supply chain and logistics management copy

Supply Chain and Logistics Management

TITLE OF THE PROJECT

“SUPPLY CHAIN AND LOGISTICS MANAGEMENT”

NAME AND ADDRESS OF THE STUDENT:

KAMLESH I. PAREKH.

A/403, SHALIBHADRA PALACE,

OPP. SHIWAR GARDEN,

NEAR BHRAMADEV TEMPLE,

MIRA BHAYANDER ROAD,

MIRA ROAD (E),

THANE – 401 107.

NAME AND ADDRESS OF THE STUDENT’S COLLEGE

ANJUMAN – I – ISLAM’S

AKBAR PEERBHOY COLLEGE OF COMMERCE AND ECONOMICS

MAULANA SHAUKATALI ROAD,

MUMBAI – 400 008.

DATE OF SUBMISSION:

1


A project report is submitted in partial fulfillment of the requirement for

the Bachelor of Management Studies, University of Mumbai – 400 032

KAMLESH I Parekh

T.Y.BMS

ROLL NO. - 24

SEMESTER-V

2003 - 04

2


DECLARATION

I Kamlesh I Parekh, a student of Akbar Peerbhoy College of Commerce and

Economics, TYBMS Vth Semester, hereby declare that I have completed this

project report on “SUPPLY CHAIN AND LOGISTICS MANAGEMENT”

in the academic year 2003-04, the information submitted is true and

original to the best of my knowledge.

(KAMLESH I PAREKH)

3


CERTIFICATE

I Principal S.A.M. Hashmi here by certify that Mr. Kamlesh I Parekh of

T.Y.BMS (Semester—V) of Akbar Peerbhoy College of Commerce and

Economics has completed the project on “SUPPLY CHAIN AND

LOGISTICS MANAGEMENT” in the academic year 2003-04. The

information submitted is true and original to the best of my knowledge.

(Prof. Vikram G. Shrotri) (Prof. S.A.M. Hashmi)

Project Co-ordinator. Principal

4


ACKNOWLEDGEMENT

Entrance, hard work, gradual progress and an exciting year, that’s

how I have reached this level and now as I stand at the threshold of the aside

world, I take a look of the past year which I spent in this college. Our

performance with their devotion, have molded me in to confident and aspiring

student all through this year.

The project has been a rich learning experience and a thorough

understanding of the Supply Chain and Logistics concepts. It gave me a first

hand experience and enabled me to understand the difference between

Logistics and Supply Chain Management.

A real artist never displays his work until he has a

feel of it to his soul. My guide for the project Mr. Vikram

Shrotri, whose constant encouragement and guidance, belong

to that galaxy of artist those who have put their art into every

part of this project. Thanks are also due to Prof. R.

Subramanian, without whose constant guidance this project

would have remained uncomplete.

Also at the outset, I would like to express my cordial

thanks to our Principal Mr. S.A.M. Hashmi, and B.M.S

coordinator who guided, instructed and encouraged me for

compiling this project report.

5


I would also like to acknowledge the assistance and

encouragement of my family, my friends, and all others for

supporting me throughout the completion of this project.

Kamlesh I. Parekh.

Executive Summary

Title of the Project: Supply Chain And Logistics Management.

About the Project: Today industry is the backbone of any economy. Every

economy has its own style of managing its regime. Doing

business is not the same as it was in the earlier. Due to the

changing behaviour and awareness of the customer, which lead

to intense level of competition. Businessman has evolved too

many new concept for facing competition and keeping them

self a step from the competitor. Among those concepts ‘supply

chain’ is one of the emerging and successful concepts, which is

used in the business.

Though ‘Supply Chain’ concept is very old, but with the help of up coming technology and IT revolution supply chain concept has got a boost. Supply Chain is not a concept alone but also is a methodology of doing business in today’s business scenario. Effective control of the flow of components and materials to the manufacturing or assembly line is a key to cost effective manufacturing. In an optimal supply chain, materials and components are received just-in-time to enable lean manufacturing, i.e., the right product, in the right place, at the right time, at the lowest possible cost. In other words, the wrong product, in the wrong place or at the wrong time, at higher than expected cost.

6


Objective of the study:

The main objective of this project is to enable me to know and understand the

various aspects of ‘Supply Chain and Logistics Management’.

Gain practical as well as the theoretical knowledge about the subject.

Problems faced in maintaining an efficient Supply Chain

Research Methodology:

The methodology used for carrying out this study was by means of secondary

data. The secondary data was collected from various articles, magazines, books and

websites. The research underlying this study that the Supply Chain and Logistics

Management concept have entered the mainstream and in some cases, are the leading

edge of the rapid changes transforming the business economy.

Constraints:The major constraint faced during making the project was that

adequate information about the concept of Supply Chain and Logistics Management,

the technicality of its operations. Though the concept is very old but very few

companies have adopted it with complete efficiency, hence it was the part of the

difficulties I faced while collecting the data.

7


Table of Contents

INTRODUCTION 1 - 2

Distinguish between Logistics and Supply Chain Management 3

The Evolution 3 - 7

Table 1 - Chronological Dates 6

Events in SCM Evolution 7

Definition And Explanation

11

Basics of Logistics

11

Outsourcing/Third party Logistics

12

Supply Chain Optimization To-Do List

15

Traditional Functional Performance Measures

15

Supply Chain Management - A Continuous Replenishment

16

Supply Chain Process 17 -

21

Process view of the Supply Chain

19

Push-Pull view of Supply Chain

21

Supply Chain Flows 22 -

24

Decision Phases in a Supply Chain 25

Supply chain strategy or design 26

8


Supply chain planning 27 - 28

Supply Chain Obstacles/Challenges 29

Supply Chain Drivers 30 -

34

Inventory

30

Transportation

31

Facilities

33

a) Warehousing/Storage 33

b) Material Handling 34

c) Packaging 34

Information

35

Order Processing

35

Planning

35

Table of Contents (Contd.)

Achieving strategic fit in Supply Chain Management 37 -

38

Achieving Strategic Fit

37

Fit Between Competitive and Functional Strategies 38

The Bull Whip Effect 39 -

43

9


Causes of the Bullwhip Effect

40

How to Counteract the Bullwhip Effect

43

How to Reduce the Bullwhip Effect

45

Supply Chain and IT 46 -

49

Enterprise Resource Planning (ERP)

47

EDI (Electronic Data Interchange)

48

The Postponement Strategy 49 -

54

Optimal Postponement Preconditions

50

Demand Preconditions: 50

Product/product line preconditions: 50

Production preconditions: 51

Postponement benefits:

52

The Postponement Strategy Examples

53

Paints – Insta Color 53

Hewlett Packard 53

The Integrated Supply Chain Strategy 55 - 56

Logistics Performance Measurement 57

Job Scope Available 58

10


Going For Gold In The Supply Chain 59 -

61

(A case study on Marico Industries)

59

11


Concepts and Relative Terms

The logistics professional of the new millennium must move well beyond the current

frontiers of supply chain management to meet the varied and complex distribution

channels of a global economy. Essentials in Supply Chain and Logistics Management

provides an opportunity to explore the latest developments in logistics strategy,

interact with industry leaders, and map out innovative business planning tactics that

will maximize your organization's profitability.

Glossary of Supply Chain Management Terms

Every field has its special language, and Supply Chain Management is no exception.

Hence, this glossary of Supply Chain & Logistics Management technical terms and

concepts are listed below:

ABC Analysis A form of Pareto analysis applied to a group of products in order to

apply selective inventory management controls. The inventory value for each item is

obtained by multiplying the annual demand by unit cost and the entire inventory is

then ranked in descending order of cost. However, the classification parameter can be

varied; for example, it is possible to use the velocity of turnover rather than annual

demand value.

Anticipation Stock: Inventory held in order to be able to:

Satisfy a demand with seasonal fluctuations with a production level that does not

fluctuate at all or that varies to a lesser extent than the demand. Cope with erratic

production or deficiencies in production capacity.

Available Stock: The stock available to service immediate demand.

Back-flushing: The deduction from inventory, after manufacture, of the component

parts used in a parent by exploding the bill of materials by the production total of

parents produced.

Backorder A: Customer demand for which no stock is available and where the

customer is prepared to wait for the item to arrive in stock.

Bar Code: See Linear Bar Code

12


Batch Management:

In various industry sectors, particularly the process industry, you have to work with

homogeneous partial quantities of a material or product throughout the entire quantity

and value chain. In this system, a batch is the quantity or partial quantity of a

particular material or product that is manufactured according to the same recipe.

Buffer Stock: See Safety Stock

Build Stock: See Anticipation Stock

Build to Order: See Make to Order

Cycle Stock: See Working Stock

Distribution Requirement Planning DRPI: The function of determining the need to

replenish inventory at branch warehouses over a forward time period. A time-phased

order point approach is used where planned orders at branch warehouse level are

exploded via MRP logic to become gross requirements on the supplying source

enabling the translation of inventory plans into material flows. In the case of multi-

level distribution networks, this explosion process can continue down through the

various levels of regional warehouses, master warehouse, factory warehouse etc and

become input to the master production schedule.

Distribution Resource Planning DRPII: The extension of MRP into the planning of

the key resources contained in a distribution system.

Economic Order Interval (EOI): In fixed order interval systems, the interval

between orders that will minimize the total inventory cost, under a given set of

circumstances, obtained by trade off analysis between the cost of placing an order and

the cost of holding stock

Economic Order Quantity (EOQ): In fixed order quantity systems, the size of an

order that minimizes the total inventory cost, under a given set of circumstances,

obtained by trade off analysis between the cost of placing an order and the cost of

holding stock.

13


Economic Stock: The sum of the physical stock and the goods ordered but not yet

received, minus the goods sold but not yet delivered for which a company carries risk

in respect of a drop in price and un-marketability

Electronic Data Interchange (EDI): The computer-to-computer exchange of

structured data for automatic processing.

Enterprise Requirement Planning (ERP): A further extension of MRP II whereby a

single system embraces and integrates all aspects of business operations into a single

database application.

Finished Goods: Inventory to which the final increments of value have been added

through manufacturing.

Finished Goods Stock: Stock that is available for supply to an external consumer,

including items that have been supplied but not invoiced to an external consumer.

Holding Cost: The cost associated with holding one unit of an item in stock for one

period of time incorporating elements to cover: Capital costs for stock, Taxes,

Insurance, Storage, Handling, Administration, Shrinkage, Obsolescence,

Deterioration.

Inventory: A term used to describe:

all the goods and materials held by an organisation for future sale or use

a list of items held in stock.

Inventory Control: Consists of all the activities and procedures used to control and

maintain the right amount of each item in stock or to provide the required level of

service at minimum cost.

Inventory Management:

Studying consignment stock, project stock, and so on). SAP Inventory Management

enables a summarized visibility of stocks in the supply chain. To fully utilize this

functionality, the following products should be evaluated.

Inbound/Outbound Material Flow:

14


Warehouse Management allows you to manage your material flow, using advanced

put away and picking strategies. In the standard system, these strategies for put away

include random put away (next empty bin), bulk storage, fixed bin, or addition to

stock. The picking strategies include standard strategies first in first out (FIFO), last in

first out (LIFO), picking by shelf life expiration date (SLED), or partial quantities

first. With the Warehouse Management system, you can control the goods receipt and

goods issue processes at a physical level. Goods receipts are possible from purchase

orders, inbound deliveries (advanced shipping notice), stock transport orders, or from

production. The goods issue process in the Warehouse Management system includes

all physical activities for fulfilling an outbound delivery or shipment. This includes

rough workload estimates in advance of the actual process, picking waves to group

the activities efficiently, and pick & pack functions. Value-Added Services: SAP

Warehouse Management supports value-added services such as customer-specific

packing or labeling.

Item: See Stock-Keeping Unit (SKU)

Just-in-Time JIT: A dependent demand inventory control philosophy which views

production as a system in which all operations, including the delivery of materials

needed for production, occur just at the time they are needed. Thus, stocks of material

are virtually eliminated.

Kanban: A simple control system for coordinating the movement of material to feed

the production line. The method uses standard containers or lot sizes with a single

card attached to each. It is a pull system in which work centres signal with a card that

they wish to withdraw parts from feeding operations or vendors. Loosely translated

from Japanese, the word "Kanban' means literally means "billboard' or "sign". The

term is often used synonymously for the specific scheduling system developed and

used by Toyota Corporation in Japan.

Lead Time: See Purchasing Lead Time

Linear Bar Code: A method of automatic identification using a series of light spaces

and dark bars differing densities, in standard formats, to enable a computer to read

data and letters accurately without keyboard entry.

15


Logistics: The time-related positioning of resources to meet user requirements.

Material Requirements Planning (MRP I): A system to support manufacturing and

fabrication organisations by the timely release of production and purchase orders

using the production plan for finished goods to determine the materials required to

make the product. Orders for dependent demand items are phased over time to ensure

that the flow of raw materials and in-process inventories matches the production

schedules for finished products. The 3 key inputs are:

the master production schedule

inventory status records

product structure records

Manufacturing Resource Planning (MRP II): A method for the effective planning

of all the resources of a manufacturing company. Ideally it addresses operational

planning in units, financial planning in money, and has a simulation capability to

answer what if questions. It is made up of a variety of functions, each linked together:

business planning, master (or production) planning, master production scheduling,

material requirements planning, capacity requirements planning and the execution

systems for capacity and priority. Outputs from these systems would be integrated

with financial reports such as the business plan, purchase commitment report,

shipping budget, stock projections in money etc. Manufacturing resource planning is a

direct out-growth and extension of material requirements planning (MRP-1).

Make to Order: A manufacturing or assembly process established to satisfy

customer demand only after an order has been placed.

Materials Management: The planning, organisation and control of all aspects of

inventory embracing procurement, warehousing, work-in-progress, shipping, and

distribution of finished goods.

Matrix Bar Code: See Two Dimensional Bar Code

Maximum Stock: The upper limit, expressed in quantitative, financial or time-based

terms, to which the stock of an item should normally be allowed to rise.

16


Maximum Order Quantity: An order quantity which, in principle, must not be

exceeded.

Minimum Order: The smallest order quantity which, in principle, is allowed.

Minimum Stock: A control limit within a stock control system which could indicate

the point at which an order should be placed, or indicate if stocks are too low, for a

specific item.

Obsolete Stock: Stock held within an organisation where there is no longer any

organizational reason for holding the stock.

Obsolescent Stock: Parts which have been replaced by an alternative but which may

still be used until stock is exhausted.

Opening Stock: The stock of an item at the beginning of an inventory accounting

period of time.

Order Lead Time: The total internal processing time necessary to transform a

replenishment quantity into an order and for the transmission of that order to the

recipient.

Production Planning: Production planning enables the planner to create feasible

production plans across the different production locations (also with subcontractors)

to fulfill the (customer) requirements in time and to the standard expected by the

customer. For the long and medium-term time horizon, rough-cut planning is based on

time buckets and determines requirements of resources (machines, humans,

production resource tools) and materials. Solvers, real-time data, and high supply

chain visibility (KPIs, alerts) support the planner's decision-making process.

Pull System: A system where orders for an end item are pulled through the facility to

satisfy demand for the end item. An examples of pull system is the JIT Kanban

process.

Push System: A system where orders are issued for completion by specified due

dates, based on estimated lead-times, or where the flow of material in a product

structure is controlled and determined by the lower levels.

17


Radio Frequency Identification (RFID): The attachment of transponders (which

may be read only or read/write) to products, as an alternative to linear bar codes, to

enable product identification some distance from the scanner or when out of line of

sight.

Raw Material: Stock or items purchased from suppliers, to be input to a production

process, and which will subsequently modified or transformed into finished goods.

Re-Order Level (ROL) (or Re-Order Point - ROP): The calculated level of stock

within an inventory control system to which the quantity of a specific item is allowed

to fall before replenishment order action is generated.

Re-Order Quantity, Replenishment Order Quantity: The calculated order quantity

necessary to replenish stocks at a given point in time. The method of calculation, and

the timing of the order, will vary depending on the type of inventory control system in

use. Quantity based systems are checked continually to determine if an order should

be placed; time based systems only have a count of stock at predetermined intervals

and orders placed as required; a distribution system plans orders to meet distribution

needs; and production based systems only order stock to meet manufacturing

requirements.

Replenish to Demand: See Make to Order

Replenishment Lead-time: See Total Lead-time

Safety Stock: The stock held to protect against the differences between forecast and

actual consumption, and between expected and actual delivery times of procurement

orders, to protect against stock outs during the replenishment cycle. In calculating

safety stock, account is taken of such factors as service level, expected fluctuations of

demand and likely variations in lead-time.

Stock: See Anticipation Stock

Stock: Stock can be defined as:

All the goods and materials stored by an organisation and retained for future use.

18


The quantity of goods between measuring points in a particular path, expressed in

quantitative and/or financial terms. For example, the goods can be in a pipeline, in a

warehouse or technical store, in reception, in production.

Stock Keeping Unit (SKU): A single type of product which is kept in stock; it is one

entry in the inventory.

Supply-Chain: The total sequence of business processes, within a single or multiple

enterprise environments, which enable customer demand for a product or service to be

satisfied.

Supply-Chain Management (SCM): Organisation of the overall business processes

to enable the profitable transformation of raw materials or products into finished

goods and their timely distribution to meet customer demand.

Total Lead-time: The total time between the decision to place a replenishment order

until its availability for use. That is, the sum of Order Lead-time, Purchasing Lead-

time, Transit Time and any Goods Inward Lead-time for that replenishment order.

Two Dimensional Bar Code (2D Bar Code): Codes in which information is placed

in two dimensions and read from side to side, and up and down, by special scanning

equipment and which can be read, even if partially damaged.

Unit: The standard size or quantity of a stock item.

Unit Cost: The cost to an organisation of acquiring one unit, including any freight

costs, if obtained from an external source or the total unit production cost, including

direct labour, direct material and factory overheads, if manufactured in-house.

Value-Added Services:

Value-adding activities in the warehouses have to be priced and invoiced. Support for

service activities on warehouse operations enable a company to decide on the type of

activities, retrieve the value of a group of activities around a warehouse process, and

invoice these activities to the warehouse customers (internally and externally). To

fully utilize this functionality, the following products should be evaluated.

19


Zero Inventories: Part of the principles of just-in-time which relates the elimination

of waste by having only required materials when needed.

20


BENEFITS/CONCLUSIONS

Learn the advanced skills to initiate major improvements and innovations in

supply chain management.

Broaden your understanding of current issues and trends in Inventory,

Transportation, Procurement and Outsourcing.

Demonstrate how to create value through supply chain relationships, and set

up more productive supply chain relationships.

Learn through first-hand case histories and discussion groups, supply chain

and logistics initiatives that have increased market share and profitability for

other organizations.

Improve business results through integrated supply chain and logistics

management strategies and concepts.

Enhance your organization's supply chain and logistics capabilities and its

ability to add sustainable value.

Isolate key performance areas and related success factors; pinpoint operational

difficulties and develop practical improvement strategies and tactics.

INTRODUCTION

Since the early 1980's, supply chain management has developed rapidly as

companies have been seeking to improve their competitiveness in respect of cost

and service levels, and to attain sustainable growth.

Supply chain management has gained increasing recognition in business, both as

a function in its own right and as a cross-functional discipline. At the same time,

supply chain management has moved from operational level to broad level

within the corporate organization. Never before the supply chain management

played such an important role in the corporate strategy of many companies as it

is today. This development has led to a much broader scope in supply chain

management in the 1990's as compared to that of the 1970's.

21


With the logistics industry becoming more crucial as its relevance ever

increasing it moved into new areas, involved in outsourcing projects and design

and implements supply chain management strategies and enable enormous

increase in output. Given the growing importance of supply chain and logistics

management, one has to determine how the calculation of transport and logistics

costs has changed over the last decades as a consequence of improved supply

chain management and the increasing significance of supply chain management.

The concept of Supply Chain Management has recently stepped into the limelight of

corporate professionals and academia. However, its roots can be traced with the

evolution of trade itself. Evidences show that supply chains were present right from

the time when mankind understood the need of merchandising and distribution.

In fact now one of the strategies is to choke all the supply feeder lines, which either

harbour or encourage terrorism of any variety. This is referred to as 'Operation

Endurance Freedom' in the recent times.

We can characterize the significant events that reflect the evolution of the

supply chain management in a chronological manner. However, it is to be

observed that the impact of each event on Supply Chain Management (SCM) is

varied. Change can be implemented easily when tough times reign. Companies in

India have been looking at ways of cutting costs and improving process efficiencies,

in their quest to become globally competitive. One such initiative is Supply Chain

Management (SCM). SCM recognizes that distinct functions like Purchases,

Inventory Management, Distribution and Production Planning work best when

integrated.

Supply Chain Management offers, at the least, reduction in costs across functions,

better planning for purchase and production, and much more efficient use of capital. It

also offers a 13% of India’s GDP-opportunity for a variety of services - trucking,

warehousing, IT, personnel, ancillaries and a host of others.

Today all the four key elements of SCM –materials, time, money and information- are

being tackled to squeeze out the maximum possible savings. Almost every leading

company in India now has an SCM drive in place. In HLL, chairman M. S. Banga

22


considers SCM as one of the key factors contributing the bottom line and enabling

growth of the power brands.

23


Distinguish between Logistics and Supply Chain Management

Logistics SCM

It is concerned with getting goods and

services where they are required and

when they are desired.

SCM encompasses of all those

activities associated with movement of

goods from raw material stage to the

end user.

No manufacturing or marketing can

accomplish without logistical support.

This includes sourcing, procurement,

production scheduling, order-

processing, inventory management,

transportation, warehousing and

customer service.

It involves the integration of

information, transportation, inventory

warehousing, material handling and

packaging.

SCM integrates and coordinates all the

above activities into a seamless

process. It embraces and links all the

partners in the chain.

Logistics add value when inventory is

correctly positioned to facilitate sales.

The best SCM practice is when it

excels in reducing operating costs,

improves asset productivity and

compressing order cycle time.

It is mainly concerned with optimising

flows within the organization.

It recognizes the internal integration

by itself.

It is essentially a planning orientation

and framework that seeks to create a

single plan for the flow of product and

information through a business.

It builds upon this framework and

seeks to achieve linkage and

coordination between processes of

other entities in the pipeline i.e.

suppliers and customers and the

organization.

24


Definition And Explanation

Logistics Management is primarily concerned with optimizing flows within the

organisation while Supply Chain Management recognizes that internal integration by

itself is not sufficient and all the channel partners i.e. all stages of a supply chain need

to be integrated.

“Logistics” becomes a large portion of the tools that we use to operate and

analyze the supply chain.

Further, a Supply Chain is an interconnected system containing suppliers,

manufacturing, assembly, distribution, and logistics facilities. This manufacturing unit

procures raw materials from suppliers, built to produce materials and move them to

the customers, through distribution units. Logistics are responsible for transportation

of materials from one unit to other.

‘Risk Reduction as a Goal of SCM’

Supply Chain management (SCM), has now became a very vital part of management.

Good Supply Chain Management can result in

- Decreases Cycle Time

- Reduces the inventory level

- Decreases cost of production

- Let you decide strategy

25


Following figure shows a typical Supply Chain:

Suppliers Manufacturers Distributors Retailers Customers

The goal of supply chain is to move material quickly while maintaining the lowest

possible levels of inventory.

What is a supply chain?

A supply chain is the link that moves products between suppliers, manufacturers,

wholesalers, distributors, retailers and finally consumers. For most of the last century,

the supply was an inflexible series of events that some-how managed to get products

out the door. A paper-heavy adventure, it often involved questionable inventory

forecasts, ironclad manufacturing plans and hypothetical shipping schedules.

What is supply chain management (SCM)?

Supply chain management is a way to supervise the flow of products and information

as they move along the supply chain. Supply chain management is the combination

of art and science that goes into improving the way your company finds the raw

components it needs to make a product or service, manufactures that product or

service and delivers it to customers. The following are five basic components

for supply chain management.

26


1. Plan - This is the strategic portion of supply chain management. You need a

strategy for managing all the resources that go toward meeting customer demand

for your product or service. A big piece of planning is developing a set of

metrics to monitor the supply chain so that it is efficient, costs less and delivers

high quality and value to customers.

2. Source - Choose the suppliers that will deliver the goods and services you need to

create your product or service. Develop a set of pricing, delivery and payment

processes with suppliers and create metrics for monitoring and improving the

relationships. And put together processes for managing the inventory of goods and

services you receive from suppliers, including receiving shipments, verifying them,

transferring them to your manufacturing facilities and authorizing supplier payments.

3. Make - This is the manufacturing step. Schedule the activities necessary for

production, testing, packaging and preparation for delivery. As the most metric-

intensive portion of the supply chain, measure quality levels, production output and

worker productivity.

4. Deliver - This is the part that many insiders refer to as "logistics." Coordinate the

receipt of orders from customers, develop a network of warehouses, pick carriers to

get products to customers and set up an invoicing system to receive payments.

5. Return - The problem part of the supply chain. Create a network for receiving

defective and excess products back from customers and supporting customers who

have problems with delivered products.

The ultimate goal of SCM is to optimize the supply chain, which can not only reduce

inventories, but may also create a higher profit margin for finished goods by giving

customers exactly what they want (and of course charging for it).

27


What can SCM do?

A good SCM initiative gives visibility to all the players in the supply chain so that

they are able to react to the order. The moment a retailer receives an order, the

retailer’s supplier also sees it. The supplier checks inventory. If inventory is low, a

manufacturer — also with access to the system — produces more products and ships

it to the supplier via a distributor that is also connected to the system.

Meanwhile the supplier has sent the product to the retail for shipment to the

customer. The customer, in turn, can track the shipment of the order and perhaps

even check inventory to make sure an item is in stock before ordering. With

Web technology, all the players in the chain simultaneously manage inventory,

control-manufacturing schedules and deliver an order on time to a customer.

Also, Supply chain management projects should also rethink the chain. Most

businesses establish their supply chains around product lines. But today,

customer orders touch multiple product lines and multiple channels of

distribution. Modern supply chains focus on the customer — and on delivering

one order at a time rather than moving one product line at a time. The focus has

to be on filling, delivering and managing inventory for every order that a

customer places. Every order should penetrate the same system that manages

inventory and connects to suppliers and distributors.

28


Basics of Logistics

Logistics is unique. It never stops! Logistics is concerned with getting products and

services where they are needed and when they are desired. Most consumers in highly

developed nations take a high level of logistical competency for granted. When they

go to the store, they expect goods to be available and fresh. It is difficult to visualize

accomplishing any marketing or manufacturing without logistical support.

Logistics and distribution are being accorded high priority in Supply Chain

Management. The priority arises not only due to possible costs savings but also

because of their impact on responsiveness and services levels. In-fact, the latter would

be more important reasons since logistics’ costs per se are not very. Not all

organizations seem to share the view that Logistics and distribution is a strategic

function. Few companies seem to be adopting leading SCM practices in the area

though can be substantial.

‘Logistics and distribution are the nuts and bolts of SCM.’

A leading-edge supply chain program can create competitive advantage for your

company. The service and cost benefits can distinguish you from competitors.

Customers have strong requirements on how they want their orders and shipments

handled. Your compliance with those requirements can enhance your status as a

supplier. Whether for company-wide or selected portion, we will analyze the key

logistics elements-movement of product (inbound, outbound, intra-company),

movement of information, service/time, cost and integration-within your company,

with customers, and with your suppliers.

The scope of your supply chain organization can be complex- imports, exports,

diverse market requirements, differing customer expectation, shortened lead times,

and more. Organization, teamwork and information technology are among the issues

that impact supply chain effectiveness. It is no longer distribution, not shopping and

receiving; it is supply chain management.

29


In the global market where competitors and suppliers are worldwide, firms want to

have supply chain operations. Asia is a key area for product sourcing, the start of the

logistics process-the suppliers. Today companies are also seeking out 3rd party

Logistics providers (3PLs), who handle not just physical distribution but also

functions like warehousing, billing, tracking and insurance. But outsourcing of

Inventory Management has not caught yet.

Outsourcing/Third party Logistics

Third-Party Logistics (3PL) is defined as the outsourcing of transportation,

warehousing, inventory management, distribution and other value-added services such

as pick-and-pack, assembly, repairs, and reconditioning, etc. It can be said that

outsourcing is, calling on external resources to provide distribution service to

maximize your efficiency and focus on your core competencies. As we approach the

21st century, outsourcing activities have been a hot topic – often red hot. The practice

is no longer confined to transportation and warehousing activities.

“3PL - third party logistics represents the outsourcing of the logistics function.”

One of the most significant trends that continued to gain the attention of forward-

thinking firms is the option to outsource logistics activities. Outsourcing has grown

for many reasons and is now a major part of economy. Like all growth industries, the

provision of third party logistics services has diversified. Its offspring “4 th Party

Logistics” is an example of such diversification. Logistics providers are developing

competitive advantage by coordinating different customer’s logistics solutions. They

are presenting some of the basic factors that are taken into considerations for a 3PL

firm when coordinating its customers. The possibilities to coordinate are dependent

not only on activities of different customers, suppliers and customers’ customers but

also the attitudes and behaviour reflected from their strategies.

What is Outsourcing?

An important characteristic of the Supply Chain is “outsourcing”. This concept has its

route in both core competency and cost control. Core competency basically means do

what you are best at, and leave all other non-value-added activities to more suited

players. During 1990’s, phase with rising cost accelerated like the gulf war in 1991,

an increasing cost competition from cheaper countries around the world, companies

30


undertook a serious bit of sole –searching. Thus originated for, “Third Party” services

providers. The business activity of farming out identified non –core activities to

external agencies came to be known as outsourcing. In Logistics and Supply Chain

Management too, companies have been outsourcing the activities of transportation,

warehousing, clearing and forwarding to different operator.

“The future shape of business is being redefined through outsourcing”

Benefits of Outsourcing

A key question that a company has to ask before considering the outsourcing option

is: What is it in there for us? Here we list some potential reasons that may argue in

favour of outsourcing.

Improve company focus: More organizations are eliminating internal functions

that are not considered core competencies.

Access to world-class capabilities and new technology: Often these third party

logistics company’s capabilities are the results of extensive investments in

technology, methodologies and people, over a considerable period of time.

Sometimes, these capabilities include specialized industry expertise gained

through working with many clients facing similar challenges. Therefore, this

expertise is translated into skills, processes, or technologies uniquely capable of

meeting these needs.

Accelerate reengineering benefits: Outsourcing to a 3PL already reengineered to

world-class standards allows the company to realize those anticipated benefits

immediately.

Share (pool) risks: There are tremendous risks associated with the capital

investments an organization makes. A 3PL can share these risks across the many

companies that it serves. This allows a 3PL to lower risk relative to a company

performing the function itself.

Free-up resources: Outsourcing offers a way to conserve capital and allows a

company to redirect its resources from non-core activities toward activities, which

have the greater return in serving the customer.

Cash infusion: Sometimes, outsourcing involves the transfer of assets from the

company to the 3PL. These assets have a value, and in fact are sometimes sold to

the 3PL.

31


Reduce and control operating costs: Outsourcing to a 3PL most likely will give

access to a lower cost structure, which may be the result of a greater economy of

scale or some other advantage based on specialization. When calculating the cost

benefits it is very important to consider total costs since coordination costs often

increase when all or part of a function is outsourced.

Resources not available internally: Companies might simply not have access to

the required resources within the company.

Eliminate labour problems: While companies are rarely willing to concede this

fact, many view outsourcing as a way to eliminate labour problems. This is a two

edged sword and one has to be extremely careful here. Perceived benefits do not

always materialize.

32


Supply Chain Optimization To-Do List Migrate electronic data interchange (EDI) transactions to the Web. Many

companies have been using EDI since the 1980s to automate purchasing of

production materials. Third-party value-added network (VAN) providers

charge a premium to connect organizations with different equipment. Using

the Web for EDI can slash costs.

Use Product Data Management (PDM) to manage product development data

from design through manufacturing and maintenance.

Engage in Collaborative Planning, Forecasting and Replenishment (CPFR),

which involve sharing forecasts among suppliers to enable automatic product

replenishment.

Take part in collaborative product design (CPD), the joint development of new

products by supply chain members.

Traditional Functional Performance Measures

Manufacturing Sales & Marketing Engineering / R&D

Unit cost

Labour cost

Labour productivity

Quality, scrap rate

Plant utilization

Plan vs. actual

production

Market share

Revenue

Sales growth

New "hot" products

Customer satisfaction

Functions/features

Labour & material cost

Time-to-market

Award-winning designs

Design for

manufacturability,

assembly, etc.

33


Supply Chain Management - A Continuous Replenishment.

Supply chain management is a driving factor in today's business world. Supply chain

run from vendor's right through to customers' door. With international sourcing and

international sales, the scope and complexity of supply chains can be significant.

Customers, and their requirements, drive the process. They demand that their orders

be shipped, complete, accurate, on tine, and in the manner they require.

The purpose of SCM is to drive out excess inventory and unnecessary costs. We work

with companies to understand what is required and the impact, both financial and

operational. With this base we work to develop and implement SCM. We can work

with clients to evaluate their present supply chain and to identify what must be done

to gain the cost and service benefits of a quality SCM program. The SCM must work

at all levels, strategically and tactically to be effective.

If you have customer who have placed supply chain requirements on you that you

may not understand, we will work with you to understand each customer's needs.

Then we can evaluate your supply chain process to see if it meets your customers'

requirements. Each customer has different requirements that you must comply with.

Your supply chain program must be tailored to each customer's special requirements.

34


The Evolution

The evolution of the SCM has moved from disparate functions of logistics,

transportation, purchasing and supplies and physical distribution to focus on

integration, visibility, cycle time reduction and streamlined channels. The new

integration has a variety of activities such as, Integrated Purchasing Strategy, Supplier

Integration, Buyer-Supplier Partnerships, Supply Base Management, Strategic

Supplier Alliances, Supply Chain Synchronization, and finally simply SUPPLY

CHAIN MANAGEMENT.

The activities of logistics are centuries old as discussed earlier. During World War II,

military forces made effective use of logistics models and forms of systems analysis

to ensure that the required material was at the right place on time every time. The

term logistics is widely used in military and military type applications even today.

Until about mid 1950's, the field of supply chain management was in a state of

dormancy. The piecemeal and isolated fragmented set of activities was rampant.

Production and manufacturing were given uppermost attention. The inventory was the

responsibility of the marketing, accounting and/or production areas and order

processing was an accounting or sales responsibility.

During the Ethiopian famine relief efforts of the 1980's, the term logistics was applied

to the food-supply activities. World Vision International, one of the many relief

organizations at work there, produced a manual entitled Getting It There- A Logistics

Handbook for Relief and Development.

SCM formerly known as logistics management now includes more aspects apart

from the logistics function. SCM is one of the most powerful engines of

business transformation that basically means delivering the right product to the

right place at the right time and at the right price. SCM is the one area wherein

much operational efficiency can be gained, thereby reducing organizations costs

and enhancing customer service. Gradually, the marketing people started giving

greater emphasis to distribution, giving rise to physical distribution management or in

today's parlance 'outbound transportation'.

35


In 1991, the international Council of Logistics Management (CLM), defined logistics

as "the process of planning, implementing, and controlling the efficient, effective flow

and storage of goods, services, and related information from the point of origin to the

point of consumption for the purpose of conforming to customer requirements".

Some of the terms like logistics, inbound logistics, materials management, physical

distribution, supply chain management seem to be used interchangeably. Very briefly,

inbound logistics covers the movement of material, components and products

received from the suppliers. Materials management describes the material handling

part of the movement of the material and components within the factory or firm.

Logistics describes the entire process of material and products moving into, through,

and out of a firm. Finally as of today, it is the Supply Chain Management that is

conceptualized as something even larger than logistics, that links logistics more

directly with the user's total communications network and with the firm's engineering

staff. It is sufficient to know this much at the present juncture on supply chain

management, as in the chapter Process View of SCM where we will explore different

views on supply chain management.

A supply chain is, in fact, a network of facilities and distribution options that

necessarily performs the functions of procurement and acquisition of material,

processing and transformation of the material into intermediate and finished tangible

products and finally the physical distribution of the finished tangible products to the

customers, whether intermediate or final ones. As already indicated, supply chains

exist in both manufacturing as well as in service organizations.

Supply Chain Management is a set of approaches utilized to efficiently integrate

suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and

distributed at the right quantities, to the right locations, and at the right time, in order

to minimize system wide cost while satisfying service level requirements.

36


Table 1 - Chronological DatesDuration Events in SCM EvolutionAncient Times

The Barter System evolved as an answer to the trading requirements. This was the first supply chain.

300 BCCaesar made trading posts in East Asia to grow his trade. This was the first retailer supplier relationship. Establishment of the silk route to India.

1151 First known fire and plague insurance offered in Iceland.

1305 House of Taxis operated courier messenger service for the rich European clients. (A kind of primitive Outsourcing)

1621 Dutch West India Co. formed to trade with America and West Africa. (A pseudo third party logistics (3PL) by the Dutch Companies.)

1904 Charles S. Rolls became selling agent for cars made by F. Henry Royce. (The first traces of outsourcing).

1956Warren Buffet started investment partnership in Omaha with money from family and friends and he went on to become a billionaire. (An overseas 3PL)

1960-1975The essence of SCM understood. This first phase is characterized as an inventory 'push' era that focused primarily on physical distribution of finished goods.

1975-1990The earlier approach changed. Companies began migrating from an inventory push to a customer pull channel as power began to move the downstream to the customer.

1980

In the last phase, companies realized that the productivity could be increased significantly by managing relationships; information and material flow across enterprise borders. This resulted in the present concept of supply chain management.

1981 IBM outsourced almost all of its activities and built a full computer.

1985 Wal-Mart introduced the concept of Cross Docking and replaced K-Mart as the leader in retail stores.

1985- Cisco removed itself from the supply chain by providing to the customer directly from the vendor.

1990 Computer changed the way business is done.

1996- Internet revolutionized the information pathway and the distribution system of the business.

1998- The concept of e-commerce changed the definition of business itself.

2000-Currently concepts like t-commerce and digital TV are beginning to take shape.

Reasons for the Big Breakthrough in the Past 20 years

The breakthrough revolution in the past 20 years is due to the following differences in

the attitude of companies and customers alike.

37


Earlier Today

Companies No two companies at the same level of competition.

The main motive was to increase production.

Production differentiation very early and far from customer.

Reaction approach of industries.

Competition at all levels.

Main motive is customer service.

Product differentiated nearer the customer.

Action approach of industries. Customer Customer did not care about

specifications.

Less market moving powers

Customers demand exact specifications.

More power devolved to the customer.

38


Supply Chain Process

The concept of supply chain management encompasses four main decision

areas: location, production, inventory, and distribution. Within these areas

decisions fall into two main categories: Strategic decisions deal with the long-

term future; and operational decisions deal with the short term running of the

company.

Location

In order to create a supply chain you must first decide on the geographic location of

the facilities that the organisation uses. These facilities include production plants,

warehouses and distribution points, suppliers, and buyers. A supply chain is

essentially the interaction between these facilities and the processes by which

products move between them.

Strategically the location of the above facilities must be determined by the location of

the target market for the organisation. It will have an effect on running costs, taxes,

local content, distribution costs, and service.

The decision to locate a facility commits the organisation to allocating resources and,

in some cases, very large amounts of capital. Therefore it is imperative that the

location is determined on a strategic level. Operationally the location of facilities may

affect the efficiency of the running of the business.

Production

A supply chain is useless unless it has a product to pass through it. The decision on

which product to produce is directly affected by the organisations target market and

therefore is a strategic decision. Other strategic issues include the allocation of

resources to the production plants (i.e. suppliers), and the capacity of the plants.

Operational issues include the day to day running of the plants. Examples of these are

production scheduling and quality control.

39


Inventory

Decisions in this area affect all stages of the supply chain. The inventories through out

the chain will probably be at differing stages of development. For instance the

inventories at the beginning of the chain will be raw materials, at the end they will be

the finished products. These inventories, no matter what stage they are at have a value

that is not yet being realized. In order to minimize the unrealized value of the goods

efficient management of the inventories must take place.

Most of the issues involved with inventory are operational, for instance the

maintenance of stock levels within safety boundaries. On a strategic level

management set the goals that are to be achieved in this area and determine the

reorder strategies (i.e. JIT).

Distribution

The key decisions in the distribution area involve the trading-off of inventory levels

of buyers with the costs of freight. Another matter to be considered is the nature of the

product. It is no good sending a shipment of perishable goods via sea or rail to save

money if the goods are not in a suitable condition once they reach their destination.

On the other hand shipping by sea or rail is cheaper but necessitates higher inventory

levels to counter the uncertainty associated with these methods (i.e. bad weather when

shipping by sea).

Strategically, forecasts of the demand for the product allow for the co-ordination

between the distribution by various methods and the buyers inventory levels.

40


Process view of the Supply Chain

Cycle view

1. Customer Order Cycle

Customer arrivalCustomer order entryCustomer order fulfilmentCustomer order receiving

2. Replenishment Cycle

Retail order triggerRetail order entryRetail order fulfilmentRetail order receiving

3. Manufacturing Cycle

Order arrivalProduction schedulingManufacturing and ShippingReceiving

4. Procurement Cycle

Supplier / Manufacturer interface

41

Sources

Converters

Retailers

Suppliers Distributors Consumers

Product and Service FlowInformation Flow

Funds Flow


42


Push-Pull view of Supply Chain

Pull Process:Execution is initiated in response to a customer order (increased responsiveness)

Push Process: Execution is initiated in anticipation to a customer order (increased efficiency)

Push-Pull Boundary: Which processes are of each type

Push Systems MRP supported

Pull Systems Require fast information transmission and sharing

43

CustomerOrder

Replenishment

Manufacturing

Procurement

Pull

Push

Customer arrivalCustomer order entryCustomer order fulfilment

Customer order receiving

Retail order triggerRetail order entryRetail order fulfillmentRetail order receiving

Order arrival from distributorsProduction schedulingManufacturing and ShippingReceiving (distributors, retailers, customers

Cycles


Supply Chain Flows

Information

Product

Funds

The industry is in the midst of a revolution, and Web technology is the firebrand

stirring up the masses. We can now order anything from home - from computers and

flowers to vacations on faraway tropical islands. The Internet is a merger of content

and commerce. We can shop, compare competitive offerings, review data sheets, get

pricing, and even order all in one session. The Internet takes inefficient channels and

makes them efficient, thus reducing the trivial activities we take for granted. So what

does it all have to do with logistics?

The efficiencies the Internet offers consumers are not going unnoticed by corporations

constantly looking to grow market share and reduce cost. Somewhere in your

company, people are gathered right now to design an e-business strategy. The strategy

may be driven by a senior manager at the request of a forward-thinking CEO seeking

to replicate performance gains he has seen in other companies. Perhaps it's a tiger

team assembled to respond to a competitive threat.

Either way, customer service will define it. Your company must be able to commit

product availability, price, and delivery date at time of order entry to the customer. If

the product is not immediately available to ship, your company must know when it

will be available and allocate it to the customer through a Capable-to-Promise (CTP)

transaction. Performance has to be close to flawless, because supplier-switching costs

for your customer on the Internet are next to zero.

It doesn't matter if you have a vertically integrated company, owning everything from

raw materials to finished goods, or a company depending on service providers and

contract manufacturers for execution. Nor does it matter whether the product is built

to order or built to inventory. Distribution channels will change. You will have to ship

directly to customers rather than send bulk orders to distributors. You may even find

it more efficient to ship directly from a supplier's dock to the end-customer. The e-

44


business model requires that all members of the supply chain act as a part of one

seamless fulfillment process. So now we have our marching orders: Increase logistics

productivity while radically transforming the supply chain. Impossible tasks? You

don't really have a choice, since your competitor will be doing the same. Besides, the

two goals are compatible. As in e-commerce, the trivial is eliminated and channels are

made more efficient, adding up to less cost and better customer service.

Defining Web-based systems is controversial and there is no one right answer.

However, one point is clear: Systems built using Web technologies offer significant

advantages over the green-screened UNIX systems common with SCE vendors today.

Navigation is vastly improved, application integration is simplified, and with

component architectures, benefit realization should be much quicker with less

complex system installs. Reductions in the cost of ownership should come, as

functionality is more centralized on servers. Web-based technologies are generally

regarded as superior. The real question becomes, "What is my migration path and

what vendors should I be looking at?"

Stage One: Internet Presence Is Established

Four levels of system evolution exist for the Web-based supply chain. The vast

majority of today's users are in the first stage - Internet Presence Established - while a

growing percentage are moving to the second - Commerce Is Initiated. As trading

partner integration grows toward collaborative execution, performance is greatly

enhanced. The third stage - Demand-Centered E-Business - represents a very real

target for the near term. The fourth - Demand Web Fulfillment - is a conceptualised

view of how Web-based systems will work together across companies and enterprises,

given current technology direction.

Most companies start on the Internet at this stage. Establishing an Internet presence is

a one-way flow of information, generally providing product and service information

to customer inquiries; its value comes from informing the customer. Users can access

order, inventory, or transportation status. Third Party Logistics (3PL) has made it a

common service offering. Companies afraid of channel cannibalization caused by

selling directly on the Internet are often frozen here. SCE vendors extended their

applications out to the Web to satisfy the demand for the capability.

45


Stage Two: Commerce Is Initiated

Buying and selling on the Web begins at the second stage. Customers can place orders

directly on the merchant's commerce server, configure them, authorize payment, and

be notified of expected delivery dates. SCE systems figure prominently, providing

inventory information, transportation routing and scheduling, and order management

to the customer-facing applications. The fulfillment process is from the Industrial

Age, and service failures are frequent. Systems are not integrated inside a company,

duplicate data entry is common, and no collaborative execution processes exist

between partners.

Stage Three: Demand-Centered E-Business

Customers buy from your company for one of three reasons: convenience, price, or

scarcity. Combine two or more reasons and you provide even greater value to the

customer and profits for yourself. How well you deliver to customer expectations

dictates how successful you will be. Execution becomes critical, and collaborative

execution between supply chain partners is essential. Acting as the demand center,

your company coordinates and makes sure the entire supply chain is focused on

serving the customer. An information backbone connects the community. You have

full visibility to supply chain inventories, purchase order status, transportation status,

and alert and workflow processes. Information is also pushed to the customer as

opposed to the pull-only model in the first two stages.

Stage Four: Demand Web Fulfillment

Supply Chain Management (SCM) moves from art to science. The fourth stage is a

conceptualised vision, but at least we can discuss a totally integrated supply chain,

confident that technology will be able to support the scalability, breadth of functions,

and communications required for such an aggressive undertaking. Completely event-

driven, information and data flow both ways throughout the entire trading community.

Systems automatically optimize for disruptions in supply and demand, with rules built

to manage fulfillment and automation of business decisions between systems and

enterprises.

46


Decision Phases in a Supply Chain

SCM is an approach to manage the entire flow of information, materials and services

from raw material suppliers through factories and warehouses to the end customer.

SCM is a very complex problem in itself. It involves complex decision-making at

various nodes and can be of different level.

Supply Chain Decisions can be classified in three categories:

Strategic Decisions: as the term implies, strategic decisions are made typically over a

longer time horizon. These are closely linked to the corporate strategy (they

sometimes are the corporate strategy), and guide Supply Chain policies from a design

perspective. These are long-term decisions of a Supply Chain and are based on

planning. These are typical reviewed in several years. The strategic level defines the

supply chain network, i.e., selection of suppliers, transportation routes, manufacturing

facilities, production levels, warehouses, etc.

Tactical Decisions: These are decisions based on strategic decisions; these decisions

are made typically taken to implement them. These are typical reviewed in several

months. The tactical level plans and schedules the supply chain to meet actual

demand.

Operational decisions: These are short-term decisions and focuses on activities of

day-to-day basis. The efforts in these types of decisions are to effectively manage the

product flow and thus are taken based on circumstances and condition prevails. The

operational level executes plans.

Apart from this decisions are also classified based on functionality like location,

production, inventory and logistics decisions. In each of these areas there can be

strategic, tactical and operational decisions involved.

47


Supply Chain Decision-Making Framework

48


Supply chain strategy or design

The real-world experience provides the capability to devise solutions that are

practical, as well as aggressive and future-oriented. The flexibility to work on any

aspect of Supply Chain decision and operation, in addition to the vision and

integration of an end-to-end design including ‘suppliers and customers’.

An effective Supply Chain development lies in: recognizing that any company should

be operating a number of Supply Chains, for different linkages of distinct sources,

customer, products, channels; leveraging the capabilities of all participants in the

chain, upstream and downstream, internal and third party; creating a demanding

vision for the future, and sequencing a series of interim, attainable, steps to reach it;

knowing the baseline starting point of Supply Chain performance, and measuring the

current state constantly. Understanding the human dimension of the significant

process, behavioral, and belief changes that are required for breakthrough in Supply

Chain performance; making operational improvements early and often, while

developing the Information Systems foundation for better transaction processing,

communications and decision support; and keeping the long-term vision, the end-state

objective, in view at all times. The scope of collective experiences a real advantage in

planning and executing a Supply Chain implementation, for sourcing and

procurement, through manufacturing integration, into Transportation and Network

Design, and Warehousing and Distribution operations.

49


Supply Chain planning

From acquiring raw materials to delivering finished products to end users, logistics

operation include all activities along the supply chain process, or as commonly

referred to in logistics circles, from "the suppliers' supplier to the customer's

customer." this is the supply chain. In well-functioning supply chain, at every link,

each unit should treat the next units a customer, always focusing on service to the

ultimate customer, the end user or client.

Customers focus

A well-functioning supply chain staff consciously strives to anticipate and satisfy

customers' need. Supply chain managers, in addition to their primary customers, also

have important intermediate customers, each with special needs and expectations.

Service providers are the final link in the long supply chain that stretches from

manufacturers to customers. Because they directly link logistics operations to the

ultimate customer, service are the most important "intermediate customer." service

providers must be given the products they need. Their fundamental concern is quality

of care, and they understand the supply chain system's contribution to their ability to

provide quality care. Service providers need the logistics system to deliver a

dependable supply of quality products and other supplies for their client, which means

they need convenient and regular re-supply with minimal additional work.

Warehouses and stores in the distribution chain are also intermediate customers that

demand logistics systems resources (staff, storage space, and transport); regular and

predicable re-supply of all products from the next higher level, and technical support

and problem-solving assistance, when needed.

Policymakers and senior program managers, as representatives of the program, also

need to be treated as customers by the next highest level in the system: donors,

lenders, or other suppliers of products. They want the same thing as every other

customer along the supply chain: reliable availability of the right products at the right

time. They also need the supply chain system to provide accurate data on stocks levels

and strict accountability for materials, and to provide cost effective logistics

50


operations. Policymakers are particularly important internal customers, because they

control the allocation of funds and other resources for the supply chain. International

donors are the customers of their own suppliers. But, they also have expectations from

the in-country logistics system: they want the system to ensure accountability for

donated products; and accurate and timely data on products consumed, quantities

needed. Above all, donors want the logistics system to ensure the availability of

products to all current and potential customers.

When developing a customer culture within a supply chain, it is essential to identify

all the system's customers and their respective needs and expectations. The primary

customer, however, is always the client. While a supply chain may be required to

satisfy a variety of internal or intermediate customers, the most successful supply

chain unswervingly focus on satisfying end users.

51


Supply Chain Obstacles/Challenges

Increasing Variety of Products

Decreasing Product Life Cycles

Increasingly Demanding Customers

Fragmentation of Supply Chain Ownership

Globalization

Difficulty in Executing New Strategies

52


Supply Chain Drivers

Inventory

This refers to means by which inventories are managed. Inventories exist at every

stage of the Supply Chain as either raw materials, semi-finished goods or finished

goods. They can also be in process between locations. Their primary purpose to buffer

against any uncertainty that might exist in the Supply Chain. Since, holding of

inventories can cost anywhere between 20 to 40 per cent of their value, their efficient

management is critical in Supply Chain operations. It is strategic in the sense that top

management sets goals. However, most researchers have approached the management

of inventory form an operational perspective. These include deployment strategies

(pull verses push), control policies – the determination of the optimal levels of order

quantities and reorder points, and setting safety stock levels, at each stocking location.

These levels are critical, since they are primary determinants of customer service

levels.

The keys to effective Inventory Management lie in shortening the lead-time

throughout your Supply Chain:

Understanding how your order frequencies and quantities drive inventory –

and its consequent effect on warehouse sizing and slotting,

Analyzing the trade-off of centralized vs. distributed inventory, in terms of

inventory investment, transportation costs, and customers service capabilities,

Integrating and coordinating the silos in your organization, for optimum

inventory strategies across the entire Supply Chain,

Being bold, and confident, enough to make inventory decisions for operational

improvements – in the face of negative accounting issues; and building a Supply

Chain and inventory strategy to evaluate your customers’ expectations – and

anticipate their genuine needs.

53


Includes:

1. Raw Materials

2. Component parts

3. Work in process (WIP)

4. Finished goods

Transportation

The mode choice aspects of these decisions are the more strategic ones. These

are closely linked to the inventory decisions, since the best choice is often found

by trading off the costs of using the particular mode with the indirect cost of

inventory associated with that mode. While air shipments may be fast, reliable,

and want lesser safety stock, but they are expensive. Meanwhile shipping by sea

or rail may be much cheaper, but they necessitate holding relatively large

volumes of inventories to buffer against the inherent uncertainty associated with

them. Therefore, customer service levels, and geographic location play vital

roles in such decision. Since, transportation is more than 30% of the Logistics

costs, operating efficiency makes good economic sense. Shipment sizes

(consolidated bulk shipment versus lot-for-lot), routing and scheduling of

equipment are key in effective management of firm’s transport strategy.

The estimated Rs 65,000crore Indian trucking industry has been in existence

before SCM as a concept came into vogue. Trucking plays a vital role in SCM

in the flow of material. The success of the entire exercise of planning and

investing in ERP and Supply Chain software depends on whether goods reach

on time. “Timely movement of goods is primary concern of any Supply Chain”,

says Vishal Gupta, director Total Logistics. The traditional transport companies

are now transforming into a fleet manager offering value-added services like

track and trace, specialized trucks for certain goods, warehousing and other

facilities, and serving user specific industries.

The need to provide value-added services has also resulted in strategic tie-ups

by truckers, say with specialized operators to serve specific industries. For e.g.

TCI has tied-up with Mitsui to form trans-system that offers logistics services to

the auto industry.

54


Transportation includes the following:

i. Moving inventory from point-to-point

ii. Impact on

(1) Responsiveness

(2) Efficiency

The future of the Indian trucking industry depends on various factors like

economic growth and investments in infrastructure. At present a number of

organised transport operations are leveraging on their strength in trucking by

combining allied services like clearing and freight forwarding, warehousing and

customer relationship Management to become complete Logistics players. This

is taking the form of tie-ups, acquisition. The future will see similar

consolidation happening in this arena, especially in the organised segment that

makes about 15% of the market.

Commercial Vehicles and Logistics: The Movement Zones

Type of Movement Key Feature

Primary

Raw material to factory

Finished goods to

warehouses

Long distance, bulk

movement

Mechanical handling

Operational economy

Secondary Warehouse to

wholesaler/retailer

Convenient batches

Safe transportation

Timely distribution

Optimum turnaround

TertiaryWholesaler / retailer to

consumer

Door delivery

Timely delivery

City Operations

Frequent start-stops

High manoeuvrability

55


The potential issues and opportunities in most transportation situations are:

Is the internal fleet cost-and-service effective?

Are you getting the most of your money from common carriers?

When is 3PL solution is the right way to go?

Are you paying what you have agreed to?

Is the mix of modes and services you are using right for your changing

business?

How much should I be charging my customers for delivery?

Why can’t my fleet make money?

How can transportation enable an integrated Supply Chain, instead of

getting in the way?

Facilities

a) Warehousing/Storage

Warehouse is the quiet key to effective service. Review whether the warehouses

are in the right locations to effectively serves the customers. With the speed that

is required to manage orders and inventory, companies must have timely,

accurate information of inventory on-hand. Warehouses must be located in the

proper areas to effectively meet customer’s delivery requirements.

i. Where inventory

(1) Stored

(2) Assembled

(3) Fabricated

ii. Types

(1) Storage

(2) Production

(3) Marketing

56


b) Material Handling

It is concerned with movement of product at the stocking point and it involves

decisions such as:

Smoothening of raw material

Selection of material handling equipment

Maintenance of material handling equipment.

"The Mission of Materials Management Services

is the acquisition

of the RIGHT goods and services,

in the RIGHT quantity,

at the RIGHT time,

of the RIGHT quality,

at the RIGHT place,

from the RIGHT supplier

and at the RIGHT cost,

at a minimum inventory and operating investment."

c) Packaging

It is concerned with design of packaging of product that ensures damage free

movement of the product and is conductive to efficient handling and storage.

57


Information

A must for successful implementation of Logistics functions. Developing proper

Data Base, IT system, such as ERP and DI methods.

Accurate forecasting

Good order Management

Just-in-time (JIT)

Contingency Replenishment (CR)

Quick Response (QR) to the customer

- are the bases for good information system to be developed.

Order Processing

The order processing system undergoes various checks to determine if:

(1) the desired product is available in inventory in the quantities ordered,

(2) the customer’s credit is satisfactory to accept the order, and

(3) the product is scheduled for production if not currently in inventory.

Management can also use the information on daily sales as an input to its sales

forecasting package. Order processing next provides information to accounting for

invoicing, acknowledgement of the order to send to the customer, picking and packing

instructions to enable warehouse withdrawal of product, and shipping documentation.

The primary function of the order processing system is to provide a communication

network that links the customer and the manufacturer.

58


Cost Trade-Offs Required in Marketing and Logistics

59

Product

PromotionPrice

Transportation costs

Place/Customer service levels

InventoryCarrying costs

Warehousingcosts

Order processing and information costs

Lot Quantity costs

LOGISTICS

MARKETING


Achieving strategic fit in Supply Chain Management

Achieving strategic fit: Matching S.C. to customer segment requirements

Understanding the

customer:

Quantity of product provided in each lot

Response time that customers are willing to

tolerate

Variety of products needed

Service level required

Price of the product

Desired rate of innovation

(Volumes, variety, response time, service level, price

innovation rates)

Understanding the

supply chain:

Responsiveness

Respond to wide range of quantities demanded

Meet short lead times

Handle a large variety of products

Build highly innovative products

Meet a very high service level

Efficiency

Economies of scale

Low capacity (excess costs)

Low cost transport

60


Achieving Strategic Fit

Finding the Zone of Strategic Fit

Fit Between Competitive and Functional Strategies

61

Competitive Strategy

Supply Chain StrategyManufacturingInventoryLead TimePurchasingTransportation

ProductDevelopmentStrategy

Marketing and SalesStrategy

Information Technology Strategy

Finance Strategy

Customer Service

Responsive Supply Chain

Responsiveness Spectrum

EfficientSupply Chain

CertainDemand Implied

UncertaintySpectrum

UncertainDemand

Zone ofStrategic Fit


The Bull Whip Effect

What happens when a Supply Chain is plagued with a bullwhip effect that distorts its

demand information as it is transmitted up the chain? In the past, without being able

to see the sales of it products in the distribution channel stage. HP had so rely on sales

orders from the resellers to make product forecast, plan capacity, control inventory,

and schedule production. Big variations in demand were a major problem for HP’s

Management. The common symptoms of such variations could be excessive

inventory, poor product forecasts,

insufficient or excessive capacities,

poor customer service due to

unavailable products or long backlogs,

uncertain production planning (i.e.,

excessive revisions), and high costs of

corrections, such as for expedited

shipments and overtime. HP’s product

division was a victim of order swings

that were exaggerated by the resellers relative to their sales; it, in turn, created

additional exaggerations of orders swings to suppliers.

In the past few years, the Efficient Consumer Response (ECR) initiative has tried to

redefine how the grocery Supply Chain should work. One motivation for the initiative

was the excessive amount of inventory in the Supply Chain, from when products

leave the manufacturers’ production lines to when they arrive on the retailers’ selves,

has more than 100 days of inventory supply. Distorted information has led entity in

the Supply Chain – the plant warehouse, a manufacturer’s shuttle warehouse, a

manufacturer’s market warehouse, a distributor’s central warehouse, a distributor’s

regional warehouse, and the retail store’s storage space – to stockpile because of the

high degree of demand uncertainties and variabilities. It’s no wonder that the ECR

report estimated a potential of $30 billion from streamlining the efficiencies of the

grocery Supply Chain.

Others industries are in a similar position. Computer factory and manufacturers’

distribution centers, the distributors’ warehouses along the distribution channel have

62


inventory stockpiles. And in the pharmaceutical industry, there are duplicate

inventories in a Supply Chain of manufacturers such as Eli Lilly or Bristol-Myers

Squibb, distributors such as McKesson. Again information distortion can cause the

total inventory in this Supply Chain to exceed 100 days of supply. With inventories of

raw materials, such as integrated circuits ad printed circuits broads in the computer

industry and antibodies, the total chain may contain more than one year’s supply.

In a Supply Chain for typical consumer

product, even when consumer sales do

not seem to vary much, there is

pronounced variability in the retailers’

orders to the wholesalers. Orders to the

manufacturers’ and to the

manufacturers’ supplier spike even

more. To resolve the problem of

distorted information companies need to first understand what creates the bullwhip

effect so they can counteract it. Innovative companies in different industries have

found that they can control the bullwhip effect and improve their Supply Chain

performance be coordinating information and planning along the Supply Chain.

Causes of the Bullwhip Effect

The following four have been identified as the major causes of Bullwhip Effect:

1. Demand forecast updating.

2. Order batching.

3. Price fluctuation.

4. Rationing and shortage gaming.

Each of the four forces in concert with the chain’s infrastructure and the order

manager’s rationalize decision-making create the bullwhip effect. Understanding the

causes helps managers’ design and develops strategies to counter it.

63


Demand Forecast Updating

Every company in a Supply Chain usually forecasting for its production scheduling,

capacity planning, inventory control, and material requirements planning. Forecasting

is often based on the history from the company’s immediate customers. When a

downstream operation places an order, the upstream managers processes that the piece

of information as a signal about future product demand. Based on the signal, the

upstream manager readjusts his or her demand forecasts and, in turn, the orders placed

with the suppliers of upstream operation. We contend that demand signal processing

is a major contributor to the bullwhip effect.

For example if you are a manager who has to determine how much to order from a

supplier, you use a simple method to do demand forecasting, such as the new daily

demand data become available. The order you send to the supplier reflects the amount

you need to replenish the stocks to meet the requirements of future demands as well

as the necessary safety stocks. The future demands and the associated safety stocks

are updating using the smoothing technique. With long lead times, it is not uncommon

to have weeks of safety stocks. The result is that the fluctuations in the order

quantities over time can be much greater than those in the demand data.

Order Batching

In a Supply Chain, each company places orders with an upstream organization using

some inventory monitoring or control. Demands come in; depleting inventory but the

company may not immediately place an order with its supplier. It often batches or

accumulates demands before issuing an order. There are two forms of order batching:

periodic ordering and push ordering. Instead of ordering frequently, companies may

order weekly, biweekly, or even monthly. There are many common reasons for an

inventory system based on order cycles. Often the supplier cannot handle frequent

order processing because the time and cost of processing an order can be substantial.

Many manufacturers place purchase orders with suppliers when they run their

material requirements planning (MRP) systems. One common obstacle for a company

that wants to order frequently is the economies of transportation. There are substantial

differences between full truck-load (FTL) and less-than-truckload rates so companies

have a strong incentive to fill a truck-load when they order materials from a supplier.

64


In push ordering, a company experiences regular surges in demand. The

company has orders “pushed” in it from customers periodically because

salespeople are regularly measured, sometimes quarterly or annually, which

causes end-of-quarter or end-of-year order surges. Salespersons who need to fill

sales quota may borrow ahead and sign orders prematurely. When a company

faces such periodic ordering by its customers, the bullwhip effect results. If all

customers’ order cycles were spread out evenly throughout the week the

bullwhip effect would be minimal. The periodic surges in demand by some

customers would be insignificant because not all would be ordering at the same

time. Unfortunately, such an ideal situation rarely exists. Orders are more likely

to be randomly spread out or, worse, to overlap. When order cycles overlap,

more customers that order periodically do so at the same time. As a result, the

surge in demand is even more pronounced, and the variability from the bullwhip

effect is at its highest.

If majority of companies that do MRP or Distribution Requirement Planning

(DRP) to generate purchase orders do so at the beginning of the month (or end if

the month), order cycles overlap. Periodic execution of MRPs contributes to the

Bullwhip Effect, or “MRP jitters” or “DRP jitters.”

Price Fluctuation

Estimate indicate that 80 percent of transactions between manufacturers and

distributors in the grocery industry made in a “forward buy” arrangement in

which items were bought in advance of requirements, usually because of a

manufacturer’s attractive price offer. Forward buying results from price

fluctuations in the market place. Manufacturers and distributors periodically

have special promotions like price discounts, coupons, rebates, and so on. All

these promotions result in price fluctuations. When high-low price occurs,

forward buying may well be a rational decision. If the cost of holding inventory

is less than the price differential, buying in advance makes sense. In fact, the

high-low pricing phenomenon has induced a stream of research on how

companies should order optimally to take advantage of low price opportunities.

65


Rationing and Shortage Gaming

When product demand exceeds supply, a manufacturer often rations its product

to customers. In one scheme the manufacturer allocates the amount in

proportion to the amount ordered. For example, if the total supply is only 50

percent of the total demand, all customers receive 50 percent of what they order.

Knowing the manufacturer will ration when the product is in short supply,

customer exaggerate their real needs when they order. Later, when demand

cools, orders will suddenly disappear and cancellations pour in. this seeming

overreaction by customer anticipating shortages results when organizations and

individual makes sound, rational economic decisions and “game” the potential

rationing. This effect of “gaming” is that customers’ orders give the supplier

little information on product’s real demand, a particularly vexing problem for

manufacturers in a product’s early stages.

How to Counteract the Bullwhip Effect

Understanding the causes of bullwhip effect can help managers find to migrate

it. Indeed, many companies have begun to implement innovative programs that

partially address the effect. Next, examine how companies tackle each of the

four causes. Categorize the various initiatives coordination mechanism, namely

information sharing, demand information at a downstream site is transmitted

upstream in a timely fashion. Channel alignment is the coordination of pricing,

transportation, inventory planning, and ownership between the upstream and

downstream sites in a Supply Chain. Operational efficiency refers to activities

that improve performance, such as reduced costs and lead-time. We use this

topology to discuss ways to control the bullwhip effect. (See table 1).

Avoid Multiple Demand Forecast Updates

Break Order Batches

Stabilize Prices

Eliminate Gaming in Shortage Situations

66


We contend that the bullwhip effect results from rational decision making in the

Supply Chain. Companies can effectively counteract the effect by thoroughly

understanding its underlying causes. Industry leaders like Proctor & Gamble are

implementing innovative strategies that pose new challenges organizational

relationships, and implementing new incentive and measurement systems. The

choice of companies is clear: either let the bullwhip effect paralyse you or find a

way to conquer it.

67

Table 1: A Framework for Supply Chain Coordination Initiatives

Causes ofBullwhip Information Sharing Channel

AlignmentOperational Efficiency

DemandForecastUpdate

Understanding system dynamics

Use point-of-scale (POSI data)

Electronic data Interchange

(EDI) Internet Computer-

assisted ordering (CAO)

Vendor managed inventory

Discount for information sharing

Customer direct

Lead-time reduction

Echelon-based inventory control

Order Batching

EDI Internet

ordering

Discount for truck-load assortment

Delivery appointments.

Consolidation

Logistics outsourcing.

Reduction in fixed costs of ordering by EDI or E-commerce.

CAO

Price fluctuation

Continuous replenishment program (CRP)

Everyday low cost (EDLC)

Everyday low price (EDLP)

Activity-based costing (ABC)

Shortage Gaming

Sharing sales, capacity, and inventory data

Allocation based on past sales.


How to Reduce the Bullwhip Effect

One way to reduce the bullwhip effect is through better information, either in the form

of improved communication along the supply chain or (presumably) better forecasts.

Because managers realize that end-user demand is more predictable than the demand

experienced by factories, they attempt to ignore signals being sent through the supply

chain and instead focus on the end-user demand. This approach ignores day-to-day

fluctuations in favour of running level.

Another solution is to reduce or eliminate the delays along the supply chain. In both

real supply chains and simulations of supply chains, cutting order-to-delivery time by

half can cut supply chain fluctuations by 80%. In addition to savings from reduced

inventory carry costs, operating costs also decline because less capacity is needed to

handle extreme demand fluctuations.

“The simplest way to control the bullwhip effect caused by forward buying and

diversions is to reduce both the frequency and the level of wholesale price

discounting.”

In addition to cycle time reductions throughout the supply chain, Haul Lee, V.

Padmanabhan, and Seungjin Whang recommend the following actions to reduce the

supply chain management bullwhip effect:

1. Focus on end-user demand through point-of-sale (POS) data collection,

electronic data interchange (EDI), and vendor-managed inventories (VMI) to

reduce distortions in downstream communication.

2. Work with vendors to create smaller order increments and reduce order

batching. Order batching exacerbates demand fluctuations.

3. Maintain stable prices for products. Price fluctuations encourage customers to

over-purchase when prices are low and cut back on orders when prices are

high, leading to large demand fluctuations.

4. Allocate demand among customers based on past orders, not present orders to

reduce hoarding behaviour when shortages occur.

68


Supply Chain and IT

Information Technology is a prerequisite for successful Supply Chain

Management (SCM) today and will become even more so in the near future. The

e-Logistics field is developing very dynamically. Business-to business

transactions are made via the Internet and ERP systems manage the

transactional information within the enterprise. While IT systems are vital

components in supply chains, their successful management relies on intelligent

and coordinated decision making throughout the logistics network. Intelligent

Decision Support using advanced decision technologies is becoming

increasingly important in e-Logistics and SCM as well. Data Warehouses and

Data Mining can be used to store and analyze product, inventory, and sales

information. Simulation and optimization, which can be found in advanced

planning and scheduling systems, can be employed for, e.g., inventory,

production, procurement and distribution planning. Intelligent agents can, e.g.,

communicate with different partners in a supply chain, assist in collecting

information, share product information, negotiate prices, and distribute alerts

throughout the logistics networks and SCM as well is a very active field in

research, consulting, and software development. Many such technologies or

systems have been implemented recently or are currently in the stage of

implementation.

“IT is an inseparable part of SCM.”

Information technology (IT) is an essential element of the Supply Chain strategy

of an organization. SCM is, to a large extent, about managing information

flows. Unfortunately, lack of sophistication in the information system is still

one of the biggest roadblocks to Supply Chain integration today. IT investments

are still guided by technology, functional and internal considerations and not by

business strategy and needs. There is a lack of extended enterprise functionality,

lack of flexibility, lack of more advance functionality beyond transaction

management, and lack of open, modular, internet-like system architectures. The

human error element too is painful.

69


In the absence of trust and partnership, organizations are not able to share

information. It sometimes doesn’t happen even within Supply Chain activities.

This leads to amplification of demand of the Supply Chain, leading to the

bullwhip effect. Firms are caught in a tricky situation: even when the total

demand variability is low, the variability in orders is very high. This increases

the Supply Chain cost, rendering these firms uncompetitive. The solution of this

problem is a centralised information system. A few organisations have taken the

initiative to integrate their distribution network by implementing enterprise

resource planning and electronic data interchange across branches networks.

However, their work is incomplete without their suppliers and channel partners.

These organisations do not have centralised information, which could lead to

large variability in orders due to smoothening at various levels of the Supply

Chain.

Enterprise Resource Planning (ERP)

Enterprise Resource Planning is a term coined in the early 1990s. It began as a group

of applications or software focused on combining multiple systems into one integrated

system where data could be shared across the enterprise, presumably reducing

redundant data entry and processes. It was originally proposed for manufacturing and

production planning.

In the mid 1990s, ERP solutions expanded to include ordering systems, financial and

accounting systems, asset management and human resource management systems.

Finally, in the late 1990s, the solutions were again broadened to include systems that

made it possible for entrepreneurs and governmental entities to consider these

solutions for their business processes.

The need to undergo an Enterprise Resource Planning project is seen as an

opportunity to not only integrate data systems, but to also redefine processes in the

interest of gaining efficiencies, as well as promote professional growth for employees

by introducing new skills and knowledge in the areas of data management and

procedures.

70


ERP systems have been widely spread. ERP is followed by Wear-House

Management systems, Customer Relationship Management (CRM) and

Transportation Management

“ERP systems integrate the key execution functions across the business”

EDI (ELECTRONIC DATA INTERCHANGE)

EDI allows the electronic transmission of orders, invoice and remittance

information between businesses. EDI has around since the late seventies and it

is used as a replacement for paper-based system has increased dramatically. The

concept involves defining a standard format for transmission of data between

two businesses, which allows the whole transaction process to be automated.

Thus, the actual applications at each end needn’t be identical.

Why EDI?

Simple. EDI saves money. It accomplishes this by making more efficient use of

valuable personnel who are released from time-consuming paper work. It also

moves business efficiency by increasing throughput and reducing the scope for

errors, and allows more sophisticated automated business processes to be

introduced.

How does EDI work?

EDI take information from a business process and delivers it to a “trading

partner” - a business that has agreed to participate in the electronic exchange of

data. The data is usually transmitted over a Value Added Network (VAN). The

VAN is essentially a giant virtual switchboard where data is shunted from one

participating company to another.

Alternative data can be transferred directly. Direct transmission occurs when a

company connects directly to the computer of its trading partner using a dial-up

connection or dedicated line. Once the trading partner receives the information,

the EDI system will translate the standardised EDI data into the local format for

use in the local IT systems.

71


Advantages

EDI is an automated method for exchanging data and therefore it eliminates

most of the errors and time delays associated when people are involved.

Disadvantages

The disadvantage of this is that it requires two companies to use compatible

hardware and communications software.

72


The Postponement Strategy

THE CONCEPT OF POSTPONEMENT

The concept of postponement has a long history of practical applications, as well as

academic literature. Practical application of the concept can be traced back to the

1920's. The first detailed empirical descriptions appeared in the 1960's. In the

literature, the concept was originally proposed by Alderson and later expanded by

Bucklin. The logic behind postponement is that risk and uncertainty costs are tied to

the differentiation (form, place and time) of goods that occurs during manufacturing

and logistics operations. To the extent that parts of the manufacturing and logistics

operations can be postponed until final customer commitments have been obtained,

the risk and uncertainty of those operations can be reduced or fully eliminated.

The concept of postponement lies in organizing the production and distribution of

products in such a way that the customisation of these products is made as close to the

point when the demand is known as possible. Postponement belongs to a set of levers

used in inventory management to attack the variability of demand and supply. This set

of levers can be divided into proactive and reactive. Proactive levers directly attack

the causes of variability; reactive levers help to cope with its consequences. Together

with substitution, specialization, and centralization, postponement is a reactive lever.

The converse concept of postponement is speculation, which holds that changes in

form, and the movement of goods to forward inventories, should be made at the

earliest possible time to reduce the costs of the supply chain. Speculation makes it

possible to gain economies of scale in manufacturing and logistics operations, and

limit the number of stock outs.

73


Optimal Postponement Preconditions

Implementation of postponement works best under certain demand, product and

production preconditions.

Demand Preconditions:

Fluctuation (e.g. seasonal hikes in demand for ski equipment)

Unpredictability (e.g. demand for high tech products with a short product life)

Urgency - operating on short required order lead times relative to the

production cycle (e.g. Benetton would not be able to run its full regular

production cycle after finding out which sweater colours sell best in the

season)

Differentiation - associated with distinct customer segments that require the

company to provide a product line in which the products have different

performance characteristics (e.g. different performance, technological or legal

requirements on the same product in different countries)

Negative correlation for the products in the product line (e.g. success of one

line of printers can have an adverse impact on the demand for the remaining

lines of printers)

Product/product line preconditions:

High product value - products with high unit value have high inventory

holding cost and high cost of oversupply. The postponement concept is best

applied if there is one particular component (or step in operations) that has a

significantly high value added. It makes intuitive sense to delay it. (for

example, in assembling a notebook computer, it would make sense to delay

the instalment and production of different LCD displays until the last minute

rather than the casing of the keyboard since an LCD display is much more

expensive than a keyboard casing).

74


High customisation - product lines with highly customized end products

usually find it difficult to forecast demand on a product basis. Additionally,

it is usually difficult to find alternative uses for them and therefore their cost

of oversupply is high. Because of this, it is important to realize which

production step has the most significant impact on customization of the

product (point of product differentiation). It makes sense to defer these

operations for the products in the product line (for example, in Benetton’s

case, it was difficult to forecast demand for each sweater colour; once the

sweater has been dyed in a certain colour, it is virtually impossible to change

it; if the colour did not sell well, the sweater could not be re-coloured).

High component commonality / modularity - component commonality refers

to a high degree of shared components across the product line. Shared

components result in inventory pooling effects and also shared production

process steps. The component commonality can be taken one step further in

the modularity concept, which uses sharing of bundles of the components

instead of single components.

Production preconditions: Balanced process capabilities - capabilities, such as cost, time, quality and

flexibility need to be kept in balance. Delaying the component production

until shortly before the demand is known may imply producing in small

batches. However, if the set up and changeover cost of the production

equipment is high, there is a high level of scale economies in running

large batches that would be lost.

Availability and quality of the outside suppliers - in order to serve more

flexible production needs, the outside suppliers need to possess similar

capabilities in terms of flexibility of deliveries, speed of order fulfillment

and quality of service.

Availability of information and IT systems in place - a steady flow of

information is needed so that the company can effectively manage the

balance between the supply and the demand.

75


Postponement benefits:

Increased sales – by being able to postpone the production to the point when

the demand is better known, the company can greatly improve its forecasting

abilities and will run a lower risk of losing sales, because the product is not

available. Not only can the company improve its performance in its existing

business; the newly gained flexibility capabilities can translate into dramatic

improvements in meeting the customer requirements, which can attract

business that was previously not attainable.

Lower inventory holding cost

Lower cost of obsolescence

Lower scrap cost

There are two sources of these benefits:

Improved forecasting

Delaying expensive operations and point of product differentiation – this

enables the company to maintain the bulk of its inventories in the cheaper

and/or pre-customized form. As a result, company will achieve the benefits of

a larger inventory buffer (pooling effect) without having to carry the full cost

of it.

76


The Postponement Strategy Examples

Paints – Insta ColorEmulsion Paints – Asian Paints

One of the first, and now classic, examples of this strategy was to postpone the colour

of paint to the retailer/customer level. Rather than holding a wide variety of premixed

colours, retailers began to stock paint in a neutral colour, and customize the final

colour upon specific customer orders. This of course, dramatically reduced the

retailers' number of necessary stock keeping units (SKU's).

Paints – The Effect

Reduce Inventory Levels

Very High Customer Service

Reduction in Forecasting Errors

Product quality undiluted

No loss of scale economics

Hewlett Packard

Overview: Hewlett Packard is known as a leader in the application of postponement

techniques. One of the areas where they have done this most effectively is in

customizing their printers close to the local markets where they are actually being

sold. The idea they use is to postpone commitment of a printer to a certain

geographic market by producing universal printers and then applying power supplies

and labels (the parts that differentiate printers for local markets) at the last stage once

demand is more certain. This allows them to gain pooling effects and therefore, to

better match supply and demand.

Traditionally, most computer peripheral manufacturers have built one plant for a

major market, such as the Americas, Asia, or Europe and then shipped product from

this plant to regional Distribution Centers (DCs) around that market. In many

instances, only one worldwide plant existed with shipments made from this plant to

Distribution Centers around the world. These Distribution Centers provided quick

response to customer orders for products and were needed in a major market to reach

customers within a certain time window. This supply chain seemed to make sense

77


since there were some economies of scale to having a centralized plant supplying an

entire major market.

Problem: However, there are certain problems with the traditional system that

necessitated looking at the policy again. The first problem is the amount of finished

goods inventory that must be carried in the local Distribution Centers. Since

shipments come from a distant plant, not only did these Distribution Centers need to

stock a large amount of inventory to compensate for the lead-time, they also had to

stock additional inventory to handle all of the product proliferation that took place.

For example, in Europe, many different versions of a single printer model must be

made due to the different power sources and sets of languages. Compounding this

problem is the increasing emphasizes placed on speed. The lead time from when a

customer orders a product to when they received it is being squeezed and HP had to

find ways to reduce cycle time while trying to keep inventory costs low. This squeeze

on lead times means that postponing back at the plant level is not an option. Local

Distribution Centers are needed to meet this short lead-time demand. So how can the

apparently contradictory goals of increasing service and reducing inventory be met?

Management Decision and Outcome: The solution, following the postponement

philosophy, was to actually build some assembly functions into their Distribution

Centers. This way, the plant could send generic printers to the Distribution Centers

and they could be customized there for the local markets. This allowed HP to take

advantage of inventory pooling at the DC level which dramatically cut inventory.

Certainly, it seemed that this would increase costs since there are economies of scale

to these manufacturing processes. However, the decrease in inventory more than

made up for the increased cost in creating some assembly functions at the DC level.

Essentially, what HP did was postpone the customisation of the printer until the

printer was actually in the geographic area where the demand was coming from and

until orders were more certain. Implementing this type of supply chain is not easy

because it takes coordination and investment, but the payoffs can be quite large.

78


MotorolaOverview: Motorola’s Land Mobile Products Sector/Radio Products Americas Group

(RPAG) has recently adopted a postponement manufacturing and distribution strategy

for its two-way radio (pager) business. The shift towards postponement allows RPAG

to carry more variety without increasing inventory. But on the other hand, the shift in

strategy also requires additional investment in its warehouse system.

Problem: RPAG builds radios for many national, regional, and local retailers. These

retailers often demand many different varieties in packaging, housing, and frequency

because the ultimate end users demand variety. In the past, products would be

manufactured to stock from different plants and then sent to the Atlanta DC.

Management Decision and Outcome: The recent shift in strategy is making to order.

The most expensive part of the radio, the circuit board, is still manufactured at various

plants and sent to the Atlanta DC. At the DC level, pre-manufactured circuit boards

are now put in different housing, label, and packaging only after an order is received.

With the new strategy, the DC can carry more variations of finished good products

without tying up additional money in inventory. Furthermore, customer service also

improves because the DC no longer needs to rely on the factory to ship special

ordered products. The DC is able to customize packaging for short runs of special

products.

However, the new strategy also requires the DC to take on additional responsibilities.

RPAG has evolved from a push to a pull operation. Consequently, the DC must now

be able to track and move inventory more efficiently to meet customer demands.

Thus, RPAG had to install a warehouse management system (WMS) to control the

flow of inventories. Furthermore, RPAG also adopted vendor-managed inventory

(VMI) for retail customers to better manage its inventory.

79


The Integrated Supply Chain Strategy

In order to optimise performance, supply chain functions must operate in an

integrated manner. But the dynamics of the enterprise and the market make this

difficult; materials do not arrive on time, production facilities fail, workers are ill,

customers change or cancel orders, etc. causing deviations from plan. The Integrated

Supply Chain Management (ISCM) addresses coordination problems at the tactical

and operational levels. It is composed of a set of cooperating, intelligent agents; each

performing one or more supply chain functions, and coordinating their decisions with

other agents -this is called a Logistical Execution System (LES). Our approach views

problem-solving as a constraint satisfaction/optimisation process where agents

influence each other's problem solving behaviour through the communication of

constraints. Coordination occurs when agents develop plans that satisfy their own

internal constraints but also the constraints of other agents. Negotiation occurs when

constraints, that cannot be satisfied, are modified by the subset of agents directly

concerned. The recent advent of the Internet and WWW as infrastructures for global

connectivity has confirmed the distributed multi-agent orientation of the project and

has allowed us to develop new Internet agent technologies that can aptly support the

global integration and management of the supply chain.

80

OutsourcingInbound TransportationProduction Planning(For Outsourcing & in-house)

WarehousingInventory Control

Order Processing /InventoryOutbound Transportation

INBOUNDSUPPLYCHAIN STORAGE

OUTBOUNDSUPPLYCHAIN


Integrated Supply Chain

81

Achieving an Integration Supply Chain


Performance Measurement

Supply Chain Performance Metrics:

Why we are doing simulation? Because, we want to analyze our supply chain. We

need a set of performance metrics, which can be used to determine comparative

efficiencies of different configuration of supply chain. These metrics can be either

qualitative or quantitative. Qualitative factors include Customer

satisfaction, flexibility of supply chain, information and material flow integration etc.

But since these can't be measured as numerical quantity, so it is very difficult to do

comparison based on it. Quantitative factors are as follows:

Cycle Time - can be supply chain process lead time or order-to-delivery of lead-time.

Customer service level - measured by computing order fill rate, stock out rate, back

order rate and delivery probability of each individual element.

Inventory Levels and holding cost, Resource Utilization, Transportation cost

Beside this we can also include cost of raw materials, penalties for incorrectly order

filled etc to our performance metrices.

82

Time

Order cycle timeReplenishment lead-time

Cost

InventoryFreightOverheads

Service

On time

Delivery

Order fill rateLost Sales


Job Scope Available

Role and Scope

Is crucial in any industry

Is critical for any product or Service

Can be the deciding factor in various industries

Available as an industry option by itself

Industry Independent Options

Purchase

Inventory Management

Production Planning

Warehousing

Transportation

Channel Management

As an Industry

Road Transport companies

Shipping Companies

Freight Forwarding Companies

Third Party Logistics companies

Supply Chain Software companies

Warehousing Service Providers

83


Going For Gold In The Supply Chain

SUPPLY CHAIN MANAGEMENT AT MARICO

Marico Industries, Ltd. is a leading India-based consumer goods company with

sales of Rs 6.96 billion (approximately $142 million) for the fiscal year ending

March 2002. With 6 factories and about 1,000 employees, it has maintained

steady revenue and profitability growth throughout the past 10 years. Marico

offers a range of products to the local and export markets (primarily South Asia

and the Middle East), including refined edible oils, food products such as jams

and sauces, niche fabric care products, and hair oils.

Marico was incorporated in 1988 and began commercial operations in 1990

when it acquired the consumer products division of Bombay Oil Industries.

Since its inception, a key strength of the company has been its ability to build

brands.

Marico has pursued a rigorous approach to creating and sustaining its brands,

focusing on understanding and anticipating consumer needs, innovating in

distinct ways, developing advertising campaigns to reinforce value delivered to

consumers, and tracking metrics that support product positioning strategies. The

company’s approach has enabled it to pioneer polyethylene packaging for

coconut oils, cold-water clothes starching product, and other unique

developments. Marico faces competition from large, well-capitalized

international rivals such as

Nevertheless, Marico’s approach has enabled the company to create unique

value for consumers and thereby to build significant market share in many

product categories. Of Marico’s nine brands, three are market leaders.

A key attribute of Marico’s brands is the widespread availability of the

company’s goods throughout India. Marico’s distribution network is key to

ensuring that its products reach about 100 million people throughout the Indian

subcontinent each month. Marico produces 125 SKUs at its own factories and

through 15 subcontracting manufacturers. It stores products at 32 warehouses

84


and sells to 3,500 distributors. These distributors in turn provide products to 1.6

million domestic retail outlets.

Marico’s peer companies in other countries recognize its strength in

distribution; consequently, Marico has secured a distribution alliance with Indo

Nissin Foods and a distribution agreement with Procter & Gamble.

Strategic Goals:

• Enhance long-term value of company brands by achieving excellence in distribution

performance

• Maintain market share growth in a competitive environment with much larger,

offshore rivals

• Scale supply chain operations to sustain customer service as the business grows

• Reduce total delivered cost

Approach:

Marico shortened its planning cycle from 30 days to about 15 days; revised its

demand planning process to forecast “sales out” (shipment from distributors to

retailers); and implemented an improved process to replenish its distributors. The

company focused on achieving relatively even shipment levels throughout each month

and developed internal collaborative processes to support planning.

Marico’s goals included improving forecast accuracy and delivery performance

in order to sustain the widespread availability of its products in the market and

the associated positive perceptions of its brands. By concentrating on internal

operations, Marico has been able to lower inventory and supply chain-operating

costs, particularly those expenses that could be reduced through better planning

in areas such as intra-company stock transfers. The company has achieved

improved cash flow to fund future growth, sustained the viability of its

independent distributor network, and maintained those elements of its brands’

images that are tightly coupled with high availability of its products to its

customers.

85


CASE: Dinesh Shah, 30, a distributor of Marico Industries (flagship brand:

Parachute oil) in central Mumbai, remembers the old bad days with a shudder.

Around month-end, he would literally be stuck with loads of inventory, with goods

being stored even in his office-corridors. The go downs would be overflowing with

stocks, and trucks often had to wait for a day or two to unload additional

consignments. The reason for this nightmare? The company’s sales-team was required

to meet its monthly targets in terms of primary sales – i.e. sales dispatched to

distributors. To achieve primary targets, the team pushed out goods to distributors

month after month even though the latter may have failed to liquidate last month’s

stocks.

This became a kind of vicious cycle because distributors spend the first part of the

month trying to liquidate old stocks, and by the tie the managed to do that, another

dreaded month-end would rear its ugly head, threatening to inundate them with fresh

stocks.

Today, Mr. Shah is breathing easier – thanks to Marico’s Midas touch. With Midas –

an acronym for Marico Industries distribution application software, which allows the

generation of uniform sales data from distributors – the company is now able to track

secondary sales data more effectively. Earlier, the company only new how much sales

had been pushed to distributors. It had little idea about how much stock the distributor

was holding, and what he may need to stock up for future sales. But even if the goods

were overflowing, the company would lose sales due to stock-outs – stock of items

that are moving in the market would not get replenished fast enough.

Not surprisingly, distributors like Shah ended up incurring high inventory costs, now

using Midas and MI-Net, a web based software, the company has effectively made its

ERP system available to distributors. And Shah says he has to keep only 15 days’

stocks, and in future he may be able to get by with just four days’ worth. That will

bring his capital needs to almost zero, since Marico works only a four-day credit

cycle.

86


Result: Marico expects its Rs 4crore investment in MI-Net to pay back in two years

time.

Results (achieved during 3Q01 to 1Q02):

• Decreased stock-outs associated with distributor sales to retailers by 33%

• Reduced lost sales due to stock-outs by 28%, thereby improving total revenue by

1.5%

• Lowered excess distributor inventory by 33%

• Reduced late deliveries to distributors by 37.5%

• Reduced costs associated with supply chain exceptions by 25% (for example, intra-

company stock transfers, truck detention costs)

• Positioned the company for a vendor-managed inventory implementation and further

performance improvements

The benefits of Marico’s MI-Net

FOR COMPANY

Improves efficiency in Supply Chain – inventory control and reduced stock-

outs.

Distributor control & shift of focus from primary and secondary sales.

Sales productivity & ability to monitor leading indicators – reach, lines sold.

Virtual office for sales force, direct access to product and company

information.

More even sales performance, with no sudden spikes at month-end.

Ability to time effective distribution along with advertising and promos.

FOR DISTRIBUTORS

Gives him a mini-ERP, and improved ROI.

Reduces paperwork on billing and report writing.

Instant information on promo schemes, discount on products.

Access to information on stocks available at depots.

Bundled software for maintaining financial accounts.

FOR SALES MANAGERS

Effective control room for monitoring sales & credit.

More precise information on lapsed outlets.

87


More detailed information on sales force performance.

Ability to cash in short-term opportunities like competitors’ stockouts.

Additional information on with (lines sold) and depth (number sold in same

SKU) of sales.

For a more detailed outline of these steps, check out the non-profit Supply- Chain Council's website at http://www.supply-chain.org/ .

CASE STUDY

A note of envy creeps into Peter Gerhardt's voice when he talks about supply chain technology. A privately held shoe retailer with 49 stores across Canada, Town Shoes lacks the size and clout to impose supply chain mandates on its suppliers, all of which are bigger companies. "We don't have the buying power to dictate to our suppliers," says Gerhardt, senior vice president in charge of information systems, real estate, finance and administration for the 1,000-employee Toronto retailer. "We're not that great at supply chain when I look at companies like Wal-Mart, which have nailed it down from end to end."

Instead of focusing on improving the interfaces with suppliers, Gerhardt is concentrating on streamlining internal operations—specifically, what happens to the shoes once they arrive at Town Shoes' 40,000-square-foot distribution center in Toronto. Several years ago, the retailer began using Rams merchandising software from Richter Systems to keep track of inventory at individual stores and the distribution center. This was a step up from the previous way of doing business. As recently as five years ago, Town Shoes would "balance" the inventory at its stores by sending around a truck every day to bring stores sizes and styles they had sold out of.

But Town Shoes chose not to use all of the features of Rams. "We did a lot of bad things to that product. We didn't want to know what we had on hand by size so we actually took out that functionality," Gerhardt says. At the time, it was easier for Town Shoes to deal only with shoe style, rather than size information in the software, and rely on store managers to refer to bar codes on boxes to track sizes. A few years ago, however, Gerhardt woke up to the need to keep tighter control of inventory information and that meant keeping track of size data at the warehouse.

Meanwhile, Richter had transformed into Essentus, and Rams had morphed into Merchandising Express. When Gerhardt installed Merchandising Express in August 2000, he made use of all the software's capabilities. For the first time, he had access to actual stock information at each store as well as the distribution center. This information allowed him to develop a product model: the standard number and size distribution of a particular shoe projected to be sold by each store. Gerhardt figured if he sent each store only 80 percent of the full model, it would cut down on the need to balance (that is, shift stock) between stores. It

88

http://www.supply-chain.org/


costs about $2 per pair to replenish shoes from the central distribution center rather than the $4 charge to send individual shoe boxes in the mail from one store to another—a savings of 50 percent.

Town Shoes has spent $1 million, including software and services on the new Essentus system, and expects its investment to pay off within two to three years. The modest initiative is already beginning to prove its worth. Sales for fiscal 2000, ended in January, were up 12.8 percent, while in-store inventory was down 20 percent as a result of the Merchandising Express implementation. "We sold more goods out of a smaller inventory. We did more with less, which was the whole goal of the supply chain project," Gerhardt says. He expects an even bigger payoff when he begins to replenish stores twice a week rather than just once a week as this will enable him to further decrease inventory. Gerhardt believes his company's future well-being may well rest on this project. "Anyone who thought retail was about selling things missed the boat," he says. "We're in the information business. If we don't have the right kind of information, we're not going to be around."

Future Trends Percentage of buyers, sellers and distributors in the industrial supply industry that are developing and incorporating e-commerce strategies

2000 - 34%2001 - 67%2005 - 83%

Source: Harris Interactive and Industrial America, based on an e-mail survey of 981 individuals responsible for buying, selling or distributing industrial supplies in the manufacturing industry.

R O I

Inventory being held across the retail supply chain at any one time amounts to $1 trillion, according to a report by Benchmarking Partners, based on U.S. Dept. of Commerce data. The Cambridge, Mass.-based consulting firm estimates 15 percent to 20 percent of those inventories ($150 billion to $200 billion worldwide; $40 billion to $50 billion in the United States) could be eliminated through improved planning, forecasting and replenishment.

Hot Quests Dr. Yossi Sheffi, MIT Professor of Engineering Systems; Director Center for at MIT & Logistics.com. answers supply chain management questions.

Question: What is the current state of integration between web based exchanges (either public or private) and legacy supply chain solutions?

Reply: We need to distinguish here between public exchanges and private ones. Public exchanges, by and large, are not doing well currently. They originally did not require or offer good integration capabilities, assuming only browser-level interactions, but the survivors are moving in the direction of offering integration with certain ERP systems. Private

89


exchanges, by their very nature, started with good integration with host systems, typically on the buyer side. Many do not require supplier integration and can operate with browser-level interaction on the supplier side. All this is changing as systems are scaling. Note, however, that in most cases, supplier integration does not lead to fully automatic actions since whenever suppliers are required to quote prices, they want a person in the loop. Similarly, many buyer system do not relinquish the actual the supplier choice to an automated system. Finally, note that integration is getting easier since there are many products on the market that include “pre-integrated” modules that can work well with most popular ERP systems.

Question: Supply Chain Management seems to have two measurable objectives: 1. Increase revenues (via time to market or improved product availability) or 2. Reduce costs (via reduced inventory and better procurement). What are companies doing to meet those objectives in the area of Culture (behaviours within the organization) and technology too?

Reply: Supply chain management, is distinct from logistics management in that it involves the management of multi-company channels rather than the individual enterprises, as well as cross-functional processes within the enterprise. Changes in culture are usually the result of changes in the measurement and reward system. To achieve better channel coordination across functions the performance metrics need to be channel-wide and encompass more than individual functions. Thus metrics like “time to market” or “cash-to-cash time” have been used (typically in addition to functional metrics) to capture and reward process mindset and performance. The technologies that are now available to optimise and enhance logistics and supply chain planning and execution are too numerous to list here. The important ones involve better communications across the functions and the channels, better accounting software to capture activity costs, better decision support and better procurement systems.

Business 2.0's -Supply Chain Management Web-guide

http://www.business2.com/webguide/0,1660,19462,FF.html Not only does this site have information including SCM benchmarking and case studies, it also contains some of SCM's major players, consultants, research, forecasts and more.

About.com - Logistics/Supply Chain

http://logistics.about.com/?once=true& The Logistics/Supply Chain page from About.com features news, discussion groups, consultants, associations, definitions and glossaries, among many other SCM topics.

90

http://logistics.about.com/?once=true&

http://www.business2.com/webguide/0,1660,19462,FF.html

supply chain and logistics management copy

Business

Transcript of supply chain and logistics management copy