The Supply Chain ManagementProf. V. P. AroraAssociate Professor

LOGISTICSLogistics term is derived from Greek word Logisticos meaning The Science of computing & calculating.Dictionary definitions of LogisticsThe branch of military science having to do with processing, maintaining & transporting material, personnel & facilities.Webster defines Logistics as The procurement, maintenance and transportation of military materials, facilities and personnel.

Council of Logistics Management (CLM): Defines Logistics is that part of supply chain process that plans, implements and controls the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption in order to meet customers requirementsTransportation adds Place value to products / servicesInventory maintenance time value

According to IMF, logistics costs average about 12% of worlds GDP. Logistics: is about creating value for customers and suppliers of the firms and the value for the firms stockholders. Good Logistics management views each activity in the supply chain as contributing to the process of adding value.Four types of Values in Products / Services

FormValueMfg. createsTimeValueLogistics throughPlaceValue- Transportation- Information flows- InventoriesPossessionValueMarketing, Engg. and Finance

Germans lost the battle not because of lack of soldiers / equipment (they had more tanks than Britishers) but because of Britain having better logistics.Military Movement

Kuwait War Iraq War

Good Logistics by USA2,00,000 troops deployed in 1 months in Iraq earlier Vietnam conflict took 9 months Treat soldiers as your customers

Military MovementPride for food, amenitiesAlso equipment reqd. to fight 70% of all jobs are in services in USA so logistics principles need to be applied meticulously.

Logistical Mission

To make available the right quantity of right quality products at the right time & place in the right physical condition.To offer best possible customer service for core competency.To minimize total logistical costs logistical costs range from 15% to 45% of the price of the product next to cost of raw materials for most of the goods.

Operational Objectives of LogisticsRight ResponseRight QualityRight QuantityRight ValueRight Cost Trade-offsRight Information

Logistics StrategyThree objectivesCost reduction _____ variable costs with movement & storageCapital reduction _____ maximization of the return on logistics assets (Shipping direct to customers, JIT supply, etc.)Service improvement ____ Revenues depend on logistics services provided in contrast with competition.

Attack StrategiesBusiness GoalsCustomer service Representatives

Logistics Planning tackles 4 Major Problem areas

- Customer service levels- Facility location- Inventory decisionsTransportation decisions

The above decisions affect firms profitability, cash flow and return on investment.

Services: TV channelsThree major events happening in one weekPrinces Diana killed in an automobile crashMother Teresa died of heart failure in CalcuttaMajor bombing incident in Jerusalem

Three corners of the world --- also there is the problem of allocating Air Time-Directed CNN reporter from Paris to Middle East-Hong Kong correspondents to Calcutta

Logistics ManagementIT refers to designing, developing, producing & operating an integrated system which responds to customers expectations by making available the required quantity of required quality products as & when required to offer the best possible customer service at the least possible costs.

Trade off between total logistical cost & required customer service level.

India spends nearly 13% of its GDP on Logistics as compared to an average of 10% in developing economies.

Transportation & Inventory costs constitute over 50% of value added in India.

Total Cost Analysis

The total cost analysis is essential in the development of an integrated logistics systems design & acts as a key to managing the logistics function

Total costs comprise of:

Inventory cost

Transportation cost

Storage & warehousing cost

Material handling & protective packaging cost

Order Processing cost

Information cost

Customer Service cost

Production lot Qty. cost

The Supply ChainThe supply chain (SC) encompasses all activities associated with the flow and transformation of goods from the raw materials stage (extraction), through to the end user, as well as the associated information flows. Materials and information flow both up and down the supply chain.

Integrated Business Logistics Management (IBLM) and supply chain management (SCM) are used interchangeably.

Logistics / Supply Chain is a collection of functional activities (transportation, inventory control etc) which are repeated many times throughout the channel through which raw materials are converted into finished products and consumer volume is added.

The life of a product, from a logistics view point, does not end with the delivery to the customer. Products become obsolete, damaged or non-functioning and are returned to their source points for repair or disposition.

EnvironmentUSA produces 160 million tons of waste each year

In GermanySeller has the responsibility either for the recovery of the spent materials and their repackaging & re-use or for their deposal.

Packaging materials may be returned to the supplier due to environmental regulations or economic considerations to reuse them. This is

Reverse logistics channel.Log Fac summarizes world class logistics performance for domestic companies as: Error parts of less than one per 1,000 orders shipped

b) Logistics costs of well under 5% of sales.

c) Finished gods inventory turnover of 20 or more times per year.

d) Total order cycle time of five working days.

e) Transportation cost of 1% of sales revenue.

Supply & distribution lines are lengthening with grater complexity produce locally and sell internationally.

- Material & Labour costs may be reduced but logistics costs are likely to increase due to increased transportation & inventory costs.-Outsourcing adds value but it requires careful management of logistics costs.

Wal-mart used logistics as the core of its competitive strategy to become the Worlds number one merchandise retailer.Marketing & Merchandising

Company vide computer system

Linking with cash registers

Investment on trucks & modern distribution centers

22.7%

ExampleWal martK MarkPresenceRuralUrban1987No. of StoresX2XSales$ 16 Billion$26 BillionExpansion Outside small towns Major citiesConcentration Operations Marketing & MerchandisingCompany vide computer systemLinking with cash registers

Return on Logistics Assets = Contribution to revenue logistics operating costsLogistics Assets

Quick restocking of goods

Investment on trucks & modern distribution centersLowering prices No depleted shelves & price check delays Law suit for overcharging because of no up to date information Present size 6Y Y Selling Administrative & overhead costs 17.3% 22.7% went into Bankruptcy & reorganization

Goal (Long run)Maximizing the cumulative return on investment

Components of good strategyAddressing- Customers- Suppliers- Competitors- Company itselfeg. GE vision to be number 1 or 2 in each market & get out if that is not possible

IBM Constantly reshapes itself to remain an effective competitor

Logistics / SC strategyInnovative strategies give competitive advantage(i) Replacing Broken down machines(ii) Hospital supply (terminals at customers offices)

Objectives a) Cost Reduction b) Capital Reduction c) Service improvement

Logistics / SC Levels Planning - Strategic- Long Range- Tactical- Intermediate range- Operational- Short Range (hourly/ daily basis)

Operational Plan Inventories for each item

Strategic Plan Inventories not to exceed certain value limit.or Achieve certain inventory turn-over ratio

Logistics Planning Major AreasMajor problem areas:a) Customer service levelsb) Facility locationc) Inventory decisionsd) Transportation decisions

i) Higher service levels will lead to disproportionate increase in costs.ii) All product movements from/to & associated costs from plant, vendor through intermediate stocking points and to customer location.iii) Perpetual inventory controliv) Mode, size of shipment, routing & scheduling

All above decisions have impact on firms ProfitabilityCash flowReturn on investment

When to plan?- Existing firm- New firm

Factors affecting Planning

Demand

Customer Service / level

Product characteristics:

Product weight, volume, value, risk

Logistics costs

For high logistics costs, frequent replanning can result in substantial cost reduction.High Logistics cost = Industrial chemicals, food productsLow Logistics cost = Machine tools / computers

e) Pricing PolicyChanges in pricing policy under which goods are purchased or sold will affect logistics strategy.Guidelines for strategy formulationTotal cost concept.

Other Logistics System Trade Offs.a) Setting the customer service levelb) Setting safety stock levelsc) Determining the number of warehouses in a logistics systemsd) Setting the sequence of production runs for multiple products Multiple distribution strategies based onDifferent customer service requirementsDifferent product characteristicsDifferent sales levels among multiple items

Not all products should be provided the same level of customer serviceFast moving itemsMedium volume itemsSlow moving itemsA mixed distribution strategy would have lower costs than pure or single strategy.

Selecting the proper channel strategy (i) Supply to stock(ii) Supply to orderSupply to stock: Maximum efficiency is obtained through- Economic production runs- Purchasing in quantities- Batch order processing- Transporting in large shipment sizes.Supply to order: Set up for maximum responsiveness- Excess capacity- Quick changeovers- Short Lead Times- Flexible processing- Premium transportation- Single order processing

Measuring Strategy Performance: Three measures are useful and if all them are positive, strategies are probably working well.

i) Cash flow: Decrease inventory, cash is released which can be used for various purposes.

ii) Savings: Reduction in costs because of no. of locations of warehouses, inventory carrying costs etc. A strategy that changes number of locations of warehouses will affect transportation, inventory carrying, warehousing and production / purchase costs. These savings appear as a profit improvement.

iii) Return on investment: Ratio of Annual savings to Investment required. It indicates the efficiency with which capital is used. Good strategies show a return greater than or equal to expected return on companys projects.

Value chain of supply chain Management

In the value chain of SCM, the flow of goods & value are in forward direction and flow of cash is in a backward direction to keep total business system alive whereas flow of information is in both directions for improvement of total supply chain system.

Value Flow

Each participant in supply chain adds some value in thegoods or services received by him from his proceeding member before making delivery to the next party. If a product remains unsold due to late availability, its cost increases & value decreases due to gradual decrease in physical attributes.

Goods Flow

Goods or inventory flow from suppliers or vendors as raw materials to producer. Better customer service with lower inventory is the aim.

Cash Flow

Money paid for goods & services received by a supply chain member

Information FlowFlow is in both directions.Backward flow facilitates:-Quality Feed Back-Customer Order & specification-Procurement qty with specification & timings.-Production & Dispatch planning

Forward information flow refers to:-Availability of Goods-Order processing & Management-Order Status-Transportation & shipping advices-Quality Assurance-Warranty CardDelay in information flow costs:-Higher Transportation Expenses-Lost Sales-Corporate Image

A speedier flow of goods from company to customer leads to a speedier flow of cash from customer to company

Supply chain effectiveness & Indian infrastructureKey issues in supply chain(i) Movement of Products(ii) Movement of Information(iii) Timing of Service(iv) Total Logistics costs(v) External & internal integration of activities

Indian Infrastructure Bottlenecks-We have second largest Railway network in world but average speed is 22 km vs 75 km in world-Av. Speed on road is 25 km-Not many reputed companies in third party logistics management business-10,000 km of superhighway requiring huge funds -Transportation & Distribution management business has a long gap to be bridged

Three change engines in worldI. Automobile RevolutionII. Retail RevolutionIII. Container Revolution

Contributions / Functions of Supply Chain1. Minimizing Uncertainty2. Reducing lead times3. Minimizing the number of stages4. Improving flexibility5. Improving Process Quality6. Minimizing Variety7. Managing Demand8. Delaying Differentiation9. Kitting of supplies10. Focusing on A category11. Planning for multiple supply chains12. Modifying performance measures13. Competing on service14. Moving from functions to processes15. Taking initiatives at an industry level.

Nature of logistics / Supply Chain ProductProduct is composed of physical and an intangible part. The intangible part is:- After sales support- Company reputation- Communication to provide correct & timely information- Flexibility to meet individual customer needs- Recovery to rectify mistakes

Classifying Products- Based on use Patterns- Consumer Products & Industrial Products(A) Consumer Products Convenience ProductsFrequently Purchased- Banking Services- Many Foodstuffs- Tobacco Products

Wide distribution required which increases sales potential as well as distribution costs. Customer service levels have to be high to get patronage for products.-Pepsi & Coca-Cola vending machines-Public TelephonesShopping Products-Seek comparisons Price, Quality, Performance etc.-High Fashion clothes, automobiles, home furnishings, medical care, etc.-Few outlets required in a given area & Distribution costs are lower than convenience products.

Speciality ProductsBuyers willing to expend substantial effort & wait like custom made automobiles or management consulting advice. Physical distribution costs are lowest & it needs creating brand preference.(B) Industrial ProductsIndustrial goods or services are directed to individuals or organizations that use them to produce other goods or services.

The Product Life CycleProducts follow a sales volume pattern over time going through four stages:-Introduction-Growth-Maturity-Decline

It has influence on distribution strategyThe 80 20 Curve

-Based on Paretos law-Bulk of sales is generated from relatively few products & useful in distribution planning.-ABC classification also used for stocking points inventories

Product CharacteristicsWeight, volume, value, perishability, flammability, substitutability, etc in various combination would be affect needs.-Warehousing-Inventories-Transportation-Materials Handling-Order Processing

i) Weight Bulk Ratio:High weight bulk ratio (steel canned foods) show good utilization of transportation equipment & storage facilities. Low density (potato chips, lamp shades), bulk capacity utilized much before weight

ii) Value weight ratioProducts having low value weight ratios (coal, iron ore) have low storage costs but high movement costs as a percentage of their sales price.

iii) SubstitutabilityHigher substitutability means a greater chance for lost sales for a given average inventory, supplier can increase speed & dependability of product deliveries to avoid lost sales.

iv) Risk characteristics-Perishability-Flammability-Value-Tendency to Explode-Ease of Being StolenThese force restrictions on distribution system & increase transportation & storage costs.

Product Packaging: There are various purposes for packaging.

Changing product density & protective packaging are areas that fall under logistics.

Product PricingPricing is a complex decision making problem involving economic theory, buyer behaviour theory & theory of competition etc.

Geographic pricing methodsSince customers are spread over, total cost to distribute varies with their location. Pricing categories could be fob, zone, single or uniform, freight equalization and basing point.

Fob PricingFOB stands for Free on Board

FOB Factory Means price is quoted at factory location.

FOB Destination Means that price is quoted at customers location or in the vicinity.

FOB factory price is a single price established at factory location. Customers take ownership at that point & are responsible for transportation beyond this point. In practice, customers might utilize the services of suppliers because he is better equipped & can combine orders, etc.

Fob Destination or Delivered PriceThis is price at customers location or in vicinity. In this, transportation costs are already included in price. It assumes that supplier can handle transportation more economically. If buyer has large volume, it can secure same rates as suppliers

Zone PricingZone pricing reduces administrative complexity by establishing a single price within a wide geographic area. Any numbers of areas can be defined depending on the degree to which company wants geographic price differences.

Single or Uniform PricingThis pricing method appeals to customers since same price is charged everywhere (like books). In this case, the distribution costs are averaged out.

Freight Equalization PolicyIf two firms produce the product at the same price, then competitive pricing is a matter of transportation costs. If markets are not equidistant from each factory location, the firm farthest may wish to absorb enough of Freight charges to meet the price competition. This practice is referred to as freight equalization. Transportation as well as production costs across a number of producing locations are averaged.

Basing Point PricingBasing point pricing establishes some point other than the one from which the product is actually delivered as the point from which to compute price. Firms may use single or multiple basing points. It is applicable when(i) Product has a high transportation cost relative to its overall value.(ii) Little preference among buyers as to the supplier of the product.(iii) Few suppliers & any price cutting leads to retalition by rival firms.

From customers perspective, industries are located at same points.

Incentive Pricing Agreements(i) Quantity Discount(ii) The Deal

Quantity DiscountsEconomies of Scale pricing yiels lower cost per unit, due to spread over of fixed costs. This has led many firms to use purchase volume as a way of offering lower prices to buyers and increasing the supplier sales.

The DealA selling company may like to reduce inventories, maintain output levels, or encourage sales as the motivation for lowering price. Such companies offer reduced product prices for a short time in exchange for larger than normal purchase quantities from its customers.The buyer must weigh the effect of a larger than normal buying quantity with its benefit of lower price against common logistics costs of transportation, inventory carrying & storage.

Logistics / Supply Chain Customer ServiceCustomers view the offerings of any company in terms of price, quality and service and respond accordingly with their patronage or lack of it.Customer service, when utilized effectively, is a prime variable that can have a significant impact on creating demand and retaining customer loyaltyLogistics customer service for many firms is the speed and dependability with which items ordered (by customers) can be made available.

Common Customer Service ComplaintsLate Delivery= 44%Product or Quality Mistakes= 31%Damaged Goods= 12%Frequently cut items= 6%Others= 7%

The most important Logistics customer Service Elements are:- On Time Delivery- Order Fill Rate- Product Condition- Accurate Documentation

Customer Service

(i) Pre Transaction Elements- Written Statement of Policy- Statement in Hands of Customer- Organization Structure- System Flexibility- Technical Services

(ii) Transaction Elements- Stockout Level- Ability to back Order- Elements of Order Cycle. Time. Tranship- System Accuracy- Order Convenience- Product Substitution(iii) Post Transaction Elements- Installation, Warranty, Alterations, Repairs, Parts- Product Tracking- Customer Claims, Complaints etc.- Product Packaging- Temporary Replacement of Product During Repairs.

Back ordering for out of Stock Item- From Secondary warehouseOrder to plant stocksNot AvailableProduction orderDelivery From Plant to Customer- Marketing mix components of product, price, promotion & physical distribution do not contribute equally to market share. Distribution, when it provides the proper levels of service to meet customer needs, can lead directly to increased sales, increased market share & ultimately to increased profit contribution & growth.

Service Effects on Customer Patronage- 65% of firms business comes from its present customers.

- on the average, it is approximately six times more expensive to develop a new customer than it is to keep a current customer. Thus, from a financial point of view, resources invested in customer service activities provide a substantially higher return than resources invested in promotion and other customer development activities

Penalties for Customer service by purchase agents against suppliers service.

Reduced volume of business = 29%Called in Salesman / Manager= 26%Stopped all purchases with supplier= 18%Discontinued Specific items= 16%Refused to purchase new items= 9%Refused to support promotion= 2%

Thus companies have realized that:(i) Due shift of power, dealers / Retailers have become their business partners(ii) Marketing acumen of intermediaries has to be exploited to bring in competitive competency(iii) Marketing Results depend on Dealer push.(iv) Development of a new dealer is too expensive than keeping a current one(v) Firms major business comes from its present customers.

Strategic ComponentsCorporate vision towards long-run customer services:- Long run customer service objectives- Continuous monitoring of environmental factors in terms of opportunities & threats- Appropriate allocation of resources to exploit threats / opportunities

(i) Full assurance for the best return on investment (ROI) to customers

(ii) Deploying customer friendly personnel eager to sort out customer complaints & grievances, co-operation during period of need, willingness to provide accurate information. If customer discontinues business, firm loses revenue, gross margin immediately & has to spend heavily to find new customers.

(iii) Continuous improvement in quality of customer service by learning from past experiences of defective delivery, improving operating systems to achieve effective customer service.Firms should continuously evaluate customer service strategy formally & informally to ensure further improvement.

Logistical Customer Service Components(i) Availability of Components- Normal qty. & specifications on regular & well established basis- Prevent stock out situation- Handle extraordinary customer service requests

ii) Reduce Fixed Replenishment cycle Time-Speedier delivery of goods so that less working capital & space is required.

iii) Zero Defect Delivery of Product- Right Quality & Quantity- Right Documentation

iv) In case of Defective delivery, prompt reverse logistics system be offered to earn goodwill.

v) Point to Point informationPrompt & Accurate information regarding- Status of inventory - Order- Tentative shipping & despatch schedulesvi) Consistency: Ability to maintain normal logistics system & meet unexpected situations.

Non Logistical Customer Service ComponentsThese are basically value added services offered to a specific customer or a group of customers depending on individual requirements 1. Financial support to customers especially for infrastructural developments. It leads toA) Motivate customers for qualitative outcomes of marketingB) Better service facility to ultimate users eg. Refrigerated display units by firms.2.Offer credit facility especially during high demand period.3.Arrange training for customers & their sales force regarding technical know how of the products.4.No tagging of new product with supply of premium products. Also, not too long waiting.5.In warranty supported products, certain discretionary powers assigned to customers to settle claims on the spot

6.If the company has exclusive territory operation norm, it should be properly followed.

80: 20 Rule80% profit comes from 20% customers 80% costs recovered from 20% customersTotal customer cost should include:(i) Inventory carrying costs(ii) Costs incurred in Reduction of replenishment cycle(iii) Costs involved in reverse logistics in case of defective delivery:. Movement of Defective Return Goods. Cost of Rectification, Re-documentation & Re- delivery(iv) Costs for continuous evaluation of system(v) Fixed costs involved in development of information system, communication & logistical infrastructure

GAPS Analysis for customer service Measurement:Three researchers defined service quality is a function of expectations Performance gap & also, service quality as the degree and direction of discrepancy between the customer service perception & expectations with the help of GAPS MODEL.

Service Quality GAP: On left hand side represents customers assessment of service quality.The four gaps on the right hand side represent organizational shortfalls that ultimately lead to customer perceived service quality gap. These organizational gaps are:

1. Market Information GAPThe companys incomplete or inaccurate knowledge of customers service expectations.

2. Service Standards GAPThe companys failure to accurately translate customers service expectations into specifications or guidelines for employees.

3. Service Performance GAPLack of appropriate internal support systems (e.g. recruitment, training, technology, compensation) that enable employees to deliver to service standards

4. Internal Communication GAPInconsistencies between what customers are told the service will be like & the actual service performance (e.g. due to lack of internal communication between the service promisers such as sales people) and service providers (such as after sales service representatives)

The focus of above research is more on internal organizational gaps evaluation whereas from Logistical perspective of core competency the focus should be on marketing intermediaries specifically.

Major GapsMajor gaps have a direct impact on customer satisfaction as well as on performance and are crucial for loyalty & can effect sales revenue. Corrective actions are required at most appropriate time & ignorance / non-action can cost the company in a big way.

GAP 1This results into wastage of resources

GAP 2Any discrepancy will have a negative impact on corporate image & customer motivation towards trade & business

GAP 3This results in lower commitment and loyalty of customers towards qualitative results of marketingGAP 4This Gap adversely affects volume of sales & market share.

Minor GAPSThese gaps will not have immediate impact with regard to wastage of resource, customer loyalty, motivation, sales volume, market share, etc. & can become major factors if proactive actions are not taken for prevention.

Gaps analysis can be used to conduct comprehensive service quality audit to identify discrepancies & bring about improvements

Customer Service Strategic ManagementKeeping customers satisfied firms need a proactively designed & strategically managed customer service portfolio so as to sustain a competitive advantage in the long run.

Step 1 Corporate vision about customer serviceTop management must be the driving force for reinforcement of expected levels of customer service & provide adequate resources & continual encouragement. The corporate vision should include:(i) Written statement of service policy & its circulation to customers.(ii) Adequate recognition to customer profitability in terms of return(iii) Transparency & uniformity in operations(iv) Commitment for long term association(v) Proper monitoring of service for continuous improvement.

Step 2 Present customer service strategyMeasure the discrepancies, validate it & find reasons behind poor performance so that corrective actions can be taken.

Step 3 Customer service needed for Product / Competitive AdvantageWith increasing competition, superior quality of service is required. Also there is demand uncertainty, seasonality, shorter life cycles requiring customer service standards eg. Demand for tractor is maximum during October November if not met, it will lie in stock till march april.

Step 4 Development of new customer service strategyTwo aspects to be considered.(i) Prevailing customer service standard in industry offered by competitors.(ii) Service expectation of customers there has to be cost benefit analysis.

Step 5 Implementation of new strategyAn effective implementation policy should incorporate:(i) Objectives & goals of the new strategy should be well defined, communicated to customers as well as to all people concerned with implementation & operational performance.(ii) Necessary resources should be allocated in time along with plans & policies.(iii) If required, proper re-structuring of organization be carried out.(iv) Simplification for speedier logistics functions.(v) Training & Education of all concerned executives & employees.(vi) Time frame for implementation.

Step 6 Evaluation & Appraisal for continuous improvement(i) Spotting out points of deviations in the strategy so as to take corrective actions in time.(ii) Prevent wastage of resources in the wrong direction.EstablishCSMC: Customer Service Monitoring CellFCSS: Formal Customer Satisfaction SurveyCC: Customer ConferenceIIWC: Informal Interaction with customersCFS: Customer Feedback System

Impediments to an effective customer service strategySometimes, Sales people misuse customer service by committing faster delivery to obtain order for achieving higher targets. This requires speedier mode of transport as well expediting production. This can disrupt other customers orders & the logistics costs increase.

Many companies have no effective customer service strategy.

Warren Blanding identified following Hidden Eleven Costs of Customer Service

Misdefining customer serviceOverlooking customer profitabilityUsing unrealistic customer service policiesFailing to ResearchBlurring Customer Service CostsMisusing customer service as a sales incentiveBlurring lines of AuthorityEqualling the Number of warehouses with customer serviceAdding Bodies Rather than systemsEmploying under trained, under compensated personnelMisreading the Sellers Market.

LOGISTICS INFORMATION SYSTEMRole of Information in- Increased focus on Reducing Response Time- Redesigning Business Processes and their continuous improvements- Streamlining Logistical activities across supply chain to reduce costs & improve efficiency- High valued supply chain relationships- Enhanced customer services for competitive advantage- Attainment of a global standard and access to world market

Logistical Information- Must flow Internally among various deptts. Such as purchasing, manufacturing, marketing, finance, accounting & logistics, etc.- As well as between company and its suppliers, transporters, forwarders, warehouses and customers for

1.Handling customer orders2.Production Planning3 Materials requirements planning- Distribution requirements planning- Finance & Sales ForecastingLogistical Information System (LIS)LIS is a set of computer hardware & Software that gathers, organizes, summaries and reports any information for use by managers, customers & others

A General Logistics Information System

A general LIS design consists of four distinct elements(i) The inputs(ii) The Database & its associated manipulation(iii) The Outputs &(iv) The Resources

Integrated Information Technology (IT) Solution for Logistics & Supply Chain Management

Most of the Corporate Enterprises are investing in a probable integrated IT infrastructural solutions for L & SCM in terms of- Computer Hardware- Software- Connectivity by Electronic Data Interchange (EDI)- Bar Code System (BCS)- Enterprise Resource Planning (ERP)- Internet- Extranet- Intranet

Electronic Data Interchange (EDI)EDI is an inter organization computer to computer exchange of standard Business documents in a structured & Machine processable format with the objective to eliminate duplicate data entry & to improve the speed and accuracy of the information flow

Enterprise Resource Planning (ERP)ERP is a computerized integrated business process of the organization used by firms to derive competitive advantages in the production, distribution & financial areas. Although there have been differences but of late ERP & L & SCM softwares are fast converging

Benefits of ERPImproving Productivity & Enhancing a competitive edge by optimizing use of all its resources.Bringing about a trade off between demand & supply.Bringing together all who work/deal with suppliers, customers & third-party logistics Providers.Ensuring a smoother flow of inventory & information at all levels and between all parties, coupled with ready access of up-to-date information.Reducing the replenishment cycle time & hence capital lock-up.Ensuring a high level of customer service with flexibility.Overall organizational look-ahead capability & control.

Benefits of Intranet, Extranet & InternetBetter collaboration by means of real time communication of information between functional deptts of the firm, suppliers, customers, third party logistics service providers, etc.Reduced transaction costs, communication costs & response time across the supply chain.Bringing about a proper balance between demand & supply resulting into lower inventory level and prevention of stock-out position.Enhanced supply chain relationships, which ultimately lead to developing strategic capabilities for competitive advantages.

Emerging Technologies in Logistics & Supply Chain Management

The following three emerging technologies promise to expedite the flow of goods

i) Voice Systemsii) Memory Buttonsiii) Radio Frequency (RF) Tags (Transponders)

(i) Voice SystemsVoice recognition frees warehouse workers handsEach unit had to be trained to recognize individual users speech patternsVoice Template to be created for every word an individual uses during dialogue with computerHelps low skill workforce to interact with computers & maintain high picking & receiving levelsIn future, consignees will be able to pick up phone & check shipments status while on the other end would not be a person but a computer using a voice recognition system

ii) Memory in a ButtonIn addition to bar codes, several pages of information can be stored in a button, which a reader must physically touch to extract the same. These are portable data bases. This technology can also be used by motor carriers and private fleets to keep main tenance records on individual vehicles.

iii) Radio Frequency (RF) TagsA more promising alternative to bar codes are RF tags which communicate data via radio waves to a reader typically connected to a host computer system. Data is coded into tags & there are active & passive tags. Active variety has the power to send signals while passive relies on reader to initiate communication.Tags can be read only where data cannot be altered and read write version, which is more expensive, data can be changed easily like floppy disk, etc. These tags have a reading range from 1 to 10 feet.

In USA, fleet operators have begun looking at transponders as a low cost alternative to satellites for shipment tracking. Strategic sites like customer sites would be equipped with readers which would scan each time vehicles entered a distribution centre.

These are used as portable data bases which manifest information shipper, content, consignee & would be valuable in speeding up border crossings with customs authorities, RF tags are useful in tracking & traffic control. Bar code labels would be applied to individual boxes & read write tags would be on pallets, trailers & containers in warehouse.

TransportationTo reduce logistical costs & improve customer service capabilities, corporates need - expectations from transport industry

Reduction in Transit time for minimization of inventory cost

Less damages, en-route handling & pilferages for minimum insurance charges

Curtailment of protective packaging costs

Point To Point information regarding the status of the shipment.

For efficient supply chain performance, transportation plays a strategic role because of:

Ensures speedier & timely physical movement of goods from point of inception to point of consumption.It creates core competency by preventing stock out & customer annoyanceIt provides protective storage during transitIt ensures cost-efficient & better customer serviceImproves logistical capabilities of corporates & results in harmomous supply chain relations.

Elements of Transportation Costs

Tariff of transport modeTransit Time costObsolescence and deterioration costsProactive packaging costsTransit insurance costMiscellaneous costs: Like local taxes, octroi, toll taxes, etc.

Modes of TransportModes of TransportAirWaterSurfaceInlandOverseasRoadRailPipeline

Multi-Modal TransportMulti-Modal / Inter Modal Transportation is the use of more than one mode of transport for the movement of shipment from the origin to its destination. Inter-modal operators use multiple to take advantage of inherent economies of each & thus provide integrated service at the lowest total cost BasicsRailRoadsWaterAirPiggybackFishybackTranshipAirtruckInter Model Transport System

Piggyback-Most widely used-Co-ordination between railways & roads-Called Trailor on Flat Car (TOFC)OrContainer in Flat Car (COFC)-Very popular from 1960s in USA & 1980s onward in India.

Fishyback-Boxes loaded on trailor on road and re-loaded on a ship & vice-versa at destination-Widely used in Export / import freight Cargo

Trans-ship-Co-ordination between railways & waterways for bulk movement of freight cargo.

Air Truck (Birdyback)Exchange of Containers/Boxes between Air & Road Carriers.

ContainerizationA metal box / case that resembles a trailor without wheels measuring 8 feet / 8.5 by 20 feet / 40 feet although larger containers are becoming more common. 20 feet container has become standard unit (TEUs twenty-foot equipment units). 40` container equates to two TEUs. Goods of any kind are packed into a container & moved by truck or rail or to sea port & at destination, process is reversed.

Major Features-Used repeatedly for packaging & transport-Specially designed to protect goods from breakages & pilferages-Equipped with fittings for easy handling from one mode to another mode of transport

Major AdvantagesLogistics cost reduction by:Speedier TransportationLower inventory cost due to reduction of transit time.Lower insurance charges due to less chances of damages, pilferages, deterioration, etc. during transitMinimum handling, etc. during transit or en-route handlingNo protective packaging requirementLess Documentation

Selection of Transportation Mode

Factors to be considered:Strengths & weakness of company in terms of marketing, financial & production resources.Market characteristics competitive scenario, geographical structure, etc.Companys products in the eyes of customers to bear stock-out situation.Product features & suitability to various modes of transport weight, size, shape, etc.Quantity to be transported each timeDistance to be coveredTotal transportation cost of various modes of transportation

Carrier performance in terms of-Speed -Availability-Frequency-Reliability-Safety-Versatility-Claim Settlement Procedure-Logistical Service Capabilities

For example Hyndai is utilizing Railways for 30% of transportation needs saving Rs.6 lakhs/month. Chennai to Delhi by Rail = 5 days, by Road (trucks) = 7 days

Aspects for Transport Related Decisions

Economic FactorsShippers FactorsCarrier Factors andAlternative Pricing Strategies

Economic Factors

-Distance (Cost Directly Related)-Volume (Affects per unit cost)-Density (Weight & Space Aspects)-Stowability (Product Dimension affecting vehicle Space utilization)-Handling (Loading / Unloading specific facilities)-Liability (Risk covered by carrier during transit)

Shippers FactorsMinimization of total logistical costs in terms of transportation, inventory, information, facility costs as well as maximization of customer responsiveness capability

Carriers Factors-Cost of Procurement of vehicle-Fixed operational costs like salaries of drivers, attendants, vehicle insurance, registration & road taxes-Trip related cots such as cost of fuel, labour, road permit, toll tax, etc.-Value added service costs such as tracking of shipment, point-to-point information, doo -to- door delivery, express cargo facility, bar coding edi, cash management, etc.

Alternative Pricing Strategies

It is a trade-off between the cost of service rendered by the carrier & time value of service to the shipper.

i) Cost of Service Strategy

A rate based on cost plus a profit margin (build-up approach) widely used in case of competitive environment.

ii) Value of Service Strategy

Transportation charges based on value of service required by shipper transportation of high-value goods and shorter and fixed replenishment cycle time assured by firm.

iii) Combination Strategy

Establishment of transport price between cost of service & value of service maximum. Widely used. Minimum & max. rates should be known for negotiation purposes.

Warehousing & Distribution CentresIn the present day competitive scenario of explosion of choice, no company can bear a stock-out situation as a large number of alternative products are available with additional features. Also, demand cannot be precisely determined & physical attributes of inventory items be preserved. Warehouse is more of a switching facility & less as a storage facility.

Inventories are maintained to:Improve supply-demand co-ordinationBetter customer service & responsivenessMarket DominanceLower overall logistics cost

Channel members provide storage, make push efforts & hence expect better return on investment

Storage, Warehouse & Distribution CentreStorage: Prior to finished productsWarehouse: Storing finished goodsDistribution Centre: Warehouse related to market & are situated near to markets. These serve regional markets, process & regroup products into customized order, maintain full line of products, consolidate shipments from different production points, etc.

Types of Ware Houses1. On the basis of ownership2. On the basis of services

On the Basis of OwnershipPrivate WarehousesPublic Warehouses

ParameterPublic WarehousePrivate Warehousei) Operating CostsHigher due to inclusion of profit10% to 25% lower if in sufficient volumeii) Initial InvestmentNoneLarge Facility, equipment, trained personnel iii) ControlGoodDirect responsibility over personnel & procedures iv) RiskMinimalRisk of obsolescence due to change of technology or demandv) Tax AdvantagesNoDepreciation Allowance vi) Economies of ScalePossibleDependent on Company Volumevii) Consolidation of shipmentsPossibleNoneviii) Storage & handling costsKnow exact charges for decision makingGenerally only estimated

B) On the basis of services Bonded Warehouse : Till import duty paid Field Warehouse: In premises of a factory for bank borrowing.Cold Storage : Preserve PerishabilityDistribution Warehouses: Nearer to market for final products. Also called distribution centres.Buffer Storage WarehousesAt strategic locations with adequate transport & Communication facilities in huge quantities & sent to distribution warehousesExport & Import WarehousesNear Ports where international trade is undertaken & provide transit storage facilities.

Functions of Ware-HousingEconomic Functions &Operational Functions

Economic Functions

Consolidation:Receives & Consolidates goods from different plants & dispatches to customer in single shipment.

Break BulkTransshipment of goods from production plant in bulk quantity by low rate volume shipment (Railways) to distribution warehouse & then reshipment in small quantities to different customers (in road transport, etc)

Stockpiling

Seasonal storage of goods to select businesses (Agricultural Products, woolen garments, etc) to serve round the year to support marketing efforts for regular / smooth availability

Value-added Services

Like packaging & labeling for specific orders and thus keeping basic product to required level.

Operational Functions-Receiving Goods-Up-to Date Recording of Goods-Storing at appropriate place & in Minimum area.-Preserving physical attributes-Proper handling during loading / unloading-Order receiving, processing & filing-Arranging assortment of goods-Dispatching of Goods-Preparation of documents pertaining to transactions, records & advices-Marketing intelligence as intermediary -Other legal functions related to trade

Three DecisionsCentralized vs Decentralized WarehousesLocations of the WarehousesThe cost of the Warehousing1. Centralized Warehouses(a) StrengthsCan Carry less inventoryNo / less stock-out situationDemand variations can be met at a short noticeCentralized control of inventoryBulk Transportation is cheaperLess warehousing costs

(B) WeaknessesDistant markets demand can be met at short notice with costly mode of transportLoss of customer service advantagePoor market coverage & controlTransport Cost will be maximum unless in bulk quantity(2) Decentralized Warehouses(A) StrengthsMarket coverage will be maximum Maximization of customer services creat a high level of loyalty & goodwill.Transportation ModerateBetter Control over market intermediate

Weaknesses

Huge inventory investmentHuge warehousing development costsStock-out situationShortage of goods & replenishment from another warehouse require additional transportation costs.

Factors for selection of number and Location of Warehouse

Number of Geographical locations of the market targeted by the firm.Location & facilities of production centers.Transportation infrastructure facilities determine number & location of warehouses.Nature & Quality of goods to be storedBrand Loyalty among customersFinancial strength of the companyChange in the use of warehouse facility lease or sale of buildingsCustomer service as a means of competitive advantage

Elements of Warehousing Costs i) Warehousing Infrastructural Development CostsCosts of procurement of storage space:Handling & Transfer costAdministrative CostCosts incurred in direct and indirect physical facilitiesii) Working capital costs include the cost of working capital involved in goods stored in warehouse as inventoryiii) Miscellaneous CostsTax to be paidInsurance paid for covering risksThe risk of product obsolescence or deterioration

Steps to be followed in Warehouse DesignPurpose of facility (Present & Future)Layout of facility (Considering material handling system)Warehouse space requirements and aisle lay out

Distribution Requirements Planning (DRP)DRP is application of MRP Logic to Distribution inventories.Distinction Between DRP &MRP is:DRP deals with finished goods inventory whereas MRP deals with dependent demand items for finished goods.MRP operates in a demand situation controlled by enterprise whereas DRP operates in an independent environment of uncertain consumer demand which is not in the control of enterprise.Bills of materials are used in MRP whereas bills of distribution (The network) are used in DRP.DRP uses time-based order point to replenish network whereas MRP applies time-phased logic to sub-assemblies & components of products in bill of material networkDRP is an impulsion process from lowest levels to central distribution centre whereas MRP is an explosion process from the master production schedule to detailed scheduling of component replenishment.

Logic of DRP

DRP anticipates the future requirements by forward planning at all levels of a distribution network.Periods of potential shortage can be identified early enough to develop alternative plans.To the net requirements, lead time is added to calculate planned release date; which becomes the gross requirement in the same time period for the parent supply centre at next higher level

Benefits of DRP(A) Marketing BenefitsImproved service levels that increase on-time deliveries & decrease customer complaints.Improved & more effective promotional & new-product introduction plans.Improved ability to anticipate shortages so that marketing efforts are not expended on products with low stock.Improved inventory co-ordination with other enterprise functions since DRP facilitates a common set of planning numbers.Enhanced ability to offer customers a co-coordinated inventory mgt. service

Logistics Benefits

Reduced distribution centre freight costs resulting from co-ordinated shipments.Reduced inventory levels since DRP can determine what product is needed & when.Decreased warehouse space requirements because of inventory reductions.Required customer freight cost as a result of fewer back-orders.Improved co-ordination between logistics & manufacturing for inventory.Enhanced budgeting capability since DRP can effectively simulate inventory and transportation requirements under multiple scenarios.

Constraints of DRP

Due to dynamic environment, there is possibility of forecasting error, which limits its effectiveness.Inventory, planning requires consistent & reliable performance cycle but its uncertainty reduces planning system effectiveness.Uncertainties such as delay in delivery schedule by vendors by in-transit delay affect the efficiency & effectiveness of DRP system.

Just-in-Time (JIT)Advantages of JITInventory levels are drastically reduced.Process time, space requirement & set-up time reduced considerably.Elimination of waste by prohibiting:-Over Production-Waiting-Undue warehousing & handling facilities-Defective Production4. Improved customer service and commitments bringing competitive advantage5. Improve productivity6. Results through greater employees participation & motivation.

Disadvantages of JITHigh risk is involved due to short-term planning & a minimum level of inventory.Suppliers of input materials need to be educated about the quality by company.Needs continuous & close evaluation and follow-up of the whole process.Needs establishment of long-term business partnership with suppliers.Not able to meet any unforeseen requirement / demand.

Order Processing

A customer order is the message that sets the supply chain process in motion. Order processing starts with the receiving of a customers order and ends with the final delivery of goods to him along with the transfer of title.Order processing is the key to the customer service & satisfaction. Focus is on three key system outputs & three system characteristics.

System outputs-Responsiveness or speed in order-handling fulfillment-Lowest possible delivered costs for products or services (in customers eye)-Minimal wastage in the system (inventory holding at various locations)

System Characteristics Targeted:Continuous improvements of system (to handle demand under a variety of conditions)Proficiency (to guarantee right-the-first-time shipping or invoicing)Efficiency related to minimizing the handling of paper work or products.Functions of Order Processing(i) Order PlanningDesigning an efficient order handling system i.e. who handles orders, whether centralized or decentralized system, etc. order placed to visiting sales people or by telephone, fax, mail order, e-mail or EDI (Computer to computer order)

ii) Order TransmittalTime between customer placing / sending an order & selling receiving the order. The need is real-time customer responsiveness to ensure better customer service & to minimize replenishment cycle time.iii) Order Handling Activities includei) Checking completeness / accuracy of order ii) Credit check by credit deptt.iii) Recording of transaction by accounts deptt.iv) Allocation of products by inventory deptt. & advice to pick the shipment and update the firms master inventory file.v) Transportation of shipment from the warehouse by the traffic deptt. Often, buyers also specify date by which order should reach supplier should try to meet this requirement

iv) Order Picking & AssemblyGiving instruction to a specific warehouse to assemble a given order for a customer as per list of customer order.With the use of computers, in case of a stock-out item, information is made available to order handling deptt. so that original documents can be adjusted.A picking list is prepared for outgoing order with initials of individuals so that consignee can verify with the packing list on receipt of order & verify all items.v) Order DeliveryTransit time i.e when a carrier picks up the shipment till it is delivered at customers place has a direct & major impact on sellers total order cycle time or customers replenishment cycle time. Hence proper load planning & fleet management are essential functions of total order processing system failing which, transportation cost per unit will go up.

Significance of Order Processing- A late or inaccurate delivery can cost a customer more than the actual product cost.- Researchers have shown that product quality, features and price factors are relatively less important than elements like i) Meeting committed delivery dateii) Intact deliveryiii) Correct documentationiv) Accuracy in filling ordersv) Information regarding order-statusvi) Advance notice of shipping delays etc.Significance of order processing is:

(A) Achievement of Required Customer Level- State-of-order customer service generates additional sales volume who passes on products to end users in time.- Shift of power to re-sellers due to increased competition & firms view them as assets & business partners.(B) Legal SignificanceThere should be transfer of title from seller to buyer as goods move by raising invoice / bill in name of customer. Other legal documents required are: shipping advices, road permits, challans, packing slips, documents related to payment of taxes & duties.

(C) Reduction of Order Cycle TimeAny reduction in order cycle time will require stream lining of total system & elimination of unnecessary administrative procedures in total order processing system. EdI would result in reduced order processing time, less chances of error in processing, reduced inventory requirements & less chances of stock-outs(d) Point to point informationA firms ability to provide accurate & timely information regarding status of order, availability of inventory, tentative shipping & dispatch schedules, back, order status, etc are critical measures. This would help customers to become aggressive in market place & meet further delivery commitments with the next level of customers/consumers.

Materials HandlingTompkins & White defined materials handling asA system which uses the right method to provide the right amount of the right material at the right place, at the right time, in the right sequence, in the right position, in the right condition and at the right costMaterials handling equipments improve productivity & in logistics, materials handling cannot be avoided but only minimized.

Objectives of Materials HandlingReduction in machine & order picking timesReduction in overall replenishment cycle time by quick marshalling & movement of goods.Uninterrupted production & distribution schedules for avoiding bottle necks such as loading and unloading problemsProtection or goods from breakages/damages during movementsOffer safety to workers and provide safe working conditions ensure better customer service & satisfaction Enhance productivity & efficiency by reducing handling costs

Principles of Materials handlingThe college industry council on Materials handling has developed 24 materials handling principles.Orientation principle Requirement principle Integrated system principle Standardization principle Just-in-time principle Unit-Load principle Minimum travel principleSpace utilization principleErgonomics principleEnergy principle

Ecology principleMechanization principleAutomation principleFlexibility principleSimplification principleGravity principle Safety principleComputerization principleSystems flow principleLayout principleCost principleMaintenance principleObsolescence principleTeam solution principle

Factors Affecting the Selection of Materials Handling EquipmentThe selection of materials handling equipment requires consideration of and attaining of proper balance between the following factors:Production problem.The capabilities of the handling equipment.The human element involved.

The ultimate aim is to arrive at the lowest cost per unit of material handled.I)) The production problem factors are:a) Volume of production to be attained b) Class of materials to be handledc) The layout of plant and building facilities.For example, the handling equipment that can be economically justified for the manufacture of 1000TV sets per day would be entirely different from the haling equipment needed in a plant manufacturing 20 steam turbine generators a year because the production rate, weight and class of materials needed are different.

II. Equipment factors to be taken into consideration include the following:1. Adaptability: The load-carrying and movement characteristics of the equipment should fit the material handling problem.2. Flexibility: Wherever possible, the equipment should have the flexibility to handle more than one material (class or size)3. Load capacity: Equipment selected should have enough load-carrying characteristics to do the job effectively.4. Power: The equipment should have enough power available to do the job

Speed: The speed of movement of the handling equipment should be as high as possible, within the limits of production process and plant safety.Space requirements: The space required to install or operate materials handling equipment is also an important consideration.Supervision required: The degree of automation in the handling equipment decides the amount of supervision required.Ease of maintenance: Equipment selected should be capable of easy maintenance at reasonable cost.Environment: Equipment selected must conform to environmental regulations.Cost: The cost of the equipment (capita investment) is an obvious factor in the selection. The various kind of costs to be considered in addition to the initial purchase price of the handing equipment are

i) Operating costsvi Space costii) Installation costsvii Depreciation chargesiii) Maintenance costsviii Salvage valueiv) Power requirements Ix Time value of money investedv) Insurance requirementsx Opportunity cost.

What is meant by integrated materials management?The complete integration of materials management functions like materials planning, purchasing, receiving, stores, inventory control, scrap and surplus disposal for better operation of the system is known as integrated materials management having following advantages: -Better accountabilityBetter coordinationBetter performanceAdaptability to computerized systems

The components of integrated materials management are: -Materials Planning Inventory controlPurchase managementStores management

Materials Planning Sales forecasting and aggregate planning are the basic inputs for materials planning. The different tasks under planning are listed below: -Estimating the individual requirements of parts.Preparing materials budget.Forecasting the levels of inventories.Scheduling the orders and Monitoring the performance in relation to production and sales.

Inventory ControlThis includes the following: -ABC AnalysisFixing economical order quantityLead time analysisSetting safety stock and reorder level.Purchase ManagementThe includes the following: -Evaluating and rating suppliers.Selection of suppliers.Finalization of terms of purchase.Placement of purchase order.Follow-upApproval of payments to suppliers.

Stores Management The different tasks under stores are listed below: -Physical control of materials.Preservation of stores.Minimization of obsolescence and damage through handling.Disposal and efficient handling.Maintenance of stores records.Proper location and stocking of materials.Reconciling the materials with book figures.

EquipmentsMaterials Handlingi. Mechanized handling systemsa) Forklift trucksb) Tow tractorsc) Cranesd) Hand powered equipment

ii.Semi Automated handling systemsa) Automated guided vehicle systems (AGVS) like mechanized tow tractor with trailer but with no requirement of operator). AGVS use optical or magnetic guidance system

b) Sortations: used in combination with conveyors The master carton must have a distinguishing code which are read by optical scanning devices & automatically routed to desired locationc) Robotics: Human like machine that can be programmed by microprocessors & function as an expert system capable of implementing decision logic in handling process.

iii Automated handling systemsAutomated Storage/Retrieval SystemProduct arriving at distribution centre is non-palletized & is moved by conveyor into a pattetizing machine, where unit loads are constructed before being moved into a high rise stacker crane. One or more radio controlled robot pallet movers are used for lateral movement in conjunction with one or more stacker cranes having storage rack Up to 67 high. Pallet loads are moved from this giant filling cabinet into depalletizers from which individual cases are moved on a pre-programmed basis into order picking chutes. Only where orders comprising boxes of different shapes are consolidated through manual labour for shipment by truck to retailers

Basic Materials handling considerationsType of products to be handledTypes of production systems Types of buildingsMaterials handling cost

MRP (Material Requirements Planning)The main purposes of a basic MRP system are:To control inventory levelsAssign operating priorities for itemsPlan capacity to load the production systemInventory Order the right parts, components & materials Order in right quantity Order at right time

Priorities Order with the right due date Keep the due date validCapacity Plan for a complete load Plan an accurate load Plan for an adequate time to view future load

The theme of MRP is :Getting the right materials to the right place at the right timeThe objectives of inventory management under an MRP system are the same as under any inventory management. system: To improve customer service Minimize inventory investment Maximize production operating efficiency.

Thus objectives of MRP are:To improve customer service by meeting delivery schedules promised and shortening lead times To reduce inventory costs by reducing inventory levelsTo improve plant operating efficiency by better use of productive resources.

General over view of MRP

Basically MRP consists of a set of computer programs that run periodically (once a week or once a month) to incorporate the latest schedule of production requirements. MRP performs three important functions, viz:Order planning & control i.e. when to release orders & for what quantity Priority planning & control i.e. comparison of expected date of availability with the need date of each item.Provision of a basis for planning capacity require ments & development of broad business plans.

MRP is applicable primarily to companies that carry out the fabrication of parts and assembly of standard products in batch quantities.

Operation of MRP systemPROCESSING

BOM = Bill of materialor Product structure file MPS = Master production schedule (specifies what end products to produce & when)Inventory status fileNet requirements for a period =gross requirement for a period (scheduled receipt for the period plus on hand inventory at the end of the period)

Information Flow for planning & Controlling with MRPCRP = capacity requirements planningMRP system outputs Two primary outputs2. Planned order scheduleIt is a plan of the quantity of each material to be ordered in each time period. The order may be a purchase order on the suppliers or production orders for parts & subassemblies on production deptts.2.Changes in planned orders i.e. modification of previous planned orders.The secondary outputs are:1) Exception reports which list items requiring management attention to control2) Performance reports regarding how well the system is operating e.g. inventory turnovers, percentage of delivery promises kept and stock-out incidences.3) Planning reports such as inventory forecasts, purchase commitment reports, etc.

Closed Loop MRPWhen the material requirements planning (MRP) system has information feed-back from its module outputs, this is termed as closed-loop MRP.A system built around material requirements that include the additional planning functions of sales & operations (production planning, maser production scheduling and capacity requirements planning). Once the planning phase is complete and the plans have been accepted as realistic & attainable, the execution function comes into play. These include the manufacturing control functions of input-output (capacity) measurement, detailed scheduling & dispatching as well as anticipated delay reports from both the plant & suppliers, supplier scheduling, etc.The term Closed loop implies that not only is each o these elements included in the overall system, but also that feed-back is provided by the execution functions so that the planning can be kept valid at all times.

Manufacturing Resource Planning (MRP-II)Through closed-loop system, the initial intent of MRP II system was to plan & monitor all the resources of a manufacturing firm manufacturing, marketing, finance and engineering. The second intent was to simulate the manufacturing system. MRP II is applicable to any manufacturing organization regard-less of its size, location, product or process.MRP II is a management process for taking the business plan and breaking it down into specific, detailed tasks that people evaluate, agree upon and are held accountable for. it involves all deptt. Both materials & time requirement (CRP) are integrated within MRP system (MRP-I).Beyond this, MRP-II has been coined to Close the loop by integrating financial, accounting, personnel, engineering & marketing information along with the production planning & control activities of basic MRP system. MRP II is the heart of corporate management information system

LOT SIZING IN MRP SYSTEMSLot sizes are part quantities to meet requirements for one or more periods. For parts produced in-house, lot sizes are production quantities of batch sizes & for purchased parts, these are quantities ordered from the supplier.Four Lot Sizing TechniquesLot for lot (L4L)economic order quantity (EOR)Least total cost (LTC)Least unit cost (Luc)Lot For Lot (L4L)Most Common technique. Sets planned orders to exactly match the net requirements. Produces exactly what is needed Minimizes carrying cost Does not take into account set-up costs or capacity limitations.

EOQIt balances set-up costs & holding (inventory carrying) cost. In EOQ model, either fairly constant demand must exist or safety stock kept to provide for demand variability. EOQ model uses an estimate of total annual demand. The set-up or order cost and annual holding cost (carrying cost for the whole year) EOQ = 2 x Annual Demand x ordering cost per orderunit Price x inventory carrying charges (%)3. Least Total CostThe least total cost method (LTC) is a dynamic lot sizing technique that calculates the order quantity by comparing the carrying cost and the set-up (or ordering) costs for various lot sizes & then selects the lot in which these are most nearly equal

4. Least Unit Cost (LUC)This is also a dynamic lot-sizing technique that adds ordering and inventory carrying cost for each trial lot size and divides by the number of units in each lot size, picking the lot size with the lowest unit cost.This method give more complete analysis & would take into account ordering or set-up costs that might change as the order size increases, if ordering/set-up costs remain constant, lowest total cost method is most preferred because of simplicity

Purchasing And Sourcing ManagementIn global competitive scenario, purchasing & sourcing management has gained importance since outsourcing of materials have become need of the hour for sustainable growth & competitiveness

Nature & scope The type of activities most frequently carried out are:Commodity analysisMarket researchPurchase order tracking & follow-up.Determination of needs & specifications for internal customersTransmitting fore casts of future needs to suppliersSupplier performance measurement (on-going exercise)management of supplier quality contract management & negotiationmanagement of inbound/out bound transportationPrice / cost analysis

It is a cross-functional process of firms various activities such as engg., quality, design, Mfg, marketing, accounting and their integration with external organizations like vendors, in-bound transporters, etc. Some major activities include:Supplier identificationSupplier evaluation and selectionSupplier managementSupplier development & improvement Supplier integration into on-going Processes

Importance of purchasingIt has tremendous scope for cost curtailment, quality improvement, reduced replacement cycle time with small inventory, developing and maintaining reliable & competitive suppliers, cooperating & integrating with other functions.Quality: Life time sourcing programmes with tier-I vendors so as to have economies of scale along with commitment to keep quality high (Bajaj Auto -60% components outsourced)CostSupplier relationshipLow inventories & smooth flowReduce inventory cycle time without stock-out with IT achieve on time delivery, time to market & efficient use of resources for survival of firms

Interface with other functionsPurchasing must understand the needs of the ultimate consumers so that suppliers relationships can be developed. Production, marketing & logistics constitute the primary value creation chain in most firms.Purchasing process trends for improved ProductivityPurchasing process contributes significantly in value-Addition to the organization & should continuously improve purchasing productivity to improve overall logistics productivity through following steps:i) Management techniques for relationshipsValue analysisStandardized itemsStockless purchasing but availing volume discounts

Information systems replacing paperwork EDI, Bar Coding, ERP, internet, etcShift of R & D to suppliersOutsourcing to third partiesTo take advantages of economies of scale, skills or technology, outsource to concentrate on core competencies

Contemporary sourcing & supplier management i.Quality of suppliersTotal quality management of goods supplied by a vendor to meet buyers (company) expectationsSupplier responsibilities:Supply goods as per specifications, quality in a timely & reliable mannerUse of statistical process control (SPC) to ensure consistencySmall & continuous supply Zero defects in terms of right assortment, correct documentation & right quantity, etc

Supplier categories Qualified suppliers by firms audit team Certified suppliers: Goods shipped are 100% fit for use.Comprehensive cost measurementPurchasing is increasingly being measured in terms of total cost including scrap & production yields, long-term warranty costs, shipping & transportation terms, re-work & other costs associated with low quality and external failure costs once the product is in customers hands

Creating & Maintaining supply relationshipThe traditional three-bid & price driven approach to buying-acentury old practice has been replaced. Firm are increasingly seeking supply relation ship such as product modifications, delivery & other specific needs a more co-operative type of relationship has begun & not just the price. Supplier provides many products & services as per long-standing agreement & both firms gain benefit in market at the expense of outsiders ( rather than of each other) taking care of critical, product, technology or services.

Best Practices in Supplier/Vendor Management Vendor rationalization by tiering of vendorsLong-term contractual relations improvements Vendor selection on non-price criteria like past performance & quick response capabilityQuick response and minimum replenishment cycle timeExtensive use of IT for quick information sharingTransfer of technology & managerial skillsMinimum number of vendors for same component/material Local sourcing Continuous performance measurement of vendors & communication of the same to them Shared cost reduction drive

Protective PackagingIntroductionProtective packaging has a great impact on the cost and productivity of a logistical system. It can optimize logistics and supply chain efficiency and effectiveness. Packaging affects the cost of every logistics activity. Transport and storage costs are directly related to the size and density of packages.

Logistical functionsPackaging can optimize logistics and supply chain efficiency and effectiveness by: Reducing the weight and space requirements for material handling and transit, Ensuring product quality en route through the logistics system and supply chain, and Selling the product.

Hence, the major functions of packaging in logistics and supply chain are to provide containment, protection, utilization and communication. However, logistical packaging provides no great value of its own but adds value only as its function in a logistical system.ContainmentProducts must be contained before they can be transported from one location to another. Packaging provides space in which a product is contained.ProtectionPackaging protects its contents on its route form the manufacturer to the consumer and even during its life with the consumers. It protects the products from spoil, discolour, loss of fragrance, damage, break, contamination, or physical deterioration of the product. Take.Product Characteristics + Logistics Hazards = Package Protection

UtilizationThe utility function of packaging relates to how packaging affects the productivity and efficiency of the total logistical system. All logistical operations like truck loading, storage in warehouses and warehouses order and picking productivity are affected g package utility

CommunicationThe communication function of protective packaging is gaining importance due to wide and extensive use of the logistical information system.

Forms Of Protective PackagingThe logistical/protective packaging materials and forms include:Wood pallets, crates, blocking and bracing;Corrugated fibreboard boxes, dividers, inserts and dunnage;Solid fibreboard slipsheets and boxesMulti-wall paper bags and drums;Steel cans, pails, drums, and straps;Steel racks and cages;Fabric (burlap and woven plastic) bags and blakets;Low-density plastic film shrink-wrap, stretch-wrap bags, and barriers;High-density plastic boxes, slipsheets, and pallets;Plastic strapping; andPlastic foam custioning and dunnage for fragile or irregular shapes (Twede, 1994).

SummaryPackaging is an art of designing and producing the package for a product with the objective to create demand, provide protection and convenience in handling. In the logistics and supply chain management perspective, packaging is required for protection and identification of goods in their journey in a supply chain network. Thus, the major functions of protective packaging are to provide containment, protection, utilization and communication. For maximization of logistical productivity and efficiency along with growing concern about environmental responsibility, today, firms are widely using film-based packaging, blanket wrapping and returnable containers. In order to have an appropriate packaging policy, for the attainment of both marketing and logistics objectives, strategists have to choose form among five alternatives, namely; packaging changing, family packaging, multiple packaging, reuse packaging, and ecological packaging, after taking into consideration various factors pertaining to consumers, resellers, company, economy, and logistic and supply chain management.

ORGANISATION FOR LOGISTICS & SCMAn efficient & effective logistics organisation is a vital part of an enterprise in strategic management. There is no single best org. structure for logistics & SCM, with the growing nature & scope of logistics & SCM in the overall performance of enterprise.Over the years there has been change in logistics organizational structure from being a part of various functions like manufacturing, finance & marketing to a core function.While designing org. structure, firm need to follow certain principles of organization like unity of command, span of control, authority & responsibility, line & staff relationships, centralization & decentralization etc. The various factors like:Size of organization Corporate structure & strategy The role of logistics & supply chain managementIn the overall value-addition activities, availability of IT infrastructural resources and environmental uncertainty

Evolutionary Trends of Logistics & supply chain organization (Organisation of Development) Prior to 1950, logistics functions were generally viewed as supportive functions & scrattered throughout the org. structure without cross-functional co-ordination resulting in repetition & duplication of work & wastage of resourcesBetween 1950 & 1960, firms started experiencing difficulties in market place mainly due to increase in competition & recession of 1958.

The evolutionary trend and transformation in logistics & supply chain organization is shown in fig 13.1

Independent functional structure Emphasis was on production related problems. Fig. 13.2 indicates a traditional org. structure of early stage of industrial revolution.Limited internally integrated functional structureBetween 1950 & 1960, firms started experiencing difficulties in market place mainly due to increase in competition & recession of 1958, Thiscompelled firms to control, costs for survival, Material management & Physical distribution management functions were created with org. structure in Fig. 13.3Fully internally integrated functional structureWith liberlazition of economies of world, continued inflation & significant increase in price of fuel, etc. forced organizations to reduce costs and there was further integration as shown in Fig. 13.4

Externally Integrated Process Functional StructureThe beginning of 1990s revolutionized total business functions. In view of IT, JIT, MRP, DRP etc. there was mass scale globilisation of market. There was shift from functional structure to process structure so as to achieve quick response to customers. Org. structure adopted was to have smooth cross-functional co-ordination & approach.Virtual supply chain org structureLinks customers directly to suppliers & even suppliers suppliers so that suppliers can respond on a real-time basis to the changes in the market & a vendor managed inventory (VMI) system can be developed. This org. structure enables firms to capture benefits of integrated logistics system without command & control of org. structure.(Virtual Implies an underlying existence without a formal recognition)

Organizational choicesInformalSemi formalFormalInformal OrganizationNo change in existing organization structure and reliance is on co-recon or persuasion to accomplish co-ordination & co-operation among those who are responsible for them.Budget, sometimes, can be a disincentive to co-ordination between key activities like transportation, inventory control & order processing, etc although budget is a major control device. A possible incentive system could be to encourage cross activity participation is to establish number of cross-charges or transfer costs among various logistics activities.

Semi Formal organizationThe supply chain co-ordinator is assigned to co-ordinate projects that involve supply chain and cover other functional areas. This type of structure is called Matrix Organization. SC co-ordinator shares decision authority & accountability with activity area manager & may even assist in co-ordinating logistics activities among member firms of supply chain beyond the boundaries of his firm. Matrix organization is a choice between informal & highly structured one but there can be conflicts because lines of authority & responsibility get blurred

Formal organizationThe formal organization establishes clear lines of authority & responsibility for logistics / SC.Organisational orientationOrganization design can follow three corporate strategies process, Market and Informationi. Process Strategy Achieve maximum efficiency in moving goods from raw materials state through work in-process and on to a finished goods state. Focus is on activities that give rise to cost. Activities such as purchasing, production scheduling, inventory, transportation and order processing will be collected & managed collectively ii. Market Strategy Firms pursuing market strategy have a strong customer service orientation. Both sales & logistics co-ordination are sought by putting these under the same executive. The organization structure is likely to span across business units to a high level of customer service of course. However, Logistics costs may not be held at their lowest level.

Information strategySuch firms have a significant downstream network of dealers and distribution organizations with substantial inventories. In order to secure information, the organistion structure is apt to span functions, divisions and business units and even traditional legal boundaries of channel membersMixed strategies often exist within the same firm. A variety of designs will appear for essentially similar firms.ORGANISATINAL POSITIONING Organizational choice & orientation are first considerations. Next comes, positioning of logistics activities for most effective management.Positioning concerns where to place these activities in the organization structure which is decided based on:Decentralization vs. centralizationStaff vs. lineLarge company size vs. small

DECENTRALISATION VS. CENTRALISATIONA centralized organization group logistics activities at the corporate level for serving all product groups. The centralized form is to maintain close control over logistics activities and to benefit form optimum utilization of equipments. The forward haul of one divisions products might be back-haul for another which is not possible in case of de-centralisation similar efficiencies can be gained through shared ware-housing, shared purchasing & shared data processing. Decentralization, however allows quicker & more customized logistics to customer needs. Decentralisation makes sense if product lines are distinctly different in their marketing, logistics and manufacturing characteristics & only few economies of scale can be found. Computerized data processing has helped centralized order processing & inventory control. Fig 15.5

STAFF VS LINEAn advisory organization (consulting role) is good when A line organization would cause unnecessary conflicts among existing personnel.Logistics activities are less critical than selling, producing & other activities.Planning is relatively more important than administration.Logistics is considered as a shared service among product divisions.The logistics staff is located near top management. In fact, some corporate level logistics staff wields more authority than many divisional heads of line.Large vs. smallThe small firm does not benefit from volume purchases & shipments. As does large firm. Organizationally, the small firm has some form of centralized organization since no product divisions might exist. Also, logistics activities may not be so clearly defined & structured.

Alliances & PartnershipsSome firms share their logistics capabilities with other firms or to contract for logistics activities to be provided by specialized agencies called third-party providers (3PLs)Benefits of Logistics partnering are: Reduced cost & lower capital requirements Access to technology & management skills Improved customer service Competitive advantage such as through market penetration Increased access to information for planning Reduced risk & uncertaintyMaximum benefits are derived by way of reduc