SDM – Ch 15 Tata McGraw Hill Publishing 2 Learning Objectives Principles of materials management, logistics and supply chain management Logistics interface with other functions Inventory management principles and systems Warehousing management fundamentals Transportation management practices How IT enables the logistics function Understand about the performance measurement of the logistics function
SDM – Ch 15 Tata McGraw Hill Publishing 3 Materials Management Materials forms the largest single cost item in most manufacturing companies – needs to be carefully managed Materials management function includes planning and control, purchasing and stores and inventory control Materials management is the precursor to logistics and supply chain management Logistics……
SDM – Ch 15 Tata McGraw Hill Publishing 4 Logistics Defined Logistics means having the right thing, at the right place, at the right time The procurement, maintenance, distribution and replacement of personnel and materials – Websters Dictionary The science of planning, organizing and managing activities that provide goods or services – Logistics World, 1997
SDM – Ch 15 Tata McGraw Hill Publishing 5 Logistics Functions: planning, procurement, transportation, supply and maintenance Processes: requirements determination, acquisition, distribution and conservation Business: science of planning, design and support of business operations of procurement, purchasing, inventory, warehousing, distribution, transportation, customer support, financial and human resources
SDM – Ch 15 Tata McGraw Hill Publishing 6 Scope of Logistics Choice of markets Procurement Plant location and layout Inventory management Location and management of warehouses Choices of carriers, mode of transport Packaging decisions Relevant to all enterprises: manufacturing, Government, Institutions, service organisations
SDM – Ch 15 Tata McGraw Hill Publishing 7 Components of LOG Management Natural Resources (land, facilities Equipment) HR Finance Information Marketing Orientation (competitive Advantage) Time and Place utility Efficient move to customer Customer service Demand forecasting Distribution Communications Inventory control Materials handling Order processing Parts and service support Plants and warehouse selection Procurement Packaging Return goods handling Salvage and scrap disposal Traffic and transportation Warehouse and storage InputOutput Logistics Activities
SDM – Ch 15 Tata McGraw Hill Publishing 8 Links and Flows Customers customer Suppliers supplier SupplierLead FirmCustomer General cash flow Information flow General material flow/ service flow Inbound / Upstream logistics Outbound / Downstream logistics Source: ICFAI
SDM – Ch 15 Tata McGraw Hill Publishing 9 Logistics and Marketing Interface on: –Product design and pricing –Customer service policies –Sales forecasts and order processing –Inventory policies and location of warehouses –Channels of distribution and despatch planning –Transportation to reach products to customers Production wants larger production runs to minimise time spent on set up changes on the machines. Marketing wants smaller runs of a variety of products.
SDM – Ch 15 Tata McGraw Hill Publishing 10 The Value Chain Company Infrastructure Organisation, people, methods Systems & technology Procurement Inbound logistics Operations Outbound logistics Marketing & sales Service Primary activities SUPPPORTSUPPPORT margin Source: Michael Porter
SDM – Ch 15 Tata McGraw Hill Publishing 11 Logistics Plan Outline Internal analysis (current position) –Organisation –Human resources –Transportation –Relations with internal customers –Quality of product –Quality of Service External / situation analysis –Competitor logistics performance –Trends –External environment / economy –Public, private and contract warehouse –Public, private and contract carriage
SDM – Ch 15 Tata McGraw Hill Publishing 12 Principles of Logistics Excellence Alling & Tyndall StrategicOperational Link logistics to corporate strategy Organise comprehensively Use the power of information Emphasise human resources Form strategic alliances Focus on financial performance Target optimum service levels Manage the details Leveraging logistics volumes Measure and react to performance
SDM – Ch 15 Tata McGraw Hill Publishing 13 Logistics Focus Areas Customer service relatedOperations related Packaging Order processing Spare parts and service support After sales Customer service support Demand forecasting Distribution communications Return goods handling Plant and warehouse site location Procurement Inventory control Materials handling Salvage and scrap disposal Traffic and transportation Warehousing and storage Logistics may be confined to the company whereas SCM extends beyond
SDM – Ch 15 Tata McGraw Hill Publishing 14 Supply Chain Management Business context: –Globalization of the market place –Advances in technology –Increasingly demanding, informed customer base –Purchase decisions on dimensions of quality, price and time Innovative supply chain: –To meet customer driven challenges –To reduce costs –Improve service levels –Enhance speed to market
SDM – Ch 15 Tata McGraw Hill Publishing 15 Supply Chain Integration Optimising the supply chain requires supplier and customer involvement to integrate processes, policies, systems, database and strategies between diverse trading partners
SDM – Ch 15 Tata McGraw Hill Publishing 17 Why Carry Inventory? Support production requirements Support operational requirements Maximize customer service – ensure availability when needed – protect against uncertainty Hedge against marketplace uncertainty Take advantage of order quantity discounts
SDM – Ch 15 Tata McGraw Hill Publishing 18 Functions of Inventory Inventory serves as a buffer between: –Supply and demand –Customer demand and finished goods –Requirements for an operation and the output from the previous operation –Parts and materials to begin an operation and the suppliers of the materials The shock absorber of business !
SDM – Ch 15 Tata McGraw Hill Publishing 19 Factors Which Drive Inventory Target service level parameters Lot sizing practices Safety stock and safety time conventions Volume discounts and purchase arrangements Seasonal build up needs
SDM – Ch 15 Tata McGraw Hill Publishing 20 Categories of Inventory Anticipation – built in anticipation of future demand – peak season, strike, promotion Fluctuation (safety) – to cover random, unpredictable fluctuations in supply and demand and lead time – to prevent disruption in operations, deliveries etc Lot-size – to take advantage of quantity discounts, reduce shipping, set up and clerical costs – also called cycle stock
SDM – Ch 15 Tata McGraw Hill Publishing 21 Categories of Inventory Transportation – pipeline or movement inventories – to cover the time needed to move from one point to another – factory to distribution point for example Hedge – for materials where prices are volatile Maintenance, repair and operating supplies (MRO) – to support M and O – spare parts, lubricants, consumables etc
SDM – Ch 15 Tata McGraw Hill Publishing 22 Types of Inventory Obvious…. –Raw materials –Work-in-process –Finished goods – of primary concern to marketing –Maintenance, repair and operating (MRO) supplies –In-transit, pipeline Performance measures…
SDM – Ch 15 Tata McGraw Hill Publishing 23 Performance Measures Inventory turns = Annual cost of goods sold /average inventory in value Days of sales = inventory on hand / average daily sales
SDM – Ch 15 Tata McGraw Hill Publishing 24 Types of Inventory Systems Pure Inventory – when and how much to order. RM procurement. Simple manufacturing operations Production Inventory – finite production rates. Demand fluctuation. Products compete for manufacturing capacity Production – distribution Inventory – compete for production capacity. Geographic placement of inventory for best service of demand
SDM – Ch 15 Tata McGraw Hill Publishing 25 Types of Classification ABC category – most common for all HML - high, medium, low - similar FSND – fast moving, slow moving, non- moving, dead – spare parts / FG SDE – scarce, difficult, easy to obtain – procurement / Spares GOLF – govt, ordinary, local, foreign source – procurement / Spares VED – vital, essential, desirable – spare parts / FG SOS – seasonal, off-seasonal - commodity
SDM – Ch 15 Tata McGraw Hill Publishing 26 ABC Inventory Analysis Based on Paretos law: –A – 20% items worth 80% of value –B – 30% items worth 15% of value –C – about 50% items account for 5% of the usage Classify items based on the above criteria Apply degree of control in proportion to the importance of the group
SDM – Ch 15 Tata McGraw Hill Publishing 27 Inventory Related Costs Unit costs – basic value of the item carried Ordering costs – generating and sending a material release, transport, any other acquisition costs Carrying costs – capital, storage, obsolescence Stock-out costs Quality costs – non-conforming goods Other costs – duties, tooling, exchange rate differences etc
SDM – Ch 15 Tata McGraw Hill Publishing 28 Approaches for Controlling Inventory Continuous review: –Safety stocks and forecasting methods –Excess and obsolete inventory Part simplification and re-design On-site supplier managed inventory Use of supply chain inventory management systems, Materials Requirement Planning, Distribution Requirement Planning etc Automated inventory tracking systems Supplier – buyer cycle-time reduction Warehouse management…
SDM – Ch 15 Tata McGraw Hill Publishing 29 Stores Management Objectives Providing efficient service to users Reduce cost of carrying goods Providing correct, updated stock figures Controlling inventory Preventing damage to or obsolescence of materials Achieve all of the above with good housekeeping
SDM – Ch 15 Tata McGraw Hill Publishing 30 Functions Warehouses Material handling Storage function Customer service Information transfer TemporaryPermanent Receive goods Identify goods Sort goods Despatch to storage Hold inventory Recall, select goods Marshal the shipment Despatch the shipment Prepare records and advices
SDM – Ch 15 Tata McGraw Hill Publishing 31 Purpose of Warehousing To provide desired level of customer service at the lowest possible total cost It is that part of the firms logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored Distribution warehousing relates mainly to FG
SDM – Ch 15 Tata McGraw Hill Publishing 32 Reasons for Warehousing Service relatedCost related Maintain source of supply Support customer service policies Meet changing market conditions Overcome time and space differentials Support JIT programs of suppliers and customers Provide customers with the right mix of products at all times Temporary storage of materials to be disposed or re-cycled Achieve production economies Achieve transportation economies Take advantage of Quantity Purchase discounts and forward buys Least Logistics cost for a desired level of customer service
SDM – Ch 15 Tata McGraw Hill Publishing 33 Warehouses Support manufacturing Mix products from multiple facilities for shipment to a single customer Break-bulk Aggregate Used more as a flow-thru point than as a hoarding point
SDM – Ch 15 Tata McGraw Hill Publishing 34 Distribution Warehousing The objective is to set up a network of warehouses closest to the customer locations to service markets better and minimise cost Could be C&FA s, depots or distribution centers Macro location strategies: –Market positioned –Production positioned –Intermediately positioned
SDM – Ch 15 Tata McGraw Hill Publishing 35 Distribution Center Warehouse designed to speed the flow of goods and avoid unnecessary costs Speeds bulk-breaking to avoid inventory carrying costs Helps to centralise control and co- ordination of logistics activities Products can also be cross-docked (one vehicle to another) Market positioned..
SDM – Ch 15 Tata McGraw Hill Publishing 36 Market Positioned Warehouses located nearest to the final customer Factors influencing are: –Order cycle time –Transportation costs –Sensitivity of the product –Order size –Levels of customer service offered Production positioned….
SDM – Ch 15 Tata McGraw Hill Publishing 37 Production Positioned Warehouses located close to the production facilities or supply sources Not the same level of customer service as the earlier one Serve as points of aggregation / collection for products made in a number of plants Factors influencing are: –Perishability of raw materials –Number of products in the product mix –Assortments ordered by customers –Transport consolidation rates ex; FTL In between…
SDM – Ch 15 Tata McGraw Hill Publishing 38 Intermediate Positioned Mid point locations between the final customer and the producer High customer service levels possible even if products made in number of units Other macro approaches look at cost minimisation or cost and demand elements to maximise profitability Transportation management….
SDM – Ch 15 Tata McGraw Hill Publishing 39 Transportation Very important in the Logistics function: –Movement across space or distance adds value to products –Transportation provides time and place utility Role of transportation includes: –Provides opportunity for growth under competitive conditions –Deeper penetration into markets –Wider distribution means greater demand –Can influence product prices favourably Principles….
SDM – Ch 15 Tata McGraw Hill Publishing 40 Transportation Principles Continuous flow Optimise unit of cargo - stackability Maximum vehicle unit – capacity utilization Adaptation of vehicle unit to volume and nature of traffic Standardisation Compatibility of unit load equipment Minimum of dead weight to total weight Maximum utilization of capital, equipment and personnel Process….
SDM – Ch 15 Tata McGraw Hill Publishing 41 The Selection Criteria Environmental analysis: shipper, carrier, government regulations, public influence Deciding objectives Selecting mode Select transport type within the mode Define functions of transport Evaluation and control – customer perception / satisfaction, best practice benchmarking
SDM – Ch 15 Tata McGraw Hill Publishing 42 Cost Factors Can be product related or market related. Product related: density, stowability, ease or difficulty of handling and liability Market related: competition, location of markets, Government regulations, traffic in and out of the market, seasonality of movements and impact on customer service Five prominent modes: –Road, rail, air, water and pipeline. –Sixth one is use of Ropeways
SDM – Ch 15 Tata McGraw Hill Publishing 43 Customer Service Factors Consistency, dependability Transit time Coverage – door-to-door for example Flexibility in handling a range of products Loss and damage performance Additional services provided Reverse logistics…
SDM – Ch 15 Tata McGraw Hill Publishing 44 Reverse Logistics Movement of goods from the market or customer back to the company The need: –Increased awareness of the environment –Stringent legislation –For some it is part of the business –Profitability of dealing with scrap, surplus Surplus, obsolescence can result due to: –Over optimistic sales forecasts, change in product specs, errors in estimating material usage, losses in processing or overbuying based on incentives Comparison of modes……
SDM – Ch 15 Tata McGraw Hill Publishing 45 Advantages of Rail Economy – more so for goods over long distances Efficiency of energy Reliability – not affected by weather conditions
SDM – Ch 15 Tata McGraw Hill Publishing 46 Disadvantages Uneconomical for small shipments and short distances Not suitable for remote stations Costly terminal handling facilities Inflexible time schedules Road transport…..
SDM – Ch 15 Tata McGraw Hill Publishing 47 Road Freight Advantages Through movement – direct from consignor to consignee, no transshipment Flexibility – routes and loading routines can be easily altered, operate day and night Less capital costs – for own fleet + immunity from industrial action Fast turn-around – if articulated units like tractors and trailers are used Minimum delays
SDM – Ch 15 Tata McGraw Hill Publishing 48 Disadvantages Susceptibility to weather and road conditions – in spite of the best protection Unsuitability for heavy loads – rail transport more economical for bulk loads Unsuitability for long distances – again the rail telescopic rates are more favourable Air transport….
SDM – Ch 15 Tata McGraw Hill Publishing 49 Air Transport Advantages Faster mode Reduction in cost particularly inventory Broad service range Increasing capabilities Disadvantages: –High cost –Weather affects flight conditions –Limitations on heavy consignments Water transport……
SDM – Ch 15 Tata McGraw Hill Publishing 50 Water Transport Advantages: –Mass movement of bulk –Lowest freight cost –Preferred for long haul of low value commodities Disadvantages: –Not for quick transit –Suitable for certain types on commodities only Pipeline….
SDM – Ch 15 Tata McGraw Hill Publishing 51 Pipeline Movement Advantages: –Reliable, continuous, all weather transport –Low energy consumption – hence low cost –Low maintenance and operating costs –Underground, no space problem –Can traverse difficult terrain –Minimal transit losses –Operation round the clock, safe –Economies of scale – double the throughput for only 30% additional cost Disadvantage is in the investment cost Ropeways….
SDM – Ch 15 Tata McGraw Hill Publishing 52 Ropeways Advantages: –In hilly or inaccessible areas –Long and circuitous routes with streams / deep valleys –For commodities capable of movement in ropeway buckets –Short haulages of less than 50 kms –Areas where other carriers are uneconomical Disadvantages: –Heavy investments –Limitations on size and quantity of haul How to decide on the right carrier?
SDM – Ch 15 Tata McGraw Hill Publishing 53 Carrier Selection Traffic RelatedShipper relatedService related Length of haul Consignment weight Dimensions Value Urgency Regularity of shipment Fragility Toxicity Perishability Type of packing Special handling required Size of firm Investment priorities Marketing strategy Network of production and distribution Availability of rail sidings Stockholding policy Management structure System of carrier evaluation Speed (transit time) Reliability Cost Customer relationship Geographical coverage Accessibility Availability of special vehicles / equipment Monitoring of goods Unitisation Ancillary services – bulk breaking, storage
SDM – Ch 15 Tata McGraw Hill Publishing 54 Chart of Relative Merits ParameterWeight age RailRoadAirWaterPipe line Rope way Speed Versatility Reliability Availability Continuity of service Distribution cost Total score Overall ranking
SDM – Ch 15 Tata McGraw Hill Publishing 55 Key Learnings Support to customer service has evolved from materials management to logistics and to supply chain management Production and marketing are the two internal customers of Logistics Logistics also has a direct impact on the financials of a company Three important functions of logistics are inventory management, warehousing and transportation
SDM – Ch 15 Tata McGraw Hill Publishing 56 Key Learnings Inventory directly supports customer service but also adds to the cost and has to be managed carefully Warehousing provides the place utility and works as a balance between production and meeting customer needs Transportation supports the place and time utility and uses different modes to reach the products to the consumer Modern day supply chains integrate the operations of a firm, its suppliers and customers