Supply Chain Management - Unit 5

Logistics and Supply Chain Managementfor III semester MBA , Marketing & Sales Sessions

Sales and Distribution Management

Prakash A

Cell ph 93412 20241

Email : [email protected]

mailto:[email protected]

Market Logistics and Supply Chain Management

Syllabus - Unit V:

Physical Distribution Management

Importance of physical distribution

Logistic system analysis and design

Organization and control, role and importance of warehousing,

warehouse Type, Size

Reference Books:

Sales and Distribution Management -- Krishna K Havaldar and Vasant M Cavale

Sales & Distribution Mgt

Market Logistics and Supply Chain ManagementIntroduction :

The origin of Logistics and Supply Chain Management (SCM) are from Materials

Management

Materials Management is function in a Co., for Co-ordination of Planning, Moving,

Storing and Controlling materials in an Optimum manner so as to provide a pre-decided

service to the customer at a minimum cost

The Materials Management function include:

Materials Planning and Control

Purchasing

Stores and Inventory Control

Handling these functions independently could create a conflict of interest, hence an

integrated approach was required.

Before 1970: The functions ware fragmented as Transport, Warehouse Management,

Materials Management and Inventory Control, parts and services and Return goods

handling

1970s: Logistics came into practice in two broad areas of Materials Management and

Physical Distribution

1980s: Logistics started getting integrated into inbound, conversions and outbound

In 1990s the concept of Supply Chain Management (SCM) and integrated operations

with suppliers and customers started getting focus



A leading automobile manufacturer in India has created spare parts hubs in Chennai, Delhi,

and Mumbai to provide access to smaller markets also. The company also operates smaller

warehouses from select number of prominent dealers. The objective is to provide quick, JIT

(Just-In-Time) service to customer

Definition:

“ The science of planning, organizing and managing activities that provide goods or

services ” --- Logistics World 1997

“A Business Planning framework for management of materials, service, information

and capital flows. It includes the increasingly complex information, communication

and control systems required in today’s environment” -- Logistics Partners, Helsinki

“ The process of planning, implementing and controlling the efficient, effective flow of

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

consumption for the purpose of conforming to the customer requirements”

-- Council of Logistics Management



Key Words: Planning , The Focus flow of materials, Services and Information,

Implementing, Controlling , and Communication are the Components of Logistics

function


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Key Tasks of Logistics Management


Logistics Operations:

Functions : Include planning, procurement, transportation, supply and maintenance.

These are strictly operational details and have to be undertaken daily. Once the Co. is

clear on its marketing and customer service strategy, the operating managers ensure

that all these details are taken care of to achieve the objective

Processes : include determination of the requirement, acquisition, distribution and

conservation. This aspect includes all the co-ordination requirements of logistics with

the functions of purchase, production and marketing. As part of operations,

interaction with other functions to help the logistics function achieve its goals

Business: Is the science of planning, design and support of business operations of

procurement, purchasing, inventory management, warehousing, distribution,

transportation, customer support, financial and human resources. -- Overall support

of logistics to the business.



Scope of Logistics :

A Company choosing the markets in which it wants to operate

Deciding on the plan location and layout. Also decision on whether whether to

have own production facilities or outsource them

All aspects of inventory management including costs and service levels

Customer service policies

Extent of distribution network to be built up

Location and management of storage facilities

Choices of mode of transport, selection and management of carriers

Any packaging decisions that directly impact storage and transportation



Key Logistics Activities :

Customer Service – consistent provision of “time” and “place” of utility. Logistics has

to ensure that the product or service being offered by the company is available to the

final consumer or end user when he/she wants it (time utility) and where he/she wants

(place utility)

Demand Forecasting – decisions on how much to order from suppliers and when and

how much to produce for customers. This activity normally starts with the sales

forecasts given by the Mktg. & Sales function. This is normally the function of sales to

develop the forecast at agreed frequencies for agreed geographies. The forecast tehn

becomes the starting point of planning function which is the responsibility of logistics

Distribution communication – need for info. on distribution, which could be complex,

automated and fast. This may include status of orders, shipment dates and likely

delivery dates. Logistics is concerned with contract with the suppliers on the

“inbound” side and the channel members and customers on the “outbound” side.

Inventory control - is a trade-off between the level of inventory to be maintained and

the expected service levels to be provided to the customers.

Material Handling – Movement and storage of raw and packing materials, WIP (work-in-

progress) and finished goods. This is physical handling of goods within the firm and

incase of finished goods till they reach the customer



Key Logistics Activities :

Order processing – getting orders in time from the customers, checking the status

of execution and delivery. Sales people get the order and pass it to logistics function

for delivery

After sales parts and service support – during warranty and post warranty till the

working life of the product

Plant and Warehouse location – at optimized cost to the Co.

Procurement – purchase of materials and services from outside Organizations

Packing – primary purpose is that it is a form of Advt. & Mktg. effort. Logistics is

concerned with providing protection for the product in transit and storage

Returned goods handling – In case of a problem, with product or the customer.

Reverse Logistics - Getting back the material for reuse, disposal, reprocessing or

recycling purpose

Warehousing and storage – to support the time and place of utility



Types of Logistics Activities :

Divided into “Inbound” and “Outbound” .

Inbound or Upstream Logistics include- Receiving, Storing, and Issuing inputs and

taking care of:

Material Handling

Inventory Control

Inbound Quality inspection along with the quality control function

Scheduling of production to manage “issues”

Return of unacceptable materials back to the suppliers

Inbound logistics is the interface with the Company Suppliers, Vendors

and other service providers

Outbound or Downstream Logistics include – Collecting, Storing, Dispatching and

physically distributing the finished goods to the buyers/ Distribution

channels/Consumers include:

Order processing of all the orders received through sales system

Material handling of finished goods

Warehousing both in the plant and in the field

Delivery vehicle operations and scheduling

Shipping and related documentation

Outbound logistics is the interface with the Company’s customers



Supply Chain Management (SCM):

SCM focuses on the processes linking the generation of demand to the fulfillment

of the demand.

Starting point is the customer and what he/she wants and all the activities are

centered around this.

SCM creates the process to fulfill customer service needs

SCM is concerned with the physical infrastructure required to support

these operations like, plants, warehouses and transport

SCM manages this infrastructure to maximize service level to customers

Need for Supply Chain Review

Some visible symptoms in business that indicate the need for review and revamp

or redesign the SCM process:

Slowed down response to changes in market. If the competition

launches a promotion on a particular brand/pack, the firm concerned is

not able to react in time

Large write-offs, since what the firm is producing, does not seem to be

what customers are looking for

In order to meet customer service needs and demands of customers

which seem to be imposing stringent conditions of delivery, the

company would be taking up easy way out by building up inventories

The company is not able to commit on finished goods delivery dates

There could frequent stock-outs and lost revenues as the planning

seems to be not keeping pace with the market needs



Influencing factor on Supply Chain Management (SCM):

Globalization of market place is forcing Cos. to have world-class delivery systems

to survive the competition

Advances is Technology in Computing, Communication and Transportation have

further made the situation more complicated

An increasingly demanding customer base is forcing the Cos. to do things

differently to keep customers happy.

All purchase decisions are only on the dimensions of quality, price and time

An innovative Supply Chain, therefore:

Is able to meet all the customer driven challenges in terms of best price, excellent

quality and delivery as specified by the customer

Helps reduce costs of operation

Improves service levels by maximizing time, place and possession utilities

Enhances the speed. Companies can not only commit and meet delivery dates,

but can take care of emergency requirements

Planning and execution are synchronized in a manner as to provide consistent

excellent service to the customer



Supply Chain Integration:

Optimizing Supply Chain requires supplier and customer involvement to integrate

processes, policies, systems, database and strategies between diverse

trading partners

Supply Chain integration benefits:

Reliable demand management - the forecasts are more accurate

High customer service levels – an efficient “pull” system works

Reduced lead times – shared planning efforts helps in this

Optimum working capital costs – there would be no need to keep additional

inventories in anticipation of demand

Optimum supply chain costs – supply chain costs need not necessaritly be

the lowest, they have to be optimum



Differences between Logistics and Supply Chain Management:

No clear differentiation made by experts on Logistics and SCM

Few consultants view points:

Pete Crossby – SCM Consultant

Logistics includes Physical distribution, warehousing, transportation (inbound and

outbound from manufacturing plants) and in some industries customer service also

(sale order processing, inventory planning and production planning

Another Consultant’s view point:

Logistics is generally concerned with strategy and co-ordination of flows between

marketing and production (i.e transportation and distribution)

A supply chain tends to focus on purchasing and procurement, but not necessarily so,

It can include materials, inventory and production planning. There is also Demand

Management which focuses on forecasting, but is sometimes included in either

logistics or supply chain functions.



Differences between Logistics and Supply Chain Management:

Few consultants view points:

Council of Logistics Management:

Definition of Logistics:

Logistics Management is that part of the supply chain management process that plans,

implements and controls the efficient, effective forward and reverse flow and storage

of goods, services, and related information between the point of origin and the point of

consumption in order to meet customers’ requirement.

Definition of SCM:

Supply Chain Management encompasses the planning and management of all

activities involved in sourcing and procurement, conversion, and all Logistics

Management Activities. Importantly it also includes co-ordination and collaboration

with channel partners, which can be suppliers, intermediaries, third-party service

providers, and customers. In essence SCM integrates supply and demand

management within and across companies



Integrated Supply Chain:


Integrated Supply Chain Management

Customer Analytics

Purchasing/ Supplier

Partnering

Inventory Mgt & Control

Demand & Lead Time Mgt

Materials Management

Manufacturing/ Re-Mfg. / Assembly

Storage & Transportation

Order fulfillment


Major Areas of Interaction – Logistics and Marketing:

Product Design: Has a direct impact on the warehouse space and transportation

utilization and related costs

Pricing: The Co. has to decide on optimum service levels which the customers can

expect the level of servicing the customer demand directly affects the product costs

and also decides the pricing policies

Market and Demand Forecast: These are critical in detailing the level of logistics

resources that are needed to service the customers

Customer Service policies: If marketing opts to provide a very high level of

service to its customers, logistics resources like facilities (warehouse space, labour,

transport arrangement). Marketing has to work closely with logistics to decide the

service levels.

Number and location of warehouses: Major area of contention between marketing

and logistics.

Inventory Policies: A careful balancing has to be done by marketing and logistics

together, between the agreed level of customer service to be provided and the costs of

holding inventory

Order processing : This is the source of daily interaction between marketing/sales

and logistics. Field sales responsible for providing the daily orders from the customers,

which logistics has to process and dispatch



Customer Service Elements:


Frequency of Delivery Quality of sales presentations

Time from Order to delivery In-store merchandising

Consistency of Delivery Credit terms offered

Emergency delivery when required Regular calls by sales representatives

Stock availability and continuity of supply Manufacturer Monitoring of retail stock levels

Orders filled completely – No SKU is missed out Customer query handling

Order size constraints Quality of outer packing

Order Status information Well stacked pallets – relates to outer packing

Advice on non-availability Claims procedures need to be easy for customer

Convenience of placing orders Condition of goods when received by the customer

Acknowledgement of orders Easy-to-use by dates on outer packaging

Invoicing procedures & Accuracy of Invoices Quality on inner packaging for in-store display

Regular review of product range to keep abreast of customer needs

Consultation on new product / package

Co-ordination between production, Marketing and Distribution


Logistics Impact on Financial Health:

Logistics impacts on both numbers which generates ROI profitability and capital

employed

ROI is the function of the profits generated on the capital employed. Profitability is

a function of the revenue and the costs

Logistics can help maximize customer service and hence increase the sales

revenues

Logistics efficiency helps costs, the net effect of these two actions is the

increased profitability



Distribution Warehousing:

Objective is to set up a warehouses closest to the customer locations to service

markets better at minimum cost

The warehouse location strategies could be

Market positioned – warehouses are located nearest to the final customer Order Cycle Time - Time elapsed between the customer placing order and the receipt of the

goods by him

Transportation Cost – Freight cost from nearest warehouse to the customer location

Sensitivity of the product – Perishable, goods which can not be kept for long time

Order sizes – Full truck loads

Levels of customer services offered

Production positioned – warehouses are located close to production facilities Perishability of the raw materials

Number of Product Mix

Assortments ordered by the customers from the product mix

Transportation consolidation rates – Eg. Full truck load

Intermediately positioned – mid point location between the final customer and the

producer



Transportation:

An important part of logistics function – Movement of products across space and

distance add value to the products as it gets them nearer to the customers

Transportation really provides the “time” and “place” utility

Transport Modes & Selection parameters/Criteria: Nature of goods, policy of the company and its customers which are all operational details

Comparison with the alternative modes that are available

The Co’s and its Customer’s expectations on speed of delivery, quality of service & Cost

Ability to track the movement

Simplicity of the documentation other than the statutory requirements

Handling of complaints and processing of the claims


Parameter Weightage Rail Road Air Water Pipeline Ropeway

Speed 30 5 6 8 4 3 3

Versatility 10 6 8 5 6 3 2

Reliability 20 6 8 5 5 7 4

Availability 10 7 8 5 6 3 2

Continuity of service 10 6 7 5 5 8 3

Distribution Cost 20 4 5 2 6 7 8

Total score 10 5.4 6.7 5.3 5.1 5.1 4.0

Overall ranking 10 2 1 3 4 5 6


Logistics / Supply Chain: Cost of Service: Total Cost of Service involves all the move-store activities of the product and includes:

Inventory Cost – unit costs, storage and working capital lock-up

Warehousing costs

Production or supply costs

Distribution channel costs

Communication and data processing costs

Transportation of finished goods

Materials handling cost

Packing related to logistics

Customer service based on policies on customer service levels committed

Cost of lost sales as a result of stock-outs

Any allocated administrative or overhead costs

Supply chain costs are confined to:

Inventory costs

Warehousing

Transportation

Special packing

Cost of lost sales if it can be worked out

Cost of losses and damages

Insurance costs



Logistics / Supply Chain: Performance Measurement: Performance of the logistics or supply chain functions can be measured both on internal and

external performance. A brief view on measurement is here:

Internal Measurement The cost incurred to accomplish the objectives of customer service

Customer service status seen as a combination of sales achieved, order numbers

received and executed, rate of stock returns, stock-outs, orders cancelled, damage

claims settled and the order cycle time

Customer service delivered in terms of satisfying customers and could include:

o Fill rates – ability to supply the full order in-time also referred as OTIF = On Time

In Full

o Orders shipped complete – ability to supply the full order every time

o Speed of response

o Consistency – delivery every time as per expectations

o Stock-out frequency – number of times as demand exceeded availability

o Reliability – ability to meet customer of service

Productivity measures, which show the relationship between input (effort, time, cost) and

output (service provided)

Asset utilization – equipment, transport facilities and inventory

Concept of perfect order – quality of the fulfilled order in terms of customer

specifications, service goals, error free invoicing and zero defect performance

External Measurement Customer perception – obtained through regular feedback or surveys

Normally rank customers service parameters in relation to competition – parameters like

order cycle time, feedback status, after sales service and support systems

Best practice benchmarking – to search for the overall practice outside the Co. and adopt

it. The systems is broken down into variables affecting it and then compared – Cost,

quality, Order processing effectiveness, transpiration and warehousing efficiencies



Logistics / Supply Chain Performance : Popular Measurement Ratios: Inventory in number of days’ sales (FG) or production (Raw Materials or packaging materials)

Inventory levels against agreed norms. Eg: a target may be set for Finished Goods levels as 7

days’ sales in the plant and 3 weeks stock in the C&FA or Distis center

Customer service levels in orders fulfilled – OTIF On Time In Full. Each order which is filled

with 100% of the ordered SKUs and on the delivery date promised is considered as complete in all

respects and gets ONE mark. Any order which is not executed OTIF gets ZERO

Warehouse capacity utilization. Utilization of the space for the tonnage handled is the

measurement

Warehouse labour utilization – the number of loads handled per day

Warehouse cost per ton handled

Freight cost per ton kilometer against budget


Summary

The support of logistics function to an organization and its marketing efforts has evolved from a

system of just managing materials to logistics and to supply chain management which extends its

activities beyond organization boundaries

Logistics is a critical function in providing the time, place and possession utilities to the products

and services of the company. Its customers are production (for Raw Materials), Packaging

materials, Consumables and Production scheduling) and Marketing (Finished Goods). Logistics

has got a major role to play in providing customer service.

The Common and regular interface of logistics is with the production and marketing. Logistics has a

direct impact on the financial performance of the company – it directly affects the ROI and the

Balance Sheet while also helping improve profitability if managed effectively

Three important functions of logistics are Inventory Management, Warehousing and Transportation

management

Warehousing provides the place utility for the product. It provides balance between production and

requirements of utilizing capacity and meeting customer requirements regularly. Distribution

warehousing has special meaning to the marketing person as it is directly concerned with finished

goods

Transportation management has developed as a useful supplement to the logistics function, in

ensuring materials are available at short notice. Various modes of transport like rail, road, air and

water are available with advantages and cost considerations. Logistics managers can use the most

suitable mode in every case while keeping costs in check but ensuring customer service

Supply Chain Management - Unit 5

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