1. Market Logistics & Supply Chain Management Tata McGraw Hill Publishing
Chapter 15
Market Logistics & Supply Chain Management
SDM – Ch 15
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2. Tata McGraw Hill Publishing
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
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3. Tata McGraw Hill Publishing
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……
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4. Tata McGraw Hill Publishing
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 – Webster’s Dictionary
The science of planning, organizing and managing activities that provide goods or services – Logistics World, 1997
SDM – Ch 15
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5. Tata McGraw Hill Publishing
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
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6. Tata McGraw Hill Publishing
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
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7. Components of LOG Management
Logistics Activities
Input
Output
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
Natural
Resources
(land, facilities
Equipment) HR
Finance
Information
Marketing
Orientation
(competitive
Advantage)
Time and
Place utility
Efficient move
to customer
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8. Tata McGraw Hill Publishing
Links and Flows
General material flow/ service flow
Information flow
Information flow
Customer’s
customer
Customer
Lead Firm
Supplier
Supplier’s
supplier
General cash flow
Outbound / Downstream logistics
Inbound / Upstream logistics
Source: ICFAI
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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.
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10. Tata McGraw Hill Publishing
Source: Michael Porter
The Value Chain S U P O R T
Company Infrastructure
Organisation, people, methods
margin
Systems & technology
Procurement
Inbound
logistics
Outbound
logistics
Marketing
& sales
Service
Operations
margin
SDM – Ch 15
Primary activities
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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
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12. Principles of Logistics Excellence
Strategic
Operational
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
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Alling & Tyndall

13. Customer service related Tata McGraw Hill Publishing
Logistics Focus Areas
Customer service related
Operations 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
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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
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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
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16. Supply Chain Integration
Customer Analysis
Order Fulfillment
Purchasing/Supplier Partnering
Integrated
Supply Chain
Management
Inventory Management and control
Storage &
Transportation
Manufacturing/
Re-manufacturing/
Assembly
Demand & Lead Time Management
Inventory management…
Materials Management
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17. Tata McGraw Hill Publishing
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
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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 !
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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
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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
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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
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22. Tata McGraw Hill Publishing
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…
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23. Tata McGraw Hill Publishing
Performance Measures
Inventory turns = Annual cost of goods sold /average inventory in value
Days of sales = inventory on hand / average daily sales
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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
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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
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26. ABC Inventory Analysis
Based on Pareto’s 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
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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
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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
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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
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30. Tata McGraw Hill Publishing
Functions
Warehouses
Material
handling
Customer
service
Information
transfer
Storage
function
Receive goods
Identify goods
Sort goods
Despatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Despatch the shipment
Prepare records and
advices
Temporary
Permanent
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31. Purpose of Warehousing
To provide desired level of customer service at the lowest possible total cost
It is that part of the firm’s 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
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32. Reasons for Warehousing
Service related
Cost 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
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33. Tata McGraw Hill Publishing
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
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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
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35. Tata McGraw Hill Publishing
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..
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36. Tata McGraw Hill Publishing
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….
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37. Production Positioned
In between…
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
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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….
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39. Tata McGraw Hill Publishing
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….
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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
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Process….

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
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42. Tata McGraw Hill Publishing
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
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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…
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Comparison of modes……
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
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45. Tata McGraw Hill Publishing
Advantages of Rail
Economy – more so for goods over long distances
Efficiency of energy
Reliability – not affected by weather conditions
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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
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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
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48. Tata McGraw Hill Publishing
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….
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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……
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50. Tata McGraw Hill Publishing
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….
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51. Tata McGraw Hill Publishing
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….
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52. Tata McGraw Hill Publishing
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?
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53. Tata McGraw Hill Publishing
Carrier Selection
Traffic Related
Shipper related
Service 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
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54. Chart of Relative Merits
Parameter
Weightage
Rail
Road
Air
Water
Pipe
line
Rope way
Speed 30 5 6 8 4 3
Versatility 10 2
Reliability 20 7
Availability
Continuity of service
Distribution cost
Total score
5.4
6.7
5.1
4.0
Overall ranking 1
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55. Tata McGraw Hill Publishing
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
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56. Tata McGraw Hill Publishing
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
SDM – Ch 15
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