reading material for logistics & scm
DESCRIPTION
Study Materials for LogisticsTRANSCRIPT
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SIES
EPGPBM Second Semester
( 2012 - 2013 )
Course: Logistics and Supply Chain Management Professor-Yashodhar Uchil
Introduction to Logistics
What is Logistics?
• Philip Kotler defines logistics as the process of planning, implementing, and controlling the
physical flows of materials and finished goods from the point of origin to point of use to
meet the customers need at a profit´.
In Other Words
• Logistics moves and positions inventory to achieve desired time , place and possession
benefits at the lowest total cost.
Why is Logistics Important?
• Logistics costs is anywhere between 8-13% of GDP
• It leads to Competitive advantage
• It helps reduce inventory across supply chain contributing to stronger cash flows.
• One cannot accomplish any marketing; manufacturing or international commerce
without logistics • Customer expectations are increasing
• It adds value to the supply chain by strategically positioning the inventory
Logistics effecting Profitability..
Reducing raw material input cost through intelligent sourcing and inbound logistics
optimization
Increasing productivity/through put from the plant
Choice of cost effective technology
Reducing outbound logistics cost
Quick/Prompt response
Since all of the above can be controlled by effective logistics management, logistics assumes a
pivotal significance in Business Strategy
The Functionality Of Logistics
Order processing
Inventory Management
Transportation
Warehousing
Facility Network design
Order Processing
Very important stage since it is the input stage.
Order registration
Order checking
Coordination
IT plays a very crucial role today since information is power as it helps even in forecasting
customer requirements
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Inventory Management
Objective is to achieve desired customer service with minimum inventory commitment
Core Customer Segmentation - Pareto Principle
Product Profitability – High availability of Profitable products
Transportation Integration-Assortments of products through shipment consolidation
Time based performance – Reduce safety stock
Competitive performance-Positioning inventory
Transportation
As a Crucial cause it accounts for 60-70% of Logistics Cost
Cost – But not at the cost of business
Speed – Higher speed-Higher costs
Consistency – Since unexpected variance creates serious supply chain operational problems
Warehousing
This largely helps in adding value to the products apart from the storage
Kitting
Sorting & Sequencing
Labeling
Packaging
Transportation Consolidation
Product Modification
Facility Network Design
Impacts customer service capability and cost
Determining the number and locations of all warehouse /distributor/retailer facilities
Inventory levels at each facility mapped/ascertained to the customer requirements
Networking between manufacturing plants, warehouses, cross dock operations and retail
stores.
What Is Distribution
The steps taken to move and store a product from the supplier stage to a customer stage in
the supply chain
OR
It is the process of delivering the products manufactured or a service rendered by a firm to
the end user.
Importance of distribution
It is a key driver of overall profitability of the firm
It impacts the supply chain costs .
It impacts customer experience directly.
The right distribution network can achieve a supply chain objective of low cost and high
responsiveness
A major task of distribution is management of demand
Demand management involves anticipating the customer requirements and fulfilling them
against defined customer service norms
Requirement fulfillment is done through proper distribution network
Levels Of Distribution Coverage
Mass distribution-Suitable for low priced products with huge consumer demand eg.,
thumsup, lifebuoy etc.
Selective Distribution-Small market size hence selected locations
Exclusive Distribution –High-end products-small customer size.
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Transportation Functionality What is Transportation?
It is an activity of movement of people ,goods from one place to another and helps in trade
and commerce
Transportation serves two purposes ,one is the product movement and the other is the in-
transit storage
The guiding principle for choosing a mode of transportation is the least cost/unit weight or
volume moved over a unit distance
Modes Of Transportation
Road accounts for 39% of the cargo moved
Rail around 35% of the cargo moved
Inland water
Sea Account for the balance
Air
Road Transportation
Some Highlights
Approximately 25mn trucks on road
The avg. distance travelled by a truck is 250-300kms/day vis a vis 550-600kms.day in
developed countries.
The avg operating cost of an Indian truck is INR 15/km
The national highway carries nearly 40% of the road traffic
The national and state highways account for 1.42 and 5.56 percentage respectively of the
roads in the country
Rail Transportation
It is used in the main supply of essential commodities
The Indian railways operate through a network of 6,896 rail stations across 62,800 kms.
Goods movement is done through 2,53,186 wagons with a total carrying capacity of
10.6million tonnes.
96% of IR cargo consists of bulk items like coal, iron ore , cement, fertilizers , raw materials
for steel plants, finished steel products, and petroleum
Bulk cargo is transported through this mode cause of the cost advantage over other modes
Sea Transport
The Shipping industry is divided into
Liner service
Tramp shipping
Types : Cargo ships/freighters can be divided into four groups, according to the type of cargo
they carry.
1. General Cargo Vessels- packaged items like chemicals, foods, furniture, machinery, motor
vehicles, footwear, garments, etc
2. Tankers- petroleum products or other liquid cargo.
3. Dry-bulk Carriers- coal, grain, ore and other similar products in loose form
4. Multipurpose Vessels -different classes of cargo – e.g. liquid and general cargo – at the same
time.
The major sea trade is handled at 11 major sea-ports (95%intl and 85%domestic)
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Air Transport
The most expensive of all the modes of transport
Its mainly used for highly perishable items and urgent shipments
Air traffic is handled by 8 international airports,87 domestic airports and 28civilian
airports(armed forces)
Air transport is concentrated around gateway airports such as Mumbai, Chennai, Delhi,
Kolkata and Bangalore .These airports handle 87 % of the air-cargo traffic in India
Inland Water Transportation
It is an eco-friendly transportation mode
India has 1,45,000kms of IWT infrastructure comprising of rivers , lakes and channels
IWT is an alternative mode of transportation and cargo movement through them in India is at
1% compared to 10-12% in UK, Europe and China
It is a good option for hazardous materials
Besides lower fuel consumption and construction cost IWT has the advantage of ensuring
minimum human loss as opposed to road and rail accidents
Pipeline
The basic advantages of pipeline is that they reduce operational costs though the initial
investment is very high
In India it is used for oil transportation by all public and private sector petroleum refineries
Currently 27% of the petroleum products ( petrol, kerosene and diesel) are moved by
pipelines over a distance of 6,350kms in India
The cost of moving oil by rail or road increases every year but with pipeline it is just the
opposite
Ropeways
In India more than 16% of the geographical area is hilly where ropeways is used largely
They have the following advantages
1. They cause the least damage to the ecology
2. Inaccessible hilly areas can be reached in short times
3. Other modes of transportation are uneconomical
4. Bulk material can be moved over short distances
Mainly used in Sikkim, Meghalaya ,Mizoram ,Himachal Pradesh and Uttar Pradesh
Choice of Transportation mode
The mode selection depends upon the product characteristics and customer service
requirements
Raw materials whose unit value is less is transported in bulk through cheaper modes of
transport –rail;sea
High value items are required faster and in small quantities-road ; air
The decision lies on three parameters namely
Cost-But not at the cost of business
Speed- The speed at times is more crucial than the cost of service for better service levels
Reliability- this is related to the ability of the carrier to deliver the shipment in good
condition within the stipulated delivery timeframe to the customer
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Other factors which help in deciding
Availability- it depends upon the existing infrastructure and the ability to reach the said
locations
Capability- the ability to accommodate the cargo in terms of size , weight and quantity for
transportation to its destination
Frequency- the no of scheduled trips between locations
Factors influencing freight cost
Volume- with the economies of scale the cost of operations is distributed over large volumes
resulting in lower per unit cost of cargo movement
Distance-The variable cost is directly proportional to the distance travelled-fuel and
maintenance
Product Density- has two dimensions of weight and volume and the limitations of the carrier
plays a role
Product shape- mainly referred to as ODC’s plays a role in the cost of transportation
Product Type- The nature of the product decides the special conditions of transport like
temperature controlled vans .May need special containers like tankers or vans specifically
designed against theft
Market Dynamics- Rates are fixed by agents and not truck owners , supply demand ratio in
a particular structure, odd and difficult routes
Calculation for transportation
• The weight of the package is considered as actual weight or volumetric weight
whichever is higher
• Volumetric Weight in kilograms= Width x Length x Height in centimeters / 6000
• For Sea-freight shipments the measure is in cubic metres(CBM)
CBM Calculation Formula : Length (centimeter) x Width (centimeter) x Height (centimeter) /
1,000,000
For Air-freight the measure is in kilograms(KGS)
Warehousing It is a support function and largely helps in adding value to the products apart from the storage
Kitting
Sorting & Sequencing
Labeling
Packaging
Transportation Consolidation
Product Modification
Warehouse Options
For acquiring space , the following are the three options
Private Warehouse-refers to the facility under the firm owning the products.
1. Ideal when product needs specific handling
2. Volumes handled are high and hence justified
3. A high degree of control over operations is required
Public Warehouse-For general cargo and provides market penetration but poor control over
operations -CWC-467 warehouses-111custom bonded
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Contract Warehouse-product specific warehouses or outsourced facility of a service
provider
Warehouse Site Selection
Revolves around two major factors
Cost
Service
The other factors for the site selection are
Infrastructure- approach road ; power , manpower availability.
Market- customer proximity or closeness to consumption centers for better service levels
Access- effects primary transportation costs
Primary transportation cost- has an impact on the product cost and will influence the
frequency of trips
Availability- Space availability and cost may lead to move away from metros which adds on
transportation
Product-Perishabililty , FMCG products
Regulations-explosives ; DGR goods the storage site is guided by the govt.regulation
Local levies- sales tax and octroi disparities to be considered
Warehouse decision model
Following factors need to be checked upon
Product-the nature of the product will decide the type of storage-temp controlled –FDA
regulation
Characteristics- value density will help decide on the investments to be made.
Objectives-volumes will justify private warehouses and for seasonality public or contract
storage can be used.
Strategic decisions- layout ;material handling systems and storage schemes will depend on
financial resources , objectives and payback period
Tactical decisions- reduction in order cycle ; efficiency in material handling , packaging to
reduce damages, level of CS to be offered
Operational decisions- increase operations efficiency and reduce operating costs
No of warehouses- financial and managerial skills to manage product varieties and volumes
and market
Warehouse Options- will depend on volumes and customization required
Warehouse Costing
Fixed cost
1. Rent
2. Capital costs
3. Salary wages of employees
4. Utilities
Variable costs
1. Repair and maintenance
2. Material handling cost
3. Transportation
4. Packaging
In general the ratio of the fixed cost varies from 25-45% of the total cost of the warehousing
operation. Inventory carrying cost is not included in the warehouse cost
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Virtual warehousing
Used by very large organizations operating in global markets with the help of IT systems
Success depends upon the availability of
Efficient transportation system
Speedy communication and computing systems
Networking facilities
A real time tracking system
Inventory software management
Performance parameters
Stock Turnover ratio-ratio of sales volume to the value of the stocks held in the warehouse
,the more the turnout better is the efficiency
Warehouse cost to sales ratio-the higher the volume the lower the fixed cost of operations
Warehouse cost per unit handled –It is the total warehouse cost divided by the no of pallets
or boxes
Occupancy rate of warehouse space-it is the actual space used as a % of the total available
space
Warehousing in India
The types of arrangements one normally sees
Captive warehouses located in the manufacturing area
Network of distribution warehouses at different locations by hiring space form private
warehouses
Network of stock points by hiring space from CWC or SWC
Using godowns available with stockists /distributors /dealers at major market centers
Warehouses in India do not operate on economies of scale .
High rise, multistory and fully automated warehouses are very rare in India
Cold chain infrastructure
The available storage capacity in India is 6-7 % of the of the fruits and vegetable produce.
Some issues
High capital cost in setting up the facility
Low returns with a longer payback period
High Operating cost due to high power tariff
High import and excise duties on cold storage equipment
Warehouse Layout Design
The following factors are to be taken into consideration
Make the best use of the available space
Use a “unitised” load system suitable for storage
Minimize goods movement by proper storage area allocations
Provide flexibility for changing future needs
Provide safe , secure and clean working conditions
The location of the stock directly effects the total material handling costs and space utilisation
The following steps needs to be considered.
Define the location for receiving and shipping functions
Allocate separate area for slow, medium and fast moving
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Define the locations of fixed obstacles like columns; staircases; washrooms etc.
Leave minimum path for movement of people, material and handling equipments
Space for material handling equipment and packing material
The following parameters need to be considered
Item Turnover-minimum handling cost to throughput ratio
Space utilization-space utilized to open space must be in the range of 70:30 to 70:25
Product Configuration-care to be taken for large items
Product Characteristics-Shelf life of a product
Good Housekeeping- directly effects productivity
Safety and security-The layout should ensure safety of people , products and equipment
during product storage
Effective warehousing
Points to be considered
Maximum utilization of storage space
Higher labour productivity
Maximum asset utilization
Reduction in material handling
Reduction in operating cost
Increased inventory turnover
Reduced order filling time
Warehousing functions
Material Storage :the same has to be carefully planned considering variables like product
categories ,product mix, product characteristics, expiry dates etc.
Consolidation : this ensures cost saving on freight
Break Bulk : its normally a trans shipment point where bulk orders are broken into small
shipments as per order
Cross Docking: here the larger shipments from multiple suppliers are broken into small
shipments and consolidate again for mix bag.
Mixing: small shipments are assembled to make the final product
Postponement: Parts and components are kept on hold and final assembly is on hold till the
order
Packing: Packing-repacking is done as per the order received at the warehouse; additionally
labeling is done
Information handling function
Need for a proper WMS for managing inventory.
Goods Inwards
Goods Outwards
Stock outs
Excess stocks
Invoicing
Warehouse expenses
Transit damage and breakage
Consignment Tracking
Inspection and auditing needs to be done on an ongoing basis and recorded for review
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Logistics Management Logistics management while coordinating and optimizing all the logistics activities also
integrates logistics with various functions like sales, marketing, manufacturing, IT and
finance .
It helps in design and administration of system to control the flow of materials, work in
progress and finished inventory for profitable business
Objectives of Logistics Management
Inventory reduction
Reliable Delivery Performance
Freight Economy
Minimum product damages
Quick response
Logistics Management-Challenges
The logistics process is becoming more demanding and complex because of the change in the
business environment in which it has to operate
Escalating customer demand
Cycle time reduction
Globalization
Restructuring
Supply chain partnerships
Environment awareness
Productivity pressures
Outsourcing
It is a strategic approach with the following benefits;
Helps focusing on core competencies
Reduces infrastructure costs
Helps reduce logistics costs drastically
Better order cycle time.
Wider geographical coverage
Logistics Outsourcing To
Wholesaler – 2PL
Integrator- 3PL
Consultants -4PL
3PL or third party service provider
External to the company and provide one or more of the entire logistic service portfolio.
However there is an increased demand for Integrated logistics service provider in today’s world
Reasons for hiring 3pl services
Reduction in risk and liability
Value added service to the customers
Source of process improvement
Wider market coverage
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4PL - Fourth party logistics service provider
4pl assembles and manages the resources, capabilities, and technologies of its own organization with
those of complementary service providers to deliver a comprehensive supply chain solution
Advantages of hiring 4pl services
They cover the entire supply chain .
Collaborative approach on a resource sharing basis.
The integrators alliance are led by IT based and not asset based service providers
The arrangement is flexible.
Steps to be followed in selection of a service provider
Define logistics problem
High logistics cost
Longer order cycle time
Increased customer complaints
Reverse logistics
Route selection
Logistics integration
Identify the problem area
Transportation
Warehousing
Packing
Inventory
Material Handling
Storage
Establish objectives
Cost reduction
Performance cycle compression
Customer complaints reduction
JIT delivery
Freight Optimisation
Route selection
Inventory carrying cost
Search for Service provider and solicit proposals
Proposal evaluation and Selection
Credentials
Logistics infrastructure
Experience and customer base
Technology base
Cost of service
Reliability
Government liaison
Formation of partnership based on….
Switching costs
Existing Channel Integration
Degree of control
Legal aspects
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E-Commerce Logistics-An emerging trend It means commercial transactions through the electronic media
It involves using network and communication technology for all internal and external
activities in the value delivery chain of a business process
Products and service are displayed in digital form on company websites
Types
Business to Business (B2B) commerce- Business transactions between two organizations
Business to Customer (B2C) commerce- Interaction between organization and the customer
directly
The main enablers of e-commerce are Internet and EDI technologies
making the world a global village in the true sense
Logistics –The back bone of e-commerce-Facilitates and executes physical flow of goods
There are basically two modes of delivery
Direct to the customer through LSP
Through the dealer nearest to the customer locations
Manual operations have no scope in e-commerce logistics operations.
E-commerce Logistics Solutions
They use the following design considerations
Online facility for organising and tracking shipment
Online order status and documentation
Online despatch documentation and service
Auto reminder for payments
Seamless interface with existing CRM or ERP system
Online alert for critical information through sms/e-mail
MIS reports on past data analysis ,delivery history etc
E Logistics Structure and Operations
Order Processing: Helps select more than one product; offer credit facility/part
payment/online or daily processing
Inventory Management: Online monitoring and delays to be communicated to the customer
Order Execution: Order to be executed passed onto the vendor with details electronically
and assigned to a LSP
Shipping: Choice of carrier is online along with despatch schedule
Tracking and Tracing :Status available on the website
Payments: Through Credit/Debit cards . The system generates online invoices/delivery
notes/credit terms.
Transaction security: Electronic fraud check systems and control applications in place
Order postponement, cancellation, substitutions:
Incase the inventory is not available the customer needs to be informed and offered
substitutes/postponement
Reverse material flow: In the event of dissatisfaction the product return policy needs to be
in place and executed by the LSP of the vendor
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Logistics Resource Management
It is a new IT tool providing a software for automating, planning, managing and optimizing e-
commerce logistics activities. It provides information on the following:
Cross Border regulatory compliance
Total landed costs(including,taxes,duties,levies)
Alert notification in exceptional situations
Track goods movement
Support carrier selection and negotiation
Provide route and lane optimisation
E-business and the distribution network
Response time – physical products longer , e-products like music or forms shorter
Product variety- larger than a brick and mortar store
Product Availability- is very high..demand can be forecasted
Customer experience-easy access , no business hours
Faster time to market-Immediate availability
Order visibility-Very high-IT plays a very big role
Direct Selling-less of channels give cost advantage
Flexibility in pricing,product portfolio and promotions
Global Logistics The need for Global logistics arises from…..
With advancements in information and communication the world has become a global village.
For global trade cargo needs to be moved physically across national boundaries.
Three focus areas of Global Logistics are:
1. Domain knowledge
2. Connectivity with international cargo carriers
3. Documentation
Transportation
In Global Logistics mainly Air or Sea mode is used
In the Indian subcontinent across India,Nepal,Bhutan and Bangladesh road transportation can
be used
Within Europe Rail network is used largely cause of the availability of an efficient train
network
For mode selection the following is considered
1. Location of Market
2. Cost of transportation
3. Speed
4. Reliability of mode used
Insurance
In domestic movement carriers take responsibility
In sea cargo carriers do not take the responsibility and the shipper goes in for marine
insurance which are of two types
1. Open blanket coverage
2. Special coverage (one time)-relatively expensive
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The shipper has to specify the kind of protection
General Average – Shared by all the parties
Particular Average-Specific Insurance cover
1. Fire and sea peril-cause of unusual forces of nature
2. Free Of damage insurance-covers the total actual loss of cargo
3. Named perils – includes fire and sea perils plus additional as named
4. Fire and sea perils with averages- not necessary that the vessel is stranded , sunk , damaged
by fire or collides
5. All risk insurance-The most comprehensive insurance
Air shipments also needs to insured but is not as comprehensive as marine insurance
Packaging
Logistical packaging needs to withstand varying storage , transit and handling conditions
It has to comply with the shipping regulations of the countries of origin and destination
The following needs to be taken care of
1. Weight-the weight of the packaging adds to the gross weight of the shipment and hence over
design to be avoided
2. Should be able to take care of all types of material handling and hence unitization like
palletization is recommended with shrink wrap
3. Pilferage and theft-codes should be used to mark the contents
4. Containerization -provides extra safety to the products but the right container should be
used for the kind of cargo
Intermediaries -They are two types
Freight forwarders who help in
1. Traffic Operations - Choosing the right mode and carrier
2. Initiate or organise the documentation from the shipper
3. Custom clearance of the cargo as per regulations at the port of origin
4. Customs clearance and documentation at the port of arrival
5. Cargo movement and handling at the port of entry and destination
They charge on the following
Freight cost /Port charges/Cost of documentation
They help the shipper in reserving space on an airline/shipping vessel
Custom house brokers-They basically assist in documentation, movement of cargo to
Custom bonded warehouses , inspection and clearance
Documentation
Either in paper form or in digital form using EDI it is necessary for control on movements of
goods and currency flow in and out of the country
1. Export license - permit allowing the goods to be exported
2. Commercial Invoice-it details the goods , prices, duties , taxes etc
3. Certificate of origin-declaration prepared by the exporter to identify
4. Inspection certificate-issued by an inspection agency appointed by the govt stating the
goods are in good condition prior to export
5. Insurance certificate-document issued to provide insurance
6. Packing list- lists the no of pieces , contents, weight and measurement of each item in the
consignment
7. Dock receipt-proof of delivery received at the dock or warehouse
8. Airway bill-for receipt of goods made by the air-carrier
9. Bill of lading-for receipt of goods meant for sea transportation.
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Introduction to SCM Logistics v/s Supply Chain Management….
SCM Definition
A Sequence of events and processes that take a product from “DIRT TO DIRT”
Ultimate Supplier → Ultimate Source
Plan , Source, Make, Deliver and Return
Integrates supply and demand management within and across companies
Five major trends that make SCM critical
Increased variety
Shorter Product Life Cycles
Higher level of outsourcing
Globalization
Changed Power equations in chain
Components of SCM
Plan Strategy for managing all resources that go towards meeting customer demand for a product or
service
Source Choosing suppliers that will deliver the product or services
Setting pricing, delivery and payment processes and matrix for monitoring the performance
Make Making schedule for production, testing, packaging and preparation for delivery and setting
matrix for monitoring and control
Deliver Coordination of receipt of order from customers, developing a network of warehouses, carriers
to get the product to the customers, invoicing and getting payments from the customers.
Return / Reverse Flow Setting up mechanism for getting defectives and surplus products from customers.
May also involve collecting products at end of the life cycle, recycling, packaging
Historical evolution of the Supply Chain
Product Variety: Single variety → Wide variety → Customization
Chain Ownership: Vertically Integrated firms
↓
Long term partnerships with chain partners
↓
Long term partnerships with loosely held networks
Supply Chain Performance in INDIA
SCM Challenges for the FMCG sector
Poor Infrastructure
Complex taxation Structure
Complex Distribution Structure
Smaller pack sizes
Dealing with counterfeit goods
Emergence of modern retail chains
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Decisions in a Supply Chain
Design decisions
Activities to be carried within and what to be outsourced
Process of selecting entities/partners to perform outsourced activities
The nature of these relationships –transactional or long-term
Capacity and location of various facilities
Operations decisions
Involves tactical decisions which have a horizon of 3months -1year
Operations decisions which have a horizon of 1day -1 month
Demand Forecasting
Procurement
Manufacturing
Inventory Management
Transportation Management
Customer Order Processing
Distribution
Relationship management with partners in the chain
Supply chain strategy and performance measures Customer Service and Cost Trade offs
As a business strategy the firm decides the market segment in which it wants to operate and
the level of customer service it wants to offer.
The supply chain strategy includes issues of cost that the firm has to incur to provide targeted
level of customer service.
A firm has to focus on the efficiency frontier which represents the best attainable
compromise between cost and service.
Customer service – Supply Chain
Order delivery lead time
Responsiveness
Delivery reliability
Product Variety
Product Availability
Returnability
Push-Pull Boundary of the Supply Chain
Processes prior to the customer order point are Push based processes based on forecasting.
Processes after the customer order point are Pull based processes which do not have any uncertainty
since they are against customer orders
Three types of supply chain
Make To Stock
In MTS Supply chain the push pull boundary is at the end of the chain and all processes are managed
with the push approach
Make To Order
In MTO supply chains all processes are managed using the pull approach and the push pull boundary
is located at the beginning of the chain
Configure To Order
In CTO supply chains the push pull boundary is usually positioned after component manufacturing
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Supply Chain Performance Measures
The Supply Chain Council has developed the SCOR model (Supply Chain Operations Reference
) as the industry standard to measure the impact of supply chain performance on business
performance
As per the SCOR model the measures fall under the following broad categories
Cost
Assets
Reliability
Flexibility
Managing material flow in supply chains Inventory
It is the second largest item after fixed assets in the balance sheet of a manufacturing
company.
It makes business sense to hold on to the inventory only when the benefits of holding the
inventory exceeds the cost of holding it
Inventory needs to be managed to better cash flow and inventory reduction leads to increase
in profits and better ROI
In today’s world Material Requirement Planning(MRP), Distribution requirement
planning(DRP) or JIT systems are preferred to maximize return on inventory
Inventory Management
It is a strategic logistic function aimed at achieving low cost and higher level of customer
service.
Inventories are held in the following categories
Raw material and components-Procurement side
Work in Progress- manufacturing
Finished Goods- at source and distribution centres
Maintenance ,repairs and operating supplies
Pipeline or in transit inventory
Poor Inventory management is a result of inaccurate forecasts and excess production
Finished Goods Inventory
Three types
Non-excise paid goods at the plant warehouse
Inventory in transit
Channel inventory
The nature of inventory risk varies within the channel
1. Manufacturer-has very high risk-has high volumes
2. Distributor-Risk factor is restricted to non moving items
3. Retailer-Very low risk since doesn’t stock for long
Inventory Functionality
Balancing supply and demand
The products are manufactured in advance in anticipation of demand and kept in stock for supply
Periodic variation
For seasonal products the raw material needs to be stored for the rest of the year
Scale economics Products are manufactured in dedicated factories to drive economies of
scale and stocked for distribution to consumption centers as per demand
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Reasons for carrying inventory
Meeting production requirements-Raw materials ,components and parts for finished goods.
Even in JIT ,inventory is managed for contingencies
Supporting operational requirements
Inventories are required for repairs ,maintenance and operational support
Customer service considerations
Replacement of spares for trouble free operations, for managing after sales service
Hedging against future expectations
To take care of increasing prices or material shortages
Inventory related costs
Inventory Costs – funds blocked for inventory
Carrying Costs-interest charges on working capital
Ordering Costs-Cost of paperwork, communication etc
Warehousing Costs-The cost related to holding the product during storage
Damage, pilferage and obsolescence costs
The material stored carries the risk of damage/pilferage
Exchange rate differentials-incase of imported inventories
The Bullwhip Effect
It is the phenomenon of variability in customer demand not conveyed properly
Because customer demand is rarely perfectly stable, businesses must forecast demand to properly
position inventory and other resources. Forecasts are based on statistics, and they are rarely
perfectly accurate. Because forecast errors are a given, companies often carry an inventory buffer
called “safety stock".
Bullwhip Effect is a problem in forecast-driven supply chains.
One way to control is to establish a demand-driven supply chain which reacts to actual customer
orders.
Methods intended to reduce uncertainty, variability, and lead time:
Vendor Managed Inventory(VMI)
Just In Time replenishment (JIT)
Strategic Partnerships
Eg: Wal-Mart stores transmit point of sale(POS) data from the cash register back to corporate
headquarters several times a day.
Inventory Control Techniques
ABC Analysis
Items are classified as per the usage value
A-Costs 60-70% of the inventory cost-10% of the items
B-Costs 20-30% of the inventory cost- 20% of the items
C-Costs less than 10% of the inventory cost-70% of the items
This helps is financial evaluation for ranking and comparison of inventories
Hence an A class item will need more attention than a B class followed by C class
VED Analysis
Related to Vital, Essential and Desirable inventories
Basically deals with the criticality of the item
In addition there is an ABC-VED analysis which considers both value and criticality of the
item
High value and critical items are continuously reviewed and ordered in low quantities while
low value and least critical items are periodically reviewed and ordered in large quantities
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SAP Analysis
Scarce ,Available and Plenty analysis
The ordered quantity is governed by the scarcity factor
The limitations in supply or obsolescence in the near future helps make a procurement
decision
FSN Analysis
Fast ,Slow or Normal Analysis
Determines the consumption pattern of each item
Inventory Planning Models
Economic Order Quantity (EOQ)
It is based on the following assumptions
Demand is known and is constant
There is no lead time for resupply
The cost of ordering per unit is same irrespective of volume
It considers two opposing costs
Reducing the inventory reduces carrying costs
Smaller lot sizes will increase the cost of ordering
EOQ = √ 2DS/HC
Q=order quantity in units; S=Cost of placing an order
D=avg. in annual consumption in units; H=% of inventory cost
C=cost per unit
Total Ordering cost = (Demand/ EOQ amount) x cost per order
Inventory carrying cost = (EOQ amount/2) x (Unit price x Carrying cost %)
Avg Inventory=(Maximum Inventory-Minimum Inventory)/2
Order Quantity=Difference between High Inventory and Low inventory levels
Re-Order Point
The minimum inventory level at which one needs to place an order-also considers the
performance cycle
Let’s see the formula for reorder point now…
Basic reorder formula if demand and performance are certain
R=D X T R = Reorder point in units;D = Average daily demand in units
T = Average performance cycle length in days
If safety stock is needed to accommodate uncertainty the formula is
R=D X T+SS
R = Reorder point in units;D = Average daily demand in units
T = Average performance cycle length in days
SS = Safety stock in units
Inventory Planning Models
Material Requirement Planning
It is done in inbound material movement based on production requirement and scheduling
It is suitable for both
Push type of supply chain -Elaborate MRP rolled back to create supplier schedule with
inventories types, quantities and delivery dates
Pull type of supply chain-Based on actual demand which is transmitted quickly in the
supply chain for faster production and distribution
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Distribution Requirement Planning
Uses the latest IT tolls to control inventory in the distribution system
It allocates inventory from the mother warehouse based on
Demand pattern; Safety Stock Provision; Order quantity; reorder point; average performance cycle
length
The major benefits of using DRP are
Improvements in Customer Service level
Effective marketing efforts for high stock items
Decrease in inventory levels resulting in reduction in carrying cost/warehouse
space/transportation costs
Just In Time(JIT)
The activity should not take place unless there is a need for it
Prerequisites for JIT
Buyer-seller partnership
Online communication and information sharing
Commitment to zero defects from both sides
Frequent and small lot size shipments
The main barrier to the successful operation of the JIT system are
Organization Structure
Organization culture
Technology differentials at the buyer and supplier ends
Reluctance in information sharing
Kanban
It is an information system to support JIT inventory in manufacturing operations.
It means signboard or label and is used for communication in the inventory system
A kanban is attached to each box containing a fixed no of parts as they go to the assembly line
It is used in the process logistics for the movement of parts and components on the shop floor
The philosophy behind Kanban is “use one by one”
Inventory policy Guidelines
Basically depends on placing inventory in
Centralized – better control
Decentralized – increases operating cost but improves service levels .
Service levels are defined as follows
Order cycle time
Case fill rate
Order fill rate
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SCM Applications-Network Design and Operations Network Design & Operations
The most imp issue is to allocation of volume to plants and plants to markets
Supply chain is a network of nodes and linkages
Nodes represent conversion points or storage points or demand points
Linkages represent transportation activities through which material flow happens
Network design focuses on the location of nodes for plants and storage points for given customer
nodes and network operations focus on identifying the optimal linkages between plants and
markets. Unlike other decisions a network design decision is strategic in nature and has long
term implications which are not easy to reverse
Strategic Role of Units in the Network
Offshore Plant
To take advantage of the low cost of material or labour in the region
Sever Facility
Objective is to supply products/services to specific national or regional markets
Outpost Plant
This allows a firm to access tacit knowledge, which is generally an advanced cluster in any specific
industry
Source Plant
The main reason is for low cost production.It might start of as an offshore facility but with technical
and managerial capability might be upgraded to being a source plant
Contributor Plant
A server plant over a period of time when it attains responsibility of processes engineering and
supplier development becomes a contributor plant
Lead Facility
Creates new processes, products and technologies for the entire network. It becomes a hub
performing critical value added activities.
Supply Chain Mapping
The method used to capture the current supply chain processes is called supply chain mapping
Existing supply chain processes can be classified on the following dimensions:
Value Addition Curve
At every stage in the activities/processes associated with the conversion of raw-material stage to the
end the FG value gets added to the product
Point of Differentiation
It is a point where the product gets identified as a specific variant of the end product. It is the point
where the process makes an irreversible decision
Customer Entry point in the supply chain
The point at which customer places an order is the customer entry point
All the orders done before the CEP is based on forecast which lacks accuracy
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Information Technology in SCM IT plays the following functional roles in an SCM
1. It supports frictionless transactions by mapping orders, manufacturing , inventory,
procurement, transportation and WMS.
2. It helps in collaboration by focusing on cooperation from partners and customers via the
internet.
3. IT based decision support systems(DSS) helps aid better decision making through supply
chain planning.
4. It helps companies to measure their SCM performance through BI(Business Intelligence)-
analysis and reports
IT in Supply Chain Transaction Execution
ERP provides capabilities to organizations to enable tracking of information across business
functions through a single comprehensive database.
The database collects data and feeds data into modular applications supporting virtually all
business functions.
When new information is entered in once place related information is automatically generated
Application modules map of enterprise systems
In addition to ERP the following are some of the supply chain execution systems
Procurement Applications- enable supplier discovery process , purchase order process and
keep track of parts , specifications , prices and supplier performance
Inventory management systems- it controls the day to day activities of material
management operations dealing with stocks ; goods receipt , goods inspection , goods issue
etc
Manufacturing execution systems- keep track of manufacturing data such as capacity yield
, work in process and machine status
Transportation execution systems- assist in the task of monitoring the effectiveness of
vehicle fleet . information regarding vehicle activities(miles travelled , tons carried, idle time
,fuel used etc is collected
Warehouse management systems- receipt of goods , storage locations , picking list, order
packing, issuance etc.
Order track and trace- to help fast , smooth and accurate information about order status
Point of Sale Tracking System (POS)-it provides instant record of transactions enabling
replenishment of goods in real time.
Supply Chain Restructuring
Supply Chain Process Restructuring Postpone the point of differentiation
By moving the POD a bulk of the activities can be carried out using the aggregate level forecast than
the variant level
Alter the shape of the value added curve
Shift the value addition as late as possible by which one will be in a better position to respond to
unforeseen changes with the least cost.
Advance the customer order point
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Move from a MTS to a CTO supply chain , since the point of differentiation takes place after the
customer order one does not have to prepare a variant level forecast
Postponement Strategy
Advantageous in the following situations
High level of product customization
Existence of modularity in the product design
High uncertainty in demand
Long transport lead time
Short lead time for postponed operation
High value addition in postponed operation
Different tariffs for components and finished goods in different markets
Only disadvantages at time could be loss in scale of economies of operations and loss of control of
the postponed operations
Restructuring the SCM architecture
There are two different ways in which architecture gets restructured
Restructure flow in the chain
Differential material flow for different variety of goods
Restructure placement of Inventory
A supply chain consists of processes and inventory nodes.
Process could be either conversion or transportation process and has a set time and cost
Where to place the inventory is a strategic decision
Outsourcing-Make v/s Buy Primary Activities
Inbound Logistics ; Operations;;Outbound Logistics ; Sales and Service
Secondary Activities
Procurement ,IT , HR management and firm infrastructure management
Each of these activities must be evaluated before deciding on outsourcing
IDENTIFY CORE PROCESSES-here invest in people , equipments and R & D
The best way to identify a firm’s core process are the business process route and the product
architecture route
The Business Process Route
1. Customer Relationship - new + existing
2. Product Innovation – new products and services
3. Supply Chain Management – Order Fulfillment
HP and High end pharma -focus on Innovations
Nike and Benetton-focus on CR and brand building
Wal-mart and Dell focus on SCM
Another option is to look within an activity and outsource
The Product Architectural Route
1. The focus is on sub-systems and components
2. By keeping the strategic sub-systems internal the firm can offer differentiated products and
can avoid commoditization
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3. Even one outsources a strategic sub-system one should retain the knowledge of its
architecture in-house
4. It is very imp to have a knowhow of the impact of internal and external environments on
market demands and supply risks
Economies of scale through outsourcing
Can be achieved in Manufacturing or Logistics Activities
Higher Volume – Spreading fixed costs over large volume of operations
Higher volume – helps in choosing efficient technologies
Pooling of Buffer capacities and inventories
Learning Curve effect
Alternatively if a firm has huge volumes it might internalize
Eg - Walmart has enough volumes to own a fleet of trucks
All automobile manufacturers assemble vehicles internally
Other Elements
Agency Cost- Internal cost of control and co-ordination of internal supply
Transaction Cost
1. Search and Information Costs
2. Bargaining and contracting costs
3. Policing and enforcement costs
4. Cost incurred because of loss of control
Incomplete Contracts
Relation-specific assets
Leakage Of Strategic Information
Poor Co-ordination
Linking Supply Chain & Business Performance
Cost Reduction
Reducing Inventory; reducing logistics expenses; reducing direct material expenses, reducing
indirect material expenses
Improving revenue and profitability
Selling higher margin products ; achieving higher market share ; reducing lost sales; attacking
new markets; decreasing supply time to market
Improving Operational efficiency
Reducing procurement expenses; increasing assets utilization ; delaying capital expenditure
Reducing working capital
Reducing Inventory, reducing accounts receivables