competition.
Effective logistics management can provide a major source of
competitive advantage. The bases for success in the market place are (i)the customer, (ii) the competition and (iii) the company, popularlyknown as the three cs.
Exhibit 1.6illustrates the competitive advantage and the three cs.
Logistics management can provide numerous ways of increasing
efficiency and productivity and thereby contribute significantly toreduce unit cost of products.
Logistics management provides a value advantage to the firmimplementing the same.
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Three cs
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Customer service is an equally powerful means of addingvalue to the product.
Logistics management adds value when inventory is
maintained correctly to facilitate sales to meet customer demand
and achieve customer satisfaction.
1.10.6 The Concept of Value Chain
Supply chains are sometimes referred to as value chains, a
term that reflects the concept that value is added as goods and
services progress through the chain.
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Exhibit 1.7 : Generic Value Chain
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The value chain concept had been developed as a tool for
competitive analysis and strategy by Michael Porter. The generic
value chain conceptualised by Michael Porter is illustrated in
Exhibit1.7.
Value chain activities can be categorised as (i) pr imary activities
and(ii) support activiti es. The primary activities comprise of activities
such as inbound logistics, operations, outbound logistics, marketingand sales and service. The support activity comprise of activities such
as firms infrastructure (plant and equipments, machinery, buildings,
warehouses, handling equipments etc.) human resource management,
technology development and procurement).
Logistics management integrates the planning and co-ordinating
of the flow of materials and information from source to the user.
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Management1.11 Integrated Supply Chains
Definition
An integrated logistics/supply chain is a comprehensive systemwide view of the entire supply chain as a single process, from raw
materials supply through finished goods distribution.
A typical supply chain may involve several stages. They are : (i)
customers, (ii) retailers, (iii) wholesalers/distributors, (iv)
manufacturers and (v)component/raw materials/parts suppliers. Eachstage in a supply chain is connected through the flow of products,
information and funds. These flows may often occur in both
directions.
Since the objective of every supply chain should be to maximise
the overall value generated, it is necessary to integrate the activities ofthe various parties in the supply chain.
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Management1.11.1Objective of integrated supply chain
The three major objectives of integrated supply chain are
(i) Establishing integration of the supply chain process taking intoconsideration customer requirements,sales argets, productspecifications and process speed.
(ii) Improving customer order cycle time by increasingcustomer response,
reducing requirement of assets, reducing set-up time forproduction, having flexible
and short- cycle manufacturing processes and
reducing bills receivables collection time.
(iii) Developing information communication through efficient and communication systems.
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Successful supply chain management requires a change from
managing individual functions to integrating activities into key supply
chain processes. Shared information between supply chain partners can
only be fully leveraged through process integration. Process integration
means collaborative working between buyers and suppliers, joint product
development, common systems and shared information
1.12 Supply Chain and Competitive PerformanceEffective supply chain management depends on both the flow of
information as well as the flow of raw materials and finished products.
Even though only some activities in the supply chain add value, all add
costs. The objective of the supply chain is to optimise performance of the
entire chain to add as much value as possible for the least possible totalcost.
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Supply chain management efforts have been motivated most directly
by two of the value attributes : cost and timeliness. Suppliers need toreduce their costs in order to lower the prices to customers. This creates aneed to eliminate non-value adding steps throughout the productionnetwork. Inventory levels can be reduced by quicker and more reliabledeliveries from suppliers. Also faster flow of information from customersto suppliers and vice versa also could be useful in reducing the costs and
improving the timeliness of supply.1.12.1The New Rules of Competition
The present era is the era of supply chain competition. Anorganisation can no longer compete as an isolated and independent entitywith other similar stand-alone organistions. Instead, there is a need to
create value delivery systems that are more responsive to fast-changingmarkets. Also, the system has to be much more consistent and reliable indelivering that value. This requires the entire supply chain (i.e., valuedelivery system) to be focused on the achievement of the neededobjectives and goals to compete successfully.
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Management of inbound and outbound logistics is one capacity now
regarded by many firms as most basic to success in the market place.
Excellence in logistics process performance is necessary to ensure higher
product availability for a multitude of consumer products at a large number
of retail outlets.
The transition from volume-based growth to value-based growth will
require a greater focus on the management of core processes. In the past thecompetitive model of a business firm was based on product innovation
whereas, in the present, the competitive model will have to be based on
processinnovation. Hence, the basis for competing in the present era will
be
To gain competitive advantage through logistics, three key issues which areto be considered are : (i) Responsiveness, (ii) Reliability and (iii)
Relationships.
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i. Responsivenessmeans the ability of a firm to respond to its customers
requirements.
ii. Reliability means suppliers ability to meet delivery promises and/or
meet the quality standards for the materials and components supplied
by them.
iii.Relationships : The current trend in sourcing is that customers are
seeking to narrow down their supplier base, i.e.,having a single sourceor as few sources as possible. Many firms develop long-term
relationships with their suppliers to gain the benefits of partnerships.
Supply chain management focuses on managing the relationships
across complex networks of firms which are legally independent but
interdependent in reality.
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1.13 Evolution of Logistics Toward Supply
Chain Management
A single firm generally is not able to control its entire product flowchannel from raw material source to points of final consumption. The
physical supply channelrefers to the time and space gapbetween a firmsimmediate material sources and its processing points. Likewise, thephysicaldistribution channel refers to the time and space gap between the firms
processing points and its customers. Due to the similarities in the activities
between the supply channel and distribution channel of a firm, physicalsupply management (commonly referred to us materials management) andphysical distribution management (usually the responsibility of salesmanagement department) are integrated into what is referred to as businesslogistics managementwhich is now popularly referred to as supply-chainmanagement.
Exhibit 1.8 shows the evolution of the management of product flows(i.e.,logistics) toward supply chain management.
Exhibit 1.9shows the activities to be managed that make up businesslogistics (Supply chain process).
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Supply Chain Management
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Immediate Supply Chain
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Activity Mix
1. Physical Supply :Transportation, inventory maintenance, order
processing, acquisition, protective packaging, warehousing,
materials handling, information maintenance and supply
scheduling.
2. Physical Distribution :Transportation, inventory maintenance,
order processing, product scheduling, protective packaging,
warehousing, materials handling and information maintenance.
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1.13.1 Need for Logistics Management
Todaysorganisations worldwide need logistics management more thanever because of the following: 1. Competitive Pressures, 2. InformationTechnology, 3. Channel Power and4.Profit Leverage.
1.Competitive Pressures : During the 1970s, logistics received moreattention as a major cost driver to offset the effect of rising interest ratesand increasing energy costs. In addition the logistics costs became more
critical for many multinational companies because of globalisation of theirbusiness.
2.Information Technology :With the explosion of information technology,organisations gained the ability to better monitor transaction intensiveactivities such as ordering, transportation (movement) and storage of goodsand materials. Computerised quantitative models along with information
technology increased the ability to manage material flows and to optimiseinventory levels and movements.
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3. Channel Power :The channel power shifted from manufacturers towholesalers, distributors and retailers. This has had a great impact on
logistics.
4. Profit Leverage :Any amount of money saved in logistics costs has
a greater impact on the organisations profitability than a similar
increase in sales revenue. Any savings in logistics costs directly addsto the companysprofit.
1.13.2 Value-Added Role of Logistics
Logistics adds to product value by increasing (i)form utility, (ii)
place utility, (iii)time utility and
(iv)possession utility.
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1.13.3 Logistical Activities
Logistics managers are responsible for the following activities: (i)
Traffic and transportation, (ii)Materials handling, (iii)Warehousing andstorage, (iv) Inventory control, (v) Industrial packaging, (vi) Orderfulfillment, (vii) Demand forecasting, (viii) Plant and warehouse sitelocation, (ix) Production planning, (x) Return goods handling, (xi)Purchasing, (xii)Parts and service support, (xiii)Customer service levelsand (xiv)Salvage and scrap disposal.
These activities are briefly discussed in the followingparagraphs:
(i) Transportation:In a logistics system, the major focus is upon thephysical movement or flow of goods or upon the network thatmoves the product.
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i iStorage : It involves warehousing and inventory management which areclosely related activities.
i i i Packaging : The type of transportation selected affects the packagingrequirements both for moving a finished product to the market and for theinbound materials.
i i i . Materi als Handling: Material handling is crucial for efficient warehouseoperation.
iv. Order Fulfillment : Order fulfillment consists activities involved withcompleting customer orders.
v. Order Fulfillment : Order fulfillment consists activities involved withcompleting customer orders.
vi. I nventory Forecasting :Accurate forecasting of inventory requirements and
materials and parts are essential for effective inventory control, especially infirms using a just-in-time (JIT) or material requirement planning (MRP)approach to control inventory.
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vii. Production Planning :It is closely related to forecasting in terms ofeffective inventory control. Once the forecast is developed and the
current inventory on hand and usage rate are assessed, productionplanning managers can determine the units to be produced to meetmarket demand. Production planning is integrated into logistics.
viii. Purchasing : Purchasing or procurement is included in logisticsbecause the transportation cost relates directly to location of thesupplier sources.
ix. CustomerService : Customer service levels in many ways gluetogether other logistics areas. Decisions about inventory,transportation and warehousing relate to customer servicerequirements.
x. Site Location :A change in the location of a manufacturing plant or a
warehouse could alter time and place relationships between plantsand markets or between supply points and plants
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i.Theprimary or major objectiveis to efficiently and effectively move
the inventory in the supply chain in order to extend the desired levelof customer service at the least possible cost.
ii Thesecondary objectiveswhich facilitate achievement of the
primary or major objective are:
(a)To reduce inventory to the minimum possible level.
(b) To achieve reliable and consistent delivery performance to
enhance customer satisfaction and build long-term customer
relationship.
(c) To achieve maximum economy in freight costs.
(d) To ensure minimum or no damage to products during
transportation and storage.
(e) To ensure quick response to customer requirements.
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1.13.5 Role of Logistics in Supply Chain
Management
Supply chain management may be viewed as a logical
extension of logistics managementIt is also known as demand
chain management, demand flow management, value chain
management, value networks, and synchronisation management.
The terms supply chain, demand chain, value chain or value
network all used as synonyms. The generic value chain was
illustrated earlier inExhibit 1.10.
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Exhibit 1.10 : Logistics Supply Chain
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The outbound logistics involves physical distribution of finishedgoods (usually higher in value than raw materials). The inbound logistics
involves transportation of raw materials and component parts fromsuppliers to the firm, inventory requirements, warehousing, packagingand materials handling.
Logistics management added inbound logistics to the outboundlogistics of physical distribution.
1.13.6 The Role of Logistics in the EconomyLogistics plays a key role in the economy in two ways: (i)Logistics
is one of the major expenditures for businesses, thereby affecting andbeing affected by other economic activities, (ii) Logistics supports themovement and flow of many economic transactions and it is an importantactivity in facilitating the sale of virtually all goods and services.
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Management1.13.7 The Role of Logistics in the Organisation
In recent years, effective logistics management has been
recognised as a key opportunity for the improvement of both theprofitability and competitiveness of organisations.
The relationship between logistics and three critical elements of
the marketing concept (customer satisfaction, integrated effort and
adequate corporate profit) are shown inExhibit 1.11.
Exhibit 1.11 : Logistics Supports Marketing
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Marketing and Logistics
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Management1.14 Logistics Costs
Logistics costs are created by logistics activities such as customer
service, transportation, warehousing, order processing and information,
lot quantity and inventory carrying, which are discussed in the
following paragraphs:
i . Customer Service Level :The key cost trade-off resulting from varying
levels of customer service is the cost of lost sales. Expenses for
customer service support includes the costs of order fulfillment, parts
and service support and costs of return goods handling.
i i . Transportation Costs : These costs are determined by the activity of
transporting goods.
i i i .Warehousing Costs :These costs are due to warehousing and storage
activities and also due to warehouse and plant location selection
process.
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iv. Order Processing/I nformation Systems Costs :These costs are relatedto activities such as order processing, distribution communications anddemand forecasting.
v. Lot Quanti ty Costs :These costs are due to procurement and productionlot quantities. Lot quantity costs are related to purchasing or productionand these costs vary with changes in order size or frequency.
vi. I nventory Carrying Costs : Logistics activities that cause inventorycarrying costs include inventory control, packaging and salvage andscrap disposal.
1.14.1Total Cost Concept
The total cost concept is the key to manage logistics processeffectively. The organisation should have the goal of reducing the totalcostof logistics activities rather than merely focusing on each activity in
isolation.
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Exhibit 1.13 shows six major cost categories with which managementshould be concerned while making decisions regarding logistics activities
which drive these major cost categories. These six major cost categoriescomprise the fourteen key logistics activities listed below:
(i) Customer service
(ii) Demand forecasting
(iii) Inventory management
(iv) Logistics communications(v) Materials handling
(vi) Order processing
(vii) Packaging
(viii) Parts and service support
ix) Plant and warehouse site selection(x) Procurement
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(xi)Return goods handling
(xii)Reverse logistics(xiii) Traffic and transportation
(xiv)Warehousing and storage
1.15 Evolution of supply chain management
Eventhough the reference to supply chain management can be
traced to the 1980s, the supply chain management concept captured
the attention of senior level management in many organisations only
in the 1990s.
The era of physical, distribution management started in the
1960s and the focus was on the outbound side of the firmslogistics
system.
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Exhibit 1.13 : Total Cost Concept
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During the early 1970s, the focus shifted on the systems
concept and total systems cost. The systems relationship amongtransportation, inventory requirements, warehousing, exterior
packaging and materials handling were recognised.
In the 1980s, the logists or integrated logistics managementconcept began to be used in many organisations. Logistics, to startwith added inbound logistics (i.e., raw materials transportation
form supply points and raw materials storage) to outbound logisticsof physical distribution. Because of global sourcing of materialsand suppliers for inbound system, the need for coordination withthe outbound logistics system became critical for success oflogistics systems.
During the 1990s, the concept of supply chain managementcame into vogue and has now become the focal point forimproving the global market place.
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Logistics management integrates materials management and sales anddistribution management. Supply chain management integratesmanufacturing management with logistics management. Exhibit 1.14illustrates the above relations among materials management, sales anddistribution management, manufacturing management, logistics managementand supply chain management.
1.16 Importance of logistics/supply chain management
Logistics management is concerned with creation of value for customers,suppliers and stake holders of the firm. Logistics creates time and place utilityor value for the customers by making available the products customers needat the time and place desired by the customers. Good logistics managementviews each activity in the supply chain as contributing to the process of
adding value. The various reasons for increasing the importance of logisticsas a value adding process are:
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Management and Other Areas of Management
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1. Significant Costs
2. Increase in Logistics Customer Service Expectations
3. Importance of Logistics/Supply Chain to Competitive Strategy of
the Firm
4. Logistics/Supply Chain Adds Significant Customer Value
5. Customers Want Quick and Customised Response
1.16.1 Difference Between Logistics Management and Supply ChainManagement
Logistics management integrates materials management (in-
bound logistics) with sales and distribution management (outbound
logistics) whereas supply chain management integrates logistics
management with manufacturing management.
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1.17.1Supply Chain Drivers
The drivers of supply chain performance (i.e.,supply chain drivers) are :(i )production,
(ii)inventory,
(iii)transportation, (iv)facility location,(v)information,
(vi)sourcing and (vii)pricing.
These drivers of supply chain are discussed in the following paragraphs:
(i ) Production :The performance of the supply chain is very much dependenton production i.e.,what is produced, how it is produced (the manufacturing
process used) and when it has to be produced.
(ii)Inventory :All raw materials, work-in-progress and finished goods within a
supply chain are referred to as inventory. Any change in inventory policiescan greatly affect the efficiency and responsiveness of the supply chain.
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(iii) Transportation : Inventory has be moved from point to point in the
supply chain using transportation facilities taking the form of many
combinations of modes (multimodal) and routes, each having its own
performance characteristics.
(iv) Facility Location :Facilities are the places in the supply chain network
where inventory is stored, parts are fabricated and assembled into
finished goods. Decisions regarding the location of the facilities (plant),
their capacity and the flexibility of the facilities have a major impact on
the performance of the supply chain.
(v) Information : Information consists of data and analysis regarding
inventory, facilities (location, capacities etc.) transportation and
customers throughout the supply chain. Information affects each of the
other driver and hence is the biggest driver of supply chain performance.
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(vi) Sourcing : Sourcing is another important area in supply chain
management. Sourcing is the activity of buying or procuring theright materials in right quantities of right quality, in right
condition, in the right time, at the right price from the right
supplier.
(vii) Pricing : Pricing is the process by which a firm decides how
much to charge customers for its goods and services.
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ManagementExhibit 1.15: Supply Chain Decision-Making
Frame Work
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Exhibit 1.15 illustrates the supply chain decision-making
framework indicating the role of supply chain drivers.
1.17.2 A Framework for Structuring Supply Chain Drivers
Supply chain strategy aims to strike a balance between
responsiveness and efficiency that results in strategy fit with the
competitive strategy of a business organisation.The role of the supply chain drivers in the supply chain and
how they re used by supply chain managers to drive supply chain
performance are discussed in the following section:
(i) The Role of Facilities (Manufacturing and Warehousing) in the
Supply Chain
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The facilities are concerned with where of the supply chain, while
inventory is what is being transported along the supply chain and
transportation is how it is moved. Facilities are the locations to or fromwhich the inventory is moved (facilities include manufacturing plants
and warehouses).
The supply chain performance in terms of responsiveness and
efficiency is greatly influenced by facilities and their capacities to
perform their functions. Decisions regarding number of facilities and their locations play a
crucial role in the design of supply chain. The various components of
facilities decisions a firm must analyse are (a) location,
(b) capacity, (c) manufacturing processes, (d) warehousing
methodology (stock-keeping unit storage, job lot storage and crossdocking).
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Inventory occurs in a supply chain because of the mismatch between
supply and demand. Inventory plays an important role in the supplychain to increase the amount of demand that can be satisfied by having
the product ready and available when the customer wants it. Also
inventory plays a significant role in reducing the cost of the product by
exploiting any economics of scale that may exist during both production
and distribution.
Inventory has a significant role in the ability of a supply chain to
support a firms competitive strategy. The major inventory related
decisions to be made by supply chain managers to create more
responsive and more efficientsupply chains effectively are:
a. Cycle Inventory Decisionb. Another inventory related decision is determining how much safety
inventory to hold.
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i i i )Role of Transportation in the Supply Chain
Transportation is concerned with the movement of the product between
different stages in a supply chain. Like inventory, transportation too has agreat impact on both responsiveness and efficiency of the supply chain.
Transportation has a major role to play in a firms competitive strategy
when the firm is considering the target customers needs it intends to
satisfy.
Both inventory and transportation may be used by a firm to increase itsresponsiveness or efficiency. The optimal decision would be to find the
right balance between the two.
The overall trade-off for transportation is between the cost of
transportation of a given product (efficiency) and the speed with which
that product is transported (responsiveness).
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(iv)Role of Information in the Supply Chain
Importance of information as a driver of supply chain performance has
grown recently because of the developments in information technology. Firms have increased the use of information to become more
responsive and efficient. However, information also has a level at
which trade-off between efficiency and responsiveness must take place.
Another key decision regarding information is what information is
most valuable in reducing cost and improving responsiveness within asupply chain.
The key components of information within a supply chain which
a firm must analyse to increase efficiency and improve responsiveness
within its supply chain are:
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a) Push Versus Pull Phase in the Supply Chain
b) Co-ordination and Information Sharing
c) Forecasting and Aggregate Planning
d) Enabling Technologie
(v)Role of Sourcing in the Supply Chain
Sourcing decisions play a crucial role in the competitive strategy of thefirm because they affect the level of efficiency and responsiveness that can
be achieved by the supply chain. The key sourcing decisions that are made
within the firm include (a)in-house or outsource to a third party, (b)supplier
selection and (c)structure of procurement. Sourcing decisions should facilitate increase in the overall supply chain
profits to be shared across the supply chain.
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Pricing plays a significant role in the supply chain performance as it affectsthe level of responsiveness required as well as the demand profile served by
the supply chain. Pricing decisions include the following key components: (i) Pricing and
economies of scale, (ii)Everyday low pricing versus high-low pricing, (iii)Fixed price versus menu pricing.
All pricing decisions should have the objective of increasing the profits of
the firm and that of the supply chain partners.1.17.3 Obstacles to Achieving Strategic Fit
To achieve strategic fit, a firm should be able to find a balancebetween responsiveness and efficiency of its supply chain along theresponsiveness spectrum which best matches with the type of demand
targeted by it. Over the years, the supply chain environment has changedconsiderably and the firms have been facing many obstacles that havecreated difficulty for the firms to achieve the ideal balance betweenresponsiveness and efficiency.
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(a) Increasing Variety of Products
(b) Decreasing Product Life Cycles
(c) Highly Demanding Customers
(d) Fragmentation of Supply Chain Ownership
(e) Globalisation
(f) Difficulty in Executing New Strategies
All the obstacles discussed in this section are making it more difficultfor the firms to achieve a proper balance between responsiveness and
efficiency in their supply chain and therefore to achieve strategic fit.
1.17.4 Change Drivers
Another way of understanding the drivers of supply chain
management is through the understanding of the forces of change in the
dynamic business environment.
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ii Shift of power in the supply chain.
iii Liberalization of economic policies of the government.iv Globalization of business and
v Technological developments or advancements.
These forces of change (or drivers of supply chain management) are
briefly discussed in the following paragraphs.
i The Empowerment of Consumer : In todays market place, consumersare enlightened and more knowledgeable. They are empowered by the
information available from the internet and from many other sources.
Because they have enough opportunity to compare price, quality, and
services of alternative products they are in a position to demand
competitive price, high quality, customised products, convenience,flexibility and responsiveness. They do not tolerate products of poor
quality.
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ii. Shift of Power in the Supply Chain :Traditionally, for consumer products,
manufacturers dominated the supply chain or distribution channels. Largemanufacturers led vendors/suppliers and wholesalers, distributors and retailers.
Product development, promotion and/or brand management were given more
importance than distribution and logistic systems. large retailers exerted
pressure back in the supply chain to force manufacturers to change their
logistics and supply chain strategies to include tailored pallet packages,
scheduled deliveries, continuous replenishment systems etc.
iii.Liberalisation of Economic Policies of the Government :Transportation,
communications, energy and financial systems are the four legsof business
operations on which the infrastructure of many businesses is based. Revolution
in communication industry introduced Internet, Email, Electronic Data
Interchange (EDI) etc., which improved the efficiency and effectiveness of
communication.
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ii.This has led to dramatic improvements and opportunities in logistics
and supply chains.iv Globalisation of Business :Probably globalisation is the most important
of the five change drivers, which had the biggest impact on logistics andsupply chain management.
v Technological Development or Advancements : Technology facilitateschanges at the micro level. But it can also be viewed as a change driver
on a macro or external basis. The revolution that has occurred intechnology-both hard ware and software has brought in major changesin the way companies do business.
Advancements in information technology has ushered an era ofInformation Age. Information technology has changed how buyersand sellers interact in the market place, both business-to-business (B 2
B) and business-to-customer (B 2 C) and how business operates.
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