26619608 Notes Logistics Supply Chain Management Ignou

Indira Gandhi National Open UniversitySchool of Management Studies

1Logistics and SCM : An Overview

MS-55LOGISTICS AND SUPPLY

CHAIN MANAGEMENT

Design and Management of SCM


2


CHAIN MANAGEMENT


3IT Enabled SCM


CHAIN MANAGEMENT

Cost and PerformanceMeasurement in SCM


4


CHAIN MANAGEMENT


5Distribution Network Planning


CHAIN MANAGEMENT

Emerging Trends


6


CHAIN MANAGEMENT

MS-55: LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Course Components

BLOCK 1 LOGISTICS AND SCM : AN OVERVIEW

Unit 1 : Logistics and SCM : An IntroductionUnit 2 : Principles of Supply Chain ManagementUnit 3 : Customer Focus in Supply Chain Management

BLOCK 2 DESIGN AND MANAGEMENT OF SCM

Unit 4 : Logistics : Inbound and OutboundUnit 5 : Models for SCM IntegrationUnit 6 : Strategic Supply Chain ManagementUnit 7 : Organizing for Global Markets

BLOCK 3 IT ENABLED SCM

Unit 8 : Information Technology : A Key Enabler of SCMUnit 9 : Intelligence Information SystemUnit 10 : IT Packages in SCM

BLOCK 4 COST AND PERFORMANCE MEASUREMENT IN SCM

Unit 11 : Cost Analyses and MeasurementUnit 12 : Best Prictices and Benchmarkin for SCMUnit 13 : Performance Measurement and Evaluation of SCM

BLOCK 5 DISTRIBUTION NETWORK PLANNING

Unit 14 : Transportation MixUnit 15 : Locational StrategyUnit 16 : Logistics and SCM Environment

BLOCK 6 EMERGING TRENDS

Unit 17 : Future Trends and IssuesUnit 18 : Design for SCM and Greening the Supply ChainUnit 19 : SCM in Service Organization/Non-Manufacturing Sector

MS-92 : MANAGEMENT OF PUBLIC ENTERPRISES

Course Components

BLOCK 1 PUBLIC ENTERPRISE: AN OVERVIEW

Unit 1 : Public Enterprise: Concept and PolicyUnit 2 : Public Enterprise Scenario National and InternationalUnit 3 : Nature and Scope of Public EnterpriseUnit 4 : Forms of Public Enterprises

BLOCK 2 PUBLIC ENTERPRISE: ACCOUNTABILITY AND GOVERNANCE

Unit 5 : Concept and Policy of Accountability and AutonomyUnit 6 : Government - Public Enterprise : InterfaceUnit 7 : Accountability to LegislatureUnit 8 : Relationship with other AgenciesUnit 9 : Corporate Governance and Corporate Social Responsibility

BLOCK 3 PUBLIC ENTERPRISE: PERFORMANCE AND EVALUATION

Unit 10 : Appraisal of Public Enterprise Performance-IUnit 11 : Appraisal of Public Enterprise Performance-IIUnit 12 : Sickness and Public Enterprise and Turnaround StrategiesUnit 13 : Dimensions and Methods of Evaluating Enterprise Performance

BLOCK 4 ORGANISATION AND MANAGEMENT

Unit 14 : Board of Directors: Constitution and FunctioningUnit 15 : Personnel Management Issues in Public EnterprisesUnit 16 : Project ManagementUnit 17 : Management of Finance, Marketing and Production, Issues

BLOCK 5 PRIVATISATION AND DISINVESTMENT

Unit 18 : Concept, Policy and DimensionsUnit 19 : Privatisation: International ExperienceUnit 20 : Disinvestment : Experience and StrategiesUnit 21 : Implications of Disinvestment

BLOCK 6 CASE STUDIES

Case 1 : State Bank of India, 19981

Case 2 : Corporate Planning at SAIL, 1989—93Case 3 : Gloom to Glory: The Successful Turnaround of the Singareni Colleries

Company LimitedCase 4 : HR Initiatives for Turnaround of Visakhapatnam Steel Plant

LOGISTICS AND SCM : AN OVERVIEW

Unit 1Logistics and SCM : An Introduction 5

Unit 2Principles of Supply Chain Management 18

Unit 3Customer Focus in Supply Chain Management 27

1Block

Indira GandhiNational Open UniversitySchool of Management Studies

MS-55Logistics and Supply

Chain Management

Expert Committee (as on 24th March, 2000)

Prof. D.K. BanwetDept of Management studies,IIT, Delhi

Prof. B.S.Sahay,Management DevelopmentInstitute, Gurgaon

Prof. Amarlal H. KalroIIM KozhikodeCalicut

Prof. J.L.BatraFORE School of ManagementNew Delhi

Prof. N. SambandamNITIE,Mumbai

Dr. Sanjay S. GaurShailesh J. Mehta School ofManagement, IIT Bombay, Mumbai

Prof N. V. NarasimhanDirector, SOMS,IGNOUNew Delhi

Dr. Himanshu Kumar Shee,(Coordinator)School of Management Studies,IGNOU

Prof Sadananda SahuDept. of Industrial Engineering& Management, IIT, Kharagpur

Prof. Atanu GhoshShailesh J. Mehta School ofManagement, IIT Bombay,Mumbai

Mr. Satish KumarDirector (Movement),Dept of Fertilizers, Ministryof Chemical & Fertilizers,Krishi Bhawan, New Delhi

Mr. Deepak Jakate,General Manager - Logistics,United Phosphorus Limited,Mumbai

Dr. Kaushik SahuXavier Institute ofManagement, Bhubaneswar

Print Production: Tilak Raj, S.O.(P), SOMS, IGNOU

December, 2004

ã Indira Gandhi National Open University, 2004

ISBN-81-

All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any othermeans, without permission in writing from the Indira Gandhi National Open University.

Further information on the Indira Gandhi National Open University courses may be obtained from theUniversity's Office at Maidan Garhi, New Delhi-110068.

Printed and published on behalf of Indira Gandhi National Open University, New Delhi by Director,School of Management Studies, IGNOU.

Cover Design by M/s. King Kraft, Karol Bagh, New Delhi

Laser Composed By : M/s. Tessa Media & Computers, Sarai Jullena, New Delhi

Paper Used : “Agrobased Environment Friendly”.

Course Preparation Team (2004)

Prof. Sushil (Course Editor)Dept. of Management StudiesIndian Institute of TechnologyNew Delhi


Prof Sadananda SahuDept. of Industrial Engineeringand ManagementIIT, Kharagpur

Prof. Atanu GhoshShailesh J. Mehta School ofManagement, Indian Instituteof Technology Bombay,Mumbai

Dr. Anurag Saxena(Course Co-ordinator)School of Management StudiesIGNOU, New Delhi

Dr. Ravi Shankar (Course Editor)Dept. of Management StudiesIndian Institute of Technology,New Delhi

Prof .Karuna JainShailesh J. Mehta School ofManagement, Indian Institute ofTechnology Bombay, Mumbai

Mr. D N SrivastavaAdvisor ( Training & Safety) &Head of Distribution Deptt. )(Retd.) in Cement GroupM/S Larsen & Toubro Ltd,Jharsuguda

Mr. Deepak JakateGeneral Manager - Logistics,United Phosphorus Limited,Mumbai

Dr. Himanshu Kumar Shee(Course Co-ordinator)-On leaveSchool of Management Studies,IGNOU, New Delhi

Dr. Biplab DuttaVinod Gupta School ofManagementIIT, Kharagpur

Lt Col. Kaushik SircarAssistant Quarter MasterGeneral Operations & Logistics,Headquarter 4 Corps

Mr. Sandeep BiswasInstitute for IntegratedLearning in Management(IILM), New Delhi

Prof. B. B. KhannaDirector,�� IGNOU, New Delhi

BLOCK 1 LOGISTICS AND SCM : ANOVERVIEW

Unit 1: Logistics and SCM - An Introduction discusses about definition of Logistics& Supply Chain Management It discusses the process of development of logisticsand its role in the economy. It also converse about Physical Distribution Management(PDM) and its components.

Unit 2: Principles of SCM defines how the supply chain works. It highlights the keyprocesses required to integrate the supply chain. It further examines the critical areasof Logistics-Marketing Interface and critical areas of Logistics-ManufacturingInterface

Unit 3: Customer focus in SCM comprehends the key processes required toenhance customer focus in the supply chain. It delineates with the concept ofEfficient Customer Response (ECR), Quick Response (QR) and Accurate Response(AR). It further scrutinizes chain relationship within and beyond organization

4

Logistics and SCM : AnOverview

5

Logistics and SCM : AnIntroductionUNIT 1 LOGISTICS AND SCM : AN

INTRODUCTION

Objectives

After going through this unit, you should be able to:

· define Logistics and Supply Chain Management (SCM);

· understand the development of logistics and its role in the economy; and

· discuss Physical Distribution Management (PDM) and its components.

Structure

1.1 Introduction

1.2 Logistics and SCM

1.3 Development of Logistics

1.4 The Role of Logistics in the Economy

1.5 Logistics and Competitive Performance

1.6 Physical Distribution Management (PDM)1.6.1 Components of PDM

1.6.2 The Systems or “Total” Approach to PDM

1.7 Summary

1.8 Self Assessment Exercises

1.9 References and Suggested Further Readings

1.1 INTRODUCTION

There is a great deal of material that is moved in any organization. Organizationscollect raw materials from suppliers and deliver finished goods to the customers. It islogistics that executes this function. In other words, logistics is the function thatmoves both tangible materials (e.g. raw materials) and intangible material (e.g.information) through the operations to the customers (as a finished product). Incontinuation to this explanation, we would introduce what a supply chain means. “ Asupply chain consists of a series of activities involving many organizations throughwhich the materials move from initial suppliers to final customers. There may bedifferent supply chain for each product. The chain of activities and organizations isnamed differently as per the situation. If the emphasis is on operations then it is calledprocess; if the emphasis is on marketing then it is called logistics; if the emphasis ison value-addition then it is called value-chain; if the emphasis is on meeting customerdemand then it is called demand chain; if the emphasis is on movement of materialthen we use the most general term i.e., supply chain. This unit will introduce you withthe concept of a supply chain.

1.2 LOGISTICS AND SCM

A supply chain may be considered as a group of organizations, connected by aseries of trading relationships. This group covers the logistics and manufacturingactivities from raw materials to the final consumer. Each organization in the chainprocures and then transforms materials into intermediate/final products, anddistributes these to customers.

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The supply chain can be defined as the integral management (within the companyand through other companies) of the company’s various logistical stages such asmaterials procurement, production, storage, distribution and customer service. TheSupply Chain concept should be seen as a whole, that is, the entire system from theorigin of procurement to the final consumption of goods or services.

In supply chain network we must include all the organizations involved in theproduction of certain goods or services (from the origin of procurement to finalconsumption), and each of the logistical stages within these organizations. Thus, thesupply chain is a network linking and interweaving different supply chains of all thecompanies involved in a production process. A diagram depicting the typical supplychain is shown in Figure 1.1.

Figure1.1: Typical Supply chain

The supply chain activity therefore constitutes complex objects, as it involvesdecision-makers from many different companies, who sometimes have no directrelationship and are place in very different geographical locations; yet the decisionsthey make are mutually dependent upon each other. Hence, there is a need for aninformation system capable of linking together the different members of the chain sothat there is an open communication between them.

The concept of supply chain is not new. Historically we have moved from physicaldistribution to logistics management and then to supply chain management. This majordifference seems to be that supply chain management is the preferred name for theactualization of “integrated logistics”, with it acting as an enabler, it is now possible tohave an integrated process view about the logistics and all allied processes related tobusiness. Ideally the supply chain should be a “seamless” chain as shown in Figure 1.2.

Figure 1. 2: Seamless Supply ChainSource: Sahay B.S., 1998

Semi-Finished Products

Raw Material

FinishedProducts Distributors

End Consumer

Raw Material

Seamless Supply Chain

Product Ordering Channel

MaterialFlow channel End Customer

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Logistics and SCM : AnIntroduction

The importance of logistics can be gained from the fact that logistics and supply chainmanagement costs are in range of 10 to 15 of the GDP for developing countries whileit is around 18 to 20 per cent for developed countries. The concept of integratedlogistics consists of two interrelated efforts:

· Logistics operation: Logistic operation can be basically clubbed intophysical distribution management, materials management and internal inventorytransfer.

· Logistic coordination: Logistic coordination pertains to forecasting, orderprocessing, operational planning and product procurement or MRP. Thisintegration is effected through effective information flows.

Definitions

Forrester (1961) suggested that the five flows of any economic activity — money,orders, materials, personnel and equipment are interrelated by an informationnetwork, which gives the “system,” which is now called as supply chain due to itsown character.

According to Christopher (1992) supply chain is network of organizations that areinvolved, through upstream and downstream linkages, in the different processes andactivities that produce value in the form of products and services in the hands of theultimate consumer. Managing these linkages and delivering the product/service to thecustomer in a cost effective way is SCM. Supply chain management encompassesmaterials/supply management from the supply of basic raw materials to final product(and possible recycling and re-use). Supply chain management focuses on how firmsutilize their suppliers’ processes, technology and capability to enhance competitiveadvantage. It is a management philosophy that extends traditional intra-enterpriseactivities by bringing trading partners together with the common goal of optimizationand efficiency.

Supply Chain Management is a set of approaches utilized to efficiently integratesupplier, manufacturer, warehouse and stores so that merchandise is produced anddistributed at the right quantities, to the right location and at the right time, in order tominimize system under costs while satisfying service level requirements (Levi(2000)).

The common thread in these definitions is that supply chain management seeks tointegrate performance measures over multiple firms or processes, rather than takingthe perspective of a single firm or process.

Supply chain management has provided the next logical stage in the evolution ofcompetitiveness for the manufacturing organization and added, importantly, a concernfor the flow of materials to and from the organization. Supply chain managementintegrated suppliers to the end consumers and emphasized the need for collaborationto optimize the whole system. As such, supply chain management is the process ofdesigning, planning and implementing change in the structure and performance of the‘total’ material flow in order to generate increased value, lower costs, enhancedcustomer service and yield a competitive advantage. In effect, the addition of supplychain management to the marketing model created a truly ‘systems’ approach to theorganization and its direct and indirect trading relationships

The content of supply chain management with in a firm varies considerably with thetype of business. Figure 1.3 shows the different components of logisticsmanagement.

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Figure 1.3: Components of Logistic Management

(Source: Douglas M. Lambert, 1998, Pg-5)

A representative list of logistic element for a firm is given in Table 1.1.

Table 1.1: Logistic Element

Facility Location Determining location, number and size of facilities needed,Allocation demand to facilities

Transportation Mode and service selectionCarrier routingVehicle scheduling

Inventories Finished goods stocking policiesRecord keepingSupply schedulingShort term sales forecasting

Customer Service Cooperate with marketing in:determining customer needs and wants for servicedetermining customer response to service

Order Processing and Information Sales order procedureFlows Information collection, storage and manipulation

Data analysis

Warehousing and Material Handling Space determinationStock layoutMaterial handling equipment selectionStock storage and retrievalEquipment replacement policies

Protection Packaging Design for: handling, storage, protection

Product Scheduling Co-operate with production in :specifying aggregate production quantitiessequencing and timing of production

MANAGEMENT ACTIONS

Planning Implementation Control

OUTPUT OF LOGISTICS

INPUT INTO LOGISTICS

Human Resources

Financial Resources

Information Resources

Raw Material

In process Inventory

FinishedGoods

Natural Resources (Land,Facilities and Equipment)

Time, Place, Utility

Marketing Orientation(Competitive Advantage)

Efficient movement to Customer

Proprietary Asset

SU

PP

LIE

RS

CU

ST

OM

ER

S

· Customer Service· Demand Forecasting· Distribution Communication· Inventory Control· Material Handling· Order Processing· Parts & Service Support

· Plant and Warehouse SiteSelection

· Procurement· Packaging· Return Goods Handling· Salvage and Scrap Disposal· Traffic and Transportation

LOGISTICS ACTIVITIES

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Logistics and SCM : AnIntroduction1.3 DEVELOPMENT OF LOGISTICS

Logistic activity is literally thousand of years old, dating back to the earliest form oforganized trade. As this area of study however it first began to gain attention in theearly 1990s. More emphasis has been given to logistics after the Gulf war in 1990-91when the efficient and effective distribution of store supplies and person were thekey factors for success. With rising interest rates and increasing energy cost logisticsreceived more attention as a major cost driver. Logistics cost became a more criticalissue for many organization because of globalization of industry. This has affectedlogistics in two primary ways. First, the growth of world-class competitors from othernations has caused organization to look for new way to differentiate theirorganizations and product offerings. Second, as organizations increasingly buy andsell offshore, the supply chain between the organizations becomes longer, more costlyand more complex. Excellent logistics management is needed to fully leverage globalopportunities. Information technology input has given a next boom to logisticsmanagement. This gave organization the ability to better monitor transactionintensive activities such as ordering movement and storage of goods and materials.Combine with the availability of computerized quantitative models; this informationincreased the ability to manage flows and to optimize inventory levels and movement.

Other factor contributing to the growing interest in logistics include advances ininformation technology, increased emphasis on customer service, growingreorganization of the system approach and total cost concept. The profit leveragefrom logistics and realization that logistics can be used as a strategic weapon incompeting the market place.

The system approach is a critical concept in logistics. Logistics is in itself a system.It is a network of related activities with the purpose of managing the orderly flow ofmaterial and personal with in the logistic channel. The system approach simply statesthat all functions or activities need to be understood in terms of how they effect andare affected by other elements and activities with which they interact. The idea isthat if one looks at action in isolation, he or she will not understand the big picture orhow such action affects or are affected by other activities. In essence the sum oroutcome of a series of activities is greater than its individual parts.

Activity 1

Every organization has to move materials to support its operations. What do servicecompanies like Internet Service Providers move? Is the concept of supply chainrelevant for these companies?

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1.4 THE ROLE OF LOGISTICS IN THE ECONOMY

Logistics play a key role in the economy in two significant ways. First, logistics is ofthe major expenditures for business. Logistics expenditure accounts for around15-20% of GDP. Thus by improving the efficiency, logistics make an importantcontribution to the economy as a whole.

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Second, logistics support the movement and flow of many economic transactions; it isan important activity in facilitating the sale of virtually all goods and services. Tounderstand this role from a system perspective, consider that if goods do not arrive ontime, customer can not buy them. If goods do not arrive at the proper place or in theproper condition, no sale can be made. Thus all economic activities throughout thesupply chain will suffer.

One of the fundamental ways that logistics add value is by creating utility. From aneconomic stand point utility represent the value or usefulness that an item or servicehas in fulfilling a want or need. There are four types of utilities namely; Form,Possession, Time and Place. Form utility is the process of creating the good orservice or putting them in proper form for the customer to use. Possession utility isvalue added to a product or service because the customer is able to take actualpossession like credit arrangement and loans. These two utility are not directly relatedto logistics but these are not possible without getting the right item needed forconsumption or production to the right place at the right time and in the right conditionat the right cost. The time and place utility are directly related to logistics. Time utilityis the value added by having an item when it is needed. Place utility is the item orservice available where it is needed. The five rights of logistics are the essence of thetwo utilities provided by logistics time and place utility.

1.5 LOGISTICS AND COMPETITIVEPERFORMANCE

Today logistics department appears on the organization charts of many largeorganizations. Linking logistics activities directly to organization strategic plan canwork effectively to support their organization for achieving competitive advantage.

Porter user a tool called the value chain as shown in the Figure 1.4 to separatebuyers, supplier and a firm into the discrete but interrelated activities from whichvalue stems. The value chain concept may be used to identify and understand thespecific source of competitive advantage and how they related to buyer value. Valueis the amount a customer is willing to pay for the products, services provided by anorganization. Value added is the difference between what the customer pays and thecost to the organization in providing that product or service. Porter defines the fivecategories of primary activity involved in competing in any industry.

Inbound logistics: Activities associated with receiving, storing and disseminatinginput to the product.

Operation: Activity associated with transforming input into the final product form.

Outbound logistics: Activity associated with collecting storing and physicaldistribution of the product to buyers.

Figure 1.4: Porter Value ChainSource: Porter, Michael E., “Competitive Advantage”. 1985, the Free Press. New York)

Support Activity

Company Infrastructure

Organization, People

System & Technology

Procurement

Inbound Logistics

Operation OutboundLogistics

Marketing & Sales Service

Primary Activity

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Marketing and Sales: Activities associated with providing a means by whichbuyers can purchase the product and inducing them to do so such as advertising,promotion etc.

Service: Activity associated with providing service to enhancer maintain the value ofthe product such as installation, repair etc.

The effective logistics management can provide a major source of competitiveadvantage. The source of competitive advantage is found firstly in the ability of theorganization to differentiate itself in the eyes of the customer from its competitor andsecondly by operating at a lower cost and hence at greater profit. There are twobases of success in any competitive context. One is the cost advantage and second isthe value advantage. Cost advantage is achieved through greater productivity andvalue advantage is pursued through a different plus over competitive offerings.

Figure 1.5: Competitive MatrixSource : Christopher, M., 1992, Logistics and Supply Chain Management

From the matrix shown in Figure 1.5 it is clear that successful companies will oftenseek to achieve a position based upon both a productivity advantage and a valueadvantage. Logistics management can play a critical role to gain both advantages. Inmany industries logistics cost represents such a significant proportion of total cost thatit is possible to make major cost reduction through fundamentally reengineeringlogistics process. In term of value advantage, companies can gain through servicedifferentiation. Today markets have become more service sensitive. Customer in allindustries are seeking greater responsiveness and reliability from suppliers, they arelooking for reduced lead time, just in time delivery and value added services thatenable them to do better job of serving their customers.

Traditionally most organizations have viewed themselves as entities that existindependently from others and indeed need to compete with them in order to survive.However such a philosophy can be self-defeating if it leads to an unwillingness tocooperate in order to compete. Behind this seemingly paradoxical concept is the ideaof supply chain integration. Supply chain integration links a firm with its customers,suppliers and other channel members. As such it integrates their relationships,activities, functions, processes and locations. The purpose is to improve theeffectiveness and efficiency of SC for ultimate consumers.

A model of the evolution of supply chain is shown in Figure 1.6 Integration starts withthe ‘baseline’ organization (Stage 1) with a reasonably informal approach tomanagement by departments. This level of evolution involves the processing ofmaterial requirements and planning routines that are short term in nature. Thematerial inventories simply arise in response to reactive management practices. Thekey requirement of employees is to react to failure and manage as best that they can.

The Stage 2 organization reflects the traditional form of supplier management. Thebusiness departments tend to operate autonomously. The Stage 2 organization is

Cost and Service Leader

Service Leader

CommodityMarket

Lo P r o d u c t i v i t y A d v a n t a g e

Lo

Hi

Hi

Cost Leader

Va

lue

Ad

va

nta

ge

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focused on the annual budget allocation and departmental cost management. For thepurchasing function this implies seeking out the lowest price provider of materialrequirements often through a process of tendering, the use of ‘power’ and theconstant switching of supply sources to prevent ‘getting too close’ to anyindividual source.

The Four stage of Development

Stage 1: Baseline

Stage 2: Functional Integration

Stage 3: Internal Integration

Stage 4: External Integration

Figure 1. 6: Supply Chain Integration

The Stage 3 organization is internally integrated and has a much greater level ofinterest in material flow processes from suppliers to customers rather than the‘grenade over the all’ approach of the earlier two forms. The organization hasintegrated the aspects of the internal supply chain that it can influence and control. Inparallel, planning systems operated throughout the organization are integrated anddemand information, production schedules and material requirements aresynchronized by teams of individuals that were once subordinates of separatedepartments. For this company, the demand and material flow drive the entiresystem in an end-to-end supply chain and the organization makes use of Just in timematerials management techniques.

The Stage 4 company has begun to realize the benefits of true supply chainmanagement and the ability to synchronize all activities within the factory and tointerface the factory with its suppliers and customers. Under these conditions, thecollaborative and participative internal environment is extended upstream anddownstream and the planning of supply chain management is recognized formally.The factory is ‘customer oriented’ instead of product oriented and seeks to partnerwith key customers and suppliers in order to better understand how to provide valueand customer service. This form of company has full improvement processes withinthe organization that are encapsulated in medium term plans for the organization andits supply chain. The organization makes most use of information systems to enhancethe responsiveness of the organization and supply chain to deliver products and has

Purchasing MaterialControl

Production Sales Distribution

MaterialsManagement

ManufacturingManagement

DistributionManagement

MaterialsManagement

ManufacturingManagement

DistributionManagement

Suppliers Internal SupplyChain

Customers

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also developed a capability in terms of product design that includes customer andsupplier involvement. To enhance the nature of collaboration the organizationrewards supplier partnerships with sole sourcing agreements in return for a greaterlevel of support to the business and a commitment to on-going improvement ofmaterial flow and relationship management. The model provides a useful means ofanalyzing the current state of the organization and understanding where thenext interventions would be needed in order to improve performance.

Activity 2

Describe the Supply Chain for a paper manufacturing organization.

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1.6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)

There are many decisions that must be taken, when a company organizes a channelor network of intermediaries, who take responsibility for the management of goods asthey move from the producer to the consumer. Each channel member must becarefully selected and the company must decide what type of relationship it seekswith each of its intermediate partners. Having established such a network, theorganisation must next consider how these goods can be efficiently transferred, in thephysical sense, from the place of manufacture to the place of consumption. Physicaldistribution management (PDM) is concerned with ensuring the product is in the rightplace at the right time.

It is now recognised that PDM is a critical area of overall supply chain management.Business logistical techniques can be applied to PDM so that costs and customersatisfaction are optimised. There is little point in making large savings in the cost ofdistribution if in the long run, sales are lost because of customer dissatisfaction.Similarly, it does not make economic sense to provide a level of service that is notrequired by the customer but leads to an erosion of profits. This cost/service balanceis a basic dilemma that physical distribution managers face.

The reason for the growing importance of PDM is the increasingly demanding natureof the business environment. In the past it was not uncommon for companies to holdlarge inventories of raw materials and components. Although industries and individualfirms differ widely in their stockholding policies, nowadays, stock levels are kept to aminimum wherever possible. Holding stock is wasting working capital for it is notearning money for the company. To think of the logistical process merely in terms oftransportation is much too narrow a view. Physical distribution management (PDM)is concerned with the flow of goods from the receipt of an order until the goods aredelivered to the customer. In addition to transportation, PDM involves close liaisonwith production planning, purchasing, order processing, material control andwarehousing. All these areas must be managed so that they interact efficiently witheach other to provide the level of service that the customer demands and at a costthat the company can afford.

1.6.1 Components of PDM

There are four principal components of PDM namely; Order processing, Stock levelsor inventory, Warehousing and Transportation.

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Order processing

Order processing is the first of the four stages in the logistical process. Theefficiency of order processing has a direct effect on lead times. Orders are receivedfrom the sales team through the sales department. Many companies establish regularsupply routes that remain relatively stable over a period of time ensuring that thesupplier performs satisfactorily. Very often contracts are drawn up and repeat orders(forming part of the initial contract) are made at regular intervals during the contractperiod. Taken to its logical conclusion this effectively does away with ordering andleads to what is called ‘partnership sourcing’. This is an agreement between thebuyer and seller to supply a particular product or commodity as and when requiredwithout the necessity of negotiating a new contract every time an order is placed.Order-processing systems should function quickly and accurately. Other departmentsin the company need to know as quickly as possible that an order has been placedand the customer must have rapid confirmation of the order’s receipt and the precisedelivery time. Even before products are manufactured and sold the level of officeefficiency is a major contributor to a company’s image. Incorrect ‘paperwork’ andslow reactions by the sales office are often the unrecognised source of ill willbetween buyers and sellers. When buyers review their suppliers, efficiency of orderprocessing is an important factor in their evaluation. A good computer system fororder processing allows stock levels and delivery schedules to be automaticallyupdated so management can rapidly obtain an accurate view of the sales position.Accuracy is an important objective of order processing, as are procedures that aredesigned to shorten the order processing cycle.

Inventory

Inventory, or stock management, is a critical area of PDM because stock levels havea direct effect on levels of service and customer satisfaction. The optimum stocklevel is a function of the type of market in which the company operates. Fewcompanies can say that they never run out of stock, but if stock-outs happen regularlythen market share will be lost to more efficient competitors. The key lies inascertaining the re-order point. Carrying stock at levels below the re-order pointmight ultimately mean a stock-out, whereas too high stock levels are unnecessary andexpensive to maintain. Stocks represent opportunity costs that occur because ofconstant competition for the company’s limited resources. If the company’smarketing strategy requires that high stock levels be maintained, this should bejustified by a profit contribution that will exceed the extra stock carrying costs.

Warehousing

Many companies function adequately with their own on-site warehouses from wheregoods are dispatched direct to customers. When a firm markets goods that areordered regularly, but in small quantities, it becomes more logical to locatewarehouses strategically around the country. Transportation can be carried out in bulkfrom the place of manufacture to respective warehouses where stocks wait ready forfurther distribution to the customers. This system is used by large retail chains, exceptthat the warehouses and transportation are owned and operated for them by logisticsexperts. Levels of service will of course increase when number of warehouselocations increases, but cost will increase accordingly. Again, an optimum strategymust be established that reflects the desired level of service.

Transportation

Transportation usually represents the bulk of distribution cost. It is usually easy tocalculate because it can be related directly to weight or numbers of units. Costs mustbe carefully controlled through the mode of transport selected amongst alternatives,and these must be constantly reviewed.

The patterns of retailing that have developed, and the pressure caused by low stockholding and short lead times, have made road transport indispensable. When the

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volume of goods being transported reaches a certain level some companies purchasetheir own vehicles, rather than using the services of haulage contractors. However,some large retail chains have now entrusted all their warehousing and transport tospecialist logistics companies.

For some types of goods, transport by rail still has advantages. When lead-time is aless critical element of marketing effort, or when lowering transport costs is a majorobjective, this mode of transport becomes viable. Similarly, when goods are hazardousor bulky in relation to value, and produced in large volumes then rail transport isadvantageous. Rail transport is also suitable for light goods that require speedydelivery (e.g. letter and parcel post). Except where goods are highly perishable orvaluable in relation to their weight, air transport is not usually an attractive transportalternative. For long-distance overseas routes air transport is popular. Here, it has theadvantage of quick delivery compared to sea transport, and without the cost of bulkyand expensive packaging needed for sea transportation, as well as higher insurancecosts.

The chosen transportation mode should adequately protect goods from damage intransit (a factor just mentioned makes air freight popular over longer routes as lesspackaging is needed than for long sea voyages). Not only do damaged goods erodeprofits, but frequent claims increase insurance premiums and inconvenience tocustomers, endangering future business.

1.6.2 The Systems or ‘Total’ Approach to PDM

PDM has been neglected in the past; this function has been late in adopting anintegrated approach towards it activities. Managers have now become moreconscious of the potential of PDM, and recognize that logistical systems should bedesigned with the total function in mind. A fragmented or disjointed approach toPDM is a principal cause of failure to provide satisfactory service, and causesexcessive costs.

PDM is concerned with ensuring that the individual efforts that go to make up thedistributive function are optimised so that a common objective is realised. This iscalled the ‘systems approach’ to distribution management and a major feature ofPDM is that these functions be integrated.

To plan an efficient logistics structure it is necessary to be aware of the interactionbetween the different distribution costs and how they vary with respect to thedifferent depot alternatives (number, size, type and location).

Figure 1.7 demonstrates how the individual distribution and logistics cost elements canbuild up the total logistics cost.

····· Storage Cost: Storage cost will increase as the number of depots will increasebecause there will be a need for more stock coverage, more storage space, moremanagement etc.

····· Delivery cost: This will concern with the secondary transportation cost i.e. costof delivery from the depot to the consumer. The greater the number of depots,the lesser is the secondary mileage and the delivery cost.

· Trunking Cost: This is the primary transport cost in the supply of products inbulk to the depots from the central finished good warehouses or productionpoints. As the number of depots increases this cost will also increases.

· Inventory Cost: The main elements of inventory holding costs are:

· Capital Cost: The cost of physical stock. This is the financing charge, which isthe current cost of capital to a company.

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· Service Cost: That is stock management and insurance cost

· Risk Cost: Which occur through pilferage, deterioration of stock, damage andstock obsolescence.

· System Cost: These costs represent a variety of information or communicationrequirements ranging from the order processing to load assembly lists.

Figure 1.7: Total Logistics CostSource: Croucher Phil et al, The handbook of Logistics and distribution Management Page No .123

The top line on the graph shows the overall distribution cost in relation to thenumber of depots in the network. The minimum point on this curve represents thelowest cost solution. The result will depend on a number of factors –producttype, geographical area of demand, service level requirements etc.

1.7 SUMMARY

Supply chain is network of organizations that are involved, through upstream anddownstream linkages, in the different processes and activities that produce value inthe form of products and services in the hands of the ultimate consumer. Logisticsexpenditure accounts for around 15-20% of GDP. Thus by improving the efficiencyof logistics operations, logistics can make an important contribution to the economy asa whole. Factors contributing to the growing interest in logistics include advances ininformation system technology, an increased emphasis on customer service, growingreorganization of the system approach and total cost concept. Supply chainmanagement seeks to integrate performance measures over multiple firms orprocesses, rather than taking the perspective of a single firm or process. Supply chainintegration links a firm with its customers, suppliers and other channel members. As

Total Distribution Cost

Trunking Cost

Inventory Cost

Storage Cost

System Cost

Local DeliveryCost

No. of Depots

Cost

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such it integrates their relationships, activities, functions, processes and locations.Physical distribution management (PDM) is concerned with ensuring the rightitem needed for consumption or production to the right place at the right time andin the right condition at the right cost

1.8 SELF ASSESSMENT QUESTIONS

1) “Logistics is the function that is responsible for the flow of materials into,through and out of an organisation”. Elaborate?

2) “These are many possible structures for SC, but the simplest view hasmaterials converging on an organising through tiers of suppliers and productsdiverging through tiers of customers”. Elaborate.

3) It is said that the overall aim for logistics is to achieve high customersatisfaction or perceived product value. This must be achieved withacceptable costs. How would you find the best balance?

4) What is Physical Distribution Management? Describe its components? Also,elucidate the “total approach” to PDM.

5) Describe the evolution of Supply Chain concept. What in your opinion is themost important stage?

1.9 REFERENCES AND SUGGESTED FURTHERREADINGS

1) Simchi Levi (2000), Designing and Managing the Supply Chain, Irwin/McGraw-Hill, IL.

2) Christopher, M., 1992, Logistics and Supply Chain Management:Strategies for Reducing Costs and Improving Services, Pitman, London.

3) Croucher Phil, Rushton Alan and Oxley John, The handbook of Logisticsand distribution Management

4) Douglas M. Lambert, 1998, Fundamental of logistics management,McGraw Hill.

5) Sahay B S, 1998, Supply Chain Management for Global competitiveness(Macmillan)

6) Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy,Planning, and Operation, Prentice Hall.

7) Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts,The MIT press.

8) Waters Donald, 2003, Logistics: An Introduction to SCM, PalgraveMcMillan (Indian Edition), NY

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Logistics and SCM : AnOverview UNIT 2 PRINCIPLES OF SUPPLY CHAIN

MANAGEMENT

Objectives

After reading this unit, you would be able to:

· define how the supply chain works;

· understand the key processes required to integrate the supply chain;

· examine critical areas of Logistics-Marketing Interface; and

· examine critical areas of Logistics-Manufacturing Interface.

Structure

2.1 Introduction

2.2 How does SCM Work?

2.3 The Logistics-Marketing Interface2.3.1 Logistics and Product Life Cycle

2.3.2 Areas of Logistics and Marketing Interaction

2.4 The Logistics-Manufacturing Interface2.4.1 Customer Service Issues at the Logistics-Manufacturing Interface

2.5 Summary

2.6 Self Assessment Questions


2.1 INTRODUCTION

Now you are aware of what Logistics and SCM mean. You have appreciated therole of Logistics and SCM in the economy. SCM is basically a system that connectsan organization with its customers and suppliers. SCM is the management of all keybusiness processes across a number of supply chains. It is important to know aboutdifferent supply chain processes for having an integrated SCM.

Also there is a strong relation between Logistics group and Marketing group in anorganization. Similarly, Manufacturing and Logistics are also interrelated. This unitwill take you through to these concepts.

2.2 HOW DOES SCM WORK?

The supply chain management (SCM) is viewed as a system that links an enterprisewith its customer and suppliers. As shown in Figure 2.1 information flows fromcustomer in the form of forecast and orders to both the enterprise and suppliers. Thisinformation is refined through planning into specific manufacturing and purchasingobjectives. As materials and products are purchased, a value added inventory flow isinitiated which ultimately results in ownership transfer of finished product tocustomers.

SCM is an integrated approach that is highly interactive and complex and requiressimultaneous consideration of many trade-offs. SCM is the management of all keybusiness process across a number of the supply chains. Successful SCM requires achange from managing individual function to integrating activities into key supplychain processes. Operating an integrated supply chain requires continuousinformation flows, which in turn helps to create the best product flows.

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Figure 2.1: Supply Chain System

Source: Logistics Management, Bowersox et al., 1986

The customer remains the primary focus of the process. However, improvedlinkages with supplies are necessary because controlling uncertainty in customerdemand, manufacturing processes and supplier performances are critical for effectiveSCM. The key processes for the integrated SCM (Figure 2.2) are as follows:

Customer Relationship Management

This is the process to identify the key customers. With customer moving to centrestage, more companies have begun to treat a customer as a value independent entity.The companies no longer view sales as selling of their products, but as selling ofrelationships, solutions, support and care. Customer relationship teams develop andimplement partnering program with key customer. Product and service agreementsspecifying the level of performance are established with these key customers.

Figure 2.2: Supply Chain Process for Integrated SCMSource: Lambert 1998

Demand Management

Customer Service Management

Order Fulfillment

Manufacturing Flow Management

Procurement

Product Development and Commercialization

Return Channel

Performance Metrics

VALUE ADDED INVENTORY FLOW

Enterprise

CustomersPhysical

Distribution

REQUIREMENT INFORMATION FLOW

SuppliersPurchasingManufacturing

Support

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Customer Service Management

Increased and intense competitions all around have made customer service as thekey differentiator in a marketing system. Customer service provides the singlesource of customer information. It provides the customer with real time informationon promised shipping dates and product availability. Customer service is a valuablebusiness activity governing both resources and top management attention. Customerservice is being offered in many forms such as post warranty support, fast repairs,speedy response to service calls from customers, easy availability of spares, qualified,competent and customer friendly technicians.

Demand Management

Customer demand in the form of irregular order pattern is the largest source ofvariability. Given this variability in customer ordering, demand management is a keyto an effective SCM process. Manufacturers are moving from a push system tomake to order mode, in such case predicting or forecasting demand is the key driveron which all of the supply related decision will depend. The demand managementprocess must balance the customer’s requirement with the firm’s supply capabilities.A good demand management system uses point of sales and “key” customer data toreduce uncertainty and provide efficient information flows through out the supplychain.

Customer Order Fulfillment

The key to effective SCM is to achieve high order fill rate. Order fill rate can bedefined as % of order fulfilled before or on the due date set by the customer.Performing the order fulfillment process effectively requires integration of firmsmanufacturing, distribution and transportation plans.

Manufacturing Flow Management

This functional area decides how production should be organized and managed.Traditionally production system uses push strategy but in a customer focusenvironment pull strategy is more effective. To implement pull system, manufacturingprocess must be flexible to respond to market changes. This requires the flexibility toperform rapid change over to accommodate mass customization; orders areprocessed on a just in time basis in minimum lot size. In a customer focused businessworld, production process has to optimize balance between customer satisfaction andefficiency.

Procurement

Procurement is concerned with buying and movement of materials, parts or finishedinventory from supplier location to manufacturing or assembly plants, warehouse orretail stores. Traditionally procurement is carried out on the basis of bid and buyssystem whereas in new integrated concept long-term partnerships are developed withcore group of suppliers. Suppliers are involved at the early design stage which canlead to reduction in product development cycle times. For quick response tocustomer demand purchasing activities are carried out with rapid communicationmechanism such as EDI and interest linkages. This reduces the cost and time on thetransaction portion of the purchase.

Product Development and Commercialization

In today’s fast changing environment new products are life bloods of a company. Forthe firm to remain competitive it has to sharpen its product development times. Thisrequires that customer and suppliers must be integrated into product developmentprocess.

Return Channel

Managing the return channel as a business process offers the same opportunity toachieve a sustainable competitive advantage as managing the supply chain from an

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out-bound perspective. Effective process management of return channel enables theidentification of productivity improvement opportunities and break through projects.

Focusing effort on improvement in key business process is the foundation of SCMphilosophy. Thus the goals of these processes are to:

a) Develop customer focused teams that provide beneficial product and serviceagreement to strategically significant customers

b) Provide a permit of contact for all customers, which efficiently handle theirinquiries.

c) Continually gather, compile and update customer demand to match requirementwith supply.

d) Develop flexible manufacturing system that responds quickly to changing marketconditions.

e) Manage supplier partnership that allows for quick response and continuousimprovement.

f) Fill 100% of customer order accurately and on time

g) Enhance profitability by managing the return channel (reverse logistics)

Activity 1

Take the case of an organization where you are working or about which you know ofand identify the key processes within that organization vis-à-vis those proposed byLambert.

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2.3 LOGISTICS-MARKETING INTERFACE

Traditionally logistics group assumed primary responsibility for warehousing, inventoryand transportation within many organizations while marketing group is responsible fornegotiation, promotion and selling. As neither group had responsibility for over allchannel management, conflicts arose at the expense of overall organization goal. Theorganizations had realized that functional interdependence, not internecine conflicts, isthe key to satisfy customer needs. Despite the realization by logistics and marketingmanager that cooperation is essential marketers often criticize logistics departmentfor being cost minimizers having no concern for customer needs while logisticsdepartment accuses marketers of chasing sale at any cost. Therefore it is essentialthat organizations identify area of agreement and potential conflict. Seniormanagement must be keen to actively support cooperation between the two groups.This can be assisted by performance measurement that rewards cooperation and aspirit of interdependence that actively discourages parochial behaviour.

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2.3.1 Logistics and Product Life Cycle

Product life cycle (PLC) is a key marketing concept that affects the relationshipbetween logistics and marketing. For different stages of PLC i.e., introduction,growth, maturity and decline, different level of logistics support is required bymarketing. In the introduction and growth stage timely cost effective fulfillment oforder is a major requirement in ensuring initial acceptance of the product. Later assales slow down and the product moves into the maturity and decline stages, thecompany changes to trimming cost as the product faces stiff price competition andconsequent pressure on margins. Hence there is need for a logistics manager tounderstand what marketing is trying to achieve with each product and whatappropriate level of logistics support is required accordingly.

2.3.2 Areas of Logistics and Marketing Interaction

In today’s competitive environment organizations are utilizing the benefits of theirestablished logistics/marketing interface to be competitive not in terms of productand price but also logistics services tailored to meet individual customer needs.These organizations are able to differentiate themselves from their competitors byoffering a total service with logistics forming an essential part of the total valuechain.

The major area of interaction between logistics and marketing includes (Gattorna1995):

· Product Design: This can have a major effect on warehouse and transportationutilization (and therefore costs).

· Pricing: This is the means by which logistics services customer demandaffects the overall cost of the product and in turn the organization’s pricingpolicies.

· Market and Sales Forecasts: Marketing forecasts will largely dictate the levelof logistics resources needed to move products to customers.

· Customer Service Policies: If marketing opts to offer a very responsive levelof service to customer, logistics resources, in the form of facilities and inventory,will need to be very considerable.

· Number and Location of Warehouses: This is one of the greatest areas ofcontention and can only be satisfactorily resolved if marketing and logisticsdevelop the policy jointly.

· Inventory Policies: This is another area of contention, as these decisions havea significant bearing on operational costs and the extent to which desired levelsof customer service are achieved. It is another key area where policy should bedeveloped jointly.

· Order Processing: Responsibility for who receives customer’s orders and thespeed and efficiency with which they are processed has a major impact onoperational costs and customer’s perceptions of service levels. This is anotherarea where joint policy-making is preferable.

· Channels of Distribution: Decisions to deliver direct to the customer orthrough intermediaries will greatly influence the level of logistics resourcesrequired. As channels change, so will the resources required. Marketing shoulddefinitely consult with logistics when making channel decisions.

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Logistics and SCM : AnIntroduction2.4 THE LOGISTICS-MANUFACTURING INTERFACE

Manufacturing and logistics are interrelated so no one can be considered in isolation.Decisions made in these two areas commit the organization to relatively long-lastingcost structures and also determine the manner in which the business competes in itschosen markets.

To maintain its competitive position in a dynamic industry, the manufacturing andlogistics functions must respond positively by considering the manufacturing/logisticsnetwork as whole and continuous improvement programmes coordinated across thevarious activities like delivery service, production priority control and purchasing toexploit the synergy available.

There are two fundamental competitive strategies, which every organization has todecide to remain unbeaten in the competitive environment. Cost leadership i.e., be thelowest-cost producer in the industry or meaningful differentiation i.e., to differ bycompetitor in some form, that can be in terms of service like delivery time, deliveryreliability etc. or in terms of technical advantages like superior features, superiorproduct etc. In new environment, where integration is the driver to achievecompetitive advantage, organizations have evolved new approaches to developinterface between two functions. The differences in these perspectives are shown inTables 2.1 and Table 2.2 when organizations decide to compete on the basis of costleadership and differentiation respectively.

Table 2.1: Manufacturing / logistics approach when the basis for competing is cost leadership(Source: Gattorna 1995)

Basis for Competing: Lowest – Cost Competitor

Old Approach New Approach

Cost-reduction programmes Eliminate all non-value adding activities/procedures/tasks etc

Reduce inventory Reduce the need to buy capacity by shorteninginternal lead times

Trim 10% all budget allocations Reduce the material conversion cost by simplifyingprocesses through integration and technology

Defer capital expenditure Emphasize product and process quality so as toreduce costs associated with rework, breakdownsetc.

Emphasize control on expenses Reduce need for inventory through superior planningparticularly direct labour systems, shortened internal lead times; linking

processes etc

Which also results in: Which also results in:

····· Inadequate support ····· Improved product performance

····· Poor product quality ····· Reduced product variability

····· Ageing equipment/processes ····· Improved flexibility

····· Poor customer service ····· Improved responsiveness to market

····· An image of being unreliable

····· Poor product availability

····· Poor delivery service

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Table 2.2: Manufacturing / logistics approach when the basis for competing is differentiation(Source: Gattorna 1995)

Basis for Competing: Product Availability and delivery time

Old Approach New Approach

Increase inventory to act as a buffer Shorten internal lead times to improve responsivenessto market

Increase number of branch warehouses Emphasize schedule performance to ensure reliablesupply

Increases capacity to provide flexibility Emphasize product and process quality so as toreduce delays caused by rework, breakdowns etc.

Release orders early to production Utilize express transport and centralized distributionto prevent misallocation of stock

Emphasize production output Initial superior customer service and order entrysystems to enhance customer communication

Which also results in: Which also results in:

Higher costs Lower costs

Negatives cause by the complexity of Improved product performancethe system and poor product quality Reduced product variabilitycaused by emphasis on ‘getting theproduct out’

Long internal lead times caused by An image of reliabilityearly release of works orders to givethe plant ‘plenty of time’

Stock-outs due to work order overload, Improved flexibility in volume and product mixconfused priorities and difficulty inallocating stock to many warehouses

Logistics link the manufacturing both from characteristics of inputs i.e., suppliers ofraw materials and characteristics of market i.e., customers. For a givenmanufacturing organization there is a production/branch warehouse configuration,which satisfies most constraints or pressures imposed by the inputs or the markets.For effective operation of manufacturing/logistic interface there are two primarydeterminants i.e., Capacity and Location.

Capacity is related to location and logistics in the following way. First, productioncapacity must be matching in some sensible way to the market demand then inaccordance with the production capacity matching is required for the logisticsnetwork i.e., procurement, storage, order entry and processing, outbound transport,branch warehouse and final customer delivery.

The capacity issues are very crucial decision and are required to change as per themarket demand and demand locations. Short-term solutions can be capacityenhancement by overtime, second and third shifts, third party contracting, extensionof the existing facility and long-term solution are additional facility in a new locationor extensive capacity in new location. Short term decisions possess the least risk, andimpact on the logistics network only in terms of the additional capacity requirementwhere as long term solution demand a re-evaluation of the manufacturing/logisticsnetwork not only in terms of the capacity of each component but also the strategicnecessity and location of each facility (factory, warehouse) in terms of its contributionto the effectiveness of the total network. In other words, a change in location andcapacity of any one facility requires a review of the location and capacities of allother facilities. Clearly, the issues involved in location, capacity and logistics areinextricably linked.

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2.4.1 Customer Service Issues at the Logistics-ManufacturingInterface

Customer service strategy is an on-going process of increasing both the quality andnumber of links between the manufacturing organization and the customer. Thewhole emphasis in today’s service intensified businesses are to increase a series ofboth human and information based technological relationships between customer andthe organization so that better customer services and satisfaction to the customer canbe realized. The issues at the manufacturing/logistics interface for better customerservice are as follows:

Demand Forecasting

The general function of product forecasting in the short to mid term is to contribute tothe process of ensuring the availability of stock for customers. This includes the useof distribution requirements planning (DRP) wherever appropriate. For the longerterm, forecasting at the product group level is crucial for manufacturing capacity andflexibility decisions.

Customer and Supplier Oriented System

Organizational systems will need to be directly related to the issues of how to bind thecustomer more tightly to the organization and how effectively integrate suppliers intothe overall supply chain with the objective of enhancing customer service.

The systems installed by organizations will need the capability to formally link thecustomer in a form that benefits both parties. Systems will also be required to linkwith suppliers in a manner that gives meaning to the concept of strategic alliances. Ina strategic alliance the supplier and the manufacturer agree to a relationship that goesbeyond the normal commercial relationship such that each obtains synergistic benefitssimilar to that obtained by forward/backward integration but with least associatedrisks and negative attributes.

Plant Configurations

The location, nature and operating performance of manufacturing facilities, centralwarehouses and branch warehouses impact heavily on both cost structure andservice levels. In the longer term, and in conjunction with other factors (systems,supplies), the plant/branch configuration is a major structural input to reducing overallsupply chain costs. When the links between manufacturer and customer andmanufacturer and supplier are complete, a rethink of the logistics (supply chain)network from supplier through to customer will be required, for two reasons:

· Available technology, particularly information technology, will allow certainplant/branch configurations, previously ruled out, to be feasible.

· There will be an on-going need to reduce (in real terms) the cost of the network.

A key feature of this process will be the requirement of involving in an appropriatemanner both customers and suppliers. This will be new ground for manyorganizations and will force a re-evaluation of values and mission in somecircumstances.

Master Production scheduling

The master production schedule (MPS) is an area where a number of parties(manufacturing, logistics, marketing, finance) have a vested interest. Often as not,though, it is done by one group in isolation from the others. In the operational sensethe MPS is primarily concerned with stock availability within a set of constraints suchas capacity. As such, it is the single instrument, which demonstrates the plan for:

a) Finished goods inventory levels

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b) Customer service in terms of stock availability

c) Machine utilization

d) Capacity utilization

e) Labor productivity

f) Output

g) Need for overtime/casual employees and so on.

The real power of the MPS, however, is its potential to involve all interested parties.In practice, when people from marketing, logistics and manufacturing get togetherand agree on a schedule, the result is a superior schedule. Clearly the MPS may beused as a vehicle to integrate a number of parties into the planning and decision-making process with the result being a superior plan which, when executed, results insuperior customer service.

2.5 SUMMARY

In this unit, we have discussed how the supply chain works and what are the keyprocesses required to integrate the supply chain. We have also examined the criticalareas of logistics-marketing interface and logistics-manufacturing interface. Theseinterfaces are critical for enhancing supply chain performance. Finally we havediscussed how manufacturing-logistics interface could provide better customerservice.

2.6 SELF-ASSESSMENT QUESTIONS

1) Explain various supply chain processes for an integrated SCM. Are there anyother processes that you can think of?

2) What are the primary responsibilities of logistics group and marketing groupwithin an organization? Why there is a conflict between the two? Whatmeasures can be taken to enhance cooperation?

3) What are the differences between manufacturing/logistics approach when thebasis for competing is

i) Cost leadership

ii) Differentiation


1) Bowersox D. J., Closs D. J. and Helferich O K, 1986, Logistical Management,Macmillan.

2) Chopra S. and Meindl P, 2001, Supply Chain Management: Strategy,Planning, and Operation, Pearson Education Inc.

3) Christopher M., 1992, Logistics and Supply Chain Management: Strategiesfor Reducing Costs and Improving Services, Pitman.

4) Lambert D. M., 1998, Fundamental of Logistics Management, McGraw Hill.

5) Gattorna J, 1995, Handbook of Logistics and Distribution Management,Ashgate Publishing Company.

6) Gattorna, J. L. & Walter P. W., 1996, Managing the Supply Chain : A strategicPerspective, Plagrave Macmillan Indian Reprinted Ed., 2004

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Logistics and SCM : AnIntroductionUNIT 3 CUSTOMER FOCUS IN SUPPLY CHAIN

MANAGEMENT

Objectives


· understand the key processes required to enhance customer focus in the supplychain;

· define Efficient Customer Response (ECR);

· define Quick Response (QR) and Accurate Response (AR); and

· examine chain relationship within and beyond organization.

Structure

3.1 Introduction

3.2 Customer Service

3.3 Functional vs. Innovative Products: SCM Issues

3.4 Efficient Consumer Response

3.5 Quick Response and Accurate Response

3.6 Chain Relationship within and Beyond the Organization

3.7 SCM as a Core Strategic Competency

3.8 Summary



3.1 INTRODUCTION

Management of a supply chain means managing all the different processes andactivities that produce value in the hands of the ultimate consumer. A supply chaincan be viewed as the network of entities through which the material and informationflow. Those entities may include suppliers, carriers, manufacturing sites, distributioncenters, retailers and customers. [1]. Effective streamlining of the supply chain canimprove the customer service levels dramatically, reduce excess inventory in thesystem, and cut excess costs from the network of the organization. [2]

Supply Chain Management competency contributes to an organization’s success byproviding customers with timely and accurate product delivery. The customer is anydelivery destination – from consumers’ homes to retail and wholesale businesses tothe receiving docks of a firm’s manufacturing plants and warehouses. The customerbeing serviced is the focal point and driving force in establishing Supply ChainManagement performance requirements. It is important to clearly understandcustomer service deliverables when establishing Supply Chain Managementstrategies.

The customer-focused marketing is built on three fundamental concepts.

· The essence of a marketing orientation to business policy

· Developing Supply Chain Management competency as strategic resource tocustomer service planning

· The changing nature of most desired Supply Chain Management practice toaccommodate product life-cycle requirements.

This unit will discuss the customer focus in Supply Chain Management.

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Logistics and SCM : AnOverview 3.2 CUSTOMER SERVICE

A customer-focused strategy needs to accomodate and develop a combination ofproducts and services that satisfies customers. One of the key factors for successfulmarketing is the availability of products and services to the customers, when andwhere desired by them.

Basic customer service is defined in terms of availability, performance and reliability.

· Availability is the capacity to offer inventory when demanded by a customer.

— Normally this is achieved by stocking adequate inventory in anticipation ofdemand from customers.

— Inventory stocking plans take into consideration forecasted demand, salespopularity, importance of a product in the product line, profitability and thevalue of the merchandise.

— Safety stock is kept to take care of demand forecast error and anyunanticipated operational or delivery problems. The availability depends onthree performance measures: stock out frequency, fill rate and ordersshipped.

· Operational Performance can be measured in terms of speed, consistency,flexibility and malfunction/recovery.

— Speed is the time taken for executing an order. With the level ofdevelopment in information, communication and transportation technology/systems, the lead-time will continue to be shorter.

— Consistency is reflected by execution of large number of orders inexpected delivery time.

— Organization’s ability to respond to unexpected situation or request forunique customer service shows the flexibility.

— Preventing malfunction and having contingency plans for prompt recoverycan add value to customer service programme.

· Reliability is one of the most important dimensions of customer service quality.Customers’ confidence can be built by providing advanced accurate informationon the status of their orders, rather than giving surprises.

A customer-focused firm will do well to state the level of basic service commitmentin terms of availability, operational performance and reliability to all customers.

The common interpretations for customer service are easy to do business with andsensitive to customer needs. LaLonde and Zinszer suggested three dimensions ofcustomer service [5]:

i) As an activity – that can be managed.

ii) In terms of performance levels – can be accurately measured

iii) As a philosophy of management – showing the importance of customer focusedmarketing

They defined: “ Customer service is a process for providing significant value-addedbenefits to the supply chain in a cost effective way.” Excellent customer serviceperformance is likely to add value for members of the supply chain. A customerservice programme needs to be evaluated of its performance through measures likegoal attainment and relevancy.

A primary reason for SCM becoming an important managerial issue in the ninetiesstems from increased national and international competition. Customers have multiplesources from which to choose to satisfy demand; locating product throughout the

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distribution channel for maximum customer accessibility at a minimum cost becomescrucial. The dynamic nature of the market place makes holding inventory a risky andpotentially unprofitable business. Customer’s buying habits are constantly changingand competitors are continually adding and deleting products. Demand changes onlymake it almost sure that the company will have the wrong inventory.

3.3 FUNCTIONAL VS. INNOVATIVE PRODUCTS:SCM ISSUES

Marshall L. Fisher observed [4] that in some cases, costs have risen tounprecedented levels because of adversarial relations between SC partners as wellas dysfunctional industry practices such as an over reliance on price promotions. Aframework was devised for deciding which SC is the best for a particular company’ssituation. Products can be classified into two categories, either primarily functional orprimarily innovative based on their demand patterns. It helps a manager to understandthe nature of demand for their products and devise the SC that can best satisfy thatdemand. The root cause of the problems faced by many SCs is a mismatch betweenthe type of product and the type of SC.

Functional products are the staples, which satisfy basic needs, don’t change muchover time, have stable, predictable demand, long life cycles and available at a widerange of retail outlets/grocery stores. Their stability invites competition and leads tolower profit margins. (See Table 3.1)

Fashion apparel and personal computer manufacturers introduce innovations to avoidlow margins and to give customers reason to buy their products. But, the demands forthese products are unpredictable, life cycle is short and profit margin is high. Theyalso require a fundamentally different SC than functional products. (See Table 3.2)

SC performs two distinct types of functions: a physical function and a marketmediation function. Physical function includes converting raw materials into parts,components and finished goods, and transporting all of them from one point to thenext in the SC. Market mediation function is less visible but equally important andensures matching of offerings with customer’s preferences.

Each of these two functions incurs physical costs (costs of production, transportation,inventory storage) and market mediation costs arising out of marked down or lostsales opportunities and dissatisfied customers.

Table 3.1: Functional Versus Innovative Products: Differences in Demand

Functional Innovative(Predictable Demand) (Unpredictable Demand)

Aspects of Demand

Product Life Cycle More than 2 years 3 months to 1 year

Contribution margin 5% to 20% 20% to 60%

Product Variety Low (10 to 20 variants High (often millions ofper category) variants per category)

Average margin of error in the forecast 10% 40% to 100%at the time production is committed

Average stock out rate 1% to 2% 10% to 40%

Average forced end of season markdown 0% 10% to 25%as percentage of full price

Lead time required for made-to-order 6 months to 1 year 1 day to 2 weeksproducts

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Table 3.2: Physically Efficient Versus Market-Responsive Supply Chains

Physically Efficient Process Market-Responsive Process

Primary Purpose Supply predictable demand Respond quickly toefficiently at the lowest unpredictable demand in orderpossible cost to minimize stock outs, forced

markdowns and obsoleteinventory

Manufacturing focus Maintain high average Deploy excess buffer capacityutilization rate

Inventory Strategy Generate high turns and Deploy significant bufferminimize inventory stocks of parts or finishedthroughout the chain goods

Lead-time focus Shorten lead time as long as Invest aggressively in ways toit doesn’t increase cost reduce lead time

Approach to choosing suppliers Select primarily for cost Select primarily for speed,and quality flexibility, and quality

Product Design Strategy Maximize performance and Use modular design in order tominimize cost postpone product

differentiation for as long aspossible

A global brand can be greatly benefited by having gathered knowledge of customersand their choices, through channel partners; and can create global products, whichmay need to be adapted as per local preferences.

Activity 1

Define Customer Service for two organizations– one offering a product (ColourTelevision) and another one offering a service (Personal Banking). What are thetargets you will set for these organizations for achieving a high image on customerservice and evaluating the performance level?

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3.4 EFFICIENT CONSUMER RESPONSE

Since 1980s, many organizations have been going through, the job of reengineeringtheir business process and it involved revisiting their supply chain. One EfficientConsumer Response study estimated that 42 days could be removed from the typicalgrocery supply chain, freeing up $30 bn in current costs and reducing inventory by41% in USA. A study by A.T.Kearney estimated that supply chain costs representmore than 80% of the cost structure in a typical manufacturing company. Forretailers, this figure is 70 to 80 %. These numbers indicate that even slightimprovements in the process can translate into millions of dollars on the bottom line.

Some of the critical success drivers to achieve improvements have been suggestedand these are:

· Well-defined processes with well-defined guidelines for decision making;

· Removal of the organizational and functional barriers;

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· Early visibility to changes in demand all along the supply chain;

· A single set of plans that drives the supply chain operations and integratesinformation across the supply chain.

Some of the learning from case studies on SCM

a) ABC Foods Company:

· Materials common across businesses are purchased centrally to take advantageof economies of scale, other items exclusive to a given business unit arepurchased by the unit,

Supply strategy includes four key practices:

i) Consolidation of the supplier base,

ii) Development of supplier partnership,

iii) Penetration into supplier performance,

iv) Commitment to Quality.

· Manufacturing plants are strategically located throughout the US, based onsupplier or customer base,

· Distribution network includes facilities strategically located based on customerdemographics, as well as transportation efficiencies. Some of these facilities areself owned and third parties operate others.

· Main focus in distribution was to establish customer partnerships, which wasbased on ECR concepts including continuous replenishment.

The ECR includes the following strategies:

1) Widespread implementation of EDI (Electronic Data Interchange), up and downthe supply chain; both between Supplier and Manufacturer, Manufacturer andDistributor, Distributor and Customer.

2) Greater use of POS (Point of Sales) data obtained by greater and moreaccurate use of bar coding.

3) Co-operative Relationship between Manufacturer, Distributor, Suppliers, andcustomers.

4) Continuous Replenishment of inventory and flow through distribution.

(Like JIT (Just-in-time), Cross Docking)

5) Improved Product Management and Promotions.

6) Could be the best source of Competitive Advantage.

One of the most beneficial aspects from ECR could be building relationship with theCustomers:

· Customer satisfaction improves, as customer gets what he wants

· Capturing database of customer through a smart card device and link it to hispurchase patterns in terms of item, quantity, size and time-offering volume orvalue bases incentive scheme.

· Make use of such database to forecast future demand and thereby achievingbetter customer service and less stock out situations.

· Inform customers of new arrivals – through direct mailers.

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Since the ECR is a strategic option for an organization, we first need to understandwhat factors have driven a firm to re-look at their current strategy and what are theoptions an organization has to respond to such factors, keeping in mind pastperformance and internal capabilities and resources.

Once a strategic option has been chosen after evaluating possible alternatives, firm isrequired to go through the process of implementation, which includes structure andsystems, people, skills, values and culture, resources and leadership.

The Efficient Consumer Response concept popularly known as ECR is a strategicchoice for many organizations to survive/grow in the current business environment,which is driven by competition, speed, technology, customer satisfaction and everchanging customer preferences. ECR provides a competitive advantage todifferentiate from other players.

ECR movement, which followed another movement called Quick Response in textile/apparel industry, initially started in grocery industry to respond to the followingcustomer service expectations, most efficiently and effectively.

· They get what they want, when they want it, and as much quantity as theyneed.

· They get it at the most competitive price

· They achieve satisfaction or delight, through customer value addition.

· They feel good of having received attention.

· They feel happy being cared for.

· They enjoy being listened to and being served quickly.

In order to fulfill these expectations organizations will be required to re-orient andreview the areas like structure and systems; people, skills, values and culture;resources and leadership.

Structure and Systems

ECR has a long-term impact on the effectiveness of the value delivery system to thecustomers, by way of a collaborative relationship between manufacturers,wholesalers, retailers, brokers, and transporters through application of advancementin Information and Communication Technologies (ICT). Therefore, the structuralchanges may be necessary to enhance and focus on proper co-ordination andcollaboration among channel partners. Many organizations have switched over fromproduct focus to customer focus.

Application of technology for data capturing and processing to help quick andaccurate decision-making is a must. EDI and Bar Coding technology can only enabletransfer of POS data to the channel partners and avoid losses due to over/understocking of products throughout the channel. Through integrated EDI; purchase order,delivery order, Invoice, Shipping bill, Stock Information, Truck Movement Informationcan be exchanged between channel partners.

Earlier firms used to produce goods as per their capacity and convenience to achieveeconomy of scale and profitability. Now the manufacturing plans are customer drivenand there is major dependence on POS data at SKU level (stock keeping unit) forforecasting, in many organizations. New product introduction system will be requiredto draw major inputs from customer feedback or customer survey. It has to be doneat a faster speed than the competitors and frequency has to be improved due toshortening of PLC. Even an innovation can’t assure a very long-term stay andbenefits. Moreover, failure rates are also to be reduced.

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Another important system change necessary for more meaningful decisions, is tointroduce Activity Based Costing (ABC) instead of using full cost allocation systems.The Internet revolution will create a new dimension in achieving ECR. Channelpartners can share data through common sites and consolidate/ process the same, foruseful decision making and information sharing, in a most cost effective way.

People, Skill, Values and Culture

Based on the current status of the organization in terms of availability of humanresources and skills, the firm has to review the needs for training of existingresources and acquiring required skill through recruitment. In case of adoption ofadvance technologies, one has to review its imperative for the organization to acquirenew skills.

As this new concept thrives on efficiency, speed, responsiveness and the customersatisfaction, the values and culture of the organization have to make necessaryadjustment and proper realignment to meet the new challenges.

Category Management requiring cross-functional skills to decide on product-mix,assortments (flavor, pack size, colour etc), co-ordination with manufacturing,purchases, shipping/transportation, accounts, contribution/profitability analysis, newproduct development, customer service etc, will require new skills.

Resources

Major investment will be necessary to acquire the new advanced technologies andthe necessary skills required to operate it. Integrated Supply Chain Network demandsadoption of similar relevant technologies by the channel partners. In a situation whensome of these Channel Partners are not able to arrange for the resources, themanufacturer/marketer may be required to find financial resources with an objectiveto achieve total Supply Chain efficiency.

It is very important to note that each partner and the links in the value delivery chainmust perform efficiently and continuously strive for further improvement. Even oneinefficient link can result in sub optimal performance for the total chain.

There may be a serious need to improve transportation facility to improve on “Speedto Market” advantage. This can be done through owning additional trucks or byoutsourcing.

Leadership

In order to adopt ECR concept as a differentiator, sound leadership can play a veryimportant role. To drive the organization and channel partners through the changeprocess may not be an easy task. Therefore, success of implementation will dependon the leadership qualities.

The leadership has to ensure executive support, commitment to change andempowerment, which are the key areas for successful ECR implementation. Forexample, wherever cross docking will be possible the tasks of and need for adistribution center will be minimum or nil. This may call for some unpleasant decisionsfrom the leadership.

Strategic Alliances can facilitate new product development/introduction andmarket access or ensuring timely delivery and is coming off age now. Rediff.comhas created such alliances with the partners like product/service suppliers,transporters/couriers and payment facilitators to be successful in their e-commerceventure.

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Activity 2

What are the learning inputs you could get from the example of ABC FoodsCompany for implementation of ECR?

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3.5 QUICK RESPONSE AND ACCURATE RESPONSE

Quick Response is a retail sector strategy, which combines a number of tactics toimprove inventory management and efficiency, while speeding inventory flows. MostQRs are between manufacturers and retailers only. When fully implemented, QRapplies JIT principles through the entire supply chain, from raw material suppliersthrough ultimate customer demand.

Customer’s sales are tracked immediately using EDI with bar code technology. Itallows manufacturer to notify raw material suppliers and schedule production anddeliveries as required to meet replenishment needs. This allows inventory reduction,speeding response times, lowering number of out of stock products, reducing handlingand obsolescence. QR was first implemented in Textile & Apparel industry and anadaptation called ECR was implemented in grocery industry.

In order to fully understand the role of supply chain management in an industry it isnecessary to study in depth the complexity of the supply chains for specific productgroups, number of constituents in each level of the chain, the impact of constituents’performance in the value delivery system in general and to their customers of thechain in particular, their awareness of this impact and which are the areas that needperformance improvement for overall efficiency and effectiveness of the valuedelivery system.

With the application of advanced Communications and Information Technology in thesystem, now each of the constituents would be able to serve its customer better andimprove the value delivery process. The partners in the chain must understand whatkind of support need to be provided to each other to ensure overall cost and valueoptimization of the system.

Some learning experience from case studies

a) Apparel Manufacturer

· The company sells lower priced brands to discount stores and upscale line todepartment stores. It has 20000 SKUs and sold through 6000 different accounts.

· Their efforts were on reducing costs within their exiting SC instead of producingoverseas and utilizing time as a speed -to-market advantage.

· Apparel manufacturing is done at 2 units in US and another one offshore. Allproducts are finished at one site and then shipped to two distribution centers.

· Implemented flow replenishment along with EDI connections with several majorcustomers. It replenished inventory at the retailer without a purchase order fromthe retailer. Products are replenished daily or in economical batches, based onPOS transactions transferred from the retailer on a daily or weekly basis,

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b) Electronico – An Electronics Company

One division produced corporate computer networks and secondary storage fordesktop computers. With ever-changing electronics trends, products are short livedand often engineered to order.

· SC is a global network that delivers products and services from the supply baseto the end customer through an engineered flow of information and material.

· SC comprises of: mining concerns, component manufacturers, assemblers,distributors, resellers/integrators, retail, end users, return depots and recyclingPartners.

· Information is communicated across nodes using various methods to assuredelivery of marketing programs. An engineering change order initiates animplementation process, which involves all departments affected by it.Information and communication must flow within predetermined normalresponse times and these are critical in maintaining strong vendor relationshipand assuring delivery of programs within marketing requirements.

The uncertain market reaction to innovation increases the risk of shortage and excesssupplies. High profit margins and the importance of early sales to capture marketshare for new products, increase the cost of shortages. At the same time short lifecycle increases the risk of obsolescence and thus costs of excess supplies. So, mostimportant is to read early sales indication or other market signals and to reactpromptly. Crucial flow of information occurs not only within the chain but also fromthe marketplace to the SC. The critical decisions about inventory and capacity are asto where in the SC to position inventory and available production capacity in order tohedge against uncertain demand. Suppliers should be chosen for their speed andflexibility, not for their cost alone.

A leading Japanese apparel manufacturer produces its basic styles in low costChinese plants keeping production of high fashion styles in Japan, where theadvantage of being able to respond quickly to emerging fashion trends more thanoffsets the disadvantage of high labour costs.

A lean, efficient distribution channel is exactly right for functional cars, but totallyinappropriate for innovative cars, which require inventory buffers to absorbuncertainty in demand. The most efficient place to put buffers is in parts, but doing sodirectly contradicts the just-in-time system that automakers vigorously adopted.

Mass Customization

National bicycle’s success of a responsive supply chain was part of new movementcalled mass customization – building ability to customize a large volume of productsand deliver at close to mass-production prices.

Accurate Response System

Sport Obermeyer, manufacturer of fashion skiwear, adopted a blending of threestrategies of reducing, avoiding and hedging against uncertainty [4].

· To reduce uncertainty, company solicited early orders from 25 largest retailers.This enabled them to forecast national demand with a margin of error of just10%.

· Once employees were told of the benefits of shaving off each day in lead timeby way of saving the cost of air-shipment, they found many ways to shorten thelead time.

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· Company asked six members of a committee to forecast for all products andselected those styles when all six individual forecast agreed. Using this averageforecast as well as data on the cost over and under production, it developed amodel for hedging against the risk of both problems. The model worked out thequantity of each style to make in the early production season (which begins ayear before the retail season) and how much to make in February, after earlyorders are received. This approach, called “accurate response”, has cut the costof both over and under production in half – enough to increase profits by 60%. Italso resulted in 99% product availability.

The “accurate response” system distinguishes those products for which demand isrelatively predictable from those for which demand is relatively unpredictable, usingblend of historical data and expert judgment.

The relatively predictable category should be made furthest in advance in order toreserve more manufacturing capacity for making unpredictable products closer to theselling season. This enables companies to make smaller quantity in advance, see howwell is the response for different items early in the selling period and then based onthat information, decide which products to make more of.[6].

Unpredictable demand and short-lived products are the hallmarks of the world marketfor apparel. Demand for fashion apparel, being a function more of taste than ofobjective consumer needs, long range forecasts tended to be highly inaccurate. Thusresulting shortages (stock outs) represent lost sales opportunities, surpluses representlost revenues consequent to successive reductions (Markdowns), often to a pointbelow the cost of production.

Due to growing demand uncertainty, retailers discontinued the practice of orderinglarge quantities of products in advance of the selling season and warehousing themuntil sold. Instead they ordered goods much closer to the selling season, in small initialquantities that could be replenished as the season progressed. Retailers essentiallylooked at indirect costs such as those associated with high inventory levels and longlead times.

This pushed the manufacturers to expand product variety, shorten order- fulfillmentlead times and achieve higher order-fill rates. These trends drove the QuickResponse movement.

The Quick Response Movement

“Quick Response” was the term used by textile and apparel manufacturers andretailers to describe buyer-seller partnership relationship in which the buyertransmitted orders via EDI and the seller promised to fill orders quickly. Many otherfeatures, as listed below could be added to these two basic elements, depending onthe preferences and capabilities of the partners.

· UPC code symbols attached to product by the manufacturer, and scanned atPOS by the retailer

· Electronic Purchase Orders transmitted to vendor

· Vendor marking of retail prices on garments (Pre-retailing)

· POS data by store, transmitted to vendor

· Advance Shipping Notices received from vendor in advance of shipment

· Electronic Invoicing

· Electronic Funds Transfer

The quick response movement had grown with the objective of strengthening thecompetitive position of the domestic manufacturing industries in the “fiber-textile-apparel” chain.

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By April 1993 industry standards had been widely adopted by textile producers,apparel manufacturers, retailers, and transport companies. This enabled the retailersand suppliers to develop partnerships with the objective “ to have the right quantitiesof the right goods in the right place at the right time”[8].

Operating on a Quick Response System apparel and textile retailing operations aretied up to the manufacturing operations, to provide the flexibility needed to quicklyrespond to shifting markets. The strategy consists of a combination of businesspractices and technology which are aimed at capitalizing on domestic manufacturers’strongest competitive advantage – proximity to the domestic markets – by providingmore suitable and acceptable products, higher customer service levels, and shorterlead times than those offered by foreign competitors. QR is intended to reduceoverall inventory levels, increase inventory turns and avoid forced markdowns as wellas stock outs [9].

Under QR mode, retailers and apparel manufacturers eliminate much of the riskinherent in the current system. Forecast error is reduced by planning assortmentsmuch closer to the selling season, performing consumer preference tests, limitedintroductions to pre-test and fine-tune specific style, colour, size options. Inventoryrisk is reduced by producing smaller initial orders and re-ordering more frequentlythroughout the season based on actual sales data from the POS, which is collected atthe full SKU level.

Although imported goods may cost the retailer much less initially, foreignmanufacturers generally require long order lead times (often nine months or more)that may result in larger and more risky inventory investments and consequently morechances of forced markdowns and stock outs at the retail level.

Estimates of the average length of time it takes for a new style of garment to makeits way through the traditional apparel pipeline, from fiber production to retailpresentation of a finished piece range from 56 to 66 weeks, with garments in actualproduction only 6% to 17% of that time.

Most important element of QR strategy is an effective information pipeline,characterized by shared information and efficient information flows. Kurt SalmonAssociates has outlined a two-step implementation procedure for achieving aneffective QR system. The first step is to establish QR partnerships with customersand suppliers and implementing the VICS (Voluntary Inter-Industry CommunicationStandards)-endorsed standards of the following technologies: UPC product marking,EDI computer-to-computer communication of transactions and shipping containermarking with bar codes to streamline distribution.

The second step aimed at developing real-time merchandising and short-cycle,flexible manufacturing, involves the use of point –of-sale data analysis to identifytrends, CAD to make important product design decisions closer to the retail sellingseason, and flexible manufacturing technologies to allow the timely, economicalproduction of small lot sizes.

Though it is contended that a quick response of 30 working days is achievable withcurrently available technologies, but typically it takes over four times as long,requiring 8days for placement of store order, 32 days for fabric sourcing and planning,7 days for cutting, 20 days for sewing and a staggering 58 days for the goods to makeonto the sales floor, for a total of 125 days [9].

Impact of Technology

Never has so much technology and brainpower been applied to improving supplychain performance. Point-of–Sale scanners allow companies to capture the

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Customer’s voice. Electronic Data Interchange lets all stages of the supply chainhear that voice and react to it by flexible manufacturing, automated warehousing, andrapid logistics. And new concepts such as quick response, efficient consumerresponse, accurate response, mass customization, lean manufacturing, and agilemanufacturing offer models for applying the new technology to improveperformance [4].

3.6 CHAIN RELATIONSHIP – WITHIN AND BEYONDTHE ORGANIZATION

Organizations that work without functional barriers are likely to achieve coordinationwithin the various components of the supply chain. This also necessitates theintegration of data across the enterprise so that all planners in the SC share commoninformation. It is important for organizations to have horizontal and vertical visibilityinto their SCs.

Advanced Manufacturing Research, a Boston-based consulting firm, developed asupply chain model, which emphasizes material and information flow betweenmanufacturers and their trading partners [1].

The changes required by the management, are due to the following changes:

· Greater sharing of information between vendors and customers

· Horizontal business processes replacing vertical departmental functions

· Shift from mass production to customized products

· Increased reliance on purchased materials and outside processing with asimultaneous reduction in the number of suppliers

· Greater emphasis on organizational and process flexibility

· Necessity to coordinate processes across many sites

· Employee empowerment and the need for rules-based, real-time decisionsupport systems

· Competitive pressure to introduce new products more quickly.

Most product supply systems are out of balance with customer requirements. Eachlink in the product supply system should be individually capable of producing anddelivering what customers order each day. The entire supply chain is only as capableas the weakest link in the system.

Having pursued cost cutting measures aggressively, many companies have reachedthe point of diminishing returns within their organization’s own boundaries and believethat better coordination across corporate boundaries- with suppliers and distributors –presents the greatest opportunities. This has coincided with the emergence ofelectronic networks that facilitate closer coordination.

Uncertainty is inherent in innovative products and requires efforts to find how to copewith it by creating a responsive SC. A company can employ three coordinatedstrategies to manage uncertainty:

· Striving to reduce uncertainty by finding sources of new data that can serve asleading indicators or by having different products share common components tothe extent possible so that demand for components becomes more predictable.

· Avoid uncertainty by cutting lead times and increasing the SC’s flexibility toproduce to order or at least make it at a time closer to when demand materializesand can be accurately forecast.

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· Hedge against the remaining residual uncertainty with buffers of the inventory orexcess capacity.

Dispersed Manufacturing – Dissected Value Chain- Management of ChainRelationship

As companies focus on their core activities and outsource the rest, their successincreasingly depends on their ability to control what happens in the value chainoutside their own boundaries. In 1980s, the focus was on supplier partnership toimprove cost and quality. In today’s faster-paced markets, the focus has shifted toinnovation, flexibility and speed [7].

Li & Fung is Hong Kong’s largest export trading company and innovator in thedevelopment of SCM. On behalf of it’s customers, mostly retailers of US and EU,they work with an ever expanding network of thousands of suppliers around theglobe, sourcing clothing, toys, fashion accessories, luggage. It draws on Hon Kong’sexpertise in distribution-process technology – a host of information intensive servicefunctions including product development, sourcing, financing, shipping, handling andlogistics.

This group’s one breakthrough was dispersed production and dissecting the valuechain- Labour intensive middle portion is done in southern China and the front andback ends of the value chain in Hong Kong.

Instead of considering which country do the best job overall, they adopted an idea ofdoing it globally by way of pulling apart the value chain and optimizing each step. Foran example when it received an order from a US buyer to produce 10000 pcs ofgarments, they might decide to buy the yarn from a Korean producer but get it wovenand dyed in Taiwan. The buttons and zippers might come from Chinese plants. Then,because of quota and labour conditions, make the garments in Thailand. If buyerneeds quick delivery, divide the orders to five factories in Thailand. Effectively it wascustomizing the value chain to best meet the customer’s needs. Five weeks after thereceipt of the order 10000 garments arrived on the shelves in US, all looked likecoming from one factory, with colours and everything perfectly matched. This is anew type of value added, a truly global product. Though the level would show “ Madein Thailand”, but it’s not a Thai product. The manufacturing process was dissectedand looked for the best solution at each step. The benefits outweigh the costs oflogistics and transportation [7].

Similarly, it may be observed that the main pillars of success for ECR are theIntegration, Collaboration, Co-ordination, Trust, Openness, and Sharing of informationas well as benefits among all the channel partners, supported by advancedInformation & Communication Technologies.

Forming close, ongoing relationships even with the carriers or logistic serviceproviders can help to have distinctive competitive advantage in speed to customer,reliability, availability or other customer service factors.

The efficiency and effectiveness of customer service is possible through dedicatedand motivated channel partners, which partly comes through a well-maintainedrelationship at each level. Suppliers, Distributors and Retailers need to trust eachother to establish long-term relationships and provide optimum value to the customer.Efficient new product introduction and sales promotion can be explored by way ofcollaborative relationships among trading partners.

Relationship Marketing is the practice of building long term satisfying relations withsuppliers, distributors, retailers and customers – with an objective to have their long-term preference and business. This is achieved by delivering high quality on time,

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good service and fair prices to other parties over a period of time. It also results instrong economic, technical, and social ties among them and reduce transaction costand time.

The ultimate outcome could be building a unique company asset called a MarketingNetwork, consisting of all stakeholders: customers, employees, suppliers, distributors,retailers, advertising agencies, university scientists, transporters and any other serviceproviders. The competition, in future, will be between whole networks- rather thanbetween the companies.

The company’s challenge is to reactivate the dissatisfied customer through customerwin- back strategies. It is easier to retract lost customers than to find new ones. Thecost of attracting a new customer is estimated to be five times the cost of keeping acurrent customer happy. The emphasis is now shifting from making sales to buildingrelationship. Apart from use of computers, information and communicationtechnologies, fundamental changes in operational relationship are required. High techwithout high touch may not provide a long-term differentiator.

Strategic Issues

The strategy of differentiation to satisfy specific customer requirements based onlogistics performance/competency is becoming increasingly popular. In the presentcentury, there is a pressing need of clear strategies to be distinctly different andunique, offering something different from their rivals.

Organizations have been rushing to implement the latest ideas on management andstruggling to fit all the pieces together: TQM, TPM, Reengineering, Time-basedCompetition, Benchmarking, Restructuring, Downsizing, Cost Reduction, ERPImplementation and Supply Chain Management.

All these improvements are necessary just to stay in the game. But, that is notsufficient because, if everybody is competing on the same set of variables, then thestandard gets higher but no company gets ahead. Therefore, organizations need tocreate distinctive competitive advantages continuously [3].

Manufacturers will have to increasingly think in terms of delivering value tocustomers/end-users, and this will require a complete rethinking in the way acompany would need to operate it’s supply chain in the future.

Activity 3

“Li and Fung of Hong Kong has been very successful in a complex and competitivebusiness environment by way adopting dispersed manufacturing, dissected valuechain and effective management of chain relationship” - do you agree with thestatement. How do you implement a similar system for an international book publisherbased in Delhi? What are the technological advances that can be useful for thisbusiness situation?

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Logistics and SCM : AnIntroduction3.7 SCM AS A CORE STRATEGIC COMPETENCY

An effective marketing mix strategy integrates resources for these activities into aneffort that maximizes impact on customers. SCM attempts to satisfy time and placeutility by ensuring satisfactory performance of timing and location of inventory andother related services, as per customer requirements in a most cost effective manner.SCM competency is a tangible way to attract customers, who value performance ontime and place.

One of the successful implementation of SCM as a business strategy was thecooperative alliance of Wal-Mart and Procter & Gamble. Both the firms individuallycommitted to build SCM competency before proceeding with their joint partnership.The inventory availability and customer response time of an organization’s serviceprogram may vary based on the prevailing market opportunity and competitivesituation.

The SC problem is mainly a calendaring game, intimately tied to the time- phasednature of decision-making cycles in the business world. Therefore, one must examinethe scope of the decision being made, as well as the authority of the decision maker.Since decisions, made at each of the strategic, tactical and operational levels, differsignificantly, the solution procedures embedded in these tools vary. These tools shouldbe configured so that they are fully integrated, which will reduce implementationcosts as well time-to-benefit [2].

Managing SC means managing across traditional functional areas in the organizationand also interacts with customers and suppliers. The cross -boundary nature ofmanagement called for incorporating SC goals and capabilities into the strategic planof the company and use SC to achieve a sustainable competitive advantage [1].

3.8 SUMMARY

Supply Chain Management competency contributes to an organization’s success byproviding customers with timely and accurate product delivery. Excellent customerservice performance is likely to add value for members of the supply chain. Manyorganizations have switched over from product focus to customer focus. It isimportant to clearly understand customer service deliverables when establishingSupply Chain Management strategies. This unit has discussed the customer focus inSupply Chain Management. It had deliberated on the key processes required toenhance customer focus in the supply chain


1) How can customer service be improved by proper implementation of SCM?

2) What are the fundamental concepts on which customer focused marketing isbuilt on?

3) Can you define Basic Customer Service?

4) Why SCM became an important managerial issue during 1990s?

5) Do you see any difference between a functional and an innovative product?How these differences influence the supply chain design and its performanceobjectives?

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6) State some of the strategies that are followed in implementation of EfficientConsumer Response (ECR).

7) How ECR can facilitate building customer relationship?

8) In order to achieve benefits of ECR, which are the organizational issues, a firmhas to review and re-orient it?

9) What are the salient features of Quick Response System? For what kind ofproduct it has been found to be beneficial and why?

10) Briefly explain the “Accurate Response System”?

11) Which are the technological advances, which have made possible the applicationof concepts like ECR and QR?

12) How the chain relationship can contribute to the success of SCM. Is it necessaryto extend this relationship beyond the chain, to further achieve the objectives ofSCM?

13) Do you think that there is a linkage between SCM and CRM (CustomerRelationship Management)?

14) Can SCM be considered as a strategy for differentiation? If yes, why and howthis should be exploited.


1) Bowersox Donald J. and Closs David J., “Logistical Management- TheIntegrated Supply Chain Management”, McGraw-Hill International Editions,1996

2) Janice H. Hammond and Maura G. Kelly, “ Quick Response in the ApparelIndustry”, Harvard Business School Publishing, Case No.9-690-038, RevApril 24,1991, pp1-19

3) Joan Magretta, “ Fast, global and entrepreneurial: Supply Chain Management,Hong Kong style An Interview with Victor Fung”, Harvard Business Review,September-October 1998, pp103-114

4) Marshall L.Fisher, Janice H.Hammond, Walter R. Obermeyer, and AnanthRaman. “Making supply meet demand in an uncertain world”, HarvardBusiness Review, May-June 1994, pp83-93

5) Marshall L.Fisher. “What is the Right Supply Chain for your product?” HarvardBusiness Review, March-April, 1997, pp: 105-116.

6) Rhonda R. Lummus, Robert J. Vokurka and Karen L. Alber. , “StrategicSupply Chain Planning”, Production and Inventory Management Journal,Third Quarter, 1998, APICS, pp: 49 – 58

7) Robert D. Buzzell, “Vanity Fair Mills- Market Response System”, HarvardBusiness School, Case no.9-593-111, Rev October 12,1993,pp1-31

8) Satyabir Bhattacharya. “Integrated Supply Chain Management – A key toEffective Manufacturing in the next Millennium”, www.indiatoday.com/btoday/200010/plus/.html, 1/1/00, pp: 1-7

9) Sumantra Sengupta and John Turnbull. “ Seamless Optimization of the entiresupply chain”, IIE Solutions, October 1996, pp: 28-33

DESIGN AND MANAGEMENT OF SCM

Unit 4Logistics : Inbound and Outbound 5

Unit 5Models for SCM Integration 25

Unit 6Strategic Supply Chain Management 40

Unit 7Organizing for Global Markets 56

2Block



Chain Management
















December, 2004


ISBN-81-






















BLOCK 2 DESIGN AND MANAGEMENT OFSCM

Unit 4: Logistics - Inbound & Outbound begins with defining Logistics. It portraysthe facets of Logistics i.e. Transportation & Warehousing. It renders Logistics as akey to supply chain management. A talk on the subject of Inbound & OutboundLogistics is initiated. Finally it describes Logistics from supplier to manufacturer &manufacturer to consumers

Unit 5: Models for SCM integration delineates SCM integration & describesstrategies involved in SCM integration. It illustrates models for integrating supply anddemand chain. It characterizes demand management & visualizes real demand. Theunit highlights the relationship between material flow, information flow and cash flow.It finally elucidates Bullwhip effect and illustrates measures to counter them.

Unit 6: Strategic Supply Chain Management thrash out the imperatives for supplychain strategy development. It helps you to be acquainted with the issues in supplychain domain and strategic decisions in the supply chain. It discusses supplieralliances and illustrates supplier quality management and related problems. It alsogives explanation of supply chain re-engineering concept.

Unit 7: Organizing for global markets begin with defining World Class SupplyChain Management (WCSCM) and International SCM. It discusses internationallogistics and globalization. The unit tries to identify the steps to be initiated beforegoing global. It also has a discussion about organization for global markets & globalsourcing. It closes by explaining world-class logistics management & interfacing oflogistics.

4

Design and Management ofSCM

5

Organizing for GlobalMarketsUNIT 4 DESIGN AND MANAGEMENT OF SCM

Objectives

After reading this unit you would be able to:

· define Logistics;

· describe the facets of Logistics i.e. Transportation & Warehousing;

· portray Logistics as a key to supply chain management;

· discuss about Inbound & Outbound Logistics; and

· describe Logistics from supplier to manufacturer & manufacturer to consumers.

Structure

4.1 Introduction

4.2 Logistics: Definition

4.3 What is Supply Chain Management (SCM)?

4.4 Design and Management of SCM

4.5 Logistics: Inbound and Outbound4.5.1 Suppliers to Manufacturers

4.5.2 Manufacturers to Consumers

4.6 Logistics Management

4.7 Integrating Logistics

4.8 Perspectives in Logistics

4.9 Summary



4.1 INTRODUCTION

The role of logistics has for long been perceived by many senior managers and chiefexecutives, as nothing more than getting the right product at the right place in timeand within costs. However, in recent times to be successful logisticians a widerperspective has to be developed with due consideration to the strategic role played bylogistic management in an organization. Strategic management of acquisitions,movement, storage of raw materials, production and shipment to delivery to end-usersare some of the significant tasks of logistics management. Cost-effectiveness andspeed are the inherent requirements to make the operation a successful one.

Logistics is a very intricate yet a very simple subject to learn about, but a verycomplicated subject in case the channels of logistics are not in place and notintegrated. Logistics per se, require a lot of coordination and integration at the highestand the lowest of levels. Rightly said, a logisticians phone never stops ringing, hemoves from crisis to crisis, and from one criticality to another.

4.2 LOGISTICS: DEFINITION

We will begin with an illustration. Take the case of a small time businessman whomanufactured and marketed jam, those were the days when it had only a few brandsto reckon with. It entailed traveling long distances from Calcutta (now Kolkata) to theremotest parts of Bengal & Bihar (some areas of Jharkhand). The load used to be

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huddled up at the rear (body of the vehicle) neatly packed in bright colored cardboardpackages. The manufacturer processed the guavas/mangoes/pine-apple etc into ajelly like substance, bottled them carefully under his eyes, sealed them with moltenwax (that was the practice those days), labeled them, packed them into neatcontainers careful enough to prevent breakages, marked them for the consignor anddispatched them to their destination. The surplus were sent to a badly lit room andstacked neatly by placing bricks under the packages to prevent against damp. Youmust have observed how meticulous he was and so concerned about his products.

One must admit here that one learn logistics in a very practical way. Right from thetime you used your tri-cycle to lug the loads your friends carried. When you played aschildren, unknowingly, stacking your belongings neatly and carefully, inadvertently,and later delivered them to another friend and took a few marbles in return of thoseproud possessions. Till date one is doing almost the same thing; mobilizing men,material, equipment and supplies over long distances across the length and breadth ofthis country, and stocking them for a further use. That is what is logistics in short.

Coming to the proper definition, the term logistics could be used to cover all aspectsof movement, storages of material and to deliver the material to the user. For amanager the definition would mean involving movement of goods both in the inboundand outbound sides. It is responsible for both incoming goods and distribution of goodsto the next member of the supply chain and to the end consumer per se. In almost allcases, the logisticians design and manage the company’s distribution system, whichconsists of warehouses, distribution points and transport systems. Logistics can play amajor role in shaping and determining the nature of the overall corporate response toexploit market opportunities (Deshmukh & Mohanty, 2004). Marketing forecastsprecede exploration of market opportunities, since, overall potential of the market,customer profiles, price/volume combinations and resellers profile is to be identifiedbefore the best suited infrastructure is utilized to maximize the opportunities available.A logistic activity enables a broader view that has to be undertaken on how theavailable opportunity can at best be approached. This would further enable themanagement to review the number of production options available whether it ismanufacturing of components, assembly operations or a combination approach. Theimportant characteristics of this decision process concern the relationship betweenfixed and variable costs ab-initio and also through the product life cycle. This willrequire a view of the markets, the response of the product competitors and anassessment of market risk.

Logistics can make or break a company. How? Once a logistics decision is taken, theimplications of that will be, high level of services in terms of product availability anddelivery. Failure of logistics will affect your company repute and overall affect themarket share. Therefore, in a nutshell one has to understand the importance oflogistics and its related decision, since it’s the key to effective supply chainmanagement, and also the first step towards building a strong market position.

Let us see this through an illustration fig 4.1:

Once you have generally understood the basics of logistics we can now inch forwardto the intricacies involved in making this logistics happen and what helps in asuccessful logistics activity. Like in the army it is said that no war can be won withoutthe foresight and planning of an expert logisticians. A soldier can fight a battle in theadverse of conditions, only when, the logistician ensures timely supply of stores, rationand ammunition in all weather and terrain conditions. The two major aspects oflogistics are transporting and warehousing, without which logistics is seriouslyaffected.

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Organizing for GlobalMarkets

Fig 4.1: Basic Block Diagram to Understand Logistics

Transportation

Transportation happens to be the most fundamental part of strategic logisticmanagement. Transport costs include all costs associated with movement of productsfrom one location to another. The average transport costs ranges from 5 to 6% of therecommended retail price of the product.

Transportation is the movement of products, materials and services from one area toanother, both inbound and outbound. It can also be said as movement from one nodeof the supply chain to the other. As Deshmukh and Mohanty (2004) says, “ byproviding for the swift and uninterrupted flow of products back and forth through thechain, transportation provides a sort of lubrication to run the chain smoothly. It alsopermits deeper penetration of newer markets far from the point of production.”1

Therefore, in order to effectively manage this transportation system the first stepwould be to establish a cost effective transportation mode. In other words highestcustomer service in lowest price, leads to company growth (Fig 4.2).

Fig 4.2 Transportation Cost Factor and it’s bearing on the Company and Customer

1 Mohanty & Deshmukh in Essentials of Supply chain Management, chapter 7, pp. 118-119.

MOVE OF RAWMATERIALS

MOVE OF RAWMATERIALS

BY DIFFERENT MODES OF TRANSPORT

BY DIFFERENT MODES OF TRANSPORT

IN-DIRECT CONSUMERS

OUTLETS

OUTLETS

DIRECT

WAREHOUSING& STORAGE

PRODUCTPROCESSING

40

35

30

25

20

15

10

05

00 05 10 15 20 25 30 35 40

CUSTOMERSATISFACTION

TRANSPORTATION SYSTEM

COST

OPTIMUM

PRODUCT

PRICE LEVEL COMPANY EXPANSION

COMPANY GROWTH

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Where, numerical 40 is a variable factor representing the optimum level in terms ofcosts & growth in X & Y axis. With the transportation costs coming down from 40 to30 the product costs lowers to even between 10 and 5, which is directly proportionalto the customer satisfaction, which rises to 30 to 35 and affects company growthto 40.

Transportation system has a strategic bearing on operation of a company. Therefore,failure to identify the best transportation mode can directly affect the growth of acompany. Higher transport costs will raise prices, which will directly affect thecustomer satisfaction in a negative way. The three factors as mentioned by Gattoma& Walters required to consider are:

····· Customer

· Environment

· Product & company.

Organization, which involves physical movement of goods require transport servicesthat varies from mode to mode. The best suitable mode is required to be identifieddepending upon the nature of product that has to be moved.Therefore, in order toidentify the right transport system the following have to be considered:

· Impact of the transport system on the supply chain.

· Factors that determine the choice of transport mode.

· Who are the customers to your product per se?

· What are the environmental factors?

· What is the product?

· What is your company profile?

· Feedback and reporting both from within and the environment on the choice oftransport, and rectify in case you went wrong the first time.

· Your foresight, flexibility & integration of available resources in planning stagewill be one of the crucial factors that will dictate the choice of transport.

Next we have to see as to what are the considerations that influence transportation?2

Considerations Influencing Transportation

· Customer Communications: in order to obviate delays in transportation andhandling of logistics both the suppliers and distributors are relying more andmore on electronic transfer systems, IT & the internet. This will help inconsiderable reduction in time delays and effect better cooperation between thechains.

· Market Coverage: transportation costs influence the size of markets coveredin a big way. The characteristics are: costs, flexibility, reliability and availability.The product per se will influence the economics of the decision. A low volumeand high value product will be able to support higher costs, which meansextended delivery distances and increase in delivery frequency.

· Sourcing Decisions: the geographical dimension of the source markets can beinfluenced by low cost transportation system, i.e. ‘reliable bulk freight servicescould extend the source markets,’ says Mohanty & Deshmukh. Companiestherefore have to consider a trade off between price & quality and the costsinvolved in delivering to the processing point, i.e. volume & cost oftransportation.

2 Mohanty & Deshmukh in Essentials of SCM, chapter on Transportation in SCM, pp. 119-121.

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· Manufacturing Operations: cost of transporting has a direct bearing on thelocation of the manufacturing market center. That is why, extraction based unitsare close to the source of raw materials and the products related to customersatisfaction are closer home, i.e. near to the customer hub center.

· Pricing Decision: transportation happens to be the important component ofproduct costs. Therefore, selection of the appropriate transportation mode willhave a direct bearing on the product costs per se, with more relevance toexports. Increase in transportation costs increases the product pricing.

· Customer Service Decisions: both customer service policy and transportationdecisions go hand in hand and hence one cannot be considered in isolation of theother. Moreover, the type of market will also dictate the decision and will varyconsiderably. Therefore, its pertinent to overrule the cost factor while servicingthe medical customers, since speed is more important than cost in selecting thetransport mode.

An Effective Selection System

Transport selection can effectively be resolved by adhering to the five stages ofselection framework:3

· Stage I: identification of those factors affecting the choice of transport selection.

· Stage II: categorize the significant factors and identify the potential risks.

· Stage III: determination of the distribution network depending upon the numberand size of the depots.

· Stage IV: application of matrix analysis for selecting the right transport.

· Stage V: measure and monitor costs continuously.

A Decision Framework

Determining an organization’s transport requirement will be based on the followingunderlying considerations:

· The available depots, their sizes including movement requirements of rawmaterials to manufacturing units and finished products to the warehouses and onto the consumers.

· The best choice of mode available depending on the distance involved.

· Product characteristics that will further dictate the type of transport mode to beemployed.

· The choice of equipment in terms of type of transport for each requirement.

· The financial option that could be employed in terms of individual type ofequipment.

· The operation needs in terms of usage of the equipment for maximum utilizationand minimum operational costs.

From the above its evident that transportation is one of the important facets oflogistics and equally important in the process of SCM, because they impact thecustomer services and other areas of cost. These decisions are prominent within thepurview of company logistics decisions due to the factor of trade off potential thatexists between alternative modes of transportation and other logistics functions withinthe firm. Therefore, an understanding of costs and benefits of alternative transportmodes, together with an in-depth evaluation of overall corporate implications ismandatory. Transportation costs will always have a direct bearing on the product

3 Deshmukh & Mohanty in Essentials of SCM, pp130-131.

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costs, i.e. increased transport costs will have risen prices and vice versa. Therefore,appropriate selection of the right transport mode is necessary for optimum customersatisfaction and for a balanced logistics system of the firm.

Warehousing: This happens to be the other important facet of logistics chain andworks side-by-side with transportation. It is that segment of logistics function thatdeals with storage and handling of inventories starting from supplier receipt toconsumption point. The management of this includes the maintenance of accurateand timely information relating to inventory status, location and disbursement. Factorsinfluencing the warehousing decisions are:

· Type of distribution.

· Value of the firm.

· Quantity and potential for obsolescence.

· Competitiveness.

· Economic condition.

Warehousing perform a variety of roles as mentioned below:

· Material handling. It consists of receiving, storing and shipping.

· Storage. This maximizes customer services by improving product and locationpositioning.

· Transfer of information. This ensures timely and accurate information oninventory status, space utilization, equipment and manpower availability andtransport capacity.

In order to develop an effective warehousing strategy the following areas have to beaddressed:

· Documentation of existing warehouses operations.

· Documentation of the storage facilities and put forth requirements over theplanning horizon.

· Identify the shortfalls within the warehouses that are available including thedeficiencies.

· Alternate warehousing plans to meet contingencies in strategy.

· Selection of the best alternative.

· Update the warehouse strategic plan.

With that as a backdrop to our study let us see the design and management of SupplyChain Management, since logistics happens to be the key of SCM.

4.3 WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)?

A simple definition would be; an integrated, synchronized and a closely knitted chainwhich links all the supply interacting organization in a two way communication systemin order to maintain a high quality of inventory in the most effective manner.Managers at all levels should understand this, since this is related closely to world-class supply management. It can also be defined as:

· An integrated system that helps in managing the flow of distribution channelfrom supplier to the consumers.

· SCM is a systematic method designed to manage the flow of information,materials and services both inbound and outbound, i.e. from the supplier tomanufacturer to the end customers.

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· It’s a strategic coordination of all the related business functions within aparticular firm and across businesses within the supply chain, in order to improveperformance of the individual companies and of the supply chain.

· It is associated with all the activities encompassing the upward and downwardmovement of goods and materials from the nascent stage to the productionstage and to the consumer. SCM is integrating these activities under one controlfor better management and for attaining substantial and sustainable advantage.It can be better achieved through better coordination and relationship.

· It’s a concerted effort of all in the channel to develop, design, manage andimplement value added services towards ultimate customer satisfaction.Integrating men, technology, information, finances and material under one roof isthe ultimate aim of this SCM system.

These varied definitions placed above are to guide you to understand the concept ofSCM better and can be used as per individual perception. The common factor to allthis is one has to go beyond the realms of traditional functioning to include andintegrate external entities to include customers and suppliers.

For better assimilation let us put it across this way.

The Chocolate Way

You manufacture a particular brand of chocolate, a popular one with all age groups.Now, in order to make your product responsive and hold fast into the competitivemarket you got to maintain a close link with suppliers who will provide the best milk

Fig. 4.3 : A Layout of An Ideal Processing Unit Explaining the Supply Chain

SUPPLIERS PRODUCT DESIGNER

PRODUCT MANAGER

MANUFACTURERWORK FORCE

PROCESSINGUNIT

FINISHED PRODUCTCHOCOLATES

TRANSPORT SYSTEM

LABELLERS

PRICINGCONTROL

TRANSPORT SYSTEM

DISTRIBUTORS

CONSUMERS

DISTRIBUTORS DISTRIBUTORS

MILK

SUGAR

COCOA

BUTTER FAT

SALT

TRANSPORTSYSTEM

COMPANY MANAGEMENT

WAREHOUSESSTOCKISTS

CONSUMERS CONSUMERS CONSUMERS

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for your money, the best coca powder for the flavor, an efficient product managerwith an equally trained staff who will design and manufacture what the marketrequires, an effective marketing system and above all the vendor who will carry itand distribute it to my consumers. This is your supply chain and managing this tomaintain a high quality at all times is called the supply chain management.

It is a linkage, so designed, that one cannot function with out the other and all have tofunction in close unison and you, as the entrepreneur has to ensure this. It involves awell conceived strategic planning and long-term tactical orientation, and there is aworld of difference between practicing and preaching.

A few flow diagrams have been placed for your better understanding. Once youhave understood this part of the unit the associated and related matters to supplychain will follow suit, (figure 4.3).

Activity 1

Visit a nearby industry and understand the SCM system being followed in thatorganization and co-relate the same with what you have learnt theoretically.

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4.4 DESIGN AND MANAGEMENT OF SCM

Internal functions and external suppliers constitute a company’s supply system, whichare involved in identification and fulfillment of requirement for equipment, materialsand key services in an optimized manner. Supply management is the foundation tosuccessful supply chain management. It can create a tremendous impact on anycompany’s bottom line more than any other business function. In case the supplychain is not positively been addressed there is bound to be problems in the firm.Integration of these services and managing them under one head is therefore the keyto an effective supply chain system in the organization.

The principle phases of supply chain management are:

· What are the requirements and its generation?

· Sourcing

· Pricing

· Post-award activities

These phases are all interrelated and interdependent and cannot function in isolation.The generation of requirement phase is the most important of all the phases, since;almost 85% of the cost of materials, services and equipment is designed during thisphase. However, the irony is that supply management is not a contributor to thisphase in particular but assumes greater role for the next three phases, i.e. sourcing,pricing and post award activities4 .

1 World Class Supply management by Burt, Dobler & Starling Tata Mc Graw-Hill page 2.

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Let us now see the four phases of supply management and how best can this beobtained by interfacing each one of them with the other.

Generation of Requirements

As an entrepreneur what is your requirement, and how do you get them? It is aquestion that is continuously lingering in the minds of all managers involved with this.It is a critical activity that terminates in identifying the right and the best materialalong with development of specifications and statements of work that describe theserequirements. The exodus of materials, services and equipments are ‘designed in’during this particular phase5 , to the tune of almost 85%. Therefore in order to ensureappropriate consideration to the services, raw materials and costs per se, supplymanagement should be involved right from the word go during generation ofrequirement phase.

Sourcing

When one decides to go shopping just try and visualize what all plays up in one’smind? Say, you have to buy a Music System for example. Then what? The mentalappreciation quickly says thems following:

· Budget: How much money can you spend on a system?

· Brand: Which is the best brand available in the market for the budget you have?

· Availability: Is it readily available too?

· Services: In case it is available how are its after sales services?

· Final selection: What is the best that suits all the above?

That is exactly the appreciation one got to do before sourcing. Identifying andselection of the best supplier available in the market, whose costs, materials,dependability, quality and services suits the manufacturers requirements. Sourcing isdevelopment of a supply alliance, and it is an activity by itself.6

Pricing

It’s a two way traffic aimed both at the supplier and the manufacturer. It’s done insuch a way that it benefits the supplier for its effort and also results in lowest cost forthe firm who buys the supplies. Keeping in mind inflationary trends, pricing formspart of the on-going process in supply management with inbuilt negotiations, to arriveat the best deal possible. If the supplies are costly the price of the commodity alsorises. Therefore, in order to strike a balance the job of supply management is tocontinuously monitor this aspect so as to keep the prices from rising. For example,when the prices of diesel goes up, the transportation cost increases leading toincrease in prices of supply. Foresight and planning on the part of the manufacturerplays a leading role in assessing and reacting to such eventualities in a big way.

Post pricing

This is another important phase which ensures that the firm receives what itdemanded, and that too timely. It also ensures that the prices are in check and thatquality is being maintained. This also includes supplier developments, criticalitiesmanagement, technical assistance and management of the complete contract.

That is what are the principal phases of supply chain management (SCM). All thesub phases are inter-related and managed under one head the SCM systems. Let ussee this more closely with this block diagram.

5 “Manufacturing by Design” by D Whitney, Harvard Business Review, July 1988, pp. 83-91

6 ‘The Foundation’, chapter 1 of WCSM, by Burt, pp. 16.

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Fig 4.4: The Principles and Phases of SCM

4.5 LOGISTICS : INBOUND AND OUTBOUND

Let us now take a closer look at the logistics both inbound and outbound. Let metell you this is the most intricate part of the system of SCM. If your goods don’treach in time and they are of inferior quality you as an entrepreneur earn a badname too. So why give the consumer a chance? Plan it in a way that youensure both quality and quantity in a reasonable time frame. Take for example7 days trucker’s strike in 2004. It was bad for economy of the country andabove all worse for those manufacturer’s who couldn’t deliver goods on time. Astrike or a bandh as we call it in India is a happy situation for the fleet ownersbut a bad time for the drivers, mill owners, small timers, labourer, suppliers,manufacturers and the consumers. That is the reason contingency planning playsa predominant role in shaping our SCM system. How, let us see.

4.5.1 Suppliers to Manufacturers

The most complicated, yet, the most important phase in any production is themovement of raw materials from the supply point by the suppliers to themanufacturing unit. Identification of the right type of suppliers is therefore thekey to effective SCM system.

Can you envisage the various agencies and steps that are involved in this totalsystem? Let us see them one by one.

· What is the raw material that has to be moved?

· What is the cheapest and the best available with the suppliers?

· Where is it available?

· What are the credentials of the supplier?

· What is the mode of transport being utilized for the move?

· Is it cost effective?

MATERIALS SERVICES COSTS

TIMEQUALITY

TECHNOLOGYSTATEMENTS OF WORK SPECIFICATIONS

POST-PRICING

QUALITY

QUANTITY

TIMELY PRICE CONTROL

LOWEST COST TO FIRM

PRICING

SOURCINGGENERATION OF REQUIREMENT

APPROPRIATE COST TO SUPPLIER

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· What is the time factor involved in the movement?

· Does weather and climate play a predominant role in moving the rawmaterial?

· What are the terrain conditions in the areas from where it has to bemoved?

· What is the distance involved?

· Is it of acceptable quality?

All these have to be addressed before one plans for movement of these rawmaterials, that too in great detail. That is what is an effective SCM system to befollowed by every firm. Let us see this with an illustration.

An Illustration

A material ‘X’ has to move from Bihar, which is famous for lot of ores and rawmaterials responsible in shaping our products. Let me be more specific in sayingso. Some minerals from Sasaram have to be moved to Surat in Gujarat formaking some product ‘Y’. The road distance works out close to approximately1600 kilometers, quite a lot as per Indian standards. A truck loaded with Xleaves Sasaram on D-day (where D is 1). As per Indian road conditions it couldtake anything between 3 to 4 days for the material to reach. Therefore the totaltime works out to D+3/D+4, i.e. 4th/5th day the truck will reach Surat. Unloadingtime ½ a day, running time works out to 4 ½ /5 ½ days. Thereafter qualitychecks and various processes to place these raw materials on the production linewill take another 2 days works out to 6 ½ /7 ½ days. Production time of 1 to 2days depending on the type of product works out to 7 ½ / 8 ½ days. Keeping acushion of 1 day the time taken for the finished product will be anything between9 to 10 days. That is the planning involved in making a finished product andachieving your target. That is under absolute ideal conditions. India is subjected tonumerous disruptions in form of natural calamities, man made obstacles, disasters,accidents and unrest. One has to cater for these criticalities and thereforeforesight in planning is must. Suppose there is flood like situation at Sasaram,then what? One has to plan for warehousing near Surat where certain stockscatering to these kinds of contingencies have to be catered for, ab-initio. Likefloods there could be strikes and bandh too. These are the gray areas that haveto be addressed in totality, apart from the fact that the vehicle could also breakdown en-route. There could be a number of examples related to movement ofstocks and supplies, be it rail, water, road or air. All have their complexities andpeculiarities, but the underlying basics are the same one has to plan ahead comewhat may, to avoid irregularities.

Table 4.1: Terrain-wise Criticalities

Criticalities

GoingConditions

Time Factor

Prone To

Repair &Recovery

Calamities

Mountains

Hilly roads,Bends & Zigs

Slow

Severeaccidents,Losses insupplies

Difficult,Frequentbreakdown

Road Blocks,Slides, FlashFloods

Plains

Smooth Going,Faster mode

Fastest

Lessermagnitude, butCannot be ruledout

Available inplenty

Floods, bandhs,riots & strikes

Desert

A mix of good andbad going

Medium

Rare but at timesover speeding resultsIn damages

Repair facilityrestricted tohighways only

Very rare, sincepopulation centersare far apart

Link Roads

Rough and slow

Very slow

Loots, bandh andStrike, AccidentsRelated topopulation

Rare, prone tosevere breakdowns

Frequentdisruptions owingto congestion ofpopulation centers

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Movement of supplies from suppliers to manufacturers differs from place toplace. Terrain plays a predominant role in this aspect and you have to realize thispoint. In mountains the criticalities are far too many and you can understand theaforesaid through this chart in a better way.

From the above it’s evident that criticalities in any form disrupts movement in a bigway irrespective of the terrain but you got to plan your time schedule depending onthe terrain on which your supplies are moving. Therefore, knowledge on these areasis very important so that the suppliers cannot take you for granted on these counts.Studies on geography and layout of an area of responsibility and related aspects aretherefore important for a manager dealing with logistics.

Activity 2

Study the aspects of terrain and its implications on logistics management. Visit a fewplaces in the hilly and mountainous terrain and understand the implication of theseareas on logistics management.

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Differences in Urban and Rural Areas

India is one such country, which enjoys a rare mix of both urban and rural pockets atregular intervals. Rural areas require tremendous amount of logistics supply andcoordination to make the SCM system effective. That is the lay of Indian society andhence one has to understand and be live to the problem. Actually most of our suppliesmove generally from these rural areas and hence you should be aware of these areasin a nutshell. Let us discuss them for a while.

The various criticalities pertaining to logistics in rural areas are:

· Large quantities and more number of collection points.

· Distance between the manufacturers and users are large.

· Materials are bulky, perishable, and expendable and have inferior packaging.

· Certain places have to be communicated through handcarts, tractors, boats,cycles and bullock carts.

· Trips are generally one-way and hence not cost effective.

· Uniformity in work is missing, since; logistics are restricted to peak seasonsonly.

· A mix of intermediaries and direct delivery.

· Storage, movement and packaging of agro products are difficult and timeconsuming.

There are many more to this depending upon the nature of terrain and climaticconditions too, but these are the salient ones and you as a manager have tounderstand this aspect. Trading in rural areas is difficult and risky too.

Storage in rural areas is another criticality due to restriction in storage areas andbecause the agro produces are seasonal in nature. These are to be consumed roundthe year, both in season and off-season. Storage starts right from the time the harvestis ready till its distributed to the consumers. The various storage places available are:

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· At the farm itself.

· Village collection centers/collection points.

· With the processor.

· Wholesaler.

· Bins and self-help store rooms under stringent conditions.

· Retailer.

· Market place/selling points.

The shelf life of these items generally the farm produce are very less and henceplanned infrastructure has to be developed for proper storage facility like the coldrooms.

Transport in these areas is still primitive in nature; starting from bullock carts,cycles, hand carts, rickshaw van, boats, animal transport and even stragglers.This is due to bad roads and roads connectivity. India has one of the largest roadnetworks in the world with approximately 2.5 million kilometers of road network.National highway accounts to nearly 5200 km, which is barely 2% of the totalroads in the country. Actually movement of goods from rural areas becomesexpensive due to its handling costs and number of organizations involved in it. Letus see it with an illustration.

Fig 4.5: Rural Area SCM System

Activity 3

As a student of Logistics suggest a few practical viewpoints, which differs urbanfrom rural logistics, both in terms of management and maintenance. Organize avisit to a rural area factory and carry out a feasibility study on how logistics canbe improved for better response.

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A RURAL AREA SCM SYSTEM: DEPICTING MOVES OF GOODS SOURCES TO THE MARKET PLACEEX

CONSUMERS

MARKETPLACE

PRODUCE

SOURCE

ROADS

WAREHOURSES

GOODS

CENTRAL POINTS

FACTORIES

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Urban Areas

Coming on to urban areas, the process is certainly different since; it doesn’t haveto go through the exercise of moving through bad roads too often and poorstorage system. Things move more systematically and less time consuming,though at times the carriers perforce move through difficult stretches of ruralareas, generally a mix of urban and rural areas. What happens in urban areas?Let us see.

· The procurement is done generally closer home and very near to the townsand cities.

· The supplier’s job is to supply the goods in the time frame and price that isfixed initially.

· The company management generally contacts the supplier who has nominatedgo-downs close to the place of manufacture, for better and even timemanagement.

· Unlike rural areas the suppliers in the fastest mode deliver the material andservices in order to save on time; a combination of rail, air and road atplaces even waterways.

· Manufacturing takes lesser time in production and distribution thereafter.

· A better market available to the manufacturer for his goods.

From the above it’s evident that a manufacturer in the rural area stands at adisadvantage visa-vie his urban counterpart for the following reasons:

· Movement of raw materials.

· Transport system.

· Storage facility.

· Production.

· Preservation.

· Distance from source to market area.

· Availability of market.

In a nutshell the SCM involved in managing a rural enterprise is more cumbersomethan the urban one.

4.5.2 Manufacturers to Consumers

Let us now visualize the various stages involved in moving the finished productsfrom the manufacturing units to the consumers. They are:

· Packaging of goods.

· Stocking them in warehouses/containerization.

· Loading into carriers/transportation.

· Delivery to the nearest wholesalers.

· Wholesalers to retailers.

· Retailers to market places/stores.

· To consumers.

These 7 steps are like any of those 7 days. It’s difficult to skip one to save onanother. Yes, there are direct marketing that the companies are following thesedays, but they are numbered. But the basic stages of these companies too movethrough pre-designated franchises and not directly. Hence, the time taken or costper se generally remain the same.

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Problems envisaged in movement of products from manufacturing units toconsumers are many and can be listed as under:

· Perishable products.

· Losses in transit.

· Accidents and calamities.

· Unavoidable delays in terms of strikes and bandh.

· Labor unrest.

· Rats and rodents.

· Breakages during handling.

· General costing since at times even double handling is involved.

Let us see this with the help of a diagram, (figure 4.6).

Fig. 4.6: Problems Involved in Logistics Support

From the above it’s evident that labor’s unrest is generally common in thecomplete process and an effective SCM in position can only help reducing thesemiscalculations and criticalities. Natural calamities and strikes do pose a problemfor the manufacturer and indirectly increases the cost of items ultimatelyavailable to the consumers. What is therefore your ultimate aim in this process ofSCM? It’s the response of the consumer for whom you made this happen, andside-by-side what is the effect of the problems and criticalities on your product?It affects the costing per se, and this is what is shown in the diagram above(Fig.4.6).

Logistics both inbound and outbound is very intricate in nature. A consumersitting at the comfort of the room cannot virtually visualize how a packet oftoothpaste reaches him every time he uses it. What actually happens on groundcan only be realized by him who makes it happen that way. Once you startthinking on it the various questions that arise are:

RESPONSE OF THE CONSUMERS

EFFECT ONCOSTING

TRANSPORTSYSTEM

MANUFACTURING UNITS

PILFERAGE

NATURALCALAMITIES

MARKETS/STORESCONSUMERS

LABOUR UNRESTULTIMATE AIM

WAREHOUSES RIOTS & STRIKES

PERISHABLE

WHOLESALERS BREAKAGES

LOSSES

RATS & RODENTS

RETAILERS

DISTRIBUTORS

20


· Where does the raw material come from?

· Who supplies it to you?

· What is the best course available to you in procuring the right material within the cost per se from the available options? Who decides on that? Youand the management.

· How is the material moved and where to?

· How do you store this?

· What are the various contingencies involved in this?

· What if the stores don’t reach on time? What is the option available to you?

· What would be the losses in production?

· What would be the losses in packaging?

· If the production channel breaks down, then what?

· How do you transport the finished goods in the time frame available to you?

· How will your marketer’s distribute or market the products?

· What will be the response of the consumers to your product, your ultimateaim?

All of the above are interlinked and have a direct bearing on the net output ofthe firm. An effective SCM system in place wards off any such minorshortcomings that can run into problems and criticalities later.

4.6 LOGISTICS MANAGEMENT

Before we went on to this let us see the triangle that is formed in the supplychain management (SCM).

Fig. 4.7: Three Components of SCM

The three critical components of SCM are:

· Supply management

· Demand management

· Logistics management

You would learn about the supply and demand part of SCM in next unit andwould discuss on logistics part of it now. As discussed earlier that the logisticsprofessionals play a vital role in shaping the success of SCM as regards

DEMANDMANAGEMENT

LOGISTICSMANAGEMENT

21


management of transportation, storage and warehousing. We sometimes do tendto ignore the role of logistics but the supply and demand chain cannot be metwithout the integrated and close-knit support of the logistics.

Logistics management deals with receiving, handling, movement, storage anddelivery of material, services and finished product in an SCM system. Logistics isrequired both at the beginning and at the end of it. (Fig 4.8)

Fig 4.8: Domain of Logistics

As Coyle puts it, “ logistics is the part of supply chain process that plans,implements and controls the efficient, effective flow & storage of goods, servicesand related information from point of origin to point of consumption for thepurpose of conforming to consumer requirements”. Logistics include the followingrole (Fig 4.9)

Fig 4.9: Role of Logistics

An effective SCM system will never be possible without the integration oflogistics, since logistics is the foundation of SCM discipline and is responsible forits activities. Needless to mention here is that the transportation cost is the

RECIEPT HANDLING MOVEMENT STORAGE

DELIVERY

TO CONSUMERS

TOMANUFACTURER

ROLEOF LOGISTICS

SERVICE SUPPORTDEMAND FORECAST

WAREHOUSING &STORAGE TO INCLUDE

INFRASTRUCTURE

TRAFFIC CONTROL &TRANSPORT

MANAGEMENT

SALVAGEMANAGEMENT &

DISPOSAL

MATERIALSMANAGEMENT &

HANDLING

INVENTORYCONTROL &

MANAGEMENT

22


heaviest in the entire chain, and even more than product selling prices. Therefore,in order to maximize customer satisfaction and meeting firm’s goal it ismandatory to ensure that effective storage facilities for goods and services are inplace.

4.7 INTEGRATING LOGISTICS

Logistics planning has to be integrated with material and capacity planning inorder to achieve maximum and optimum level of satisfaction. The needs andrequirements of our customers is variable and never a constant factor, therefore,in order to serve them better and be profitable you got to tailor your logistics andensure it to be more dynamic with passing time. The emphasis should be onreduction of cycle time and elimination of waste in order to increase customersatisfaction. You have to understand that movement of goods, warehousing ofmaterials and delivery is time consuming and at times requires precisionsynchronization at all levels i.e. from supplier to manufacturer and frommanufacturer to consumer.

Illustration

Can you visualize the effort involved in moving crackers from Shivakasi in TamilNadu to Kolkata? A child who burst these crackers only have to demand them,and you as the guardian have to procure them from the shop, which sells these.Where does the shopkeeper get it? He gets from the wholesaler, and thewholesaler from the distributor/stockiest of that area. How does the company Xstock the stockiest? The crackers are packed at Shivakasi and loaded in carriers,depending upon the time it has to reach and the time in hand before it isrequired. In case the planning fails the crackers will land up after Diwali to thedismay of many. That’s dead stock and is of no use to the consumer.

Therefore, logistics involves procuring and transporting of the raw materialsrequired to make firecrackers from the source to the manufacturer and onceagain tran-shifting the finished products to the warehouses near to the targetarea, so that closer to the festival the crackers could be utilized at once. Whenthis is happening another set of crackers are in the process of moving fromShivakasi for the target area to meet any contingency. What if the warehousecatches fire? That actually depends on the demand per se and supply thereof,which we shall see in the follow up unit.

From the above it’s seen, as to what all gets involved in movement offirecrackers, from the source to the consumer, and how logistics play apredominant role in assisting the products to reach the consumers in time.

4.8 PERSPECTIVES IN LOGISTICS

One has to continuously think and think rightly to get over the routine criticalitiesthat are involved with logistics. Theory will surely help you to understand theguidelines involved in logistics, but unless you understand the practical aspectsand device methods to tackle them, you will find yourself in a quandary eachtime, when faced with a criticality. Certain newer perspective in logisticsplanning and execution could be as enumerated below.

· Produce at Source: This will involve production near to the source of rawmaterial and cheap labor. It will also involve lesser movement of transportand reduce double handling to a large extent. There are other disadvantages

23


in this though, like distance from the target population, which will involvemore number of stocking points and areas. But, this can reduce the basiccost of production considerably.

· Fleet Management: Can you think of managing your own set of transport?Yes, certainly you can. Thinking of additional costs and expenditure? Yes,there are. But, certainly not more than hiring and facing the problems oftrucker’s strike, and incessant rise of carriage charges. Maintaining a fleet iscumbersome today, but if you can maintain a good sixty vehicles along witha minor repair organization, it will help you immensely on a rainy day. Youhave something to call your own.

Integration of logistics network. Logistics have to be integrated with the others inthe firm for a better coordination. How? Let us see with the help of a figure.

Fig. 4.10: Showing An Integrated Logistics Organization And Inherent Reporting

Activity 4

Suggest a new perspective to logistics management keeping in mind the presentchanging logistics scenario.

..............................................................................................................................

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..............................................................................................................................

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4.9 SUMMARY

Logistics plays a predominant role in designing and shaping of SCM in a firm.Without an effective logistics system the effectiveness of the firms SCM channelis questionable. Logistic activity helps in enabling a broader view to be taken forhandling the best available opportunity and how it is to be approached. If weunderstand and know the economics of logistics activities it is possible to reviewa number of production options that may include individual production(manufacturing of all components), assembling, or an ideal combo approach. Thekey players of logistics activity that is transportation and warehousing has beenamply discussed and will enable you to understand the nuances of selecting theright transport mode for the right product and equipment within the overall gambit

CHIEF LOGISTICS OFFICER (CLO)

DY MANAGING DIRECTOR /CEO

MANAGER STORES

COSTING FINANCES

INVENTORY CONTROL DELIVERY CONTROL WING

TRANSPORT MANAGER

SPARES & SERVICES

SUPPLY OFFICER

PROCUREMENT WING

24


of cost effectiveness. We have discussed the issues pertaining to move oflogistics both in-bound and out-bound in the Indian scenario, within the scope ofthis unit per se. Last but not the least, we have understood the designing andmanagement of SCM and the key to effective SCM, the logistics.


1) Define logistics and elucidate with appropriate examples in the Indiancontext.

2) Explain the various factors of logistics with special reference totransportation.

3) What are the stages for selection the appropriate transport mode and why?

4) Why is transportation important in a firm’s supply chain?

5) What is more important-inbound or outbound logistics in a supply chain?

6) Give relevant examples of the problems involved in logistics activity. Howcan we overcome them?

7) What is a supply chain and what is effective SCM?

8) What are the factors that link supply chain?


1) Krishnaveni Muthiah (2003), Logistics Management & World Sea-borneTrade, Himalaya Publishing House, Mumbai (for basics of Logistics &marketing interface)

2) Deshmukh & Mohanty(2004), Essentials of SCM , Jaico Publishing House,Mumbai (should be included in compulsory reading, since the text pertains toIndian context, simple and easy to comprehend)

3) Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edith (2004), DesigningAnd Managing The Supply Chain, Tata McGraw-Hill

4) Mentzer, Fundamentals of Supply Chain Management, Sage IndiaPublishers

5) Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-Hill

6) D Whitney (1988), Manufacturing by Design, Harvard Business Review,July 1988, pp. 83-91.

25

Organizing for GlobalMarketsUNIT 5 MODELS FOR SCM INTEGRATION

Objectives

· define SCM integration & describe strategies involved in SCM integration;

· illustrate models for integrating supply and demand chain;

· define demand management & visualize real demand;

· highlight the relationship between material flow, information flow and cashflow; and

· elucidate Bullwhip effect and illustrate measures to counter them.

Structure

5.1 Introduction

5.2 Integrated Supply Chain/ Value Chain

5.3 Supply Chain Strategies

5.3.1 Push Based Supply Chain

5.3.2 Pull Based Supply Chain

5.3.3 Push-Pull Strategy

5.4 Demand Management

5.5 Internet and SCM

5.6 Physical Goods Flow, Virtual Flow and Cash Flow

5.7 Bullwhip Effect

5.8 A New Perspective to Counter Bullwhip Effect

5.9 Drivers of SCM

5.10 Summary



5.1 INTRODUCTION

The main objective of the supply chain concept is to integrate and synchronizethe service requirements of the consumer/customer with the flow of materialsfrom suppliers in such a way that any conflicting or contradictory situation risingcan be balanced out. These conflicts could be like, high customer service, lowinventory investment and low operating cost. These have to be balanced oroptimized, and therefore, various models have been proposed over the years inorder to integrate the SCM systems, for example Stevens Model (1989), whichproposes a balance in the supply chain involving functional trade-off. Supply chainmanagement revolves around efficient integration of suppliers, manufacturers,warehouses and stores. The main challenge being coordination of the activitieswithin the chain and across it for improved performance, reduced costs, increasedservice level, reduced bullwhip effect, resource utilization, and effective responseto market changes. Companies have realized over a period of time thatintegrating the front-end of supply chain, customer requirements/demands, to theback-end of the supply chain, the production and manufacturing portions of thesupply chain.1

1 Designing and managing the Supply Chain by Simchi Levi etal, TMH, p. 120

26


Development of an integrated supply chain requires management of material andinformation flows to be viewed from three perspectives:

· Strategic

· Tactical

· Operational.

At each of these levels, there has to be utmost coordination and harmonizationbetween the finance, information, material, facilities, people and the system as awhole. Let us see these perspectives one by one.

5.2 INTEGRATED SUPPLY CHAIN/VALUE CHAIN

Integration of Supply Chain & Demand Chain can be seen from three angles asfollows:

Strategic Level: What should be the focus at the strategic level?

· What are the objectives and policies for the supply chain and how can theybe developed to achieve competitive superiority?

· How to develop the physical components of the supply chain?

· How to develop the statement of customer service intent by the productmarket, customer group or by a large customer?

Purchasing

Material Flow Customer Service

Material control Production Sales Distribution

Material Management Manufacturing Management

Material Flow

Distribution


Material Management Manufacturing Management Distribution


Suppliers Internal Supply Chain Customers

Stage 1: Baseline, Elevation Principally Technology Based

Stage 2: Functional Integration Elevation Organization Based

Stage 3 Internal Integration - Elevation Attitude Based

Stage 4 External Integration

Fig 5.1: Steven’s Model of Supply Chain Integration

27


· Developing an organizational structure capable of bridging the functionalhurdles, thereby ensuring an integrated value delivery based supply chain.

Tactical Level: This focuses on the means by which the strategic objectivescould be achieved. The various objectives for each element in the supply chainprovide the directions for achieving the balance within the supply chain. Itinvolves identifying the necessary resources with which the balance could beachieved.

Operational Level: the implementation level in the model, and aims atconverting the objectives and policies so formulated into workable solutions. Thisis also the supply chain development phase and the strategy and plans forimplementation are evolved. Implementation plans require a time-phased programfor allocation of resources all through the supply chain. (Fig 5.1).

Steven’s comment concerning supply chain development is equally interesting,which says while the impetus for the development of the strategy may be a top-down approach; its success is likely to be achieved by a bottom-up approach.The same is highlighted in the fig 5.1 (Stevens 1989):

· Stage 1 is a situation in which the company approaches the supply chaintasks in discrete decisions with a responsibility lodged in each of the taskcenters. The result is usually a lack of control across the supply chainfunction because of organizational boundaries preventing the coordinateddecisions from achieving an overall customer service objective.

· Stage 2 of development is denoted by the functional integration of theinward flow of goods through material management, manufacturingmanagement and distribution. The emphasis is mainly on cost reductionrather than on performance achievement and is focused on the discretebusiness functions with certain attempts at achieving internal trade-offbetween purchasing discounts and inventory investment, and also plantoperating costs and batch volumes. Customer service is reactive in this case.

· Stage 3 accepts the necessity of managing the flow of goods to thecustomer by integrating the internal activities. In this stage, the integratedplanning is achieved by using the distribution requirement planning (DRP),JIT (just in time), manufacturing techniques, etc. This stage is essentialbefore the company can consider integrating customer demand in an overalldemand management activity. IT is an effective enabler for this process.

· Stage 4 extends the integration to external activities. While doing so, thecompany becomes customer oriented by linking the customer procurementactivities with its own procurement and marketing activities.2

The concept of value chain/supply chain management approach enables acompany to react effectively to market swings and changes. However, in orderto get the optimum potential, a connection and inter-relationship between thecomponents of the supply chain has to be established and an integrated chainformed for utmost customer satisfaction, i.e. cost-effective product.

5.3 SUPPLY CHAIN STRATEGIES

The various strategies that has to be followed for an effective integration are:

· Push & pull

· Push-pull

2 Mohanty & Deshmukh in Essentials of SCM, JAICO, 2004, pp. 8-10.3 Supply chain integration by Kaminsky, TMH pp. 120-122

28


5.3.1 Push Based Supply Chain

Long-term forecasts are the backbone of a push-based supply chain model, asregards the production and the distribution decisions are concerned. Typicallythough, the manufacturer bases demand forecasts in orders received from theretailer’s warehouses. Therefore, it takes much longer for the push based supplychain to react to the changing marketplace, which may lead to3

· Inability to meet changing demand patterns.

· The obsolescence of supply chain inventory as demand for certain productsdisappears.

Actually, the bullwhip effect leads to under utilization of resources, becauseplanning and managing is (to be discussed later in this block) more difficult. Forexample a production manager is in quandary as to how to discern productioncapacity. Should it be based on peak demand or average demand? Similarly it isnot clear as to how to determine the transportation aspects, based on average orpeak demand? Therefore, a push based chain we find extra transportation costs,higher inventory levels and higher manufacturing costs, due to need foremergency production change-overs.

5.3.2 Pull Based Supply Chain

In this type of supply chain the production and distribution is based on demandsso that it can be effectively coordinated with true customer requirements ratherthan forecasts. Inventory in on firms following the pull system is negligible and itresponds only to orders per se. This is further coupled with fast information flowmechanisms on customer demands to the various components of the supply chain.This system is more attractive in nature because, it leads to:

· A lesser lead-time, since better anticipation is made on customer demandsand the retailers

· Lesser inventory with the retailers

· A decrease in variability due to reduction in lead-time

· Decreased inventory with manufacturer due to reduction in variability.

In a pull based supply chain there is considerable reduction in inventory, enhancedresource management and a comparable reduction in system costs to push basedsystem. At the same time, pull based systems are difficult to implement whenlead-time are long and it is not practical to react to the demand information.Moreover, since the systems are not planned well in time it’s difficult to takeadvantage of economics of scale in manufacturing and transportation. Takingthese advantages and disadvantages into consideration the companies haveformulated a new system ‘the push-pull’ system, i.e. an integration of push andpull system.

5.3.3 Push-pull Strategy

This is an ideal mix of both push and pull strategy in which the first half of thesystem is based on push method and the remaining half as pull based. Theinterface between the two models is push-pull boundary. In order to comprehendthe strategy better you have to consider the supply chain time line, that is, thetime that elapses between procurement of raw materials and the delivery to thecustomer, the end of the time line. The push-pull boundary, exists somewhere inbetween this time line and denotes the time when the company switches fromone strategy to the other as illustrated in figure 5.2.

3 Supply chain integration by Simchi Levi etal, TMH pp. 120-122

29


Consider a computer manufacturer, who builds to stock and thus makes allproduction and distribution decisions based on forecast. This is a push system.Whereas, push-pull strategy is one in which manufacturer builds to order, whichimplies that component inventory is based on forecast and final assembly is inresponse to specific customer request. Therefore, the push system is prior toassembly and the pull system starts with assembling till delivery of the product.The push-pull boundary is prior to assembly.

Fig. 5.2: The Push-Pull Supply Chain System

Activity 1

Visit a company and analyze the SCM strategy being followed in the light ofpresent trends worldwide and justify your observation, with suitable case studies.

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5.4 DEMAND MANAGEMENT

Why do we require demand management? It’s primarily required sinceaccumulation of inventories amounting to millions in the supply chain showsabsence of demand management in the total system. “Demand management’simperative of forecast error reconciliation with the actual order rate of anenterprise is one of the most overlooked potentials in the successful managementof inventory levels, customer satisfaction, staffing strategies and facilitiesexpansion or contraction”.4

An Example to Elucidate Forecast Accuracy

You are part of a counseling class on SCM at IGNOU that meets every daybetween 1800 hours to 2000 hours. Let the topic of discussion be forecastaccuracy. The counselor asks you approximately as to where will you be oneweek from now at 2130 hours. You respond by saying 90% you will be here forthe class, with a 10% possibility of getting tied down to family commitments.

4 WCDM, from World Class Supply Management by Burt, Dobler & Starling, TMH, Chapter 8, pp. 624-626.

START TIME

PUSH STRATEGY

PROCUREMENT OF RAWMATERIALS

DELIVERY TO CUSTOMER

PULL STRATEGY

PUSH-PULLBOUNDARY END TIME

30


The next question of the counselor will be, with that in mind where will you be4 years from now, at the same time?

You are partly speechless, and say “well one cannot be too sure and probably Iwill graduate from IGNOU with a degree in SCM and will be trying to copewith a job in hand.” The counselor adds on by saying, how sure can you be ofthat? “ Not to sure perhaps I will be where I presume to be at that point intime.”

So that is what it is just try and visualize how difficult it is for the firms toforecast future demand for their product and services. It is quite akin to thepolicy on trees plantation adopted by certain firms a few years back, where youpurchased trees today and expect a hike 20 years from now, without actuallyforecasting what is going to be the condition of the sapling planted today after 20years. The firms actually utilized the concept of forecast demand in a reversingorder and made the consumer/customer go in circles over own probability errors,which they miscalculated. The company had done their homework pretty well toconvince you on this aspect, but you as the customer didn’t predict the future toowell. That is forecast accuracy, very difficult to predict in actuality but easy totalk appreciate, with a may/could be factor, a gamble better avoided.

What is Demand Management?

Let us now see what is demand management per se? “It seeks to estimate,control, smooth, coordinate, balance and influence the demand and supply for afirm’s products and services in an effort to reduce total costs for the firm and itssupply chain.”5 It recognizes that forecasts are developed at several pointsthrough out an organization, but doesn’t develop forecast. It accepts forecastfrom other functions and updates these based on real time demand. It is alsodirectly related to supply in order to adjust the flow of raw materials andservices. So, how can we establish control in demand management?

By:

· Execution of effective production schedule

· Calculation of inventory levels

· Capabilities and capacity

· Developing of customer service strategies

It is also responsible for smoothing and streamlining production after the masterproduction schedule is in place and been released to internal production andexternal suppliers. Demand keeps on changing on a day-to-day basis. Thereforethe demand managers should have contingencies in place in coordination with thesupply chain members so that necessary modifications could be affected well intime. “Demand management also balances the total costs of not meeting thedemand against the total costs of adding additional resources required to meet thegrowing demand,” says Burt in his book WCSM. Actually, without a forecast ofdemand, supply channels tends to get cluttered and all this can effectively beovercome through a comprehensive demand management.

Demand Driven Strategies

Demands forecast and demand shaping are the two different processes, whichhelps in generating information for integrating demand information into the supplychain planning process, as enumerated below:

· Demand forecast: A process in which historical demand data are used todevelop long-term estimates of expected demand, that is, forecast.6

5 Demand Management from WCSM by Burt, TMH, pp. 326.6 Demand driven strategies in designing and managing supply chain, Simchi Levi et. al,

pp. 126-128

31


· Demand shaping: It is a process in which the firm determines the impact ofvarious marketing plans such as promotions, pricing discounts, rebates, newproduct introduction and product withdrawal on demand forecasts.

In either case, the forecast is not completely accurate, and hence animportant output from demand forecast and demands shaping processes is anestimate of the accuracy of the forecast, the so called forecast error,measured according to standard deviation. This information provides insightinto the likelihood that demand will be higher (or lower) than the forecast.High demand forecast error has a negative impact on supply chainperformance, resulting in obsolete inventory and underutilization of resources.Therefore, can the firm employ supply chain strategies to increase forecastaccuracy and thus decrease error? Let us see with the followingapproaches:

· Select the push-pull boundary so that demand is aggregated over one ormore of the following dimensions:

· Demand is aggregated across products

· Demand is aggregated across geography

· Demand is aggregated across time

The objective is clear. Since aggregate forecasts are more accurate, the result isimproved forecast accuracy.

· Use market research, demographic and economic trends to improve forecastaccuracy

· Incorporate collaborative planning and forecasting processes with thecustomers for better understanding of demands

· Determining the optimal assortment of products by store so as to reducethe number of SKUs competing in the same market

At the end of it the firm has a demand forecast by SKU by location. The nextis to analyze the supply chain and see if it can support these forecasts. Thisprocess, called supply and demand management, involves matching supply anddemand by identifying a strategy that maximizes profit or minimizes transportationcosts, inventory costs and production costs. The firm also determines the bestpossible way to handle volatility and risks in supply chain. This is tacticalplanning, which is impact to demand planning. Therefore an iterative processmust be used to identify the following:

· The best way to allocate marketing budgets and supply and distributionresources

· The impact of deviation from forecast demand

· The impact of changes in supply chain lead-times

· The impact of competitors’ promotional activities on demand and supplychain strategies

5.5 INTERNET AND SCM

The influence of Internet has been tremendous over a very short period of time.Changes are taking place rapidly and the emerging e-business has its inherentadvantages and disadvantages. E-business strategies supposedly reduce costs,increase service level, increase flexibility and increase profits. But in reality veryfew have been successful. Many Internet companies have crashed due to theirindividual logistic gray areas. On the other hand some of them have been

32


successful in developing new business models and profited significantly bycapturing a sizable market share. These companies use the Internet as the driverof business changes. Next is e-business and e-commerce. Now what is e-business? It is a collection of business models and processes motivated by theInternet technology and focuses on improvement of extended enterpriseperformance. E-commerce is the ability to perform major commerce transactionselectronically, and it forms the integral part of e-business.

Companies have realized over a period of time that Internet can have a hugeimpact on supply chain performance. Internet can help in a big way to moveaway from the traditional push strategies to the pull system, but eventually mostof the companies have landed up with the push-pull strategy.

The Bottom Line

Recently, many companies have improved performance, reduced costs, increasedservice levels, reduced bullwhip effect and improved responsiveness to changes inmarketplace by integrating the supply chain. In most cases, this was facilitated bythe push-pull model and by a focus on demand driven strategies, however, ineffect the Internet has created a revolution in integrating the SCM and evolvingsupply chain strategies. At the same time the collapse of many such internetcompanies does send an alarm that e-business not only makes business but breakthem too. The key to these challenges lies in identifying the appropriate strategiesfor a particular company and individual product. The new supply chain paradigm,push-pull strategy, advocates holding inventory, though it pushes the inventoryupstream. Most important is that the traditional companies are required tomaintain and effective distribution system depending on environmental factors,warehouses, direct shipment, transshipment so as to ensure effective managementof inventory and reduction of distribution costs.

5.5 PHYSICAL GOODS FLOW, VIRTUAL FLOW ANDCASH FLOW

Related to what we have studied earlier in integration of Supply chain, physicalflow, virtual flow and cash flow could be seen in more detail. David N Burt inhis book World Class Supply management says ‘the supply chain extends fromthe ultimate consumer to the mother earth’ and has explained the same with anillustration, which we shall see later. “The chain is viewed as a whole, a singleentity rather than fragmented groups, each performing its own function”.7 Onlywhen an ultimate customer buys a product does the money enter the supplychain. Transactions help in allocating the customer’s money among the membersof the chain. “A firm’s supply system includes all the internal functions plusexternal suppliers involved in the identification and fulfillment of needs formaterials, equipment and services in an optimized fashion”.8 Supply system playsa key role in helping the firm satisfy its role in supply chain. Professor Charlesof MIT writes, “Supply chain design is the meta-core competency fororganizations”.9

The Internet today permits the supply chain managers to manage their supplychains collaboratively and also synchronizes their operations. The net result is:

7 Gentry, J. J, “The role of Carriers in buyer-supplier strategic partnerships: a supply chainmanagement approach,” Journal of Business logistics pp. 35-53, cited in Amelia S. Carr & LarrySmeltzer, “The relationship of strategic purchasing to supply management”, European Journal ofPurchasing and supply management 5 (1999) p. 44.

8 Burt, Dobler & Sterling WCSM by Tata Mc Graw Hill 7th edition, p. 7 in Supply chain & networks.9 Charles H. Fine, Clockspeed: Winning Industry Control in the Age of Temporary advantage. (as

specified by Burt in his book WCSM by Mc Graw-Hill, p. 7.)

33


· Reduced costs.

· Time management.

· Competitiveness.

· Profitability.

Success of an organization in the near future will be driven by its ability tocompete effectively as a contributing member of a dynamically connected supplychain management and not in isolation. Connectivity with customers, suppliers andother partners and be able to interact quickly is critical to survival. Tomorrow, atightly connected e-chain will be a necessity.”10

Fig 5.3: Supply System’s Role in helping the Firm satisfy its role in its Supply Chain (Adaptedfrom ‘The Supply Chain’ By Burt In WCSM, 7th Edition, TMH)

Supply chains are relatively easier to describe and visualize, but the terminology isalready dated. “Traditionally, companies have connected with one another insimple, linear chains, running from raw material producers to distributors toretailers.”11 But the day is not far off that most companies will be an integralpart of the supply networks worldwide. Networks optimize the flow of goods(physical flow) and services, virtual flow (information) and money (cash flow). Itfocuses on the ultimate customer, who is once again the generator of funds.They are so designed that one member doesn’t benefit at the cost of the other,the networks are therefore:

· Adaptive

· Speedy

· Innovative

· Integrated

SCM in essence is based on creation of values. It is a network of businessprocesses used to deliver products and services from raw materials to endcustomers through an engineered flow of information, physical distribution andcash flow. It oversees the organizational relationships in order to get theinformation necessary (virtual flow) to run the business, to get the productsdelivered (physical flow) and get the finances that generate the business profits

1 0 Lisa L. Henriott, “Transforming Supply Chains into e-chains,” Supply chain managementsupplement, Spring 1999, p.16 (Burt and Dobler in WCSM Tata Mc Graw-Hill pp. 7-9.)

1 1 Kevin Werbach, “Syndication: The emerging model for business in Internet era”, Harvard BusinessReview, May-June 2000, pp. 85-93.

EXTRACTORS/MINERS

END CUSTOMER

DISTRIBUTOR

MOTHER EARTH

SUPPLIERS/CONVERTER

CONVERTER

OEM

DISPOSAL

SOURCE OF FUNDS

MATERIALS & SERVICES PHYSICAL

INFORMATION VIRTUAL

FUNDS/CASH FLOW

34


(cash flow). This is an integrated and extended enterprise concept and includesnot only relationships with internal business functions, but also with those outsidethe firm. What has been explained above is just the tip of the iceberg, sinceSCM strategies are changing rapidly with growing involvement of IT andelectronic media.

Fig 5.4: An Ideal Supply Network (Adapted From Supply Networks, Chapter 1 WCSM By Burt,

Dobler & Starling)

With this as a backdrop we come to bullwhip effect, which happens to be thebasic benchmark in understanding the supply, demand and inventory management,and reasons why companies fall pray to this effect and how best can theyreduce it if not eliminate.

5.7 BULLWHIP EFFECT

“Failure to accurately estimate demand and share information among supply chainentities can result in bloated inventory levels due to cumulative effect of poorinformation cascading up through a supply chain12 , says Burt in his book WCSM.This is in fact quite natural in a way. If a firm doesn’t have information of thedemand it will unnecessary carry a load of additional inventory or even increasethe lead-time to cater for the uncertainty. Either ways the inventory gets bloated,if the lead-time increases so will the buyer increase order quantities (based onconventional recorder point calculations). This will result in the supplierinterpreting this to be growing customer demand, with a cascading effect on thesupplier who feels the necessity to increase capacity to meet the trend. To addfuel to the fire, just as supplier has added additional capacity to meet theincrease in demand, demand falls off because the buying firm has excessivestock available. The resultant is firing of employees, selling of assets in order toreduce the capacity. This ‘phantom’ demand in SCM is called as bullwhip effect.In other words, ‘the increase in variability as we travel upwards in the supplychain is referred to as the bullwhip effect.13

12 ‘The Bullwhip Effect’ Chapter 27 towards world-class supply chain management, WCSM by Burt, Dobler & Starling, TMH, pp. 627-62813 Value of information, in Designing & managing the SC by Samchi Levi et. al, second edition, 2004,TMH

EXTRACTORS

AN IDEAL SUPPLY NETWORKMOTHER EARTH

CONVERTORS

DISTRIBUTORS

END CUSTOMERS

OEMs

35


Therefore, in order to identify and control the bullwhip effect its pertinent tounderstand the main factors that contribute towards increase in variability in thesupply chain.14

· Demand forecasting: Traditional inventory management techniques practicedat each level in the supply chain lead to the bullwhip effect. As discussedearlier in unit 5, managers generally use standard forecast smoothingtechniques to estimate average demand and demand variability. Theimportant characteristics of forecasting are that as more data are observed,the more we modify the estimates of the mean and standard deviation incustomer demands. Since safety stocks strongly depend on these estimates,the user is forced to change the order quantities, thereby increasingvariables.

· Lead Time: Increase in variability is magnified with increase in lead-time. Inorder to calculate safety stock levels and recorder points, we in effectmultiply the estimates of the average and standard deviation of the dailycustomer demands by the lead-time. Thus, with longer lead-times, a smallchange in estimate of demand variability implies a significant change insafety stock and recorder level, leading to a significant change in orderquantities, which in effect leads to increase in variability.

· Batch Ordering: The impact of batch ordering is simple to understand. Ifbatch ordering is used by the retailer, as happens while using min-maxinventory policy, then the wholesaler will observe a large order, followed byseveral period of no orders, followed by another large order, and so on.Therefore, the wholesaler sees a distorted and highly variable pattern oforders.

· Price Fluctuation: This can also lead to bullwhip effect. If prices fluctuatethe retailers tend to stock up when the prices are lower. That is anotherreason why stocks vanish from the market prior to budget month. This isaccentuated by certain manufacturers and companies of offering promotionsand discounts at certain times on certain commodities.

· Inflated Orders: Inflated orders placed by the retailers during storageperiods increase the bullwhip effect. Such orders are common when retailersand distributors suspect that a product will be in short supply, and thereforeanticipate receiving supply proportional to the amount ordered. When theshortage period is over, the retailer goes back to the standard orders, leadingto all kinds of distortions and variations in demand estimates.

After having seen the factors leading to the bullwhip effect we now go on tohow to reduce the bullwhip effect by centralized information.

Impact of Centralized Demand Information

Centralizing demand information within a supply chain can reduce bullwhip effectconsiderably. This would entail providing information on customer demand in eachstage of the supply chain. How and why? If demand information is centralized,each stage of the supply chain can use the actual customer demand data tocreate more accurate forecasts, rather than relying on the orders received fromthe previous stage, which can vary significantly more than the actual customerdemand. To determine the impact of centralized demand information on thebullwhip effect, we have to distinguish between two types of supply chains: onewith centralized demand information and a second with decentralized demandinformation, as described below.

14 Value of Information in Designing & Managing Supply Chain, pp. 104-106.

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· Supply Chain with Centralized Demand Information: In this type ofsupply chain the retailer (who is the first stage) observes customer demandsand forecasts his demands with moving average method finds his targetinventory level on the forecast mean demand, and places orders to thewholesaler. The wholesaler who forms the second stage of the supply chain,receives the order along with the retailers forecast mean demand, uses thisforecast to determine its target inventory level, and places the order to thedistributor. The distributor who finally places the demand to the factory, thefourth stage in the supply chain, follows the same process.

In this particular chain, each stage of the supply chain receives the retailersforecast demand and follows an order-up-to inventory policy based on thisdemand. Therefore, the demand information, forecast technique and inventorypolicy in this case has been centralized.

Fig 5.5: Supply chain with centralized demand information

· Decentralized Demand Information: the second type of supply chain isthe decentralized one. In this case the retailer doesn’t make its forecastmean demand available to the remainder of the supply chain. Instead, thewholesaler must estimate the mean demand depending upon the ordersreceived from the retailer. Here once again the wholesaler uses a movingaverage with p observations of the orders placed by the retailer in order toforecast the mean demand. Thereafter, it uses this forecast to determine thetarget inventory level and places an order with the distributor. Thedistributors target level is utilized to place orders in the fourth stage of thesupply chain. Again, in this stage as we move up the supply chain theorders become larger and the variable increase with every stage.

Actually, in both the types of the supply chain the variance of orders becomelarger as we go up the chain so that the orders placed by the wholesaler arelarger than those placed by the retailer, and so on. The difference in the twotypes of supply chains is in terms of how much the variability grows as we movefrom stage to stage. It is seen that the orders move additively in the centralizedsystem and multiplicative in the decentralized one. In other words in the

FACTORY

DISTRIBUTORS

WHOLESALER

RETAILER

STOCK/GOODSFLOW

DEMAND FLOW/INFORMATION

FLOW

Observe Customer Demand.Forecast Mean Demand.Find Target Inventory. Place Orders.

CONSUMERS

CASH FLOW

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decentralized system where only the retailer knows the customer demand canlead to higher variability than a centralized one, in which the customer demand isavailable at each stage, particularly when the lead times are large. Thereforemore often than not the centralized system can effectively reduce the bullwhipeffect.

It’s also important to note that even with the centralized system the bullwhipeffect remains, since the complete system is based on demand predictions andthis is a variable factor. Therefore, it will be correct to say that it can onlyreduce the effect but not eliminate it completely.

Activity 2

Understand the aspects of Bullwhip effect and analyze the same with a practicalcase study. Try and visit a firm to understand the effect of Bullwhip on SCMsystems and how does the company plan to negate the effect to some extent.

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5.8 A NEW PERSPECTIVE TO COUNTER BULLWHIPEFFECT

We have seen that bullwhip effect continues to stay in spite of our relentlessefforts. Hence, why don’t we put our minds together to find some solution tocounter this effect and remove it almost completely? It can be considerablyreduced, if we gave it a fair try. Let us take into cognizance of the variousenvironmental factors, consumer behavior, market research and area study intoeffect to counter this problem. For a moment let us get into a model calleddirect information system (DIS), in which we allow the manufacturer to getdirect information from the consumer bases rather than the retailers andwholesalers or the distributors. It will require the following:

· A thorough knowledge on the consumer behavior, to include peculiar habitsas available in the Indian context and differs state-to-state, region-to-region

· A detailed market research

· An area study compendium to know about the area per se, this will easeout transportation, warehousing and material handling activities

· Last two to three years consumption report analysis

· Last but not the least, an integration of these factors under one commonhead the DIS.

Let us see this with a live example

An area ‘X’ has a vibrant population and uses 2 popular brands of toothpaste‘Y’ & ‘Z’. Say 50% uses ‘Y’ and the other 50% uses ‘Z’. Keeping the trendsof our present day advertisements people can sway from Y to Z and vice versa.How do you find that out? Through your retailers/wholesalers who tell you thismonth people are asking for more number of Y to Z? Can you actually believethem? Since you believe them you aggravate your problems of existing Bullwhipeffect. Resultant to this is over stocking and if not sold you land up with aclogged inventory, since the demands were more predictive than actuality. In

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order to nullify this effect you could get your DIS activated and find out theactual on ground situation and believe your ‘eyes to the ears’. Let us see thismathematically. Out of 1000 customers in an area, 700 under presumed idealconditions uses ‘Y’ and the balance 300 uses ‘Z’. That has been the trend forthe last 3 months plus minus 10% here and there. This month things weredifferent and you find your brand ‘Y’ has dipped to a low of 300, i.e. this monthyou got 400 toothpastes that never sold. What do you do now? Think of a salegimmick and rush out your stock? Under ideal conditions, Yes! But how longcould you afford to do that? Another 3 months? It’s better you tide over thispersistent problem once for all by activating the DTC (direct to consumers)method, wherein your own representatives are on the move continuously takingdirect feedback from the consumers, in site. This will give a more realistic figurethan a predictive one. These inputs can then be compared with that you receivedfrom the retailers/wholesalers/distributors, and you reach a common average ofdemands from one particular area. Looks simple on paper, requires tremendouscoordination to implement. Let us see this with a figure to remove any ambiguityof sorts.

Fig 5.7 : DIS model for negating bullwhip effect by DTC link (Direct to Consumer)

5.9 DRIVERS OF SCM

SCM is indeed the most dominating paradigm in contemporary business and isslowly emerging as powerful creators of sales and revenue growth. In the 21st

century, the rapidly exploding liberalized global market is creating enormouslydiversified customers, products and services. Organizational, informational andmanagerial demands are being redefined. The new millennium is creatingconditions and an entirely different type of challenge, which are being manifestedin innovative supply chain developments. The first driver is the behavioralchanges in the top management of global companies. This has dramatically

MANUFACTURERDIRECT INFORMATION SYSTEM

ENVIRONMENTALREALITIES

AREA STUDIES

CONSUMERBEHAVIOUR

MARKET RESEARCHTECHNIOUES

CONSUMERS

DISTRIBUTORS

WHOLESALER

RETAILER

FEEDBACK/DEMAND

CONSUMERS CONSUMERS

DIRECT TO CONSUMERS.

A TWO WAY TRAFFIC

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altered the way people think, learn, decide, act and believe in how they canimprove their responsiveness towards their clientele groups. The second isconcerned with making quality products to retain customers, the third driver isdiscipline of supply chain cost economics, fourthly is creation of a valueinnovation process and fifth the decision making process, so as to make everystage of the management accountable and responsive.

5.10 SUMMARY

In this unit we have focused on the concepts like models for SCM. You havelearnt about value chain system. You deliberated the stages of integration ofsupply chain and learnt about integrating supply and demand chain to includedemand management. You discussed the relationship of goods flow, informationand cash flow. Bullwhip effect and measures to reduce this effect were alsodeliberated.


1) Integration of supply and demand chain will go a long way to build andeffective SCM system. Discuss with examples.

2) Explain with examples demand and demand management.

3) Explain the various models of SCM.

4) Explain push-pull model with relevant examples.

5) Discuss the role of Internet in SCM. Explain e-business and e-commerce.

6) What is Bullwhip effect? Explain the various permutations and combinationsto reduce this effect in SCM.

7) What are the reasons for variability in the supply chain? Explain in detailwith relevant examples.

8) How do you link goods flow, information flow and cash flow in SCintegration? Explain with appropriate diagram.


1) Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-Hill

2) Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House,Mumbai-23 (should be included in compulsory reading, since the text pertainsto Indian context, simple and easy to comprehend)

3) Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edited (2004), DesigningAnd Managing The Supply Chain, Tata McGraw-Hill

4) Mentzer, Fundamentals of Supply Chain Management, Sage IndiaPublishers

5) Gentry, J. J,(1999), “The role of Carriers in buyer-supplier strategicpartnerships: a supply chain management approach,” Journal Of BusinessLogistics pp. 35-53, cited in Amelia S. Carr & Larry Smeltzer, “Therelationship of strategic purchasing to supply management”, EuropeanJournal of Purchasing and Supply Management 5 (1999) p. 44.

6) Kevin Werbach, “Syndication: The emerging model for business in Internetera”, Harvard Business Review, May-June 2000, pp. 85-93.

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Design and Management ofSCM UNIT 6 STRATEGIC SUPPLY CHAIN

MANAGEMENT

Objectives


· discuss the imperatives for supply chain, strategy development;

· be acquainted with the issues in supply chain domain and strategic decisionsin the supply chain;

· discuss supplier alliances;

· illustrate supplier quality management and related problems; and

· explain supply chain re-engineering.

Structure

6.1 Introduction

6.2 Supply Chain: Growth

6.2.1 Trends in SCM

6.2.2 Strategic Decisions

6.2.3 Strategic Supply Management Activities

6.3 Supply Alliances

6.3.1 Developing and Managing the Relationship

6.4 Supplier Quality Management

6.4.1 Problems of Quality

6.4.2 How to Find the Qualified Supplier?

6.4.3 Quantity Survey of Suppliers

6.5 Supply Chain Re-engineering

6.6 Summary



6.1 INTRODUCTION

After having seen the various models for SCM integration, integration of supplyand demand chain, let us now take a closer look at the strategic supply chainmanagement.

The successes in the manufacturers of today revolve around certain basicservices related to both product management and consumer satisfaction. Theimperatives are:

· Shorter product life cycle.

· Quality control.

· Timely delivery.

· Low cost delivery options.

· Reduction in costs, both production and to the end user.

· Waste management.

The imperatives above create a continuous pressure on the companies forfrequent changes, both in terms of policies and strategies, and in a way force the

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companies to stay abreast of the latest. According to the world competitivenessreport competitiveness is equal to multiplication of competitive assets andcompetitive process (Deshmukh & Mohanty).

Where, competitive assets include technology, infrastructure, people andgovernment institutions, and competitive process include quality, speed,customization and services.1 Logistics has always been the backbone toinfrastructure for the manufacturers. Within the purview of SCM logistics hasbeen the art and science of procuring, producing and delivering products andservices at the right time, in right quantity and at the appropriate place. As wehave seen earlier, SCM involves planning, implementation, controlling, storage, andtransportation and end delivery from the point of origin to the point ofconsumption as part of consumer/customer requirements. It is a network offacilities that perform the tasks of procuring the raw materials, transport them,transformation of materials to finished products and further distribution of goodsto the end user, the customers. During initial evolution it was felt that logisticsthat involved transporting and warehousing couldn’t effectively influence thestrategic goals and hence, extensive investment needn’t be done. Activitiesrelating to customer services, warehousing, order processing, inventories and saleswere also ignored. Production, marketing and finance operated independently, andinventories and sales ignored. It was in the seventies that the managementexplored the scope of reducing the distribution costs. The concept of total costmanagement was evolved in order to optimize the total costs rather than costs ofactivities taken in isolation. A centralized logistics function was given theresponsibility of controlling costs with emphasis on maximization of service level.Slowly but steadily the aspects of logistics got integrated with the other functionalactivities of the supply chain, and the functional chain emanating from supplier tothe delivery options to the end user, were formulated and incorporated with theoperational and strategic plans. In the final stage logistics were accorded dueimportance in the strategic planning. The imperatives for supply chain strategyare:

· Global sourcing

· Global networking and marketing

· Revolution in global business process

· Customer centric management activities

· Integrated planning system

· Integration of functional activities in the supply chain towards a commongoal for competitive advantage

6.2 SUPPLY CHAIN: GROWTH

According to Hicks, the imperatives for growth of supply chain are:

· Enhanced customer expectation: Competition worldwide has led tomaximum emphasis on customer service over the years. The value of theproduct can only be determined when the product reaches the customer intime and at the required place. The value of customer service has acquiredsuch dimension that, if the product doesn’t reach in time, the sale will belost to a competitor who offers in time, an ideal substitute. This can furtherbe classified under:

· Pre-transaction Elements: Relating to corporate policies and program.

1 Deshmukh & Mohanty in Essentials of Supply Chain Management, p 13

42


· Transaction Elements: These are those variables involved directly inphysical distribution, i.e. product and delivery reliability.

· Post-transaction Elements: These are those aspects dealing with aftersales service, warranty, repair, customer complaints and replacements.

· Pressure for Quick Response: Customers today expect a better andquicker response owing to the value added services being provided by themanufacturers. This is mainly due to shortened product life cycles,consumer’s drive and volatile markets, making reliance on forecasts difficultand dangerous. The key to quick response is pipeline management, i.e. aprocess where manufacturing and procurement procedures are linked torequirements of the market. It seeks to meet the competitive challenges ofincreasing the speed of response to the market needs.

· Impact of Globalization: Present global environment is forcing theorganizations to incorporate the world in their strategies and analysis. Certainkey factors like, economic trends, competitiveness, technological advances,the firms today cannot ignore them. Companies therefore must identify andanalyse factors that differ across nations and determine the impact on theoperations functions. Transportation and distribution therefore assumesgreater importance in such scenario, and the companies have to rightfullyintegrate and manage the facilities and markets available in this backdrop.Logistics, therefore, assumes greater strategic significance.

· Organizational Integration: Organizations today need to be broad-basedintegrators, inclined towards the achievements of market place successes,based on managing systems and people that deliver the service. Generalists,therefore, assume greater importance to specialists to integrate materials andoperation management with delivery. Today, IT is slowly proving to be agreat integrator for various functions, spanning from supplier to thecustomers.

6.2.1 Trends in SCM

The major trends in SCM are:

· Co-maker Ship: It is defined as the development of a long-termrelationship with limited number of suppliers on the basis of mutualconfidence.2 The benefits are:

· Shorter delivery lead times

· Reliable delivery

· Lesser schedule disruption

· Lower stock levels

· Lesser quality problems

· Stable prices

· Higher priority to orders

The basic philosophy of this alliance is that the supplier is considered to be theextension of customer relationship, with emphasis on continuity and a seamlessend-to-end pipeline. With growth in outsourcing the trend towards co-maker shipalso increases manifold. This principle can be extended both ways in the supplychain-upstream to customers and downstream to distributor, retailer and users.

· Third Party Logistics: Outsourcing operations like storage, transportationand delivery, improve service levels, reduce costs and increase flexibility. It

2 Essentials of SCM by Deshmukh & Mohanty pp. 16-18

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also helps in reducing costs on trucks, warehouses and certain infrastructurerequirements, and allows firms to acquire new technologies and enter newermarkets. Yet, certain aspect does merit attention. These outside serviceproviders may not at times perform up to the requirements of themanufacturer and would result in loss of image of the firm. Thereforethough third party logistics could be cost effective, at times the firm shoulduse these depending upon the organization’s needs, capabilities of the serviceprovider and the resulting pay off.

· Principle of Postponement: The time when the product is ready for saleis known to the organisation, and consequent delay in labeling, packaging andpricing till the last moment is called principle of postponement. The soleobjective is to minimize the risk of carrying finished product to the variouspoints of the supply chain by delaying the product differentiation to the latestpossible moment before customer purchase. The cost savings ontransportation and storage are attained by keeping products at the highestlevel and by moving goods through the supply chain in large, genericquantities (Deshmukh & Mohanty 2004). Examples of postponement are:

· Delayed labeling

· Shipping in bulk

· Transferring to small containers at warehouses

· Delay final assembly

· Stocking fuel, oil & lubricants (FOL) in unblended state

However, it has to be noted that postponement shouldn’t compromise the desiredservice level.

· Enterprise Resource Planning (ERP) & DRP: ERP systems arebasically information integrators and they help in binding various businessprocesses in an enterprise. It also helps in streamlining and re-engineering ofvarious processes, focusing on value activities and eliminating non-valueadded activities. Due to influx of IT, ERP has been able to provide a wideinformation base with an aim to optimize resources. This has further helpedin in-bound logistics, transportation, material management and accounting atlarge. DRP on the other hand helps in estimating inventory requirements atstocking areas and ensures supply sources are able to meet the demand. Itincorporates policies on safety stocks, information and relation betweendemand forecasts, inventory levels, manufacturing and distribution schedules.DRP helps in both short term and future production and distributionresources, in order to match both supply and demand. Because of minimalinventory that is held, DRP can be called the key to logistics and JITproductions.

6.2.2 Strategic Decisions

Strategies are a set of important decisions derived from a decision makingprocess of the top management in the organization. In order to ensure success,the strategic changes that are being incorporated in the supply chain, has toconform to well defined strategies formulated by the company from time to time.The top management in the company forms the strategic decisions and successfulexecution of these decisions should provide a cutting edge to the organization.Areas that require strategic decisions are warehousing, transportation, IT, andmake versus buy. We have already seen warehousing and transportation in detailin unit-4 and 5, and hence will dwell on IT and makers versus buy.

· IT Solutions and Integration: IT solutions will play a significant role ininformation building all through the supply chain. However, companies should

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address several queries centered on proper alignment of informationtechnology tools and the expected increase in productivity and services.Identifying the very scope of the business problem that is to be addressed isthe most important in this complete exercise. This effort will help inidentifying the best course available to the manufacturer and the area that itis to be applied, the core business issues. At the same time, it is alsoimportant to assess the effect of IT on the organization as a whole and itscapabilities. More often than not, IT affects the business in 3 ways:3

· The integrated process requires managers for restructuring the culturesand capabilities on values providing continuous improvement andteamwork.

· It enables the organization not only to rethink but also leverage newinformation, like graphics, computer integration and workstationtechnology.

· Application of new information requires redefinition of goals and skills ofthe enterprise’s people resources.

The response to the issue of managing the supply chain included having a fullyintegrated business, and some of the vehicle manufacturing companies werestructured in a way where the input were raw materials and output the finishedproduct. However, the driving forces for global manufacturers have ranged frombecoming a tiered global supply system in the West to the Japanese Kereitsubased company supply system, although there are quite a few near fullyintegrated companies in the developing nations till date.

The following are the reasons propounded by Christopher (1992) for not followingthe integrated supply chain:

· Few managers retain a grasp of a process from one end of the pipeline tothe other. As a result, the way things get done can reflect convenience fordoers, a desire to protect functional boundaries and a lack of understandingthe related consequences, both up and down streams of individualprocesses.

· Initiatives of changes are functional in nature and seldom reflect the costof the system.

· Their custodians as a means of providing breathing space and as ways ofproviding some hidden flexibility respond to protect lead times. Theindividual functional lead times contain slack and where these becomeembodied in a processing system, they are institutionalized.

Actually, companies that have benefited from integration are pacing ahead withconfidence, and IT as a whole have further aided in integration vigorously.

· Make versus Buy: The main organization focus today is on outsourcing ofnon-critical components. These decisions are arrived at after considering thefactors like, capacity, leverage an organization gets and the quality andconfidence in working with the vendor. Make buy decision is a strategicdecision and the area that has to addressed in this is development of thetotal cost model (Deshmukh & Mohanty). It has been seen that having asupplier that can work in a simultaneous engineering way with the companyis the main aspect in order to avoid costs associated with unnecessarydesign complexity. This may also mean having a supplier who can providethe same support through IT rather than having an engineer in site, andachieve the same result. The next consideration is the aspect of labour

3 Deshmukh & Mohanty in Essentials of supply chain management, pp. 20

45


elements. Here, once again the need for simultaneous engineering is requiredmainly in those off-shore areas with low labour rates, over and above issueslike labour rate inflation and challenges of overseas sourcing. All these haveto be considered in a structured manner and not in isolation.

6.2.3 Strategic Supply Management Activities

As per Burt and Dobler, supply management focus on ten strategic activities:

· Environment Monitoring: Monitoring the supply environments to identifythreats and opportunities, is an important task of supply managements, toinclude material shortages affecting both price and availability of purchasedmaterials and services. They can further be classified as:

· Changes in legislation: affecting the workplace. This can affect bothprice and availability.

· Wars and conflicts that can affect availability of materials resulting inprice increase.

· Consolidation among suppliers: to the extent of monopoly. A firm shouldchange its strategy based on such changes.

· Integrated Supply Strategy: Supply management should develop andmanage the firm’s supply strategy based on wholesome integration strategyand not in isolated strategies.

· Commodity Strategy: Must develop and update sound commodity supplystrategy. The following activities have to be performed to ensureeffectiveness of the strategies:

· Strategy Updating: Commodity teams must identify materials, items ofequipment and services that are strategic in nature or should formulatea strategic plan for obtaining them.

· Technology Access Control: All supply management organization’sdevelop and update technology road maps, which lists critical currentand future technologies to be pursued. Action should be at hand toprotect these technologies that yield a competitive edge and ensure arenot transferred to competitors.

· Supply Management Organization: The organization of the supplymanagement system must enhance the effectiveness and efficiency ofthe system in attaining the primary objective.

· Risk Management: Actions should be taken to ensure minimumdisruption of supplies and price increase.

· Data Management: Supply management, accounting and informationtechnology must cooperate in the collection and application of supply data tofacilitate the strategic supply planning.

· Corporate Strategic Plan: Supply management should join the marketingand operations as the key players in development of each of the firm’scorporate strategic plan. Supply management provides input to the strategicplanning process on threats and opportunities in the supply world. It alsoprovides inputs on constraints that may affect strategic initiatives. Itsknowledge of the firm’s supply world may be a vital source of input forstrategic planning.

· Strategic Sourcing: The firm should manage and develop its supply base inline with firm’s strategic objectives. Several actions that should be taken are:

· Periodic review of the active suppliers.

· Identification of the appropriate relationship (transactional, collaborativeor alliance) for each commodity class.

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· Optimization of supply base with coordination and combinationwith several forces to increase the importance of the firm’s supplybase.

· Strategic Supply Alliances: Developing and managing the supply alliancesfrequently are two of the most crucial and most strategic activitiesundertaken by any firm. Institutional trust is a key prerequisite to supplyalliances. Rapid growth of American society of Alliance Professionals is atestimony to the industry’s recognition of importance of these activities.

Fig 6.1 Strategic Supply Management

STRATEGICSOURCING

DATA MANAGEMENT

INTEGRATEDSTRATEGY

COMMODITYSTRATEGY

ENVIRONMENTMONITORING

UNDERSTANDINGKEY SUPPLIERS

SUPPLYCHAIN/

NETWORK

STRATEGIC SUPPLY

ALLIANCES

SOCIALRESPONSIBILITIES

FIRM`S SURVIVAL AND SUCCESS

· Legislation changes· Wars & conflicts· Consolidation among

suppliers

· Strategy updating· Technology access· Supply management

organisation· Risk management

· Periodic review· Identify relation· Optimize supply base

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· Supply Chain/Networks: These help in developing and managing of supplyalliances, but is more complex. IT & relationship skills are essentialprerequisite for personnel assigned to the task. Charles Fine in his bookClock speed writes, ‘ the farther you look upstream in your technologysupply chain, the more volatility you see. Customers are foolish if they don’tspend any time or resources thinking of the health, survival, and possibleindependence of their core technology suppliers’.4

· Social Responsibilities: Supply management must develop and implementprograms that will protect the environment, facilitating the inclusion ofwoman-owned, minority based and small business in our economy topromote values in the workplace.

· Understand Key Supply Industry: Its impact is directly proportional to theknowledge of related industries in which it buys. They study and understandthe industries that provide the key materials, equipment, and services, coststructures, technologies, competitive nature and culture.

The above provides the understanding of supply managements responsibilities bothstrategic and tactical, which if executed effectively and efficiently will be a keyto the firm’s success and survival, fig 6.1.

Activity 1

Understand the difference in strategies in supply managements and how it buildsup a company to be successful in the international arena?

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6.3 SUPPLY ALLIANCES

As seen above supplier alliances plays a key role in strategic supply chainmanagement activities across the board. Therefore in order to develop andmanage these relationship and alliances a firm has to continuously endeavor toidentify methods to facilitate these relations. Supplier is as important as thecustomer and that has to be realised in the true sense.

Riggs & Robbins spelt out these relations in their book ‘The Executive Guide toSupply Management Strategies’, they are:

· Annual Supplier Meetings: Annual supplier meeting is a commonphenomenon in maintaining direct relationship with the suppliers by the buyerfirm. It is used both as a teaching and learning platform as well as theopportunity to distinguish one’s organisation as a supply management leader.It dwells on the buyer’s management performance, learning and future goals.The main objective being learning of key strategies to support the buyer’sbusiness. It requires extensive planning and is expensive, but it lays thefoundation of a buyer supplier relationship in the long run.

· Supplier Discussions: It’s an informal forum for gaining and sharinglearning, between the representatives, like the chief executive, chiefoperating officer, and representatives from marketing, supply management

4 Fine, Clockspeed, p. 95.

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and research divisions. It reviews the buyer’s progress and goals in thebackdrop of shift in strategies and policies. It’s a forum that builds trust andrespect, towards a successful supplier relationship.

· Workshops and Seminars: These are aimed at creating opportunities forsupply-stream innovations, which will benefit all the participants. It composesof members of supplier participants who provide material and services thatare critical to the products made available at the marketplace. Suchdiscussions open the door for newer set of goals and collaborations. Itprovides the base for continual improvement, concepts and innovationsrequired to guide and organize discussion and work sessions.

· Collaborations/Partnership: This is supposed to be the most successfulsupplier buyer relationship in recent times. These are based on mutualinterdependence and respect. These alliances begin with careful selection ofsource during the product design process. This is the time when the buyerrequires a dependable supplier who can provide the required process, designand technological support for a successful product. The supplier at the sametime requires a responsible customer for its product and services. They bothrequire each other and have to work hand in glove. Unexpected criticalitiesthat may arise can be sorted out with a ‘we shall overcome’ attitude. Themost important in these relationships is the integration of the buyer andsupplier as long as the relationship is beneficial to each other.

6.3.1 Developing and Managing the Relationship

Supply managers at all levels should ensure and tailor appropriate actions duringthe planning and management of such alliances mentioned above. Like:

· Instituting a Cross-Functional Team: A team so designated should be inplace to handle such alliances, which is responsible for development,integration, and develop and manage appropriate measures for the alliance tobe successful.

· Training: Teams from both sides as designated should undergo appropriatetraining in being constructive team players, and also in cross-functional teamskills.

· Communication System: The teams should develop and integrate aneffective communication system responsive to the needs and requirements ofboth the firms.

· Trust Building: Measures to improve trust between the two organizationshave to be developed and implemented too.

· Visits: Periodic visits by the respective team members to each others sitehas to be resorted to for confidence building and co-location of key technicalpersons.

· Specialized Training: Plans have to be evolved and developed forspecialized training involving variance of products, designing, value analyses,engineering, cost analysis and cost management.

· Objectives: Certain objectives have to be established in areas, includingquality, cost and time aspects.

· Monitoring: Results have to be continuously monitored and reported to themanagement level.

· Supportive: Inter-firm team members should realize the importance of suchalliances and support the alliance goal in letter and spirit. It’s in the interestof both the firms to support each other’s operations and their respectivegoals, ethics over expediency.

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Management of supply contract is a challenging responsibility and a critical too.Companies have to continuously generate and develop newer ideas andinnovations to maintain these relations and work in unison to a common goalwithout jeopardizing each other’s interest in the overall gambit of supplier buyeralliances and relationship.

6.4 SUPPLIER QUALITY MANAGEMENT

After having seen the supplier-buyer relationship, we will now see the qualitycontrol aspects of supplier units. Quality management dates back to the 80’s,wherein the Japanese companies developed a zero-defect program for theirproducts, primarily based on quality of the raw materials they procured. This wasresorted to by traditional methods of sampling of the incoming raw materials,which implicitly inferred that there will be some non-conforming parts, that will beused in the manufacturing operations resulting in lower material productivity andhigher manufacturing costs. This was never a full proof system and the lacunaswere too many, and resulted in longer lead-time to correct the specific problemsor adjustments to the operating systems. This would generally lead to longercustomer delivery time and cascading decrease in profits.

The main objective of this unit is to discuss the problems of quality and how togenerally overcome these issues. In every organization there is a wide diversityof functions and structures for quality planning and control, and hence the firststep to quality assurance is a structural basis for the procurement system thatshould be organic in character and reflect the concern for quality control indeveloping the relationship of the interdependent organization throughout thesupply chain. With this as a preamble let us see the problems of vendor /supplier quality.

6.4.1 Problems of Quality

The suppliers till late had been providing natural/semi-processed materials to themanufacturers for their finished products. Under such circumstances, qualitycontrol was never a problem since it was dependent on the quality of rawmaterials. “The buyer and suppliers were almost quasi-independent and had littleinteraction between them” (Deshmukh & Mohanty, 2004). Today things havechanged considerably and most of the companies are engaged in different type ofpurchases and procurements, particularly very complex and highly engineered sub-systems with critical interfacing with other components. Therefore, some keyfeatures have to be evolved for a better buyer-supplier relationship and its effecton the quality assurances on the whole (we have seen this in the last unit ofbuyer-supplier relationship/alliances). However, for quality assurance, someactivities that are to be followed are:

· Mission: The company’s mission and policies on supplier quality relationshave to be spelt out clearly (as for ISO-9000).

· Identification: Identify and develop qualified and capable suppliers who canassure of quality, and weeding out the lesser variants.

· Communication: Communicating essential and helpful information, designs,and specifications and also engineering changes promptly.

· Development: Developing methods for detecting the deviations throughreproduction and trials.

· Assistance: Provide assistance to the supplier on quality related problemsand overcome them.

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· Review: Periodic review of the performance of the supplier throughsupplies rating and follow up actions against poor suppliers.

These activities are not sacrosanct and depend on the following:

· Nature of goods being purchased

· Volume of the purchase

· Total suppliers

· Repeat purchase

· Research, design and subcontract management.

6.4.2 How to Find the Qualified Supplier?

A very tedious process and action at hand by the buyer firm is to find a suitablesupplier who can generally meet the benchmark of the purchaser, i.e. ‘the bestfrom the best within the cost’, under ideal conditions of course. However thefollowing evaluation methods could be used to get the best from the best:

· Reputation: This is a variable factor and differs from company to company,big and small. For a big company it is of significance and for a smallercompany it’s almost obscure. A detailed survey and market search will helpin identifying the best that can deliver the best within the cost per se. Thebuyers’ generally maintain database on prior performance of thesecompanies.

· Database: Maintaining a database in financial function has been veryeffective, however, it is in development stage for use in quality functions(Desmukh & Mohanty, 2004).

· Surveys: The purchasing and procurement division of a company is carryingout the selection of the appropriate supplier. Clarity of information is animportant factor in this selection process, and such information on thesupplier will provide the right weightage for the supplier selection.

· Trial & Error: Sometimes this procedure will also help in choosing thecorrect supplier for the manufacturer. At times certain obscure suppliersqualify to the requirements of the manufacturer and provide the goods asrequired. The limiting factor is the right chance at the right time.

· Faith & Reliance: This is another aspect that will help in getting the rightsupplier when the company requires the most. No supplier would like toloose out/compromise on the aspects of faith and reliability that has beenbestowed on it by the buyer unit.

· Opportunity: This is another factor because of which many small suppliersloose out on a buyer’s search radar. The buyer should carry out an in-depthselection of the supplier and provide a fair opportunity to even the smallestto prove its worth, sometimes, it does pay huge benefits in the long run.

6.4.3 Quality Survey of Suppliers

It’s an evaluation process, which enables the buyer to select the appropriatesupplier conforming to the buyer’s requirements. Does the supplier have theability to respond to the buyer’s requirements? Does he require assistance in anyform? This and many, can be answered by help of visits to the supplier’s site bya team of specialists or through a balanced questionnaire. The following are thesurvey evaluation on the supplier:5

5 Assuring the Quality Procurement System in Essentials of SCM by Desmukh & Mohanty

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· Policies/Practices on Quality: These are the basic guidelines based onwhich the quality assurance of the supplier can be determined. They are thereal intentions that are to be implemented in a variety of degrees, the mainproblem is to evaluate the policies and determine the degree to which theyare to be implemented.

· Facilities: These are related to tests and inspection that meet the qualityrequirement of the purchased product. Samples are taken and checked withthe vendor and buyer’s gauge to compare the gauging systems. This kind ofchecking reduces the risk to both the supplier and the buyer.

· Procedures and Actions: These are the procedures for handling qualityproblems like gauge control deviations from existing specifications. Theaim of the survey is to determine whether the procedures are in vogueor not.

· Appraisal: Appraisal of personnel from viewpoint of quality is very difficult,but discovering the technical competence and attitude to quality can beestablished. But, this could be just subjective at times, due to turnover ofkey personnel. Yet, a general attitude of quality control can be found outthrough auditing, discipline, and maintenance and housekeeping records.

For a new product line searching for a capable supplier is indeed a difficult taskand this can well spell the difference between success and failure of any newproduct. Geographical location and close proximity is a reason to search for asupplier closer home, without a rating of sorts, but selection for a long-termsupplier in high volumes is a tedious process and should start early. Theprospective suppliers can be located by any methods, but the pertinent questionsthat should be addressed are:

· How well do the objectives of the quality program conform to the buyer’sneeds?

· How well the practices of the quality control program conform to theobjectives?

The objective of this evaluation is to arrive at a judgment of how well supplier’sprogramme operates, neither to tabulate the efficiencies nor rationalize theshortcomings. The areas for evaluation are:

· Quality

· Price

· Performance

· Production capabilities

A supplier survey is analogous to a profit and loss statement, that is, it speaks ofthe status at any one point in time and will not guarantee of the status at anyother time. Therefore, the communication of the survey must continue for a longtime towards a good partnership.

Increased competition in the economic scene worldwide results in heavydependence on quality as both an endogenous and exogenous factor. This resultsin the other elements that aid in quality control to have an ever-expanding role.Procurement function therefore plays a key role in getting the best from the bestavailable in the open market. It plays a predominant role in the in ensuring qualityin an organization. Improving quality therefore should shift from desire tocompulsion in the quality assurance of supply agencies.

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Design and Management ofSCM 6.5 SUPPLY CHAIN RE-ENGINEERING

Business structure is continuously changing from one phase to another, and todayhas reached the stage of professionalism where it is revolving around customerfocus in a big way. These changes have shown remarkable improvement incompany performance measures such as quality, costs, services and lead times.Hammer & Champy in 1993 identified these changes and improvements andpackaged these ideas into concept of ‘business re-engineering’, which was latertermed as ‘business process re-engineering’ (BPR).

The areas in common between BPR and SCM seems to be very few at acursory glance, but SCM is not a traditional improvement technique, but aphilosophy that helps in improvement not involved with functional reviews, ashighlighted by Stevens’ model of supply chain integration, which we have seen inour earlier units. However, in an introspection of BPR & SCM reveals that thereis more than one common link between the two. Business transformation fromthe concept ‘what we make we sell’ to a more flexible concept of ‘what themarket want us to sell’ can effectively be achieved after a competitive analysisand a supply chain diagnostic review. It is well understood, that effectivetransformation is only possible after a series of phased step involvingtechnological reorganization, attitudinal and organizational attribute, and integrationbetween the competition and customer demands.

The comparison between SCM & BPR is as shown in the table 6.1

Achieving internal integration is a desirable stage, however, performance ofpockets of excellence is generally downgraded (from customer’s viewpoint) dueto poorly performing suppliers and customers in the supply chain. In order tounderstand this further a wider perspective of the supply chain needs to be takenkeeping in mind the 12 steps of BPI, as evolved by Harrington, to streamline theprocess. They are:

· Elimination of bureaucracy

· Eliminating duplication

· Value added assessment

· Simplification

· Process cycle time reduction

· Error proofing

· Upgrading

· Simple language

· Standardization

· Supplier partners

· Broader picture improvement

· Automation

Business (Process) Re-Engineering

(Hammer & Champy, 1993)

Supply Chain Management(Stevens’ 1989)

The fundamental rethinking and radical redesign of businessprocess to achieve dramatic improvements in critical,contemporary measures of performance, such as cost, quality,service and speed.

The management of material suppliers, production facilities, anddistribution services and customer linked together via the feedforward flow of material and the feedback flow of information.

Table 6.1 : As Adopted from Deshmukh & Mohanty, 2004 (Essentials of SCM)

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From the above its evident that the first 9 steps are operational, step 10 is forsupplier side, and step 11 is for the customer satisfaction. Therefore, to attain thisstep, if a radical redesign is taken, business process integration turns to businessprocess re-engineering, in the supply chain scenario. Side by side in the Stevens’model step 3 moves to step 4, i.e. full integration is achieved. Therefore, thisintegration involves extending the internal management to supplier focus andcustomer orientation in order to create a strategic partnership, by reducing thesuppliers. Customer understanding will in a big way change the entire philosophyfrom pushing products to selling goods as per customer requirements. Backwardintegration is a very difficult process in supply chain integration, since; it involvesa change in inter-company attitudes from adversarial to that of mutual support,which is in fact very crucial to a successful supply chain integration.

We should as a matter of fact, never lose sight of the fact that business in thesupply chain, is directly dependent on customer finances which enables thecontinuity of the supply chain. Therefore, the strategies in the supply chain shouldhave common aim of improving the performance of the chain from theperspective of the consumer/customer. Stevens’ integration, in stage 4 of thesupply chain is generally successful because of the financial position enjoyed bythe big companies. Such companies generally bend rules of supply chainintegration and manipulate smaller members of the chain to their financial ends, inorder to benefit the most. Therefore, backward integration is a contentious issue.Both internal and external integration is required to be achieved for improvingperformance in the supply chain management, under ideal conditions. Yet, internalor external or a combination approach may be the goal depending upon product,industry, market conditions or where advantage could be gained for the supplychain. Though, Stevens’ model suggests that external integration, without internalreorganization does not exploit all the benefits of true supply chain integration.

Now, let us see whether BPR internal re-engineering is equivalent to thefunctional and internal integration stages in the Stevens’ model? Actually, the firstand the final stages are similar in both BPR & Stevens’ model. Initially, non-existent planning and control structures across departments are optimized todepartmental goals resulting in customer necessities not being catered to, but thefinal structure is customer centric with major changes in culture, structure andtechnology. The intermediate steps are different, since BPR calls for one-leapchanges on a process-by-process basis. Whereas, Stevens’ model opts forfunctional integration, followed by internal integration. Functional integration inBPR is not necessary, only the process should be sought and redesigned. Effortsto optimize a function are considered a waste in this system. The functionalintegration stage, does bring together a trans-departmental view which, ifperformed correctly, will lead to improved operating performance (Deshmukh &Mohanty). Improvement in the overall performance level and integrating of thecore functional areas as one single function does negate the poor performance ofthe surrounding functions. Therefore, It is mandatory to initially bind the functionsalong a process line, and then integrate the appropriate cross-functional processesat a later stage.

Therefore in spite of BPR being a later model, Stevens’ model is still valid in thelight of BPR concept, though more details of reorganization stages are required.Therefore, cross-relationship between both the stages is to be highlighted morevigorously. This can be achieved by examining the pre-requisites and techniquesused in integration stages of SCM and in virtuality, i.e. by philosophy.

Let us now see the various categories covering the parallels of essentialsbetween SCM & BPR, through this table:

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6.6 SUMMARY

This unit highlights the common foundations, which underlie both SCM & BPRphilosophies, which are indicative of the important difference between the two,the drive for improved business operations. Those who follow the SCMphilosophy would have traversed the path as BPR after having re-engineeredown processes. The existing philosophies such as SCM (integrated) as mentionedin this unit covers a large portion of the BPR ideas, yet a few ideas have to beadded to the model:

· Radical approach for internal integration.

· Continuity in step changeover improvements, and strategic placements ofthese ideas on the marketplace.

The various points for learning in SCM re-engineering are:

· SCM is not a traditional improvement technique but that which facilitatesimprovement, not associated with functional/departmental reviews that focusinternally.

· Transforming a business from inward looking to outward looking.

· Integration being the mainstay between the customers and competition.

· Inquisitiveness throughout the organization will facilitate re-engineering.

· This is applicable at the higher echelons as these positions give a widerperspective, seeking core processes and creating leaner structures, a mustfor SCM integration through re-engineering.

· The change management associated with re-engineering has to be handledsmoothly and skillfully.

Sustaining the spirit of re-engineering throughout the corporate culture is a bigissue that requires serious attention. Continual re-engineering allows a company’squality initiatives and re-engineering to be completely and effectively integrated,with an added advantage of the involvements of the high teams for continual re-engineering.

Table 6.2: Parallels of Essentials between SCM & BPR (excerpts from Hammer &Champy, Davenport, Grover et al, Stevens & Deshmukh & Mohanty, 2004)

Area for change

Process

People

Technology

Innovation

Analysis

BPR (Business Process Re-engineering)

· Elimination of wastes· Speed up process· Concentration on core

processes

· Board level commitment· A management that questions· A workforce that questions· Multi-skilled workforce· Attitudinal changes

· Technological changes· IT a key to BPR· Break the rule· Treat vendors as adversaries

· Customer focus· Constant innovation· Constant· product/process innovation

· Analysis by paralysis is notbeneficial

· Take a holistic view

Supply Chain ManagementTerminology

· Reduce non-value added activities· Lead time reduction· SCM positions each firm to do

what it does best

· Board level commitment with alogistics champion at board

· A management that questions· A workforce that questions· Multi-skilled workforce· Attitudinal changes

· Technological changes· IT a key to SCM· Partnership sourcing· Deep penetration to customers

bases

· Constant innovation at theinterfaces of the company

· Streamline processes

····· Aggregate modeling can aid theredesign strategy and take asystems view

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Organizing for GlobalMarkets6.7 SELF ASSESSMENT QUESTIONS

1) Explain in detail the process of re-engineering.

2) What are the benefits of re-engineering in supply chain?

3) Explain the benefits of integrated approach for implementation of SCM.

4) It is a fact; SCM and BPR have a common goal and are interrelated.Explain the sentence with examples.

5) Explain the parallels between the BPR & SCM philosophy.


Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-Hill

Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House,Mumbai-23.

Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edith(2004), Designing AndManaging The Supply Chain, Tata McGraw-Hill

Mentzer, Fundamentals of Supply Chain Management, Sage India Publishers

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Design and Management ofSCM UNIT 7 ORGANIZING FOR GLOBAL MARKETS

Objectives

· define WCSCM and International SCM;

· discuss international logistics and globalization;

· identify the steps to be initiated before going global;

· talk about organization for global markets & global sourcing; and

· describe world-class logistics management & interfacing of logistics.

Structure

7.1 Introduction

7.2 Strategies for WCSCM

7.2.1 What is WCSCM?

7.2.2 Features of World –Class Companies

7.3 Globalization

7.3.1 Organizing for Global Markets

7.3.2 Stages to Global SCM

7.3.3 Supply Channels

7.4 International Logistics

7.4.1 Integrating Logistics

7.4.2 World Class Logistics Management (WCLM)

7.5 Summary



7.1 INTRODUCTION

After having seen the strategic SCM, supplier alliances, quality management &SCM re-engineering let us see SCM as organized for global markets. Thisparticular unit is focused on world-class supply chain management, which isspreading rapidly in almost all countries across the globe, and in most advancedeconomies. Broad product range, shorter product life cycle and growing changesin the market place are becoming the norm. More and more companies arecoming forward to provide customized value based services to their clientele andat the same time maintaining a high volume of production. Internet, e-businessand e-commerce have become the business drivers of today with companies ableto converge geographically through the electronic media. At the same time datawarehousing and data mining is allowing the companies to contact the customersover a wide front and at the same time maintain a one to one contact.

World-class is a wide term extending over a vast spectrum of correlateddevelopments, which together define a comprehensive change in the prevailingenvironment of hyper-competition.1 They are:

· At the marketing level, customer satisfaction, and integration of product andservices, characterizing a world-class supply chain.

· At the organizational level, world-class supply chain is defined by theintegration of new productive capabilities out of available resources. It refers

1 Essentials of SCM by Deshmukh & Mohanty, p.282

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to the physical facilities and knowledge base irrespective of the locationwithin one group or cooperating companies.

· At the individual (people) level, the development and emergence of aflexible, skilled and knowledgeable workforce as the ultimate differentiators.

· At the management level, world-class supply chain is governed by aphilosophy of leadership, empowerment, motivation and productiveperformance (White, 1994).

The world-class manufacturing model is summed up by Schonberger’s agendathat included:2

· Design & organization.

· Operations.

· Human resources development.

· Quality and problem solving.

· Accounting and control.

· Capacity.

· Marketing.

The Cranfield Competitive Manufacturing Model (New, 1987) has identified theperformance characteristics of manufacturing systems through seven fundamentalobjectives for step change, they are:

· Reduction of inventory by 50% or even more.

· Reduction in manufacturing lead-time by 50% or more.

· Introduction of new products at 2 to 3 times the rates.

· 50% of the current design/development lead-time.

· Reduction in costs by 30% or more.

· Reduction in support labor by 50% or more.

· Improve quality to parts per million.

With this as a backdrop let us now see the strategies for World-Class SupplyChain Management (WCSCM).

7.2 STRATEGIES FOR WCSCM

WCSCM is a result of the developments of the world-class manufacturing modeland is to be capable of operating profitably in a competitive environment to thefactors of uncertainty and unpredictability. The companies that are able torespond to the structural and functional changes in this changing market placecan emerge profitable in the long run. WCSCM is a process that is value centric,and therefore all the processes like development, sourcing, movement, productionand distribution of products and services are centered on value generatingparadigm. It is an ongoing process from buying a product to buying a solution ona long-term basis.

WCSCM can be conceptualized under three basic dimensions:3

· Enrichment of Customers: Represents varying degrees of collaborationand interaction in defining products, services and concepts.

2 Schonberger, 1990 as also in Deshmukh & Mohanty in Essentials of SCM p 2823 WCSCM Chapter 17, in Essentials of SCM by Deshmukh & Mohanty, 2004, p 283

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· Recognition of Company by the Customers: Quality speaks, andreduction in fixed price to shared risks and recognition.

· A Linkage between Suppliers, Company and Customers: Representslinked networks of workstations, shared databases, tools and facilities.

In order to meet the challenges of globalization, economies that are liberal willrequire restructuring their operating policies and a complete reformulation of thesystems to eliminate wastes and create a value base. Value for money isbecoming a strategic necessity in this competitive world, i.e. high quality atreasonable prices at the appropriate time. But, for the manufacturer the realitieslike increase in costs of labor and energy continue to pressurize them. They haveto realize this aspect and identify what and how to do it, by servicing the existingcustomers, dealings with suppliers, opening new channels for newer customers,reduction in costs and adding to value added services.

7.2.1 What is WCSCM?

Before getting on with the various components of WCSCM, we must understandthe working definition of this term. It has to be understood that every companyaims to make profits, which further results growth. World-class denotes to beable to sustain oneself, in this competitive market and at the same time makeprofits in the long run. For profit, a company got to sell its product at a costhigher than its costs, and at the same time offer its product through the supplychain at the competitive market place with a value for money. In actuality, world-class denotes being able to provide the better value than the competition withoutgoing broke.

7.2.2 Features of World –Class Companies

The world-class companies as compared to non-world-class companies arefeatured by a set of different characteristics as under:

Management Level: The various tasks performed by them are:

· Visionary: Has a set of managers who are continuously improvingperformance through leadership, coaching, vision, and motivation. They worktowards eliminating of wastes and create competitiveness. The topmanagement in such circumstances performs the role of a visionary forceand the middle management involve in coaching and training thesubordinates. The supervisory staff executes the role of facilitator andsupporter of the employees in eliminating waste.

· Policy Making: These companies use benchmarking methodologies to seekand evaluate the best policies and practices for setting agendas to tide overthe old traditions and new set of thinking, to strive towards previouslyunreachable goals (Senge, 1990).

· Long-term Strategies: They generally have a long-term strategic plan,defining the corporate activities, objectives, goals, and operational plans toadd value to company’s products and services. The Tata Group is one suchliving example.

· Human Resource Development: They generally involve their employeesand their staff through extensive training programs for providing them theskills and knowledge base to achieve these policies and goals. It is a provenfact that if the employees are treated equally and with respect, is providedmeaningful jobs and is involved intimately in decision-making and problemsolving the company will develop, because it satisfies personal goals and

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company objectives. Tata group is once again one such example of humanresource development. The Sahara Group has of late started to showresults.

· Holistic Approach: The management policies and practices are so tunedthat it provides a holistic approach, which helps in integrating the objectivesand activities of different functional areas. These developments of commoncorporate goals are necessary for competing successfully. Providingleadership by the top management in an eventuality can obviate losses incertain circumstances.

· Measurement and Rewards: It is recognized that what gets measured andrewarded gets done (Deshmukh & Mohanty 2004). Simple performancerelated policies are used towards human resource improvement, team effortsand selected key variables necessary for adding value to its product, therebyavoiding short term dictates, evolving from financial controls and dictatedstandards.

Quality Control: They can further be divided as under:

· Customer Focus: These companies establish relationship and linkage withuniversity systems, promoting research and educational activities for long-term competitive advantage. All these activities are aimed at customer focusand service.

· Customer Oriented Products: These companies aim at customer drivenstrategies for product development and marketing, organizing customercontact, and intellectual commitment for product concepts, performance andspecifications. One has to continuously determine the customer requirementsand expectations. Hearing the ‘voice of the customer’ is the key issue. It’scustomer definition of value that counts for a faster and flexible supplychain.

· Cross-functional Teams for Product Design: These companies use design,manufacturing, marketing & distribution for responding and communicatingthe needs of the customer throughout the organization, and integrate thecross-functional teams for a better quality product in a faster time frame.Team approach to product development and improvement has allowed manycompanies to achieve 4 to 6 fold improvements in product reliability, 70-90%reductions in warranty costs, 40-50% reduction in workmanship and 20-40%reductions in product costs. It is a key for becoming world-classmanufacturers and the top management can influence this aspect more thananyone else, since It is more of cultural changes than technological.

· Quality Improvement: There is no compromise in quality as far as suchcompanies are concerned. The quality improvement department continuouslyserves as a support and coordinate functions for quality improvements andexcellence all through the organization.

· Process Control: These companies, control the products based on statisticsand encourage decision making at operating level using local data sources onkey variables for comparisons against customer needs.

· Innovation: These companies are innovators, who constantly experiment toimprove existing products and processes, and develop new ones (Deshmukh& Mohanty 2004). Lesser variability and greater capability.

· Partnership: Vendor partnership provides a win-win situation as regardsquality improvement and new product development efforts. These companiesseek outwardly for such partnership like relationship, since suppliers areimportant to success and crucial too.

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Integrated Operations/Production: They are further sub-divided as under:

· Cellular Manufacturing: The main focus in standardizing and simplifyingtheir manufacturing operations and related instructions, thereby, reducingcomplexity, and facilitating the effective use of continuous-flow processingconcepts for reducing lead-times, process inventories and materials handling.Continuous flow processing, often implemented through cellularmanufacturing, provides quantum leaps. Improvements in manufacturinglead-time from 10-12 weeks, to one to three days are common along withcorresponding reductions in work-in-process levels from weeks to days.These companies use multi-disciplined and multi-level work teams tostandardize and simplify changeover procedures, thus reducing equipmentdowntime during job changeovers and allowing production in smaller lot sizes,a key requirement for flexible production.

· Demand-based Processing: These companies believe that by adopting anenlarged view of manufacturing operations even at the cost of allowingmachines to sit idle can provide gains in plant efficiency and quality;whereas, pushing the machines to their optimum usage can yield poor qualityproducts and longer manufacturing lead-time, over and above wear and tearof the machines.

· Standardization: World-class companies rely on high technology andautomation more as complementary tools than as part of the manufacturingstrategy, with focus on standardization, simplifying and proving the integrityof the manufacturing process before automating. Automation beforestandardization creates non-solving problems. It focuses on flexible changesand decisions and avoids making expensive changes and inflexible decisions.Shankar says, principal of USA (understand, simplify and automate) isextensively applied by these companies, in their organization.

· TPM (Total Productive Maintenance): In these organizations preventiveand predictive maintenance are given importance, based on workerinvolvement so as to minimize occurrence of machine downtime.

Technological Advances.

· Communication Systems: These companies recognize the importance ofeffective communication skills and strive to establish and maintain simpleprocedures so as to provide timely and accurate information flow throughoutthe manufacturing enterprise (Chatterjee 2000). Information is the basicsurvival of any organization, both directional and feedback oriented. It is themanagement’s responsibility to provide effective, simple and appropriateinformation to the workforce for better results.

· Information Technology (IT): It can be utilized in a big way to thecompetitive advantage of an organization. Data mining and warehousing andERP are the technological solutions available today. The main purpose beingshortening the lead-time and remove non-value added activities.

· Human & Technology Interface: These companies recognize andacknowledge the interface and importance of humanity and technology. It isthe responsible of the top management to do so across the organization. Therequired resources are so deployed so as to make the interface more andmore active. At every stage of technology deployment, the human issues aredealt in a serious manner. All these don’t happen automatically, but with theinterference of the management’s leadership, and application of the policiesto strive better to eliminate waste and creating better value for the customer,the end user.

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Fig 7.1.: A Model for Supply Chain Excellence

Activity 1

Identify the role of management in integration of SCM and its positive implicationon the organization through a case study you have encountered.

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7.3 GLOBALIZATION

WCSCM is responsible for those actions and values responsible for continuous upgradation and improvement of the development, design & management process ofa firm’s supply system. The main objective is to, improve the profitability, survivaland mere existence of both the supplier and the customer. A world-class supplymanager is not departmentally or internally focused, but concentrates incontinuously improving the system with an ultimate goal of upgrading thecompetitive capability of the firm and it’s supply chain.

Senior management must always recognize supply management’s critical natureand support the required transformation, to see the firm grow to a world-classstatus. It is indeed necessary in that case to appoint a Chief Supply Officer atthe organizational level equated in stature and responsibility like the marketing,engineering and operations. The transformation has to be planned very carefullyand executed well with the commitment of the top management and theirinvolvement.4

7.3.1 Organizing for Global Markets

Before going global you got to answer the set of six questions, which needs tobe addressed as a candidate of global sourcing:5

4 WCSM, chapter 1 by Burt, Dobler & Starling, pp. 6-7.5 Raul Casillas, “Foreign Sourcing: Is it for you?” Pacific purchaser, November-December 1988, p.9

(Burt & Dobler in WCSM Tata Mc Graw-Hill pp. 361-369.)

ULTIMATE COMPANY AIM

REWARD SYSTEM

LEADERSHIP, VISION &

STRATEGIC PLANNING

FORESIGHT IN PLANNING

CUSTOMER SATISFACTION

MARKET GROWTH

VENDOR INTERFACE

QUALITYCONTROL

ROLE OF TOP MANAGEMENT AND ITS BEARING ON SCM

HOLISTIC OBJECTIVES& SYSTEMS THINKING

TECHNOLOGYADVANCES/

DEVELOPMENT

DEVELOPMENT OF

HUMAN RESOURCES

INTEGRATION OF

PRODUCTION & OPERATIONS

SOCIETAL CHANGES

WORKER SATISFACTION

LEVEL

COMPANY PROFILE

BRAND NAME

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· Does it qualify as high-volume in your industry?

· Does it have a long life (two to three years)?

· Does it lend itself to repetitive manufacturing or assembly?

· Is demand for the product fairly stable?

· Are specifications and drawings clear & well defined?

· Is technology not available domestically at a competitive price and quality?

If the answer to all the six questions is yes, then the supply manager may wantto evaluate the support network within his/her firm, asking the following questions:

· Does sufficient engineering support exist to efficiently facilitate engineeringchange orders (ECOs) when they occur?

· Will the buyer be able to allow sufficient time to phase out existing “in thepipeline” inventory?

· Will the supply managers firm take the responsibility for providing thenecessary education and training for those that will have to interact with andsupport foreign suppliers?

· Is the firm ready to make a financial commitment for expensive trips to thesupplier?

· Is the management willing to change the approach, in some cases evenpolicy matters of how business and related transactions are conducted?

· Is the buyer aware of the environment?

If the answer is positive to both sets of these questions, global sourcing ispossible.6

Activity 2

Visualize the impact of globalization and its effect on Indian companies and howthey could effectively gear up to the international order?

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7.3.2 Stages to Global SCM

Most of the firms today are replacing the term international sourcing by abroader philosophy of “global supply management”.7

The three stages of world class wide sourcing is as follows, as suggested byJoseph Carter:8

····· Stage One: International Purchasing : Organizations focus on leveragingvolumes, minimizing prices, and managing inventory costs. These areas arethe characteristics of an organization first entering the global purchasingarena.

6 Burt & Dobler in WCSM by Tata Mc Graw-Hill pp. 369-370 (7th edition)7 Robert M. Monczka & Robert J. Trent, Global Sourcing: A development Approach”’ International

Journal of purchasing and materials Management, Spring 1991, p. 3 (Burt & Dobler in WCSM by Tata McGraw-Hill pp. 365-366)

8 Joseph R Carter, PhD, “The Global Evolution”’ Purchasing today, July 1997, p. 33 (Burt & Dobler inWCSM by Tata Mc Graw-Hill p. 365)

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····· Stage Two: Global Sourcing : Organizations focused on globalopportunities will put more emphasis on supplier capability, supportingproduction strategies, and servicing customer markets. Of those that havesourced offshore for some time, most are at this stage.

····· Stage Three: Global Supply Management : Organizations optimizessupply networks through effective logistics and capacity management. Theseorganizations have effectively minimized risks in offshore sourcing and havesourced worldwide for technology leadership.

(As enumerated by Burt, Dobler & Starling in their book World Class SupplyManagement)

Let us now take a look at the reasons for doing global sourcing.

It requires additional efforts as compared to regional/domestic sourcing; butnatural, but yields greater profits in the bargain. The biggest criticality orcomplexity of purchasing goods from foreign countries is the wide variabilityavailable in the open market. The difference comes in quality, services and thedependability factor. Quality could be very high in the products of a particularcountry and unacceptably low or inferior in another. With this in the backdrop letus now see the reasons for purchasing the goods and services from internationalsources.9

····· Superior Quality : A key reason to global supply management is to obtainthe required level of quality. Although this is loosing its significance, yet themanagers worldwide are still looking at international sourcing for the criticalquality requirements.

····· Better Timed : Another good reason for global tendering is to meet theschedule requirements. Lead-time between orders and delivery is lesser ascompared to domestic sourcing and more reliable too. This aspect has infact improved considerably over the years and so has the capability of thesuppliers in meeting the growing requirements. Once the initial hiccups arestabled many international sources have proved more dependable than thosecloser home, specifically in meeting the time schedule.

····· Lower Cost : There are a lot of add on expenditures that are involvedduring international sourcing compared to domestic ones. Communications,transportations, duties and investigation of potential supplier’s add to theseexpenses, however, cost of material being cheaper compensates theseexpenses. Yet, it’s very seldom that a company’s total cost of materialthrough global sourcing could be lowered.

····· Advanced Technology : Globally this is more advanced as compared todomestic products and materials. Advantage will always be of themanufacturer who can identify the right source of the technologicallysuperior material in order to maintain a monopoly in business. Anentrepreneur who fails to identify this will loose out on the productcompetition too soon.

····· Larger Supply Base : International sourcing increases the number ofpossible suppliers resulting in a choice among many. Competitiveness willenhance the chances for the firm to get the best deal keeping in mindreliability and low cost options. Broadening the supply base doesn’t increasethe quantity of suppliers but increases the options of finding better suppliers,so as to enable the purchaser firm to reduce the number of contractedsuppliers and pursue collaborative or alliance relationship at the appropriatetime.

9 “World Class Supply Management,” Burt, Dobler & Starling Tata Mc Graw-Hill pp. 366-367, 7th edition.

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Larger Customer Base : Global sourcing can create opportunities to sell incountries where the buyer’s suppliers are based. With minimal trade restrictionssales opportunities could arise just out of interaction itself. Yet, some countrieshave arrangements like barter, offsets or counter trade, wherein there aretremendous trade restrictions. Here the international suppliers/non-domesticsuppliers are required to procure materials in the buying country as part of salestransactions. This kind of tying makes both marketing and supply management farmore challenging than when pure money transactions are involved. Such anarrangement of competing and selling in many countries makes it a necessity toenter into some kind of agreement to purchase items from that particular country,Fig 7.2 (a).

Fig 7.2(a): Global Tendering

There are however certain criticalities in going global too, it’s not so easy as itseems and one has to keep this at the backdrop before setting out, fig 7.2.2(b).

· Cultural Aspects : These are mostly in relation to beliefs and superstitionsthat are generally prevailing in Asian and African countries. These are realissues and shouldn’t be ignored.10 These are generally due to the versatileregions available across the globe; every region has its belief and faith thatrevolve around their day-to-day dealings.

· Longer Timeframe : Longer lead-time in shipping of material and servicesfrom international sourcing creates a major problem. Generally through sea,which are prone to storm damage. Hence, there is a requirement to tap theaerial route; a much costlier option although.

· Inventory Increase : There could be an increase in inventory in suchconditions, and this can never be determined. Therefore to obviate suchcriticalities inventory-carrying cost must be added to purchase price, thefreight costs, and administrative cost to determine the actual cost of buyingfrom global resources.11

· Inferior Quality : As mentioned earlier, global sourcing is generally resortedto due to high level of quality control, however, there are chances that thereis a risk of production outside the control of the domestic firm, resulting in“off-spec” incoming material. Like for example, the United States is the onlymajor non-metric country in a metric world, which frequently leads tomanufacturing tolerance problems for buyers of US products and viceversa.12

· Labor Problems : This is a growing problems world over, mainly in thethird world countries. This would entail stringent measures to be adopted bythese countries to improve the labor laws to tide over this menace.

10 Chapter Strategic Sourcing: WCSM by Burt & Dobler Tata Mc Graw-Hill, pp. 368-369.11 ‘Additional Inventory’ paragraph 3 of Potential Problems, WCSM, and p. 368.12 “Lower Quality”, paragraph 4 of Potential Problems, WCSM, p. 368.

GLOBAL TENDERINGADVANCEDTECHNOLOGY LOWER COST

TIMELINESS

LARGERCUSTOMER BASE

LARGER SUPPLYBASE

SUPERIOR QUALITY

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· Cost Factor : There are a considerable amount of add on costs due to thecommunication factor, translators cost, and distances involved. Theseincrease the cost of doing business. Moreover, inadequate logistical supportcomplicates communication and product distribution in the long run.

· High Opacity : Bankers, investors and supply managers involved in globalactivities have been aware that the risk of conducting business varies fromcountry to country. Recently, a risk factor called the “opacity index” hasbeen developed to address the risk costs associated with conducting businessin a specific country.13 It addresses the following areas:

· Corruption at bureaucratic levels.

· Contract & property right laws.

· Economic policies.

· Accounting standards.

· Business regulations.

Fig 7.2.2 (b): Criticalities in going Global

China for example has a higher opacity in comparison to USA. US have fewerhurdles of types mentioned above and very less corruption.

7.3.3 Supply Channels

After having decided to go global the next step is to infer the supply channelsthat are to be used. Direct procurement is the easiest and lowest cost option toprocure goods globally. It entails dealing with all the associates in procurement bythe buying firm along with the facilities. However, limited resources in supplymanagement may make direct procurement infeasible more often than not.Therefore, intermediaries will play a key role in streamlining the efforts ofprocurement through international sources, in fact, the simplest way to procureglobally.14

Though sourcing through the intermediaries is costly option, yet, in most of thecases it avoids many unforeseen problems. The supply manager venturing intoglobal sourcing is advised to solicit the advice of the contemporaries from thelocal supply management association. Certain, typical intermediaries are asmentioned below:15

13 “The Opacity Index: Launching a new measure of the effects of opacity on the cost and availability of capitalin countries World-wside (Executive Summary)”, Price Waterhouse Coopers, London, January 2001, pp.1-3. http://www.opacityindex.com/. Burt, Dobler & Starling in WCSM, Tata Mc Graw-Hill, p. 369.

14 ‘Supply Channels’ Strategic sourcing in WCSM by Burt, p. 370.15 N. A. DiOrio, “International Procurement”, Guide to Purchasing 1987, p. 7, & Strategic Sourcing WCSM,

TMH, pp. 370-371.

LABOURPROBLEMS

OPACITYINDEX

CRITICALITIES IN GOING GLOBAL

HIGHOPACITY

INFERIORQUALITY

LONGER TIMEFRAME

INVENTORYINCREASE

CULTURALASPECTS

COSTFACTOR

· Corruption at bureaucratic levels· Contract & property right laws· Economic policies·Accounting policies· Business regulations.

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· Import Merchants: They buy the goods for their own account and sellthrough their own outlets. They including all intermediary activities carry outall the risks of clearing.

· Commission Houses: They generally act for exports abroad, like selling inUSA & receiving commission ex foreign exporters. Bills are generally neverbilled to them, though they handle all clearing of shipping and customs.

· Agents: These are representatives or firm that carry out the selling. Theyhandle all the clearing and handling of material but hold no financialresponsibility of the principal. They receive their commission from the sellerand hence their primary interest is the exporter.

· Brokers: Just like the marriage brokers, they mediate between the buyer &the seller from different nations. They receive the commission from both thebuyer & the seller, but are not involved in clearance/shipment of the material.They often do act as special purchasing agent against commission, for pre-designated material. They don’t have any fiscal responsibility of the seller,just like the import brokers.

· Trading Companies: These are large companies that generally perform allfunctions like the agents/groups listed above. They have an added advantageover the others and are listed in directories and trade publications.

· Subsidiaries: They are established by MNCs in countries where a physicalpresence is required to improve competitive capability and/or meet hostgovernment restrictions. Akin to most of the publishing houses that carry outreprint of the popular titles worldwide from established publishing house andalso act as their subsidiary in India. Hitachi America is also such an examplethat was created primarily to look after the interest of North Americanmarket. Subsidiaries can increase sales and lower employment costs by theprincipal of sons of the soil concept. They slowly develop the host managersover a period of time and train them according to their requirements. Mostof the MNCs in India are following this principle, like Citibank, HSBC andAlcatel. These subsidiaries offer to set prices in the local currency anddeliver material to buyers with all duties paid. However, at times they couldblock flow of technical information since they are remote from manufacturingand marketing decision.

The above are the intermediaries for global trade and an organization interestedin going global should perforce follow the proper channel, lest you fall prey to theupheavals of the host country. Various offices like the IPO (internationalprocurement offices) are set worldwide to tide over these intricacies. Theseoffices facilitate business transactions and interactions in the foreign country andsurrounding areas.

7.4 INTERNATIONAL LOGISTICS

‘Logistics management includes the design and administration of systems tocontrol the flow of material, work in progress and finished inventory to supportbusiness unit strategy’, (Krishnaveni Muthiah 2003). Logistics is a strategicresource and its importance has to be understood by one and all (the functionalmembers in the supply chain). But, in order to achieve this strategic influence, agood amount of competency has to be achieved and a well-defined logisticalmission and objective has to be committed to, by everyone in the firm, especiallyby the top management.

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As brought out earlier in unit 4, international logistics can be well comprehendedwith this figure, the triangle that is formed in the supply chain management(SCM), fig 7.3 (a).

Fig. 7.3 (a) World class supply chain management

The Three Critical Components of WCSCM are:

· World class Supply management

· World class Demand management

· World class Logistics management

As discussed earlier, the logistics professionals play a vital role in shaping thesuccess of WCSCM as regards management of transportation, storage andwarehousing is concerned. We sometimes do tend to ignore the role of logistics,but the supply and demand chain cannot be met without the integrated and close-knit support of the logistics.

International Logistics management deals with receiving, handling, movement,storage and delivery of material, services and finished product in a WCSCMsystem, at a global level. Logistics is required both at the beginning and at theend of it, Fig7.3 (b).

Fig. 7.3(b): International Logistics management

WORLD

CLA

SS D

EMAND

MANA

GEMENT W

ORLD CLASS LOGISTICS MANAGEM

ENT

RECIEPT HANDLING MOVEMENT STORAGE

DELIVERY

TO CONSUMERS

TOMANUFACTURER

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As Coyle puts it, “ logistics is the part of supply chain process that plans,implements and controls the efficient, effective flow & storage of goods, servicesand related information from point of origin to point of consumption for thepurpose of conforming to consumer requirements”. Logistics include the followingrole, Fig 7.3 (c).

Fig. 7.3 (C): Role of Logistics

An effective SCM system will never be possible without the integration oflogistics, since logistics is the foundation of SCM discipline and is responsible forits activities. Needless to mention here is that the transportation cost is theheaviest in the entire chain, and even more than product selling prices. Therefore,in order to maximize customer satisfaction and meeting firm’s goal it ismandatory to ensure that effective storage facilities for goods and services are inplace.

7.4.1 Integrating Logistics

Logistics planning has to be integrated with material and capacity planning inorder to achieve maximum and optimum level of satisfaction. The needs andrequirements of our customers is variable and never a constant factor. Therefore,in order to serve them better and be profitable you got to tailor your logistics andensure it to be more dynamic with passing time. The emphasis should be onreduction of cycle time and elimination of waste in order to increase customersatisfaction. You have to understand that movement of goods, warehousing ofmaterials and delivery is time consuming and at times requires precisionsynchronization at all levels i.e. from supplier to manufacturer and frommanufacturer to consumer (unit 4). But things at the international level are muchcomplicated. The coordination aspects required are tremendous and detailedplanning is required before execution of the logistics movement.

ROLEOF LOGISTICS

SERVICE SUPPORTDEMAND FORECAST

WAREHOUSING &STORAGE TO INCLUDE

INFRASTRUCTURE

TRAFFIC CONTROL &TRANSPORT

MANAGEMENT

SALVAGEMANAGEMENT &

DISPOSAL

MATERIALSMANAGEMENT &

HANDLING

INVENTORYCONTROL &

MANAGEMENT

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7.4.2 World Class Logistics Management (WCLM)

The third side of WCSCM triangle, is the WCLM include the following:

· Value-added Activity: WCLM ‘tailors’ products to the consumers/customersneeds and requirements. Logistics characteristics for each type of customerare incorporated into each product’s specifications. Product testing prior todelivery, packaging for unique storage related to the type of product beingshipped, specialized marking and labels, and tracking of products through thesupply chain are some of the events involved in WCLM. These are thevalue added activities that take place and are enhanced as per the customerrequirements.

· Real Time Trace Ability of Materials and Product: WCLM organizationsemploy paperless inventory status and movement in real time, through out thesupply chain.

· Enhanced Logistics Competency: Logistic competencies of the supply chainmembers are continuously being gauged by survey and related activities.Effort is on to reduce waste and continuous improvement in all spheres.Focus is generally ‘outward’ towards extended enterprise.

· Collaborative Cross-functional Teams: (as discussed earlier in same unit):They involve both the customers and the suppliers and integrate theirrespective functions under one head. Actually, more often than not thechanging pace of market and technological advances mandate therequirement of a team based effort and a collaborative approach to logisticsplanning and execution.

Each of the functional areas in SCM is important to each other and together theyserve an important role in achieving WCSCM. The professionals in logistics,finance, marketing, accounting, engineering, IT, and other functional areas arenever geared adequately both in skills and know how to manage theinterrelationship based on which the successful supply chains are built. Theintegration of these functional areas is what separates the excellent from thelesser ones.

It is quite unfortunate that supply management and logistics don’t collaborate theway it should in many companies, and hence, effort should be there tocollaborate these functional areas and integrate them to perform better. Thiswould not only gather efficiency but at the same time will eliminate wastes in abig way.

7.5 SUMMARY

Moving towards a global market requires detailed planning, foresight, flexibilityand integration. In order to achieve excellence and a competitive advantage inthe global market the companies have to continuously modify their strategies inorder to remain embedded in the international markets since, the competition levelis much more. Foundation of a company will also play a leading role inestablishing itself globally. A well-conceived and accepted strategic plan is to beevolved which has to be far-sighted and look after the long-term aspects of thecompany, and not be myopic in nature.

A sound strategic plan, however, makes the ultimate difference in the amount ofgains achieved in quality, quantity, productivity, cost reduction and manufacturingflexibility, the key components of value, which determine competitive advantageand profitability. Actually, establishing the strategic plan is the first step towardsachieving excellence.

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More often, a firm’s approach to global supply management progresses from areactive mode to a proactive one. Therefore, in order to remain in thiscompetitive world the supply management professionals must have the followingability:

· Develop a strategic point of view with relation to global supplymanagement

· Deal with continuous changing scenario

· Dealing with diversity in culture

· Work with and within distributed organizational structures

· Work with others as team members and leaders

· Communication aspects.

Keeping the above in mind we can conclude by saying that this will not only helpus to become successful supply chain professionals but also help us in becomingbetter human beings in this far reached professional and busy environment.


1) Explain in brief international SCM.

2) How can you organize your company for global markets? Give relevantexamples to elucidate your point.

3) Explain the interfacing between logistics and functional members of thesupply chain, with examples.

4) Logistics is a strategic resource; discuss the same in the global context.

5) Explain global sourcing and its advantages and disadvantages. How can youarrive at the best course of action for global sourcing?

6) Explain world-class management model in respect to SCM.


1) Krishnaveni Muthiah, (2003), ‘Logistics Management & World Sea-borneTrade,’ by Himalaya Publishing House, Mumbai.

2) Deshmukh & Mohanty, ‘Essentials of Supply Chain management,’JAICO, Publishing House, Mumbai.

3) ‘Design & Management of SCM’, Simchi-Levi, David Kaminsky, PhilipSimchi-Levi, Edit (2004), Tata Mc Graw-Hill.

4) Burt, Dobler & Starling, (2002), ‘World Class Supply Chainmanagement’, Tata Mc Graw-Hill.

5) Dr KK Khanna,‘Physical Distribution Management & LogisticalApproach’ Himalaya Publishing House, (Eighth reprint)

IT ENABLED SCM

Unit 8Information Technology : A Key Enabler of SCM 5

Unit 9Intelligence Information System 22

Unit 10IT Packages in SCM 46

3Block



Chain Management
















December, 2004


ISBN-81-






















BLOCK 3 IT ENABLED SCM

Unit 8: Information Technology: A Key enabler of SCM enables one to be onfamiliar terms with the importance of information in Integrated Supply ChainManagement. It discusses the categories of information and their role in Interorganizational setup. It describes the methods of determining the informationrequirements for a supply chain. Finally, it describes Information Technology and itsapplications in Supply Chain Management for increasing efficiency.

Unit 9: Intelligence information system deliberates the recent developments in theinformation system, particularly in the supply chain context. It discusses aboutMaterials Requirement Planning (MRP), Enterprise Resource Planning (ERP), andDistribution Resource Planning (DRP/DRP-II). It ends with comparing ERP andSupply Chain Planning (SCP).

Unit 10: IT packages in SCM highlights the importance of software packages inBusiness. It portrays the advantages and limitations of software packages of SCM. Itdescribes a few software packages such as BaaN, SAP, i2/RHYTHM. It also had adiscussion on a few success stories of software packages to the SCM.

4

IT Enabled SCM

5

IT Packages in SCMUNIT 8 INFORMATION TECHNOLOGY: A KEY

ENABLER OF SCM

Objectives


· recognize the importance of Information in Integrated Supply ChainManagement;

· discuss the categories of information and their role in Inter organizationalsetup;

· describe the methods of determining the information requirements for asupply chain; and

· be familiar with the Information Technology and their applications in SupplyChain Management for increasing efficiency.

Structure

8.1 Introduction

8.2 Information and Technology in the Integrated Supply Chain

8.3 Importance of Information in Integrated Business

8.4 Inter Organizational Information Systems (IOIS)

8.5 Information Requirements Determination for a Supply Chain

8.6 Information and Technology Applications for SCM

8.7 Summary



8.1 INTRODUCTION

To survive, thrive and beat the competition in today’s brutally competitive world,one has to manage the future. Managing the future means managing information.In order to deliver quality information to the decision-maker at the right time andin order to automate the process of data collection, collation and refinement,organizations have to make Information Technology an ally, harness its fullpotential and use it in the best possible way.

Information technology is revolutionizing the way, in which we live and work. Itis changing all aspects of our life style. The digital revolution has given mankindthe ability to treat information with mathematical precision, to transmit it with highaccuracy and to manipulate it at will. These capabilities are bringing into being, awhole world within and around the physical world. The amount of calculationpower that is available to mankind is increasing at an exceptional rate. Computersand communication are becoming integral parts of our lives.

IT has a major role to play in any organization. All organizations have certainobjectives and goals to achieve. For any organization to succeed, all businessunits should work towards this common goal. But each department or businessfunction in the organization will have its own goals and procedures. The successof an organization rests in resolving the conflicts between the various businessfunctions and making them do what is good for the organization as a whole. Forthis, information is critical. Everybody should know what is happening in otherparts of the organization.

6

IT Enabled SCM IT has a major role to play both at the organizational level and at thedepartmental level. At the organizational level, IT should assist in specifying theobjectives and strategies of the organization. IT should also aid in developing andsupporting, and procedures to achieve them. At the departmental level, IT mustensure a smooth flow of information across departments, and should guideorganization to adopt the most viable business practices. At this level, IT ensuresseamless flow of information across the different departments and develops andmaintains an enterprise – wide database. This database will eliminate the need ofthe isolated data islands that existed and in each department and make theorganization’s data accessible across the departmental boundaries. Thisenterprise– wide sharing has many benefits likes automation of procedures,availability of high quality information for better decision-making and fasterresponse times.

In this unit, we will learn the importance of the information required for effectivesupply chain management and a number of information technologies and theapplication of the information that organizations are using to make informationreadily available across the supply chain.

8.2 INFORMATION AND TECHNOLOGY IN THEINTEGRATED SUPPLY CHAIN

As discussed in the earlier Blocks, the supply chain management is concernedwith the flow of products and information between the supply chain membersthat encompasses all of those organizations such as suppliers, producers, serviceproviders and customers (See Figure 8.1). These organizations linked together toacquire, purchase, convert/manufacture, assemble, and distribute goods andservices, from suppliers to the ultimate and users.

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IT Packages in SCMBy 1980, the information revolution was well accepted in the world’s advancedeconomics. During this period, many standard business processes and functionssuch as customer order processing, inventory management, and purchasing werealtered through the use of computer technology. These technologies andcapabilities began to grow exponentially since 1985, providing means for multipleorganizations to coordinate their activities in an effort to truly manage a supplychain.

Today, information and technology must be conceived of broadly to encompassthe information that businesses create and use as well as a wide spectrum ofincreasingly convergent and linked technologies that process the information withthe emergence of the personal computer, optical fiber networks, the explosion ofthe Internet and the world wide web. The cost and availability of informationresources allow easy linkages and eliminate information-related time delays in anysupply chain network. This means that organizations are moving toward aconcept known as Electronic Commerce, where transactions are completed via avariety of electronic media, including electronic data interchange (EDI), electronicfunds transfer (EFT), bar codes, fax, automated voice mail, CD-ROM catalogs,and a variety of others. The old “paper” type transactions are becomingincreasingly obsolete. Leading-edge organizations no longer require paperpurchase requisitions; purchase orders, invoices, receiving forms, and manualaccounts payable “matching” process. All required information is recordedelectronically, and associated transactions are performed with the minimumamount of human intervention. Recent developments in database structuresallowed part numbers to be accumulated, coded, and stored in databases, andelectronically ordered. With the application of the appropriate information systems,the need to constantly monitor inventory levels, place orders, and expedite orderswill soon become a thing of the past.

8.3 IMPORTANCE OF INFORMATION ININTEGRATED BUSINESS

Information is the key to the decision making in Business. Prior to the 1980s, asignificant portion of the information used to flow between functional areas withinan organization, and between supply chain member organizations, were paper-based. In many instances, these paper-based transactions and communicationswere slow, unreliable, and error prone. Conducting business in this manner wascostly because it decreased firms’ effectiveness in being able to design, develop,procure, manufacture, and distribute their products. During this period, informationwas often overlooked as a critical competitive resource because its value tosupply chain members was not clearly understood. However, firms that areembarking upon supply chain management initiatives now recognize the vitalimportance of information and the technologies that make this informationavailable.

In a sense, the information systems and the technologies utilized in the supplychain represent one of the fundamental elements that link the organizations into aunified and coordinated system. In the current competitive climate, little doubtremains about the importance of information and information technology to theultimate success, and perhaps even the survival, of any supply chain managementinitiative. Cycle time reduction, implementing redesigned cross-functionalprocesses, utilizing cross-selling opportunities and capturing the channel to thecustomer underpin the competitive positioning of business.

Timely and accurate information is more critical now than at anytime. Threefactors have strongly impacted this change in the importance of information.

8

IT Enabled SCM 1) Satisfying, in fact pleasing, customers have become something of a corporateobsession. Serving the customer in the best, most efficient, and effectivemanner has become critical, and information about issues such as orderstatus, product availability, delivery schedules, and invoices has become anecessary part of the total customer service experience.

2) Information is a crucial factor in the managers’ abilities to reduce inventoryand human resources requirements to a competitive level.

3) Information flows play an essential role in the strategic planning for anddeployment of resources.

The need for virtually seamless bonds within and between organizations is a keynotion in the essential nature of information systems in the development andmaintenance of successful supply chain. That is, creating inter-organizationalprocesses and link to facilitate delivery of seamless information betweenmarketing, sales, purchasing, finance, manufacturing, distribution and transportationinternally, as well as inter organizationally, to customers, suppliers, carriers, andretailers across the supply chain will improve fill rates of the customers service,increase forecast accuracy, reduction in the total inventory and savings in thecompany’s’ transportation costs - goals which need to be achieved.

Clearly, the need to share information across the supply chain is of paramountimportance. In fact, inaccurate or distorted information from one end of a supplychain to the other can lead to tremendous inefficiencies such as excessiveinventory investment, poor customer service, lost revenues, misguided capacityplans, ineffective transportation, and missed production schedules. This is termedto be bullwhip effect, which is commonly being experienced by the consumergoods industries. Suitable technologies such as bar codes and scanners have beendeveloped and applied in the portions of supply chain and remove inaccurate ordistorted information.

Activity 1

Develop procedures to elicit and define information needs for making a decisionfor an organization of your choice. How would you implement your plan? Whatare the problems?

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8.4 INTER ORGANIZATIONAL INFORMATIONSYSTEM

In supply chain management, the suppliers, producers, retailers, customers, andservice providers are the members and are linked through the ultimate level ofintegration. These members are continuously supplied with information in realtime. The foundation of the ability to share information is the effective use ofInformation Technology within the supply chain. Appropriate application of thesetechnologies provides decision makers with timely access to all requiredinformation from any location within the supply chain. Recognizing the criticalimportance of information in an integrated supply chain environment, manyorganizations are implementing some form of an inter-organizational information

9

IT Packages in SCMsystem (IOIS). IOISs are the systems based on information technologies thatcross organization boundaries.

An IOIS is an integrated data-processing/data-communication system utilized bytwo or more separate organizations. These organizations may (buyer-supplier) ormay not (credit clearing house) have a preexisting business relationship. Whatmust exist is a computer-based electronic link between the two organizations thatautomates some element of work, such as order processing, order-statuschecking, inventory-level review, shipment tracking information or, minimally,transaction transfer, which would previously have been performed manually orthrough other media, such as the mail.

Among the earliest forms of IOISs were those developed by time-sharingservices and on-line database vendors. The potential impact of such systems onthe way business is conducted was recognized as early as the 1960s. Since thattime, new technologies have been integrated to produce systems of increasingcapability. Examples of such implementations include electronic funds transfer(EFT) systems, the Treasury Department’s decision support system, a variety ofbuyer-supplier order-processing systems, and on-line professional tool supportsystems. Existing implementations serve the grocery industry, the drug wholesalingindustry, the insurance industry, and the transportation industry, with more systemscoming into existence each year.

The development of an IOIS for the supply chain has three distinct advantages:cost reductions, productivity improvements, and product/market strategy. Fivebasic levels of participation for individual firms within inter organizational systemare:

1) Remote I/O node, in which the member participates from a remote locationwithin the application system supported by one or more higher-levelparticipants;

2) Application processing node, in which the member develops and shares asingle application such as an inventory-query or order-processing systems;

3) Multi participant exchange node, in which the member develops and shares anetwork inter-linking itself and any number of lower-level participants withwhom it has an established business relationship;

4) Network control node, in which the member develops and shares a networkwith diverse applications that may be used by many different types of lower-level participants; and finally

5) Integrating network node, in which the member literally becomes a data-communications/data-processing utility that integrates any number of lower-level participants and applications in real time.

The participant shares a network of diverse applications with any number ofparticipants with whom it has an established business relationship. IOISparticipants may therefore be at a level lower, higher, or equal to the IOISsharing organizations. As organizations explore development of IOISs to supporttheir supply chain management efforts, they will be faced with several challenges.Developing a common language in terms of planning, format, and priority acrossseveral vastly different constituencies. Information sharing requirements are wellbeyond those of a manufacturer, and its distributor’s need to process orders in aconsistent way. All relevant information ultimately must circulate to and among allorganizations between the supply chain’s point of origin and its point ofconsumption, such as ordering (i.e., orders for component parts, services, andfinished products), inbound transportation, manufacturing, warehousing, inventorymanagement, outbound transportation, sales, marketing, forecasts, and customer-service information. Although organizations recognize the importance of an IOIS

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IT Enabled SCM for effective supply chain management, no one standard approach is being utilizedin terms of technology or information.

Activity 2

Consider your organization or an organization with which you can freely accessfor information. What are the most frequent indicators for evaluating theperformance of lower, middle, and top managers in the considered organization?Compare these indicators with that of another organization.

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8.5 INFORMATION REQUIREMENTSDETERMINATION FOR A SUPPLY CHAIN

It is important to ensure that the right information are captured and used tomanage the supply chains effectively (doing right things) and efficiently (doingthese things well). Four fundamental mistakes are commonly made whendetermining information requirements and these are:

1) Viewing systems as functional instead of cross-functional

2) Interviewing managers individually instead of jointly

3) Not allowing for trial and error in the detail design process

4) Asking the wrong questions during the interview.

Viewing systems as functional instead of cross functional is a very narrow andinappropriate perspective to take in the information requirements determinationprocess. Much of the information needed to make decisions within a givenfunction will come from sources outside the function. Therefore, it is necessaryto include all of the functions involved in an information system in order tofacilitate the development of the system that allows information to flow cross-functionally. When developing information systems to support an integrated supplychain, this cross-functional perspective needs to be extended to be cross-functional and inter-organizational, because the information required to makedecisions within one organization may come from another supply chain member.

To properly determine information requirements across organizations, it isimportant to use appropriate method that ensure all information requirements areidentified. Therefore, a cross-organizational session using several structural-interviewing techniques, including business systems planning, critical successfactors, and ends/means analysis are suggested for this purpose.

1) Business Systems Planning (BSP) is a structured interview techniquedeveloped by IBM. It focusses on the identification of problems anddecisions associated with an organizational process and determine whatinformation is needed to address them. For a supply chain management,analysts must identify supply chain management problems and decisions forthe member organizations. The result of this process is a set of tables listingthe problems that must be addressed, the decisions that must be made across

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IT Packages in SCMthe supply chain, and the information required to address them. Tables 8.1and 8.2 present Business Systems Planning examples.

Table 8.1: BSP–Problems/Solutions/Information

Problems Solutions Information

· Reduce order fulfillment ·Need to understand current ·Order fulfillment performancecycle times between supply order fulfillment performance for each organizationchain member organizations between supply chain · Total supply chainwhile maintaining or reducing members and logistics logistics costtotal supply chain logistics cost/performance trade-offs ·Order history betweencost. across the supply chain. supply chain members

· Inventory carrying cost peritem for each organization

· Transportation cost andlead times by differentmodes and carriers.

Table 8.2 : BSP–Decisions/Information

Decisions Information

· How to transport product X · Carrier and mode used by competition

· Transportation cost and performance by modeand carriers.

2) Critical Success Factors (CSF) focus on key performance areas that mustfunction effectively for the organization to be successful and associatedinformation requirements. For the supply chain, CSFs have to be identifiedfor each of the member organizations. As one might imagine, most of theorganizations have common CSFs. Once the CSFs are determined, theinformation needed to address the CSFs is then identified. Table 8.3 presentscritical success factors (CSF) example.

Table 8.3 : CSF–CSF/Information

Critical Success Factors Information

· Integrated supply chain performance · Performance measures for integrated supplymeasurement system chain.

· Performance measures for individual memberorganization.

·Actual performance for supply chain andorganizational measures.

·Targets/goals for measures.

·Historical performance for measures.

3) Ends/Means (E/M) analysis focuses on what it takes for an organization tobe both effective (doing the ‘right’ things) and efficient (doing these thingswell) and on the information needed to manage it. This interview techniqueconsists of two phases. First, the analyst identifies the ends that the supplychain members consider important, the effectiveness issues associated withthe ends, and the information needed to address them. The second phasedeals with means, their associated efficiency issues, and the informationneeded to address them. Table 8.4 and 8.5 present Ends and Means analysisexamples, respectively.

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IT Enabled SCM Table 8.4 : Ends/Means Analysis – Ends/Effectiveness/Information

Ends Effectiveness Information

· Reduce order-fulfillment · Minimize total supply · Customer preferencescycle times across the chain logistics cost (features, cost, time)supply chain in a way · Activity-based cost · Profit by supply chainthat improves customer accounting information member organizationsatisfaction. · Maximize profit · Supply chain performance

(order fulfillment cycle time,inventory levels, capacity,customer satisfaction).

Table 8.5 : Ends/Means Analysis – Means/Efficiency/Information

Means Efficiency Information

· Monitor inventory · Minimize cost required · Actual cost for measuringperformance: to measure inventory each factor- Total supply chain performance

inventory levels (days,Rs.)

- Organization inventorylevels (days, Rs.)

- Turns- Service levels- Costs.

The result of each of the structured interview techniques is a set of tables thatidentifies areas of concerns across the organizations and the associatedinformation needed to address these concerns. There will be some redundancy inthe information requirements identified when using multiple structured interviewtechniques. This helps to ensure that the analyst has a comprehensive andaccurate set of information requirements.

Traditional systems development also does not allow for trial and error whendesigning information systems. The outcome of this approach to systemsdevelopment has resulted in systems that need to be changed the day they areimplemented and, in a worst-case serve as systems that are totally unusable.Prototyping was introduced as a way to overcome these problems by validatingsystems requirements through experimenting, refining, and testing the system untilthe development team and users are satisfied that they have identified all of theinformation requirements for the system being developed. The specific informationidentified for the supply chain consists of ten primary categories. These categoriesand examples of information contained within them are shown in Table 8.6.

Table 8.6 : Supply Chain Information Categories

Information Categories Examples of Information contained in Categories

1. Production information Product specifications, price/cost, product sales history

2. Customer information Customer forecasts, customer sales history, management team

3. Supplier information Product line, product lead times, sales term & conditions.

4. Production Process information Capacities, Commitments, production plans.

5. Transportation information Carriers, lead times, cost

6. Inventory information Inventory levels, inventory-carrying costs, inventorylocations.

7. Supply chain alliance information Key contacts for each organization, partner roles andresponsibilities, meeting schedules.

8. Competitive information Benchmarking information, competitive product offering,market share information.

9. Sales and marketing information Point of-sale information, promotional plans.

10.Supply chain process and Process descriptions, performance measures, cost, quality,performance information delivery, time, customers’ satisfaction, etc.

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IT Packages in SCMActivity 3

Select a typical manufacturing organization and describe the dependencies thatexist among the departments. Prepare a dependency chart showing informationand material flows.

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8.6 INFORMATION AND TECHNOLOGYAPPLICATIONS FOR SCM

Many innovations on technology-based approaches are well suited to theenhancement of supply chain management, including Just-in-Time, QuickResponse, Efficient Consumer Response, and Continuous Replenishment – all relyheavily on the information made available through the latest technologicaladvances. In the development and maintenance of the supply chain’s informationsystems, both hardware and software must be addressed. Hardware includescomputers, input/output devices, and storage media. Software includes all of thesystem and application programs used for processing transactions, managementcontrol, decision-making, and strategic planning. A few examples of softwaretitles that address some aspect of supply chain management are presented below:

1) Base Rate, Carrier Select, and Match Pay (Version 2.0) developed byDistribution Sciences, Inc., with which users can compute freight costs,compare transportation mode rates, analyze cost and service effectiveness ofcarriers, and audit and pay freight bills;

2) A new software program developed by Ross Systems, Inc., called SupplyChain Planning is an integrated suite of constraint-based planning tools thatprovide demand, replenishment, and manufacturing tools for accurateplanning and scheduling of those activities. This software provides an end-to-end enterprise-resource planning solution incorporating the most advancedsupply chain planning capabilities available.

3) A technology partnership between Procter & Gamble Distributing Co. andSabre Decision Technologies resulted in a software system calledTransportation Network optimization, which allows shippers to give bidding,in twin streamlining the bidding and award process.

4) Logistility Planning Solutions was recently introduced to provide a programcapable of managing the entire supply chain from demand to supply bysynchronizing customer demand and supply constraints through the provisionof Internet enabled communications about forecasts, inventory, andreplenishments for all members of the chain.

Several technologies have gained popularity recently, due to their ability tofacilitate the flow of information across the supply chain. Electronic commerce,Electronic Data Interchange, Bar coding and Scanning, Data Warehouse, Internet,Intranet/Extranet, World wide Web, Decision Support systems are a relatively

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IT Enabled SCM recent phenomenon for supply chain management applications. These arediscussed in the following sections.

Electronic Commerce

Electronic Commerce is the term used to describe the wide range of tools andtechniques utilized to conduct business in a paperless environment. Electroniccommerce therefore includes electronic data interchange (EDI), e-mail, electronicfounds transfers, electronic publishing, image processing, electronic bulletin boards,shared databases, and magnetic/optical data capture (such as bar coding), theInternet, and Web sites. Electronic commerce is having a significant effect onhow organizations conduct business. Companies are able to automate the processof moving documents electronically between suppliers and customers in such amanner that the entire process is handled electronically; no paperwork is involved.With the rise of the Internet and the ability to transfer information cheaply andeffectively over the whole world, electronic commerce is becoming a major focusfor many organizations and represents a significant opportunity for integratedsupply chain management efforts.

Electronic Data Interchange

Electronic data interchange, commonly referred to “EDI”, is the computer tocomputer interchange of business documents and/or information between tradingpartners in standard data format. Where, trading partners means, cooperationbetween companies is required to get the EDI systems running properly.Computer-to-computer and standard data format mean information must beprecisely formated so that a computer can process the information without humanassistance. EDI replaces the traditional forms of mail, courier, or fax. It is beingutilized to link supply chain members together in terms of order processing,production, inventory, accounting, and transportation. It allows members of thesupply chain to reduce paperworks and share information on invoices, orders,payments, inquiries, and scheduling among all channel members. The benefits ofEDI are numerous: quick access to information, better customer service, reducedpaperwork, better communications, increased productivity, improved tracing andexpediting, cost efficiency, competitive advantage, and improved billing.

EDI improves productivity through faster information transmission as well asreduced information entry redundancy. Accuracy is improved by reducing thenumber of times an individual is involved in data entry. The use of EDI results inreduced costs on several levels, including:

1) Reduced labour and material cost associated with printing, mailing, andhandling paper-based transactions;

2) Reduced telephone and fax transmissions; and

3) Reduced clerical costs.

EDI is also tremendously beneficial in counteracting the bull whip effectdescribed earlier in this unit. Through the use of EDI, supply chain partners canovercome the distortions and exaggerations in supply and demand information byusing technology to facilitate real-time sharing of actual demand and supplyinformation. Although about 20 percent of all retailer orders for consumerproducts were placed via EDI in 1990, that percentage had grown to well over60 percent by the end of 1995. Clearly, firms are realizing that the use of EDI tofacilitate information sharing throughout the supply chain is beneficial.

In general, EDI is used for communication of business information such aspurchase orders, invoices, bills of lading, shipping instructions, productionsequences, inventory or order status, fund remittances, and point-of-saleinformation (in the case of retailers).

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IT Packages in SCMEDI cuts down time delays, labor costs, errors, inventory and uncertainty.Business with EDI reduces the paper work, which is about 4 to 7% of the valueof the goods traded. The EDI activities are the following:

1) Sales return could be analyzed and fed into the ordering process;

2) Orders could be raised to reflect both demand and known stock availability;

3) Instruction could be sent to distributors in parallel with the orders to ensurefast delivery;

4) Carriage by road, rail, sea, or air could be booked simultaneously;

5) Customs clearance documents could be available in advance of goodsarriving, avoiding hold ups;

6) Payment instructions could be issued to banks to ensure prompt payment.

Bar Coding and Scanning

At its most basic level, bar coding refers to the placement of computer readablecodes on items, cartons, containers, and even railcars. This particular technologyapplication drastically influenced the flows of product and information within thesupply chain. As noted throughout this unit, information exchange is critical to thesuccess of supply chain management. In the past, this exchange was conductedmanually, with error-prone and time-consuming paper-based procedures. Barcoding and electronic scanning are identification technologies that facilitateinformation collection and exchange, allowing supply chain members to track andcommunicate movement details quickly with a greatly reduced probability of error.The critical point-of-sale data that organizations such as Wal-Mart provide to theirsupply chain partners is made possible through the use of bar coding andscanning technology. This same technology is critical to transportation companies,such as FedEx, by enabling them to provide their customers with detailed trackinginformation in a matter of seconds.

Bar code scanners are most visible in the checkout counters of the supermarket.They scan the black-and-white bars of the Universal Product Code (UPC). Thiscode specifies the name of the product and its manufacturer. Bar codes are usedin hundreds of situations, ranging from airline stickers on luggage to bloodsamples in laboratories. They are especially useful in high-volume tracking wherekeyboard entry is too slow and/or inaccurate. Other applications are the trackingof moving items, such as components in PC assembly operations, railroad cars atvarious locations, and automobile in assembly plants. The general benefits of BarCode technology in the supply chain environment are: Speeds data entry,Enhances data accuracy, Reduces material-handling labour, Minimizes on-handinventory, Monitors labour efficiency, Improves customer service, Reduces productrecall, Verifies orders at receiving and shipping, Reduces work-in-process idletime, Monitors and controls shop floor activity, Improves shop floor scheduling,Optimizes floor space, and Improves product yield/reduces scrap.

Data Warehouse

Generally, a data warehouse is a decision support tool for collecting informationfrom multiple sources and making these information available to end users in aconsolidated, consistent manner. The concept originated in the 1970s, whencorporations realized they had many isolated information systems “islands” thatcould neither share information nor provide an enterprise-wide picture ofcorporate activities. Recently, there has been a renewed interest in this concept,as organizations adopt distributed computing architectures while they leveragetheir isolated legacy systems. Rather than trying to develop one unified system orlinking all systems in terms of processing, a data warehouse provides a means tocombine the data in one place and make it available to all of the systems.

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IT Enabled SCM In most cases, a data warehouse is a consolidated database maintained separatelyfrom an organization’s production system databases. It is significantly differentfrom a design standpoint. Production databases are organized around businessfunctions or processes such as payroll and order processing. Many organizationshave multiple databases, often containing duplicate data. A data warehouse, incontrast, is organized around informational subjects rather than specific businessprocesses. The data warehouse, then, is used to store data fed to it from multipleproduction databases in a format that is readily accessible by end users. Dataheld in data warehouses are time-dependent, historical data and may also beaggregated.

For example, separate production systems may track sales and coupon mailings.Combining data from these different systems may yield insights into theeffectiveness of coupon sales promotions that would not be immediately evidentfrom the output data of either system alone. Integrated within a data warehouse,however, such information could be easily extracted.

One immediate benefit of data warehousing is the one previously described in theexample about sales and marketing data. Providing a consolidated view ofcorporate data is better than many smaller (and differently formatted) views.Another benefit, however, is that data warehousing allows information processingto be off-loaded from individual (legacy) systems onto lower-cost servers. Oncedone, a significant number of end-user information requests can be handled bythe end users themselves, using graphical interfaces and easy-to-use query andanalysis tools. Accessing data from an updated information warehouse should bemuch easier than doing the same thing with older, separate systems. Furthermore,some production system reporting requirements can be moved to decision supportsystems – thus freeing up production processing.

Internet

In terms of advancement in technology and communications capabilities, perhapsthe most influential development over the past decade has been the adaptation ofthe Internet from strictly government and research applications into the areas ofcommerce and mass communications. At the most basic level, a network ofnetworks, the Internet provides instant and global access to an amazing numberof organizations, individuals, and information sources. Through systems like thepopular World Wide Web (the web), Internet users are able to conduct organizedsearches on specific topics as well as browse various web sites to discover thevast resources available to them through their computer.

The Internet offers tremendous potential for supply chain members to shareinformation in a timely and cost-effective manner, with relative case. Manyorganizations are now exploring the numerous opportunities provided by theInternet. For example, the Internet provides opportunities for the development ofEDI systems. It also provides an incredible source of information aboutpotential suppliers of products and services. A few examples of the type ofinformation available on the Internet are provided under the World Wide Webheading.

Although the potential benefits of supply chain applications on the Internet aresubstantial, as with any emergent technology, certain issues must be resolved. Akey Internet concern is the issue of privacy, the level of security for information.Privacy of information transmitted on the Internet is an issue for all users,particularly in the use of credit-card members and other sensitive information. Forsupply chain members already struggling with the challenge of freely sharinginformation, these issues only add to their concerns.

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IT Packages in SCMThese issues may soon be resolved. Currently, web software called ‘merchant’server is in advanced stages of development. Although present applications arebeing developed to assist with consumer transactions, such as providing secureconduits for payment information and transactions, other applications are not farbehind. One approach for such security problems is the development of thesupply chain’s own Internet.

Intranet/Extranet

Intranets are networks internal to an organization that use the same technologythat is the foundation of the global Internet. Many industry analysts expect suchcorporate networks to provide most of the revenue for computer hardware andsoftware vendors over the next few years as an increasing number of businessexpand their internal networks to improve efficiency.

By using Web browsers and server software with their own internal systems,organizations can improve internal information systems and link otherwiseincompatible groups of computers. Internal networks often start out as ways tolink employees to company information, such as lists, product prices, or benefits.Because internal networks use the same language and seamlessly connect tothe public Internet, they can easily be extended to include customers andsuppliers, forming a supply chain “Extranet” at far less cost than a proprietarynetwork.

World wide Web

The World Wide Web is the Internet system for hypertext linking of multimediadocuments, allowing users to move from one Internet site to another and toinspect the information available without having to use complicated commandsand protocols.

The implications of the Web for business applications are obvious and far-reaching. Web-based technology and tools have been developed in virtually everyindustry and forms of commerce. Supply chain functions are no exception. Forinstance, Enterprise Transportation management was recently launched byMetasys Inc. through the Oracle Web Applications Server; this system deploys avariety of critical information about transportation and distribution applicationsthroughout the supply chain. Further, the system can be accessed with any Java-enabled browser. Access may be controlled through a corporate network, via theInternet or an Intranet Web site.

The number of Web sites relevant to supply chain management is growing at arapid pace. From specific sites providing information about the capabilities andfees of potential supply chain partners to educational sites developed primarily onreference tools, the number of sites and variety of information available on theWeb is impressive. Examples of the Web sites available include the following:

1) www.con-waynow.com provides information about the expedited motor-carrier arm of Con-Way Transportation Services, providing information aboutthe company’s services, market coverage, and truck fleets, as well as directe-mail links to Con-Way NOW’s sales, operations, and human resourcesdepartments.

2) www.gebn.bus.msu.edu provides access to Global Procurement and SupplyChain Benchmarking Initiative home page. The Global Procurement andSupply Chain Benchmarking Initiative is a third-party procurement and supplychain benchmarking effort housed in The Eli Board Graduate School ofManagement at Michigan State University. The primary mission of this group

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IT Enabled SCM is to collect and disseminate information concerning the best procurement andsupply chain strategies, practices, and processes being employed bycompanies across a wide range of industries worldwide.

3) www.supply-chain.com developed by the Supply Chain Council provides avaluable reference source introducing shippers to the Council’s mission andsupply-chain reference model, a leading edge benchmarking tool beingdeveloped for specific supply chain applications.

Most of the supply chain related professional societies have highly informativehome pages. These Web sites typically provide information about theorganization’s objectives, educational and training opportunities, educationalproducts, reference libraries, job placement services, discussion forums,conferences, and membership requirements.

Decision Support Systems

By the early 1970’s the demand for all types of Industrial Software started toaccelerate. The increased capabilities and reduced costs justified computerizedsupport for an increased number of non-routine applications. At that time, thediscipline of decision support systems (DSS) was initiated. The basic objective ofa DSS is to provide computerized support to complex non-routine and partiallystructured decisions.

At first, the cost of building a DSS prohibited its widespread use. However, theavailability of low-cost personal computer around 1980 changed this situation.Desktop PCs, which are easily programmable, made it possible for a person withlimited programming ability to build useful DSS applications (e.g., spreadsheetswith built-in-macros). This was the beginning of the era of end-user computing.Analysts, Managers, many other professionals, and Secretaries began buildingtheir own systems.

Given the complexity of supply chains, development of DSS to assist decision-makers in terms of both the design and operation of integrated supply chains islikely to increase. These DSS will help decision-makers identify opportunities forimprovements across the supply chain, far beyond what even the mostexperienced manager could provide through intuitive insight. Supply chain-wideDSS will allows management to look at the relationships across the supply chain,including suppliers, manufacturing plants, distribution centers, transportation options,product demand, relationships among product families, and a host of other factorsto optimize supply chain performance at a strategic level.

Supply chain DSS requires large amounts of both static and dynamic informationfrom the member organizations. The static information includes production ratesand capabilities for all supply chain entities, bills of material, routings, and facilitypreference. The dynamic information includes forecasts, orders, and currentdeliveries. Using all of this information to solve, for example, a quick-responsescheduling problem across the supply chain is virtually impossible with a singletechnology. However, all the data can be readily obtained from existinginformation systems through Structured Query Language (SQL) using variousrelational databases or the “supply chain data warehouse” if one exists.

Specific technologies that may be utilized for an effective supply chainmanagement DSS include: SQL interface, Expert system rules, Schedulingalgorithms, optimization (Linear programming capabilities), Blocked scheduling,Multisite/multistage scheduling, Graphical user interface, User definable database,Available-to-promise, and Demand management.

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IT Packages in SCMActivity 4

Examine the suitability of e-commerce, Electronic Data Interchange and BarCode System practices of Indian Organizations. For this, refer National/International Journals or select an organization known to you.

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8.7 SUMMARY

The sharing of information among supply chain members is a fundamentalrequirement for effective supply chain management. At the ultimate level ofintegration, decision makers at all levels within the supply chain membersorganizations are provided with the information they need, in the desired format,when they need it, regardless of where within the supply chain this informationoriginates. Providing the decision-makers within the supply chain with the ‘right’information, in the necessary format, and in a timely manner is a major challenge.The information requirements determination approaches presented in this unit havebeen effective in ensuring that these information requirements are met.

The information systems and the technologies utilized in these systems representone of the fundamental elements that “link” the organizations of a supply chain.The range of technologies available to support supply chain management effortsis vast and ever changing. Unfortunately, there is not a single “right” IT solutionto supply chain management. Organizations need to explore various options toarrive at a solution that provides the functionality required for their specific supplychain management initiative. Towards this end, benchmarking integrated supplychain efforts to identify “best practices” is essential.

Supply Chain Management initiatives are unlikely to succeed without theappropriate information systems and the technology required to support them.These important decisions should be made by a cross-functional, interorganizational management group that can afford to manage the constraintsrelated to the time and resources required to develop a supply chain informationsystems strategy. The team should implement the strategy, and ever see itsongoing performance.


1) Define Information Technology. What are the advantages and disadvantagesof adoption of IT in Indian Manufacturing Organizations?

2) What is the value of information? How would you try to assess the value ofinformation to a decision-maker?

3) Explain briefly the Inter Organizational Information system. How is IOISimportant for effective supply chain management?

4) What are the fundamental mistakes commonly made while capturinginformation? How would these mistakes be eliminated in SCM?

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IT Enabled SCM 5) Give various supply chain information categories. Give examples ofinformation contained in these categories.

6) What are the major advantages and disadvantages of inquiry systems inwhich data are captured on-line but files are updated later – say at night?

7) How would you measure the extent of unemployment created by theimplementation of IT? What factors tend to mitigate the problem of increasedunemployment if it actually occurs?

8) Does IT have an impact beyond the organization, for example, onstockholders or customers? What kinds of effect occur and what problemsare created for these groups?

9) What is the IT enabled organization design variables? How do theysupplement or replace conventional design variables?

10) What are the risks for a small company connecting itself electronically withmajor customers?

11) What kinds of employees are most likely to be replaced by InformationTechnology? Does your answer depend on the type of system? Are thedecision levels affected?

12) Write a brief note on the following:

i) Electronic commerce

ii) Electronic Data Interchange

iii) Bar Coding and Scanning

iv) Data Warehouse

v) Internet

vi) Intranet/Extranet

vii) World Wide Web

viii) Decision Support System

13) What are the advantages and disadvantages of using Bar Code and ScanningSystem in the Manufacturing Organizations?

14) Give a list of potential benefits of using Electronic Data Interchange (EDI).Who are the service providers of EDI in India and their terms andconditions?

15) Compare and contrast EDI, Internet, and Intranet/Extranet. How are theyapplied in SCM?


1) CAPS Logistics, Inc., Atlanta, Georgia, USA, or http://www.Caps.com, 1999.

2) Copacino, W.C., : Supply Chain Management: The basics and beyond,St. Lucie Press, 1997.

3) Handfield, R.B. and Nichols, E.L. Jr., : Introduction to Supply ChainManagement, Prentice Hall, 1999.

4) Jonathan Blain, et. al., : Using SAP R/3, Prentice-Hall of India Pvt. Ltd.,1998.

5) Lambert, D.M., Stock, J.R., and Ellram L.M., : ‘Fundamentals of LogisticsManagement’ Mc-Graw Hill- Irwin, 1998.

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IT Packages in SCM6) Lucas, H.C., Jr., : ‘Information Technology for Management’, TheMcGraw-Hill Companies, Inc. 1997.

7) Martinich J.S., : ‘Production and Operations Management: An AppliedModern Approach’, John Wiley & Sons, Inc., 1999.

8) Oden, H.W., Langen Walter, G.A., and Lucier, R.A., Hand Book ofMaterial and Capacity Requirement Planning, McGraw Hill, Inc., 1993.

9) Pressman, R.S., : ‘Software Engineering: A Practitioner’s Approach’,Mc-Graw Hill, Inc., 1992.

10) Rosen, K.T. and Howard A.L., : E-Retail: Gold Rush or Fool’s Gold?,E-Commerce, California Management Review, Vol.42, No.3, Spring, 2000.

11) Senn, J.A., : ‘Information Systems in Management’, Wadsworth PublishingCo., 1990.

12) Stevens, G.C., : Integrating the Supply Chain, International Journal ofPhysical Distribution and Materials Management, Vol.19, No.8, 1989.

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IT Enabled SCMUNIT 9 INTELLIGENCE INFORMATION SYSTEM

Objectives

The objectives of this unit are to enable you:

· to learn about the recent developments in the information system, particularlyin the supply chain context;

· to learn about Materials Requirement Planning (MRP), Enterprise ResourcePlanning (ERP), and Distribution Resource Planning (DRP/DRP-II); and

· to compare the ERP and Supply Chain Planning (SCP).

Structure

9.1 Introduction

9.2 Changing Paradigm of Manufacturing

9.3 Materials Requirement Planning (MRP)

9.4 Manufacturing Resource Planning (MRP-II)

9.5 Enterprise Resource Planning (ERP)

9.6 Distribution Requirement Planning (DRP)

9.7 Distribution Resource Planning (DRP-II)

9.8 ERP vs. SCP (Supply Chain Planning)

9.9 Summary



9.1 INTRODUCTION

Decision-making is a key activity for management. Unfortunately, the earlyinformation systems developed during the 1960s and 1970s often had fewimplications for decision-making. Today, firms routinely monitor a variety ofactivities, for examples, sales and production. A company is very likely to storeinformation on its competitors’ sales as well. Given the wealth of informationkept in corporate databases, there are many opportunities today to use intelligenceinformation system to aid decision-making.

Information is tangible and intangible entity that reduces uncertainty about somestate or event. As an example, consider a weather forecast predicting clear andsunny skies tomorrow. This information reduces our uncertainty about whether anevent such as a cricket match will be held. Information that a bank has justapproved a loan to our firm reduces our uncertainty about whether we shall be ina state of solvency or bankruptcy next month. Information derived fromprocessing transactions reduces uncertainty about a firm’s order backlog orfinancial position. Information used primarily for control in the organizationreduces uncertainty about whether the firm is performing according to plan andbudget.

In this unit, the paradigm shifts in manufacturing, the materials requirementplanning, the enterprise resource planning, the distribution requirement planningand the supply chain planning are presented. All these planning capsules focusand make use of the intelligence information system for an effective and efficientbusiness. Through these the organizations achieve the competitive advantage forglobal competitiveness.

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IT Packages in SCM9.2 CHANGING PARADIGM OF MANUFACTURING

Since, 1950, global trade is growing at a faster pace than the overall growthGross Domestic Product (GDP) of the world. Indian Government, with its newopen policies towards foreign investments; overhauling of customs and duties;fewer stringent rules toward repatriation of profits; and open market policiesthrough privatization are positioning it to harness the benefits in the new surge inglobalization of economics.

Increased global competition, informed customers, technology adaptation, andglobal trade will put pressure on Indian companies to become more efficient. Thismeans, the Indian companies have to strive for manufacturing excellence byimproving product quality, making their price competitive, promoting productdelivery and enhancing flexibility to absorb markets varied needs.

The manufacturing function is undergoing through a period of extra-ordinaryrevitalization. This requires attention on customer oriented products, excellentprocesses, the best tools and equipment, efficient production goods flow, clear andtransparent controls, carefully engineered job, renewed emphasis on productivity,vastly upgraded quality standards empowered with total quality programs andinnovation experiments in the management of people in the organization. Thisrevitalization is also seen new manufacturing technologies. These technologies arebeing accompanied by innovation in management of manufacturing systems.These innovations place greater emphasis on manufacturing excellence – animportant consequence of global competition in the global economy. Theseinnovations are in effect answers to the challenges placed on the prominentmanufacturing capability, by manufacturing enterprises who were caught upbetween high technology spurred by heavy investment, intelligent customers, newpolitical and economic environments, demanding workforce and increasingcompetition. Every segment of manufacturing enterprise has gone through closescrutiny and as a result excellent and efficient new technologies emerged andearned their due place in the organization.

Table 9.1: Changing Paradigm of Manufacturing

Old Rules of Manufacturing New Rules of Manufacturing

Produced to forecast Produced to order

Uniform/standardized Highly variable/customized

Low on information content High information content

Characterized by a specific market niche. Characterized by multiple market niche

Expected to have a larger market life. Expected to have a shorter market life

Self-contained Open ended platform for upgrades/information/services

Line personnel shouldn’t challenge The person closet to the problem is the world’s bestcurrent practices. expert

Layout the factory by function Cellular layout

Always keep people busy and Make only as such as you need only when you needequipment humming.

Inventory is an asset. Inventory is liability

Traditional performance measures Measurements focus on improvement rates in cost,such as labor and machine efficiencies, quality, flexibility and value-added activities andpurchase price variance and overhead customers satisfaction.absorption rates.

Quality is inspected at the end of line. Building quality in throughout entire process.

Large lot sizes are better because we Constantly try to economically reduce lot size andamortize setup and change – over setup times.times over more units.

24

IT Enabled SCM The new rules of manufacturing that cause the changing paradigm ofmanufacturing are compared against the old rules of manufacturing – shown inTable 9.1. The intelligence information systems consisting of MRP. ERP, DRPand SCP are a few solutions that gained significance to meet the currentbusiness challenges.

9.3 MATERIALS REQUIREMENT PLANNING (MRP)

The materials requirement planning system is a major element in a manufacturingcompany and is also the heart of MRPII (Manufacturing Resource Planning).MRP is a computer-based information system designed to order and schedule‘dependent’ demand inventories (raw materials, component parts, andsubassemblies) in a coordinated manner. MRP is as much a philosophy as it is atechnique, and as much as an approach to scheduling as it is an approach toinventory control. It views inventory from the vantage point of the stock-room,trying to insure that there will always be “just enough” on hand to meet projecteddemand.

Until the 1970s, the materials planning process in manufacturing environmentsuffered from two problems. The first was the enormous task of setting upschedules, keeping track of large numbers of parts and components, and copingwith schedule and order changes. The second was the perception that a companyhad to choose between investing in high quantities of inventory or havingexcessive stock-outs. Practitioners used inventory-planning techniques that weredesigned for independent demand items, resulting in high inventories and frequentstock outs. Starting in the late 1960s and early 1970s, manufacturers recognizedthat planning dependent items differently from independent items (using MRP)could produce lower inventories and lower stock-out rates. Additionally, theyenlisted the power of the computer to handle much of the burden of keepingrecords and determining material requirements.

The main purposes of an MRP system are to control inventory levels and assignoperating priorities for ordered items. These may be briefly expanded as follows:

1) Inventory

- Order the right part

- Order in the right quantity

- Order at the right time (start data)

2) Priorities

- Order with the right due date

- Keep the due date valid

The motto of MRP is getting the right materials to the right place at the righttime. The operating philosophy of MRP is that materials should be expeditedwhen their unavailability would delay the overall production schedule, and de-expedited when a schedule change postpones their need. To this end, MRP logicwill always plan inventory to the lowest possible amount, unless instructedotherwise by order modifiers. Order modifiers, including safety stock and lot sizesare discussed later in this unit.

Material Requirements Planning Inputs

Figure 9.1 illustrates the five major sources of information required for MRP tooperate:

25

IT Packages in SCM

Figure 9.1: MRP Inputs and Outputs

Figure 9.2: Inputs to Master Production Schedule

Master Production schedule states which end items (items that are sold tocustomers) are needed, in what quantities, on which specific dates, and whenthese items will be produced. The MPS has five major inputs, as shown inFigure 9.2.

The production plan provides a set of constraints on the MPS. The MPS musttake into account all types of demand data for the items being scheduledincluding: sales forecasts, customer orders, distribution warehouse requirements,interplant requirements, service demand forecasts, and safety stocks. The MPSmust know how much is available to accurately determine how much to orders.This requires the inventory status information on hand inventory, allocated stock,released production and purchase orders, and firm planned orders. The itemmaster file provides planning data on each item to guide the MPS planningprocess, such as: lot-sizing rule to be used, shrinkage factor, safety stock, andlead-time. Rough cut capacity planning determines the capacity requirements toimplement the Master Production Schedule, verifying the schedule’s feasibility orcausing the master schedules to revise the schedule.

1) The Bill of Materials (BoM), also called a product structure or parts list, is alist of all the materials, and the quantity of each, required to produce one unit

Bill of Materials

Action Report

Item Master

Orders

Requirements

Pegging Report

Primary (orders)Report

MATERIALREQUIREMENT

PLANNING

Master Production Schedule

Production Plan

Demand Data

Inventory Status

Planning Data

Rough CutCapacity Planning

MPS

26

IT Enabled SCM of a manufactured product, or parent. MRP uses the bill of materials, as thebasis for calculating the amount of each raw material required for each timeperiod. The engineering Bill of materials (often called the parts list) for asimple product (ball-point pen) is as shown in Table 9.2.

Table 9.2: Engineering Bill of Materials (Parts List) for ball-point pen

Item No. Description Quantity Make or Buy Drawing File No.

1 Barrel 1 Make 26079

2 Tip 1 Buy 26080

3 Spring 1 Buy 20091

4 Refill 1 Buy 20026

5 Cap 1 Make 26048

6 Plunger 1 Buy 26032

7 Clip 1 Buy 26054

In an MRP system, a Bill of Materials (BOMs) file is an up-to-datecomputerized file that contains a single record for each individual parent-component relationship. The BOMs represent the actual sequence of fabricationand assembly.

2) Item Master in an MRP system is a computerized file with a completerecord for each item, or part. Because MRP systems are part-oriented, theItem Master File is the heart of the system. Each item, no matter at howmany levels it is used in a product, or in how many products, and no matterwhether it is currently stock-on-hand or not, has one and only one record.The item master record for a part contains many types of information,including: static data, such as part description, unit of measure, and MRPplanning factors (lot sizes, lead times, safety stock, and scrap rates); plusdynamic data, such as various costs, current quantities on hand and onorder.

3) Requirement is a computerized record of a future stockroom issue that willdiminish stock-on-hand. There are two types of requirements: Internal (whichwill be used within the plant to make other products), and External (whichwill be sent outside the plant, such as customer orders and service parts.

A typical requirements record contains the item number of the part required,the quantity required, the date on which it is needed, and the quantity alreadyissued from the stock room. Customer orders also contain such additionalinformation as the customer name and ship to address, the date on whichthe customer wants delivery, and the date we promised to ship.

4) Orders are computerized record of a future stockroom issue receipt that willincrease stock-on-hand. Just as there are two types of requirements, thereare two types of orders:

a) Shop orders (or work orders or manufacturing orders), which will bemanufactured within our own plant. These are similar to our internalrequirements, because they will be procured internally.

b) Purchase orders, which will be procured from outside our plant. Theseare similar to our external requirements, because they will come into ourplant from external sources.

We can also categorize the incoming orders (both shop orders and purchaseorders) in a different manner, which tells whether the order has beenreleased, or whether it is still planned. The categories are:

27

IT Packages in SCMa) Scheduled receipts (or open order, or released order), which is an orderthat has been officially released, either in the shop or to a supplier. Ascheduled receipt commits our company to take action and spend money.

b) Planned order, which exists only in the computer, and perhaps someprintouts at this point. Our company has not yet been authorized tospend money; no supplier or shop has been authorized to start work onthis order.

Planned order can become scheduled receipts only when a human expresslytakes action, this is one of the primary responsibilities of a materials planner. AnMRP order record contains considerable data, including item number beingordered, order quantity, original due date, actual received quantity, revised duedate, quantities in MRB (Material Review Board) and scrap, supplier (if purchaseorder), and other information.

Activity 1

Identify and discuss the different Bill of Material Database in an organization.Does the Bill of Material Database vary from department to department? Why?Draw a Bill of Material “tree” for one of a typical product that you know.

.............................................................................................................................

.............................................................................................................................

.............................................................................................................................

.............................................................................................................................

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Material Requirement Planning Logic and Mechanics

The logic underlying MRP is to use the product structure (BOM) and lead timeinformation to determine when purchase and production orders should be releasedso that materials are obtained just when they are needed.

1) Exploding the Product

The first step is to use the BOM to ‘explode’ the product into a production (orassembly) time chart. Figure 9.3 is a production time chart for the spider climber(It is the playing implement that kid uses in the children’s park).

The explosion begins with the time the end product is needed and then worksbackward through each production or purchasing activity that must be done tomake each succeeding item. For example, consolidating and packing a spiderclimber requires one day of lead time, so if a supply of climbers is required attime T, shells, leg supports, ladders, and bolts and nuts must be available oneday earlier, at time T-1. Welding and coating a shell requires three days of lead-time, so an order to begin welding shell quads must be released three daysearlier, or at time T-4. Casting and demolding shell quads also has a three-daylead-time, so an order to cast shell quads must be issued and aluminum ingotsmust be available at time T-7. Figure 9.3 shows that the cumulative lead timefor producing a spider climber is eight days, so the company would have toinitiate production or purchase activities at least eight days before climbers arerequired.

28

IT Enabled SCM

Figure 9.3: Production Time Chart for the Spider Climber.

2) Developing the Material Requirements Plan

The next step is to construct a material requirements plan for each item in theBOM, as illustrated in Figure 9.4.

Master Production Schedule

Day 1 2 3 4 5 6 7 8 9 10 11

Quantity 0 0 0 0 0 0 0 0 20 0 30

Spider Climber

Gross requirements 20 30

Projected on hand 0 0

Scheduled receipts 0 0

Net requirements 20 30

Planned order release 20 30

ObtainAluminum

ingots*

Cut leg support

Cast shell quads

Order Aluminum

pipe

EndProduct

Available

Days beforeshipping ofEnd-product

8 7 6 5 4 3 2 1 0

Weld and coat shell

Pack Products

Order point

* Items not ordered by the MRP system, materials are always in stock.

29

IT Packages in SCMShells






Shells Quads (× 4)






Leg supports (× 4)






Pipe (× ¼)






Ladders (× 4)






Ladder Legs (× 2)






30

IT Enabled SCM Figure 9.4: (Contd..)

Pipe (× 4)






Ladder Steps (× 7)






Figure 9.4: Material Requirements Plans for Spider Climber

A material requirements plan is a production or purchase schedule for an itemthat makes up the end product. The procedure begins by converting the grossproduct requirements in the MPS into net product requirements. The grossrequirements are the number of units actually required (desired) at the beginningof each time period. The requirements are the gross requirements less anyavailable inventories and any scheduled receipts, where the available inventoriesare total inventories for the item at the beginning of the period less any desiredsafety stock (in the MRP, available inventories are normally labeled as projectedon hand). The scheduled receipts are replenishment orders that have alreadybeen placed, either in our plant (shop orders) or at a supplier (purchase orders).These will increase the inventory on hand. Hence,

(net requirements)t = (gross requirements)

t – (projected on hand + scheduled receipts)

t

(projected on hand)t = (total expected inventory)

t – (safety stock)

t

Gross product requirements are transferred from the MPS to the materialrequirements plan for the end product, and the net requirements are computed,as shown in figure 9.4. The next line in the material requirements plan is theamount of product or material planned to be received through production or froma vendor at the beginning of the time period. Under lot-for-lot ordering(production) we order or produce exactly what is needed in a time period so thatthe planned order receipts will equal the net requirements. (It may be noticedthat in Figure 9.4, the planned order receipts is combined with the netrequirements).

The final lines in the material requirements plan for an item is the planned orderreleases. This is the amount that must be ordered (internally through productionor externally from a vendor) at the beginning of a time period so that the plannedorder receipts occur when needed. Therefore, the planned order releases equalthe net requirement (or planned order receipts), except that they are offset bythe lead-time. For example, in figure 9.4 the net requirements for the spiderclimber are 20 units on day 9 and 30 units on day 11. The lead-time for finalconsolidation and packing is one day, so the planned order releases for theclimber must be 20 on day 8 and 30 on day 10.

31

IT Packages in SCM9.4 MANUFACTURING RESOURCE PLANNING

(MRP-II)

As we have noted, MRP is a production planning system that converts an MPSinto planned order releases. Manufacturing resource planning (MRP-II) is aphilosophy that attempts to incorporate the other relevant activities of the firminto the production planning process. In particular, the financial, accounting, andmarketing functions of the firm are tied to the operations function. As anexample of the difference between the perspectives offered by MRP and MRPII, consider the role of the master production schedule. In MRP, the MPS istreated as input information. In MRP II, the MPS would be considered a part ofthe system and, as such, would be considered a decision variable as well. Hence,the production control manager would work with the marketing manager todetermine when the production schedule should be altered to incorporate revisionsin the forecast and new order commitments. Ultimately, all divisions of thecompany would work together to find a production schedule consistent with theoverall business plan and long-term financial strategy of the firm.

Another important aspect of MRP II is the incorporation of CRP (capacityresource planning). Capacity considerations are not explicitly accounted for inMRP. MRP-II is a closed-loop cycle in which lot sizing and the associated shopfloor schedules are compared to capacities and recalculated to meet capacityrestrictions. An MRP-II system may convert information from the materialrequirements plans into specific work schedules for departments and machines,evaluate department workloads and capacity conditions, generate shippingdocuments and customer invoices, and produce management reports on productionand financial performance. Typically, these systems have feedback mechanism(and therefore called closed-loop MRP systems) so that if department, machine,or personnel capacity limits are exceeded, the material requirements plans andcorresponding production schedules are revised to stay within capacity limits.

9.5 ENTERPRISE RESOURCE PLANNING (ERP)

In the past, most of the planning covered only limited routine operationalrequirements, with focus on historical record keeping and accounting. Thebusiness functions in the enterprise were using information technology toautomate the departmental activities, to fulfill only individual and departmentalneeds and objectives, not realizing the effect on other functions.

However, the enterprise is the group of people with a common goal, which hascertain resources at its disposal to achieve this. The group has some keyfunctions to perform inline with the goals. Resources are anything, which costmoney. Resources include raw materials, purchased parts, and produced parts,personnel, processing machine capacity, material handling capacity, tools, fixtures,NC programs and such others as needed to produce the end items. Planning is toensure that nothing goes wrong and also putting necessary functions in place.ERP is the method of effective planning of all resources in an organization.

Every organization committed to making and selling goods and services has threemajor objectives:

· To provide maximum customer service

· To minimize inventory carrying cost

· To optimize plant operation

32

IT Enabled SCM Unfortunately, these objectives are basically conflicting in nature and representcertain trade-offs. Sales department requires all the inventory necessary toservice their customers and at the same time production flexibility to meetchanging demands. Factory desires a constant production schedule with long runsand less overtime. Finance insists on keeping the capital investments to aminimum. More often they end up with the managers nightmare:

· More was bought than required

· More was used than essential

· More was produced than sold

ERP is an attempt to bridge the gap. It is defined to be a company wideplanning system which works around core activities of business and has all logicalinterfaces to achieve seamless flow of information within the supply chain andvalue stream. Such systems can optimally plan and manage all the resources ofenterprise to run the business with high level of customer service at lower costand improved productivity.

The evolution of ERP took over three decades, during which the continuousimprovement for integration and planning with creative thinking by innovatorsdeveloped this comprehensive planning and control framework. Three ancestorsof ERP serve as milestones:

· 1960’s Material Requirement Planning (MRP)

· 1970’s Closed Loop MRP

· 1980’s Manufacturing Resource Planning.

During this it also absorbed the new techniques proven to produce businessbenefits from Just-in-Time (JIT) and Business Process Reengineering (BPR).

In 1960’s the computerized production and inventory control systems began toprovide better methods of ordering materials and control inventory. It uses masterproduction schedules (What are we going to make?), bills of material (What doesit take to make it?), and inventory records (What do we have?) to determinefuture requirements (What do we have to get?), which is called as MaterialRequirement Planning (MRP). In the changing conditions of manufacturingenvironment, the priority planning and capacity planning were tied in with MRP toaccommodate the variations in demand and supply using feedback from tacticalplans and execution levels. This closed structure is called as closed loop MRP.The next generation, Manufacturing Resource Planning (MRP-II), plans toforecast sales, to set production rates and resources levels integrated withinvestments decisions before translating the business plans to Master ProductionPlans (MPS).

In the new generation ERP, the whole supply chain management concept isincorporated extending the planning concept to trading partners where thecomplete visibility throughout the enterprise is possible and the concept of virtualenterprise is supported using electronic commerce.

This incorporates the techniques, Just-in-Time (JIT) and Business ProcessReengineering (BPR), particularly in the areas of work empowerment, humanengineering and waste reduction. The benefits of JIT are never fully realizedunless it is being applied within the rational framework without which one couldeasily make wrong part at wrong time with utmost efficiency. The drawback ofMRP II was the planning based on lead times, which never asked forimprovement and taken as it is. The BPR is becoming an essential tool beforeand while ERP implementation concentrating on reduction in non value addingactivities and work simplification causing reduction in cycle time.

33

IT Packages in SCMERP consists of different modules integrated into one system. The modules are:

1) Distribution and transportation which serves day-to-day logistics usingforecasting tools, extensive planning, comprehensive sales, purchasing,warehousing, packaging, inventory management and electronic commerce.

2) Order management integrates customer order processing into masterproduction schedule, supports multiple sites and currencies, electroniccommerce for real time information.

3) Manufacturing module supports master production schedule, materialrequirement planning, capacity planning, supplier scheduling and shop floorcontrol.

4) Finance module delivers high level of visibility of financial transactions,supports accounts payable, accounts receivable, different costingmethodologies, general ledger and electronic commerce.

5) Human resource module integrated with pay-roll track skills, capabilities,experience and training needs of an organization, prepares and maintainsorganization structure.

6) Quality management lets user tap collect, distribute and analyze criticalquality information and uses powerful statistical tools to monitor and controlproducts and processes.

7) Maintenance management calls for optimal schedules for personnel,availability of spares, and effective maintenance tasks. It handles all types ofmaintenance, keeps details of equipments, generates spare parts andmaintenance requirements automatically.

8) Project module supports cost management of projects includes estimates, bids,scheduling, planning, budgeting, purchasing, tracking, billing, and integrationwith finance, manufacturing and distribution operations.

Why a Company Pursues a New ERP Solution

a) The company wants to achieve performance improvements, such as reducingoperational costs, gaining competitive advantage, improving customer service,and improving or reengineering business processes.

b) The existing system in the company is not able to support its needs andrequires significant information system resources for maintenance andsupport.

c) The system uses multiple points of input, often with duplication of effort.

d) Staff members are unable to answer questions easily or respond toinformation requests by key customers or suppliers.

e) The enterprise has grown through mergers and acquisitions and contains avariety of incompatible systems

f) Key information is updated on a batch basis instead of in real time.

A few ERP software modules and their features are presented in Unit 10.

9.6 DISTRIBUTION REQUIREMENT PLANNING(DRP)

Distribution Requirement Planning (DRP) is a management process thatdetermines the need of inventory stocking locations (store, distribution center,regional distribution center, central DC, manufacturing DC, or warehouse thatcarries product for sale) and ensures that supply sources (third party supplier, aregional distribution point, or a factory) will be able to meet the demand. This isaccomplished in three distinct phases.

34

IT Enabled SCM First, DRP receives input from the following:

a) Sales forecasts by stock keeping unit by stocking location.

b) Customer orders for current and future delivery.

c) Available inventory for sale by stock keeping unit (SKU) by stockinglocations.

d) Outstanding purchase orders and/or manufacturing orders by productpurchased and/or manufactured.

e) Logistics, manufacturing, and purchasing lead times.

f) Modes of transport used as well as deployment frequencies.

g) Safety stock policies by SKU by stocking locations.

h) Normal minimum quantity of product to be purchased, manufactured, anddistributed.

Second, once all inputs are received, DRP generates a time-phased model ofresource requirements to support the logistics strategy. These include:

a) Which product is needed, how much, and where and when it is needed.

b) Transportation capacity needed by mode of transport by stocking locations.

c) Needed space, manpower, and equipment capacity by stocking locations.

d) Required inventory investment by stocking locations and in total.

e) Required level of production and/or purchases by product and by supplysource.

Third, DRP compares the required resources to what is currently available atsupply sources, and what will be available in the future. It then recommendswhat actions must be taken to expedite or delay purchases and/or production,thereby synchronizing supply and demand. This third phase forces integration andfeedback into the system, thus closing the loop among manufacturing, purchasing,logistics, and the customers.

DRP Logic

Consider a company manufactures distributes and sells pharmaceuticals andsupports a network of six retail stores. Specifically, we will track the planning forvitamin C tablets packaged in bottles of 100. The store at Mumbai has 500 ofthis product on hand, 200 as a safety stock, and a forecast that varies between80 and 120 per week (see Figure 9.5).

Mumbai StoreVitamin C Tablet 100/Bottle

Past Week

Due 1 2 3 4 5 6 7 8

Forecast 100 120 90 110 120 100 80 120

In Transit

Projected on hand 500 400 280 190 80 -40

Planned Shipments.–Receipt. Date

Planned Shipments.–Ship Date

Figure 9.5: DRP Logic for a Mumbai Store

On-hand Balance : 500

Safety Stock: 200

Lead Time: 2 weeks

Order Quantity: 300

35

IT Packages in SCMIn Figure 9.5, the projected on-hand balance is determined by means of thesimple computations. This logic reduces the on-hand balance by the quantitiesforecast for each week. In the beginning of the first week, for example, 500 areon hand. Forecast sales for the week are 100; they are subtracted from the 500on hand, leaving a projected balance of 400 at the beginning of the next week.The same mechanism ripples through the schedule. The projected on-handbalance dips below the safety stock of 200 in week 3 (projected on-hand balanceof 190), at which point the store will probably run out of stock and go on backorder in week 5. In the example in Figure 9.5, no product is in transit. If thatwere the cases, the product in transit would be added to the projected on-handbalance in the week that it is due to arrive.

The situation shown in Figure 9.5 will occur if nothing is shipped from the supplysource. The store manager needs more of the product delivered in week 3 tokeep the balance from dropping below safety stock, which means that moreproduct must arrive by week 5 to keep the product from going on back order.

Mumbai StoreVitamin C Tablet 100/Bottle

Past Week

Due 1 2 3 4 5 6 7 8

Forecast 100 120 90 110 120 100 80 120

In Transit

Projected on hand 500 400 280 490 380 260 460 380 260

Planned Shipments.– 300 300Receipt. Date

Planned Shipments.– 300 300Ship Date

Figure 9.6: DRP Logic for a Mumbai Store with Planned Shipment

The replenishment lead-time for vitamin C at the Mumbai store is two weeks,and normally 300 bottles, or four full cases, are shipped at a time. Therefore, ashipment of 300 units must arrive in week 3 to prevent the inventory fromdropping below the desired safety-stock level. Since the replenishment lead-timeis two weeks, the shipment should be ordered from the supply source in week 1.Figure 9.6 includes this planned shipment (i.e., future order) from the supplysource in the two lines labeled planned shipments. One shows the plannedshipments on the date they are due to arrive at the store (planned shipments –receipt date). The other shows the planned shipments on the day they are due tobe shipped from the supply source (planned shipment – ship date).

The planned shipments provide enough stock to last until week 8, although thestore will drop below safety stock in week 6. Therefore, another order mustarrive in week 6. This order should be sent from the supply source in week 4.Figure 9.6 shows the complete picture of the Vitamin C product at the Mumbaistore.

Now that we have seen how DRP functions in one store, let’s expand it to allthe stores for the Vitamin C product. The following examples (Figure 9.7) showDRP displays for the other stores and are similar to the DRP display shown forthe Mumbai store.

In the case of the Indore store in Figure 9.7, an order of 150 is in transit. Theorder was shipped because the lead-time is two weeks; and it is due to arrive in


Safety Stock: 200

Lead Time: 2 weeks

Order Quantity: 300

36

IT Enabled SCM week 2. The in-transit quantity is added to the projected on-hand balance in theweek the order is due to arrive. The store manager can now see what materialis in route and when it should be expected.

In the case of Calcutta store (Figure 9.7), a planned order is overdue forshipment. This is the planned shipment for 300, which appears in the past-duetime period. There could be several reasons for the past-due order. Perhaps saleswere greater than forecasted, so the product was needed in Calcutta earlier thananticipated. Or, the shipment might not have been sent from the supply source ontime. In that case, because of the visibility that DRP affords, the manager of thestore could determine whether the supply source is shipping on time. Moreover,the manager could determine the problem well before a stock out occurs.

The situations at the New Delhi, Chennai and Bangalore stores, as shown inFigure 9.7, are similar to the Mumbai store. Nothing is in transit, but there areseveral planned shipment from the supply source to the stores. The Bangalorestore is in the same city as the supply source, so its lead-time for product is onlyone day.

The lead-time (LT), order quantities (OQ), and safety stock (SS) are different foreach store, so each store can be scheduled independently if desired. In addition,the lead times, order quantities, and safety stocks can be different for differentproducts at the store. (This is not apparent in the figures 9.6 and 9.7 becauseonly one of many products is shown. Each product at each store, however, isscheduled independently). DRP gives the people operating the system completeflexibility in scheduling any item at any stocking locations.

Indore, Calcutta, New Delhi, Chennai & Bangalore Store Vitamin CTablet 100/Bottle

Indore Store

Past Week

Due 1 2 3 4 5 6 7 8

Forecast 40 50 45 50 40 45 40 50

In Transit 150


Planned Shipments. 150– Receipt. Date

Planned Shipments. 150– Ship Date

Calcutta Store

Past Week

Due 1 2 3 4 5 6 7 8

Forecast 120 130 115 125 140 110 125 105

In Transit


Planned Shipments. 300 300 300– Receipt. Date

Planned Shipments. 300 300 300– Ship Date

Figure 9.7: Indore, Calcutta, New Delhi, Chennai & Bangalore Store


Safety Stock: 75

Lead Time: 2 weeks

Order Quantity: 150


Safety Stock: 75

Lead Time: 2 weeks

Order Quantity: 150

37

IT Packages in SCM

New Delhi Store

Past Week

Due 1 2 3 4 5 6 7 8

Forecast 20 25 15 20 30 25 15 30

In Transit




Chennai Store

Past Week

Due 1 2 3 4 5 6 7 8

Forecast 25 15 20 25 20 20 25 15

In Transit




Bangalore Store

Past Week

Due 1 2 3 4 5 6 7 8

Forecast 105 115 95 90 100 110 95 120

In Transit


Planned Shipments. 300 300– Receipt. Date

Planned Shipments. 300 300– Ship Date

Past Week

Due 1 2 3 4 5 6 7 8

Mumbai 300 300

Indore 150

Calcutta 300 300 300

New Delhi 150

Chennai 150

Bangalore 300 300

Total 300 300 150 750 450 300 300 0 0

Figure 9.8: Summary of Planned Shipments to the Stores


Safety Stock: 50

Lead Time: 3 weeks

Order Quantity: 150


Safety Stock: 50

Lead Time: 1 weeks

Order Quantity: 150


Safety Stock: 150

Lead Time: 1 day

Order Quantity: 300

38

IT Enabled SCM In figure 9.7, forecasts for New Delhi and Chennai stores are nearly the samefrom week to week. Based on this, you might expect that the demand on thesupply source would be smooth as well, with demand in any one-week nearly thesame as demands in other weeks. Yet, the opposite is true. The demand on thesupply source is lumpy. Figure 9.8 illustrates this point very well. For example, inweek 2 the demand is only 150, but in week 3 it jumps to 750.

Lumpy demand is one of the reasons why it is so important to have visibility inthe supply chain system. Because the demand on the supply source can vary somuch from one week to another, a planner or buyer needs to be able to seewhat product is needed and when it must be shipped to meet the needs of thestores in the systems without DRP, buyers must use averages – hence, theinevitability of lumpy demand. With DRP, however, buyers see the true needs ofthe supply chain system. This gives tremendous visibility into the distributionnetwork, and enables buyers to realistically plan for the needs of the stores. Thebetter buyers see what the stores need in the future, the better they are able tomeet those needs and resolve problems before they occur.

9.7 DISTRIBUTION RESOURCE PLANNING (DRP-II)

Distribution Requirements Planning (DRP) has been defined as the application ofMRP principles to the distribution environment, integrating the special needs ofdistribution networks of retailers, etc. It is a dynamic model that looks at a time-phased plan of events that affect inventory.

Figure 9.9: Distribution Resource Planning Process

TransportationPlanning&Scheduling

ResourcesRequirementsPlanning& Scheduling

Bill of Distribution

Order Entry Forecasting InvetoryControl

Open PO`s/MO`s

Yes

Sales &

OperationsPlanning

Purchase& / or

InventoryPlanning

( )MPS

Make Buy

= Key Input InterfacePO = Purchase OrderMO = Manufacturing Order

= DRP plans/cchedules & Key Output Interface

39

IT Packages in SCMDistribution Resource Planning (DRP-II) is an extension of distributionrequirements planning. DRP applies the time-phased logic to replenish inventoriesin multiechelon warehousing systems. DRP-II extends DRP to include theplanning of key resources in a distribution system – warehouse spaces,manpower levels, transport capacity (e.g., trucks, railcars), and financial flows.

Figure 9.9 depicts the DRP-II system schematically. It is to be noticed that theaccurate forecasts are essential ingredients for successful DRP-II systems. ADRP-II system translates the forecast of demand for each stock keeping unit(SKU) at each warehouse and distribution center into a time-phasedreplenishment plan, transportation plan, financial plan and budgeting, predictingwarehouse space requirements and predicting labour requirements and equipmentneeds, and more importantly manufacturing plan such as master productionschedule. More details may be found in reference on MRP-II.

Activity 2

Prepare a feasibility report for the recommendation of MRP, MRP-II, DRP,DRP-II, ERP, and SCM that suits your organization or an organization of yourchoice.

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9.8 ERP VS. SCP (SUPPLY CHAIN PLANNING)

ERP: Enterprise Resource Planning is company wide planning systems, whichworks around core activities of business and has all logical interfaces to achieveseamless flow of information within the supply chain context. Such systems canoptimally plan and manage all the resources of enterprise to run the business withhigh level of customer services at lower costs and improved productivity.

SCM: Supply Chain Management is the logistics of managing the pipe line ofgoods from contracts with suppliers and receipt of incoming material, control ofwork-in-process, and finished goods inventories in the plant, to contracting themovement of finished goods through the channels of distribution.

From the above definitions of ERP and SCM one may understand that there is agreat deal of commonality. However, the software designers consider the keyprocess shown in Table 9.

Table 9. : Comparison of key processes of ERP & SCM

ERP Key Processes SCM Key Processes

1. Sales and Distribution 1. Customer relationship management

· Order entry 2. Customer service management

· Delivery scheduling

2. Business planning 3. Demand management

· Demand forecasting 4. Order fulfillment

· Planning of product production & capacity 5. Manufacturing flow management

· Detailed routing 6. Procurement

3. Production planning 7. Product development and

· Master production schedule commercialization

· Material requirement planning 8. Returns channel (reverse logistics)

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IT Enabled SCMERP Key Processes SCM Key Processes

4. Shop Floor Control

· Production orders

· Scheduling, dispatching & job costing.

5. Logistics

· Inventory management

· Warehouse management

· Delivery management

· Purchasing management

Supply Chain Management Pitfalls

Supply chain management faces the following 14 key pitfalls:

1) No supply chain strategy

2) Inadequate definition of customer service

3) Inaccurate delivery status data

4) Inefficient information systems

5) Ignoring the impact of uncertainties

6) Simplistic inventory stocking policies

7) Discrimination against internal customers

8) Poor coordination

9) Incomplete analysis of shipment methods

10) Incorrect assessment of inventory costs

11) Organizational barriers

12) Product-process design without supply chain consideration

13) Separation of supply chain design from operational decisions

14) Incomplete supply chain strategy.

There are however excellent ways to overcome these problems. The suggestedapproaches deal with design and measurement. First, the design of the product orservice should give consideration to the cost and service implications for theexisting or proposed supply chain. Second, database should be integratedthroughout the supply chain to ensure operational control. Appropriate datainclude past performance, current inventory levels, positions and schedules, aswell as forecast data. This system would support the opportunity for improvedsupply chain performance: the integration of control and planning support systems.This in turn would reduce independent decision making, which ignores thesystems approach. Thus, the fourth point-to expand the view of the supply chainis critical. Supply chain members should embrace the systems approach with therealization that each member’s activities have an impact on the others.

The last two issues concern internal and external measurement. The organizationmust redesign its incentives, so that individuals, divisions, and sites are rewardedfor taking a system-wide, supply chain approach. In addition, the organizationshould institute supply chain performance measurement. For example,inventory measurement should be viewed across the supply chain instead of localassessments.

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IT Packages in SCMSupply Chain Planning (SCP)

Managers responsible for supply chain process improvement planning,implementation, and measurement received a much-needed framework to guidetheir efforts in November 1996 when the 69 members Supply Chain Councilintroduced its Supply Chain Operations Reference Model (SCOR). The majorbenefit of SCOR is that it gives inter-organizational supply chain partners a basisfor integration by providing them, often for the first time, with something tangibleto talk about and work with. It turns out that the various departments are nowtalking in the same language, which is a notable achievement. The frameworkhelped to break down functional silos and allowed people to look at real issuesand practices supply chain management improvements. It gave people the chanceto look at the supply chain with company-wide needs in mind.

The development of software applications pertinent to supply chain managementis currently a hotbed of activity, promising continued growth into the future. Anew software program developed by Ross Systems, Inc. called Supply ChainPlanning (SCP) is an integrated suite of constraint-based planning tools thatprovide demand replenishment, and manufacturing tools for accurate planning andscheduling of various activities. This software provides an end-to-end enterprise-resource planning solution incorporating the most advanced supply chain planningcapabilities available. SCP is just an example of hundreds of software titles thataddress some aspect of supply chain management.

ERP Vs. SCP

A supply chain is a network of facilities and distribution options that performs thefunction of procurement of materials, transformation of these materials intointermediate and finished products, and the distribution of these products to thecustomers. Supply chain exist in both service and manufacturing organizations,although the complexity of the chain may vary greatly form industry to industry.

The most distinguishing characteristic of ERP systems is their comprehensiveness.We take SAP’s R/3 package (refer unit 10 for details) and try to differentiatebetween ERP and SCP by taking this as a model. R/3 broadly covers Sales andDistribution, Business Planning, Production Planning, Shop Floor Control, andLogistics. On the surface, this would seem to cover anything that SCP claims toprovide. Therefore, it helps to review the relevant functions of R/3 in detail, to beable to contrast to SCP software. First, Sales and Distribution covers order entryand delivery scheduling. This module also naturally checks on product availabilityto ensure timely delivery, and checks the customer’s credit line. BusinessPlanning consists of demand forecasting, planning of product production andcapacity, and the detailed routing information that describes where (in which workcells) and in what sequence the product is actually made.

The capacity and production planning gets very complex, therefore simulationtools are provided as part of R/3 that can help managers to decide how toovercome shortages in materials, labour, or time. Once the Master ProductionSchedule is complete, that data is fed into the MRP (Materials RequirementsPlanning) module. The MRP has three principle pieces of output: an exceptionreport, an MRP list, and order proposals. The exception report brings to attentionsituations that need attention, such as late delivery of materials, and reschedulingproposals. The MRP list shows the details of shipments and receipts for eachproduct and component. Order proposals are used to order materials and issueproduction orders.

This naturally leads to Shop Floor Control. The planned orders from the MRPare converted to production orders. This leads to production scheduling,

42

IT Enabled SCM dispatching, and job costing. Finally, the Logistics system takes care of rest,assuring timely delivery to the customer. Logistics in this case consists ofinventory and warehouse management, and delivery. The purchasing function isalso usually grouped under logistics. The overall process summary looks like:Sales & Forecasting Data, Production & Capacity Planning, Production Execution,and Logistics.

This functionality is representative of all the major ERP vendors, including SAP,Oracle, Baan, and PeopleSoft. However, it also seems to be very close infunctionality to SCP products such as those from i2 and Manugistics. So what’sthe difference?

The Manugistics web site (http://www.manugistics.com) has the followingdescription of supply chain management: “Effective supply chain managementenables you to make informed decisions along the entire supply chain, fromacquiring raw materials to manufacturing products to distributing finished goods tothe consumer.”

This sounds a lot like what R/3 does. R/3 has detailed functionality to orderneeded materials, schedule and track the manufacture of products, and toschedule and track distribution. So really, what’s the difference? The descriptionof i2’s Rhythm product line (found at http://www.i2.com) is slightly different:“RHYTHM’s Supply Chain Planner provides advanced planning capabilities toleading companies in many industries. RHYTHM plans and optimizes the supplychain as a continuous and seamless activity that integrates all planning functionsacross the supply chain. RHYTHM goes beyond traditional planning solutions likeMRP (Manufacturing Resource Planning) and DRP (Distribution ResourcePlanning) by simultaneously considering demand, capacity and materialconstraints”. This provides a better idea of the chief differences between ERPand SCP systems.

Enterprises with multi-echelon distribution networks that have aggregation, dis-aggregation, balancing or echelon-skipping requirements within the distributionnetwork will need to augment their existing ERP applications with advanced SCPfunctionality or risk incurring distributions costs that are at least 10 percent higherdue to expediting, low order fill rates and inventory imbalances. This is caused bythe static sourcing tables used in ERP systems. While ERP systems provide agreat deal of planning capabilities, the various material, capacity, and demandconstraints are all considered separately, in relative isolation of each other. Themore leading edge SCP products are able to consider all the relevant constraintssimultaneously, and to perform real-time simulations of adjustments in theconstraints. ERP systems have a harder time adding this more dynamicfunctionally because they are chiefly concerned with transaction processing, andalso have many more jobs to do than just SCP. Getting answers from anoverloaded ERP systems may take hours, whereas getting them from a separateSCP system may take minutes or seconds.

The leading SCP products generally have many other enhancements as comparedto the ERP packages. Many employ visible maps of the entire supply chain,showing where problems are. Here is a description of Manugistics latest version:“Navigating your way through mountains of supply chain information is madeeasier with Supply Chain Navigator’s state-of-the-art graphical user interface.This intuitive GUI gives you complete visibility into the inner-workings of thesupply chain – through demand, supply, manufacturing scheduling, andtransportation – all at your fingertips.” Just recently, SAP has added similarfunctionality. But that functionality is actually a SAP version of the SCP productmade by i2, which SAP is selling as a separate module. This is a relatively

43

IT Packages in SCMsimplistic explanation of the key differences between the ERP vendors’ SCPmodules and the leading SCP only products, but it hits the main points.

Now, since these products have many naturally overlapping features, how is datakept consistent between them? i2 uses SAP’s ALE (Application Link Enabling) toexchange data between R/3 and Rhythm (i2’s SCP product suite). Oracle andthe other ERP vendors also have APIs that i2 and other vendors can use ascommon denominator middle-ware to interface to. However, this means that eachvendor has to change their middle ware interface software quite often, which isoften a trial and error process, doesn’t usually perform well, and often turns intoa nightmare. A newer, and possibly better solution to this problem is SIS(Specialized Integration Software). This software is designed specifically to allowERP and other systems to share processes and data. This removes the core ofdeveloping an interface to every other vendors software. The major company inthis area is Cross Worlds Software Inc., although more are appearing. Thissoftware, which runs on Windows NT, claims to work by simply pointing andclicking on a sending application (such as SAP) and a receiving application (suchas Manugistics) and then selecting the processes to link together. Noprogramming is required.

One other key development that should be noted is the rapid convergence that ishappening between ERP and SCP software. The ERP vendors have awaken,and are rushing to add more sophisticated supply chain functionality to their ERPproducts. And the SCP vendors are also expanding their functionality, furtherencroaching on the area inhabited by the ERP vendors. Although it seems that allthe leading SCP vendors are partnered with the all the leading ERP vendors, thisis only a temporary relationship if SAP, Oracle, etc. have their way. FollowingSAP’s example, Oracle has also added a SCP module, and Baan and PeopleSoft both have recently acquired smaller SCP vendors to integrate into futurereleases of their ERP products. As the ERP vendors move heavily into the mid-size market with their new supply-chain bolstered products, they should push a lotof the smaller SCP and ERP vendors out of business. With the industry shakeout,implementations should become somewhat simpler and thus shorter and lessexpensive, since there will be less products to integrate, and more experiencedimplementers in job market.

Activity 3

Select a case study from a National/International Journal, which discusses theselection and implementation of either ERP or SCM. Discuss the suitability of theselected case study in Indian context.

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9.9 SUMMARY

How to best extract value from information technology resources is a majorchallenge facing both business and IT managers, particularly as they turn theirfocus on searching for competitive benefits of strategic information systems andstriving for benefits beyond process reengineering. This search becomesincreasingly complex for those organizations attempting to operate in supplychains with multiple participants.

44

IT Enabled SCM In this unit, the recent development in the information system, particularly insupply chain context, has been reviewed. The changing paradigm ofmanufacturing from old rules to new rules of manufacturing required anintelligence information system. The sets that include MRP, ERP and DRP are afew business intelligence that automate the enterprise activities. This applicationmakes use of recent developments in information technology. However, the supplychain planning (SCP) emerged as a new tool for an integrated business. Thebenefits of this tool includes, reduction of lead-time, inventory cost reduction,reduction in operating costs, cycle time reduction, and improved productivity. Acomparison of ERP and SCP reveals that there exists a great deal of similaritybetween these two approaches. However, the key processes vary and hence thedifferences are reflected in the software. Additional features are being handled inthe SCM. Supplier reliability, supplier lead time, process reliability, changeovertime, schedule attainment, perfect order completion, replenishment lead time,delivery days on hand, total supply chain and total cycle time are the keyperformance indicators that need to be continuously measured and monitored forcompetitive advantage. SCM software product developers keep these indicatorsfor benchmarking their products.


1) “Making changes in a manufacturing company is probably the hardest thingthat civilized man has ever set out to achieve” – give your comment on thisstatement in context with the organization switching to supply chainmanagement.

2) Distinguish between independent and dependent demand inventory system.Why inventory control system is not practiced for dependent item materialplanning?

3) Give major inputs of MRP. Identify the sources through which these inputsare obtained. Give your answer for both Make to Stock (Make to Forecast)and Make to Order situations.

4) Prepare a flow chart for Material Requirement Planning logic. Illustrate thebasic mechanics of the logic for a simple product like a ballpoint pen.Assume all the necessary data for your selected product.

5) Each year Sputter Sports, Inc., receives orders for footballs from theParamutuel Foot ball League (PFL). Because of the destructive left foot ofTransylvanian superstar Vladimir ‘Toze’ Kickofski, the PFL orders a singlequantity of balls, so Sputter Sports wants to determine when the materialsnecessary to produce the order should be obtained. Sputter Sports plans toship 300 footballs in week 8, 200 in week 10, and 200 in week 12. Sputterhas no other customer for footballs.

A football is composed of a leather cover, a rubber bladder, and a string tolace the leather cover after the bladder has been inserted. Sputter purchasesbladders already molded with the inflation valve as an integral part of it. Thelead-time to obtain bladders is five weeks and they cannot be purchased inorders of less than 250. Sputter purchases pigskin in sheets large enough tomake four footballs. Records of past purchases indicate that it takes twoweeks from the time of order until the skins are delivered. It takes oneweek to cut and stitch 100 footballs with the current work force, andSputter does not plan to enlarge its facilities or work force for this order.One hundred strings for the footballs are cut from on cowhide, which takesonly one week to purchase. It takes one week to assemble an order offootballs up to 500 units.

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IT Packages in SCMShow (a) the master production schedule, (b) a product structure tree, and (c)plan Sputters’ material requirements for this product.

6) What is MRP-II? How is it different from MRP?

7) Define ERP. Give its tangible and intangible benefits.

8) Why a company pursues a new ERP solution?

9) What are the three distinct phases of Distribution Requirement Planning?

10) Explain the DRP logic for a medium size soft-drink manufacturing company.How is the safety stock decided in such distribution system?

11) Compare and contrast DRP and DRP-II.

12) Give the key processes considered in both ERP and SCM. How are theseprocesses different from one another?

13) What are the supply chain management pitfalls? How are these pitfalls beingeliminated?

14) Briefly explain the supply chain planning and a few software for SCP.

15) “The leading SCP products generally have many features as compared toERP software packages” – Give your elaborate remarks on this statement.



2) Copacino, W.C., : Supply Chain Management: The basics and beyond,St. Lucie Press, 1997.

3) Dave Garwood, : Bills of Material: Structured for Excellence, DogwoodPublishing Company, Inc., 1997.


5) Jonathan Blain, et. al., : Using SAP R/3, Prentice-Hall of India Pvt. Ltd., 1998.

6) Lambert, D.M., Stock, J.R., and Ellram L.M., : ‘Fundamentals of LogisticsManagement’ Mc-Graw Hill- Irwin, 1998.

7) Lucas, H.C., Jr., : ‘Information Technology for Management’, TheMcGraw-Hill Companies, Inc. 1997.

8) Martin, A.J., : ‘Distribution Resource Planning: The Gateway to true Quickresponse and continual replenishment’, John Wiley and Sons, Inc., 1995.


10) Oden, H.W., Langen Walter, G.A., and Lucier, R.A., Hand Book of Materialand Capacity Requirement Planning, McGraw Hill, Inc., 1993.





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IT Enabled SCMUNIT 10 IT PACKAGES IN SCM

Objectives

The objectives of this unit are to enable you:

· to know the importance of software packages in Business;

· to know the advantages and limitations of software packages of SCM;

· to know a few software packages such as BaaN, SAP, i2/RHYTHM; and

· to know a few success stories of software packages to the SCM.

Structure

10.1 Introduction

10.2 Role, Advantages and Limitations of Software Packages

10.3 Architecture of ‘SAP R/3 ERP’ Solution

10.4 Architecture of BaaN ERP Solution10.4.1 BaaN IV

10.4.2 BaaN ERP

10.5 Selecting the Right ERP Package

10.6 i2 Technology

10.7 Contribution of the Software Packages to the SCM

10.8 Summary

10.9 Self –Assessment Questions


10.1 INTRODUCTION

Organizations have the opportunity to become more efficient and competitive.Skilled and creative managers are required to accomplish these goals. Today’sMBAs need the knowledge and confidence to deal with issues related totechnology. They must apply technology aggressively if they are to competesuccessfully in our global economy. They must take advantage of the ability thatManufacturing and Information Technology give them to change the way work isdone.

During the past five years computers and communications technologies haveproliferated in offices and homes. Organization distributes the responsibility fortechnology to all levels of management and to different geographic locations. Asa result, managers from supervisor to CEO encounter information technology ona daily basis. Managers have to take advantages of the technology; they mustmake decisions about how to use the technology.

One of the most important parts of using the technology is the design ofinformation systems. Much of the distribution of technology to end-users resultsfrom the rapid diffusion of personal computers or workstations. Users now wouldlike to access a number of different applications on different computers through aLAN and probably the Internet as well.

Users may design systems for themselves alone, or they may be one of manyusers of a system designed by others. The design of multi-user applications ismuch more complex than the design of a personal computer system for anindividual user. Many more people are involved in the process, each with unique

47

IT Packages in SCMand often conflicting needs and expectations. Package programs are softwarewritten by a vendor to be sold to multiple customers. Packages have beenavailable since the first days of computers, but there has been an explosion intheir sale and use. One of the reasons for this proliferation is that the technologyhas matured. There are packages around today in their respective forth or fifth(or more) version, each new version improving with earlier version. The otherreason why the packages are going in popularity is the standards set by personalcomputer packages.

10.2 ROLE, ADVANTAGES AND LIMITATIONS OFSOFTWARE PACKAGES

The context in which software has been developed is closely coupled to almostfive decades of computer system evolution. Better hardware performance, smallersize, and lower cost have precipitated more sophisticated computer-basedsystems. We have moved from vacuum tube processors to micro-electronicdevices that are capable of processing 200 million instructions per second.Computer users as well as computer specialists often refer to software packageswhen they discuss how a system will be used. Software is the general termdescribing programs of instructions, languages, and routines or procedures thatmake it possible for an individual to use the computer. In a general sense,software is any prepared set of instructions that controls the operation ofcomputer system for computation and processing. The term is often applied onlyto commercially prepared packages, as opposed to user-prepared instructions.Commercially prepared programs are developed by manufacturers or companiesthat specialize in software. Their primary purpose is to control all processingactivities and to make sure that the resources and power of the computer areused in the most efficient manner.

Computer programs are sets of coded instructions that cause the computer toperform a series of operations that accomplishes a specific purpose. Theprograms are written in programming languages specially developed languages orcommands that make it possible to specify calculations and other processing interminology that can be converted to particular operations by the computersystem. Fourth-generation languages are in wide spread use to supplementprocedure oriented programming languages. Such language allows users todevelop sophisticated programs for retrieval of data with only a fraction of theinstructions needed when programs are written in procedure-oriented languages.Because they are much easier to use them traditional programming languages,fourth-generation languages are frequently utilized by non-programmers (such asmanagers).

As we approach the year 2000 plus, we can no longer look to the past as aguide to the future. In the face of strong market forces created by electroniccommerce and mounting competition, corporations can no longer plod alonghistorical tracks or seek the preservation of the status-quos. Companies arediscovering that old solutions do not work with new problems. The businessparameters have changed, and so have the risks and payoffs. A new computingparadigm is quickly emerging. It is called network-centric computing, Intranets, ordistributed objects. The aim of it is to provide highly configurable, more fault-tolerant, more scalable, and more easily used solutions for enterprises thantraditional client/server systems that have been able to deliver.

Despite its promise, supply-chain application software implementation isaccompanied by the confusion and misconception that is inherent in any softwareand business method.

48

IT Enabled SCM The questions range from:· What software is best suited for supply chain management?

· How can the costs involved and return on investment of a sofrware beestimated?

· What are the key design issues in developing information architecture?

· How can software and management issues be aligned to gain the maximumvalue?

Of these, the most pressing question-facing companies is: what is the righttechnology that protects investment in a changing environment? The answerappears to lie in network-centric computing discussed in the following sections.

Activity 1

Get access to the following Web sites in the Internet and update your Knowledgeon IT software packages in Supply Chain Management:

· www.manufacturingsystems.com

· www.mrp3.com

· www.sap.com/solutions

· www.i2.com

· www.lean-e-business.com

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10.3 ARCHITECTURE OF ‘SAP R/3 ERP’ SOLUTION

A SAP product is a suite of standard software made up of individual programsthat have been written to carry out computing tasks in the most efficient mannerpossible. SAP R/2 is a system for mainframes. The SAP R/3 has open systemarchitecture and applies the client/server concept across multiple levels.

The SAP R/3 Basis (R/3 Standard System)

All R/3 installations include a set of components that form the core of the systemand are referred to as R/3 Basis. It provides the users with a set of tools tobuild a suite of integrated programs that can be fitted exactly to the requirementsof the company and modified as the company develops. Every implementationwill need a SAP R/3 Basis module that provides the elements of the SAP R/3runtime system. It includes the fundamental tools and functions of the R/3 DataDictionary, the SAP R/3 Reference Model. The ABAP/4 DevelopmentWorkbench and R/3 Customizing Component. When designing an implementation,the R/3 Reference Model is used to select which module components will beneeded in the target system.

The SAP R/3 Applications

A SAP R/3 application is a set of programs that has been designed for aspecific types of business data processing. Each application addresses a mainsector of business activity, ranging from financial accounting to human resources.Under each application are grouped the modules most likely to be associated withthe title of the application. However, the fully integrated design of all SAP

49

IT Packages in SCMstandard business programs allows great flexibility in the assembly of modules toform a specific implementation.

Figure 10.1 : Major SAP Application

Each application is fully integrated with the R/3 Basis. This allows eachapplication to communicate with any other application. Some application modulesdepend on other applications. For example, the Controlling (CO) module dependson the Financial Accounting (FI) module. Some of the components of a modulemay be optional. Some of the functions within a component may be optional. Thisflexibility allows each R/3 installation to be built to fit exactly the uniquerequirements of the Client Company.

MAJOR R/3 APPLICATIONS AND THEIR MODULES

1) Financial Accounting (FI)

· General Ledger (FI-GL) · Legal Consolidation (FI-LC)

· Accounts Receivable (FI-AR) · Special Purpose Ledger (FI-SL)

· Accounts Payable (FI-AP)

2) Controlling (CO)

· Overall Cost Control (CO-OM) · Sales & Profitability Analysis (CO-PA)

· Product Cost Controlling (CO-PC)· Project Control (CO-PRO)

· Activity-Based Costing (CO-ABC)

COControlling

FIFinancial

Accounting

SDSales and

Distribution

MMMaterials

Management

ISIndustrySolutions

HRHuman

Resources

PMPlant

Maintenance

PPProductionPlanning

QMQuality

Management

PSProjectSystem

AMFixed AssetsManagement

WFWorkflow

R/3 BASISCLIENT/SERVER

ABAP/4

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IT Enabled SCM 3) Fixed Asset Management (AM)

4) Project System (PS)

· Basic Data (PS-BD) · Approval (PS-APP)

· Operational Structure (PS-OS) · Project Execution/Integration (PS-EXE)

· Project Planning (PS-PLN · Information System (PS-IS)

5) Workflow

Workflow refers to the movement of work items through a series of operationsthat add value to these items. It also refers to the flows of information that musttake place if this added value is to be optimized. A workflow managementsystem is intended to manage business processes automatically or semi-automatically by controlling the sequence of activities. It should ensure that theappropriate steps are carried out at the right moment by specific people orgroups, or by particular data processing programs and the machinery they control.SAP Business Workflow is devoted to developing and managing the flows ofwork and information that will make a business as effective and efficient aspossible.

6) Industry Solutions (IS)

An Industry Solution is an enhancement of the standard R/3 system that mayinclude some or all of the components of any R/3 applications, according to thesector of industry for which it has been designed. Some of the industry solutionsoffered by SAP are for the following sectors:

· Public Sector (IS-PS) · Hospital (IS-H) · Banks (IS-B)

· Oil (IS-OIL) · Telecom (IS-T) · Real Estate Management (IS-IS)

7) Human Resources (HR)

This application provide an integrated human resource management systemthrough the use of the components of the Personnel Planning and Development(PD) module and Personnel Administration (PA) module.

Personnel Planning and Development (HR-PD) Personnel Administration (HR-PA)

· Organizational Management (PD-OM) · Employee Management (PA-EMP)

· Seminar and Convention Management (PD-SCM)· Benefits (PA-BEN)

· Personnel Development (PD-PD) · Compensation Administration (PA-COM)· Workforce Planning (PD-WFP) · Applicant Manager (PA-APP)

Personnel Planning and Development (HR-PD) Personnel Administration (HR-PA)

· Room Reservation Planning (PD-RPL) · Time Management (PA-TIM)

· Incentive Wages (PA-INW)

· Travel Expenses (PA-TRV)

· Payroll (PA-PAY)

8) Plant Maintenance (PM)

· Equipment and Technical Objects · Maintenance Projects (PM-PRO)(PM-PRM)

· Preventive Maintenance (PM-PRM) · Service Management (PM-SMA)· Maintenance Order Management · Plant Maintenance Information

(PM-WOC) System (PM-IS)

9) Quality Management (QM)

· Planning Tools (QM-PT) · Quality Certificates (QM-CA)· Inspection Processing (QM-QC) · Quality Notifications (QM-QN)

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IT Packages in SCM10) Production Planning (PP)

· Basic Data (PP-BD) · Kanban/JIT Production (PP-KAB)· Sales & Operations Planning · Repetitive Manufacturing

(PP-SOP) (PP-REM)· Master Planning (PP-MP) · Assembly Orders (PP-ATO)· Capacity Requirements Planning · Production Planning for Process

(PP-CRP) Industries (PP-PI)· Material Requirements Planning · Plant Data Collection (PP-PDC)

(PP-MRP)· Production Orders (PP-SFC) · Information System (PP-IS)· Product Costing (PP-PC)

11) Materials Management (MM)

· Materials Requirements Planning · Invoice Verification (MM-IV)(MM-MRP)

· Purchasing (MM-PUR) · Information System (MM-IS)· Inventory Management (MM-IM) · Electronic Data Interchange

(MM-EDI)· Warehouse Management (MM-WM)

12) Sales and Distribution (SD)

· Master Data (SD-MD) · Billing (SD-BIL)· Basic Functions (SD-GF) · Sales Support (SD-CAS)· Sales (SD-SLS) · Information System (SD-IS)· Shipping (SD-SHP) · Electronic Data Interchange

(SD-EDI)

SAP Configuration and Customization by Applications Programmes

By itself the SAP program will not be very friendly to an individual user. It willnot know what sort of business is to be conducted or exactly how the UserCompany wants to invoice and conduct other interactions with its customers. Ifthe SAP implementation is to look and behave as if it really understands thecompany it is working for, it will have to be configured and customized. Naturallythe SAP software expects to be told how to behave in a specific company andhas standard routines, which help the company experts to set out what has to bedone in a format that SAP can accept. The experts who do this are referred toas Applications Programmers or Applications Developers.

Development of SAP Product Range in Three Directions

1) A function within a SAP component may be elaborated so as to become acomplex module. For example, the requirements of enterprise controlling canbe met by the components of the Controlling (CO) module, but in addition,the Enterprise Controlling (EC) product is available as a separate module andincludes functions not available in the Controlling (CO) module.

2) Extra integrating functions can be provided to interact with a group of SAPapplication modules. For example, the Logistics General (LO) module isdesigned to provide integrating functions for the following modules:

· Sales and Distribution (SD) · Production Planning (PP)

· Materials Management (MM) · Plant Maintenance (PM)

· Quality Management (QM)

3) Where there are many companies in a particular sector of business thatshare a specialized requirement, a SAP partner may develop a specializedenhancement of the R/3 system that can be marketed as an “IndustrySolution”.

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IT Enabled SCM10.4 ARCHITECTURE OF ‘BAAN’ ERP SOLUTION

Baan company’s ERP solutions are available as BaaN IV (the older version) andBaanERP (the latest version). The architecture of both versions is describedhere.

10.4.1 BaaN IV

The BaaN IV software can run on many platforms, for example, it can run onvarious UNIX platforms supplied by HP, IBM, Sun, Digital, etc. It is alsoavailable on Windows NT. The software can use database provided by thesoftware manufacturer, or, third-party databases such as Oracle or Ingress canalso be used. Figure 10.2 shows the menu browser displayed to the user havingaccess to all the packages of BaaN IV.

Menu Browser [User:]

· BAAN IV Common

· BAAN IV Finance

· BAAN IV Project

· BAAN IV Manufacturing

· BAAN IV Distribution

· BAAN IV Process

· BAAN IV Transportation

· BAAN IV Service

· BAAN IV Enterprise Performance Manager

· BAAN IV Enterprise Modeler

· BAAN IV Constraint Planning

· BAAN IV Tools

· BAAN IV Utilities

· Distributed Data Collection

Figure 10.2 BaaN IV Menu Browser

BaaN IV Common

The BaaN IV common package allows you to maintain the common master data.This data is used by all the BaaN IV packages. All the files that are used inmore than one module are stored in this package. The BaaN IV commoncontains the following tables:

1. Logistic Tables 4. Customer Master

2. Financial Tables 5. Supplier Master

3. Employee Master

BaaN IV Finance

The finance package allows users to extract financial transactions from the salesand manufacturing areas and post them to the general ledger without having tokey any transaction. It also has a budget system, and an activity base module.Following modules are included in the finance package:

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IT Packages in SCM1. General Ledger 6. Financial Statement

2. Accounts Receivable 7. Financial Budget System

3. Accounts Payable 8. Cost Allocation

4. Cash Management 9. Electronic Data Interchange (EDI)

5. Fixed Assets

BaaN IV Project

BaaN IV project is designed to support the management of projects through allstages, from estimating tenders to delivery and throughout the guarantee period. Itis especially suited to project-driven companies for the coordination of multipleprojects. The goal is cost-effective management of each project according to thetime schedule, within the specified budget and to the required quality.Furthermore, allocation of personnel and equipment to projects is critical in cost-effective operation, which will maximize company profits. The project packageprovides all the tools necessary to control project accounting and planning. Aplanning requirement process accurately tracks costs for the project-relatedindustries. This package is linked with all the software’s other functions toprovide the information necessary to successfully manage the project within theenterprise environment. It includes following modules:

1. Project Estimating 6. Hours Accounting

2. Project Definition 7. Project Progress

3. Project Budget 8. Project Monitoring

4. Project Planning 9. Project Invoicing

5. Project Requirements

BaaN IV Manufacturing

The manufacturing package provides all the manufacturing planning functionssuch as, MPS, MRP-I, and CRP. It can also provide control for all operationsrelated to product’s fabrication, labour management, and capacity required. Thefollowing modules are included:

1. Engineering Data Management 9. Repetitive Manufacturing

2. Item Control 10. Shop Floor Control

3. Bill of Material Control 11. Hours Accounting

4. Routing 12. Project Budget

5. Cost Accounting 13. Product Configuration

6. Master Production Schedule (MPS) 14. Product Classification

7. Material Requirements Planning (MRP) 15. Project Control

8. Capacity Requirements Planning (CRP) 16. Quality Management System

BaaN IV Distribution

The Distribution package is designed to take care of day-to-day logisticalmanagement in production and trade companies. The package is fully integratedwith all other packages of BaaN IV. This package contains all the programs tocreate and manage the sales orders. It is a reliable source of information onmarket trends and developments. It also includes all the inventory relatedfunctions such as inventory control, location control, distribution requirementsplanning (DRP I), and replenishment control.

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IT Enabled SCM BaaN IV Distribution Package Contains the following Modules:

1. Item Control 8. Inventory Control

2. Cost Accounting 9. Lot Control

3. Purchase Control 10. Location Control

4. Sales Control 11. Distribution Requirements Planning

5. Sales and Marketing Information 12. Tables

6. Electronic Data Interchange (EDI) 13. Common Data

7. Replenishment Order Control 14. Distribution Parameters

Characteristics of BaaN IV Distribution

1. Simple and fast data input and control

2. Extensive purchase and sales statistics

3. Comprehensive forecasts and planning techniques

4. Interface with the graphical module enterprise performance manager

5. Interface with EDI

6. Use of multiple currencies

7. Use of multiple warehouses

8. Multi-company solution including supply chain management.

BaaN IV Process

The Process package is designed to help manage the entire supply chain of anycompany operating in a process environment, such as the chemical industry. Ithelps manufacturers of identical product in different containers. It also helps tokeep track of the various batches processed. It is able to account for thepotency, the acidity, and the grade of items. Following are the modules providedin the process package:

1. Item Control 5. Capacity Requirements Planning

2. Formula Management 6. Production Management

3. Routing 7. Hours Accounting

4. Cost Accounting 8. Quality Management System

BaaN IV Transportation

The Transportation package helps in managing transportation orders and tomaximize equipment use. It can handle all types of transportation modes. It haspowerful modules for managing warehousing and packaging. It keeps track oftransportation costs and determines cost trends. It includes the following modules:

1. Employee Control 7. Transport Control

2. Address Control 8. Invoicing Control

3. Transport Fleet Management 9. Packing Control

4. Transport Fuel Control 10. Electronic Data Interchange

5. Hours and Expense Control 11. Warehouse Control

6. Central Data Entry 12. Distribution Requirements Planning

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IT Packages in SCMBaaN IV Service

The Service package can be used to manage all the repair and warrantyinformation for supporting installations in the field. With this package:

1) You can register at which customers and locations specific installations aresituated.

2) An installation bill of material that lists the components requiring servicingincluding their serial numbers and service history can be linked to eachinstallation.

3) This data helps in analyzing the causes of malfunction in the fastest possibleway.

4) You can create maintenance contracts and record warranties together withassociated warranty terms for each customer.

5) Calls reporting malfunctions can be recorded even as you are on the phone.

6) Based on periodic maintenance obligations and calls a service plan is drawnand service job sheets are printed.

7) Finally, the service activities can be invoiced and a detailed service history isbuilt up.

The modules included in this package are:

1. Service Tables 5. Service Analysis Control

2. Installation Control 6. Item Control

3. Contract Control 7. Cost Accounting

4. Service Order Control 8. Inventory Control

BaaN IV Enterprise Performance Manager

The enterprise performance manager (EIS) incorporates tools that are designed togiven various levels of management access to the data in the BaaN IV tables.The data of the distribution, finance, and manufacturing modules are available inthis module and they can be displayed using various formats.

· The tool can be used interactively to get an overview of the overall businessperformance by using Ishikawa fishbone diagrams.

· Via a flexible user interface the enterprise performance manager can drilldown to the basic figures. These figures can be fetched from the integratedBaaN IV repository and can be linked to the persons responsible in theorganization. A set of predefined performance indicators is available andnew indicators can be defined very easily. The EIS module is fullyintegrated with the manufacturing, finance, and distribution modules.

· The enterprise performance manager is especially meant for middle and topmanagement. It can be used as a business-benchmarking tool during BaaNIV implementation and optimization cycles (business process reengineering)and as a management and reporting tool at tactical and strategic level.

BaaN IV Enterprise Modeler (formerly known as Orgware)

Enterprise modeling is a process in which customers can map all the processesused and then develop an accurate and complete implementation plan.

BaaN IV Constraint Planning

The constraint-planning package provides planning functionality that takes intoaccount capacity and materials constraints. This package currently provides MPSfunctionality with both finite and infinite planning methods.

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IT Enabled SCM BaaN IV Tool

The Tools package consists of all the programs designed to maintain andcustomize the application. The form manager, report writer, and sessions managerare the options that allow the developers to tailor BaaN IV to user’s needs. Italso includes programs to manage the database, devices, and user profiles.Following modules are included in the Tools package:

1. Software Installation 11. Business Objects

2. Application Configuration 12. Application Customization

3. User Management 13. Application Development

4. Device Management 14. Terms and Definitions

5. Job Management 15. Translation

6. Database Management 16. Documentation

7. Audit Management 17. Conversion

8. Text Management 18. Software Distribution

9. Menu Management 19. Desktop Management

10. SQL Queries

BaaN IV Utilities

The existing utilities allow users to easily import or export information betweenBaaN IV and any other system. This package facilitates the implementation ofthe software by helping in creation of master files imported from other software.This package has tools to facilitate the communication between BaaN IV andother databases, spreadsheets, etc. This module can also be used to convert dataof older versions of the application to new versions. The exchange module canbe very useful for multi-site applications as it facilitates the communicationbetween two sites. In short this package provides the needed bridge between allother sources and BaaN IV and includes following modules:

1. Import Module 2. Export Module 3. Generate Exchange Scheme

Distributed Data Collection

This package allows the users to interface between BaaN IV and third partydata collection such as vendor’s data collection systems. This allows for thecollection of data through the use of devices such as laser scanners etc. with thereal time update of the interfacing BaaN IV module. The data collection vendormust supply an interface to BaaN IV to create a functional solution.

10.4.2 BaaN ERP

Baan ERP, the successor to BaaN IV has the following enhancements, asclaimed by Baan Co., over the older version:

1) Order to Cash foundation for all Baan business solutions.

2) Open Component Architecture

3) Fully integrated allowing for consistency and visibility across the enterprise

4) Comprehensive international capabilities, supporting multiple languages, taxstructures and currencies including the Euro.

5) Modular components that allow for incremental implementation and migration.

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IT Packages in SCMBaaN ERP Includes the Following five Components:

(a) Manufacturing (b) Finance (c) Project

(d) Distribution, and (e) Tools.

A. BaaN Manufacturing

BaaN ERP Manufacturing Module Includes:

1. Bills of Material 10. Project Budgeting

2. Cost Price Calculation 11. Project Control

3. Engineering Change Control 12. Repetitive Manufacturing

4. Engineering Data Management 13. Routings

5. Hours Accounting 14. Shop Floor Control

6. Product Classification 15. Tool Requirements, Planningand Control

7. Product Configuration 16. Capacity Requirements Planning*

8. Production Control 17. Master Production Scheduling*

9. Production Planning 18. Material Requirements Planning*

* These modules come with extensive enterprise planning capabilities

Benefits

1) Open architecture design allows for a seamless and simplified integration withpopular CAD packages via “BaanEngineering” elements.

2) Graphical simulations help analyze a ‘what if’ impact on financialrequirements, capacity and inventory.

3) The system’s object orientated configurator supports different productionstrategies.

4) Planning is integrated at every level and across multiple sites allowing smoothand consistent operational activity.

5) Within a dynamic environment, enterprise planning simulates alternative plansand reactive planning.

6) Planning and tracking capabilities are extended to improve production resourcemanagement issues such as inventory.

7) The integrated quality management tool enables a wide range of statistics(from raw material to finished goods) to be monitored resulting in continuousimprovement in manufacturing quality.

8) Multiple valuation methods help the company identify cost drivers and reduceproduct costs.

B. BaaN Finance

BaaNERP Finance module is designed to meet dynamic financial managementand reporting requirements around the world. It includes:

1. Accounts Payable 6. Fixed Assets

2. Accounts Receivable 7. General Ledger

3. Financial Budgets System 8. Cost Accounting

4. Cash Management 9. Sales Invoicing

5. Financial Reporting System

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IT Enabled SCM Benefits

1) This independent system allows for easy solution configuration to meetchanging business strategies.

2) Integration with Hyperion financial software provides advanced budgeting,consolidation, reporting and analysis.

3) BaaN Accounts Payable streamlines vendor payments. It supports checks,electronic banking and payment on consumption.

4) Accounting operations are simplified and duplicate data entry is eliminatedwith parameter-driven posting and updating tools.

5) Superior visibility enables the company to immediately focus and act onfinancial information to help increase margins, revenue and cash flows.

6) International business requirements are met with the use of multi-dimensionalledger and dual sets of books.

7) Provides cost analysis and cost allocation functionality on both at detailedand summarized levels.

8) Costs can be proactively tracked via budget links.

9) Multi-currency functionality allows the company to hold up to 3.homecurrencies therefore complementing and complying with the Euro regulations.

10) Central point invoicing.

C. BaaN Project

The project module provides the control and visibility the company needs forprofitable operations from estimates and bids through site installation andmaintenance. In addition the system supports project invoicing for all the differentcontractual agreements found in project environments. Baan Project Moduleincludes:

1. Project Budget 5. Project Monitoring

2. Project Definition 6. Project Planning

3. Project Estimation 7. Project Progress

4. Project Invoicing 8. Project Requirements Planning

Benefits

1) Real time control of all aspects of project management

2) Integration of project management and manufacturing resource enhancingvisibility and timely consolidated reporting.

3) The link with Baan Manufacturing allows all the relevant, cross functionalinformation about each project to be easily accessible for effective enterpriseresource management.

4) An integrated planning and scheduling system environment results in activitynetworks to be defined, resources to be allocated, and ‘what if’ analysis tobe conducted.

5) Organizational, logistical and contractual structures can be modeled and theresulting project activities report, which results in effective cross-functionalmanagement.

D. BaaN Distribution

To help develop the best solution for meeting customer requirements andbalancing business constraints, this component manages the entire spectrum of

59

IT Packages in SCMdistribution, sales, and logistics for manufacturers and distributors. BaaNERPDistribution modules includes:

1. Sales Management 2. Purchase Management 3. Warehouse Management

Benefits

1) Extensive simulation capabilities optimize purchasing and internal inventorydecision making.

2) Top-down planning supports any distribution strategy.

3) With integrated workflow management and order templates, order processingis speeded up.

4) Shipping constraints, order blocking algorithms and multi-level ATP componentchecks are supported by the system.

5) Integration with the Aurum Front-Office suite enhances the capabilities ofBaan Sales solution.

6) Purchasing is simplified with online requisitioning.

7) Sophisticated supplier contract and release management enable your companyto take advantage of economies of scale.

8) EDI is key in enhancing the speeds of communication with trading partnersas well as providing a solid link between distribution operations andmanufacturing planning.

E. BaaN ERP Tools

All Baan applications are built using flexible BaaNERP Tools to handle businessneeds that require software or configuration changes. BaaNERP Tools includes:

1. Open System Tools 2. Client/Server Tools

3. End User Tools 4. Developer Tools

5. Documentation Tools 6. Translation Tools

7. Software Distribution 8. Implementation Tools

Benefits

1) BaaNERP enables quick reaction to new trends in the marketplace thatrequire software or software configuration changes.

2) Helps in developing the Baan applications in such a way that they are keptindependent of third party products.

3) Helps create tailored applications to meet special requirements.

4) Facilitates integration of Baan applications with third-party products.

10.5 SELECTING THE RIGHT ERP PACKAGE

1. The selection and implementation of ERP is primarily an operationsmanagement initiative and decision, not an IT or MIS project, hence it iscritical that the chief executive officer (CEO), the vice president ofmanufacturing, and other key players be involved and support the chiefinformation officer (CIO) in the ERP selection and implementation process.The selection team must have top-level representation from all majorfunctional areas including production, distribution, finance and accounting,human resources, sales, marketing, customer service, and informationsystems.

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IT Enabled SCM 2. A project leader must be selected from among the team members.

3. The team must develop consensus on several critical issues that will shapethe entire project budget, time frames, goals, and deliverables.

4. A tentative schedule should be prepared for the selection process andimplementation.

5. The team should determine what critical business needs/problems thecompany is trying to address and what benefits are to be gained from ERP,some possible needs, problems, and benefits are:

· Reducing inventory investment · New product planning and introduction· Increasing fulfillment rate · Customer service programs· Lowering transportation costs · Company downsizing· Simplifying the manufacturing process · Company expansions into new areas

or markets· Gaining market share · Potential acquisitions

6) The team should then develop a document containing:

· Total number of customers · Company goals

· Company’s most significant · A narrative on how the companybusiness process – areas conducts its businessthat set it apart

7) By putting these business processes in the form of key (transaction)scenarios, potential vendors can prepare scripted demonstrations. Thisdocument helps in focusing the internal team’s efforts and also becomes avaluable tool for potential ERP provides to understand the business and itsneeds.

8) The project team must determine its differentiating points to ensure that avendor’s product plays to those strengths.

9) The team should also find out which ERP packages the competitors areusing or implementing.

10) After narrowing down the choices, the top two or three vendors should beinvited to demonstrate how their products could be tailored to the specificwork environment. The vendor should be asked to build and demonstratebusiness processes and transaction scenarios based upon the company needs.

11) Once the scripted demos narrow down the alternatives, team members mustconduct site visits of the top ERP candidates’ solutions to see the vendorsworking environments, gauge the vendors’ commitment to training andcustomer services, and get a sense of their overall business philosophies.

12) Finally the project team must visit the sites of other companies that are usingthe particular ERP product to see how the software system functions inactual applications and assess vendor support, both during and after initialimplementation.

10.6 i2 TECHNOLOGY

i2 Technology is the recognized leader in supply chain planning and optimizationwith more than ten years of experience in optimizing business process.

i2 emerged in 1988 as a supply chain management leader with innovative newproducts that streamlined the entire supply chain management process. Throughconsistant innovation and dedication to providing value, i2 has created the latest

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IT Packages in SCMbusiness to business e-commerce applications that have changed the waycompanies are doing business. i2 is the established leader in SCM and intelligenteBusiness. For the second consecutive year, i2 has been named one of ForbesASAP’s Dynamic 100 software companies. i2 is the only company in theLeader’s Quadrant in Gartner Group’s “Supply Chain Planning Magic Quadrant.

i2’s forward-thinking solutions consider the real conditions of companies tooptimize every key business process-from product design to customerrelationships. With industry leading customers and partners; i2 recently launchedTradeMatrix, a collection of electronic market places dedicated to deliveringadvanced Business to Business solutions. TradeMatrix offers a full breadth ofservices that range from procurement, commerce, fulfillment, customer care,retail, product development and planning. i2’s mission is to create $50 billion inaudited value and serving for its customers by the year 2005. The organization iswell on its way to meeting its goal of $50 billion in value, with an audited $7billion of value already documented as of October 1999. With i2 solutions,customers are able to attract and retain new clients, bringing the right products tomarket quickly and efficiently, and streamlining their entire supply chain.

Rhythm Solutions

i2 RHYTHM solutions offer the intelligent answer for decision-making across theenterprises. RHYTHM software optimizes and integrates Key business processes,while delivering intelligent e-Business through collaboration with trading partners.RHYTHM offers a complete solution for Business Process Optimization (BPO)by offering the optimization, integration, and forward visibility required for high-velocity business. The RHYTHM solution has delivered billions of dollars inmeasurable value for major companies in a wide range of industries. Historically,leading companies have achieved success by mastering one of the three corebusiness disciplines:

i) Product Leadership: Developing and launching innovative products at theright time, while managing the product life cycle from concept to phase-out.

ii) Operational Excellence: Manufacturing and delivering the right products atthe right time, while collaborating with trading partners at maximumefficiency.

iii) Customer Intimacy: Engaging the right customers, managing theirrelationships and providing superior customer service.

In the past, a company could succeed by pursuing excellence in just one of theseareas. Most e-Business solutions today focus on making promises with little or noconsideration of integration across business process.

Rhythm Software Solutions

i2 consistently creates the standards that others adopt. Their thought leadership isevident in the innovations they have established over last decade. RHYTHM’sholistic end-to-end solution provides the ability to segment the market on aproduct level, help buyers make sound decisions based on real-time availability ofinformation, as well as personalize the entire shopping experience. These aspects,combined with i2’s proven supply chain planning and optimization solutions, cantransform any organization into a high-velocity eBusiness enterprise.

However, the terms of engagement have changed. Globalization, increasingcompetition and the Internet have added incredible velocity and complexity totoday’s business landscape. Velocity, or the ability to make intelligent decisions athigh speed, is necessary in this real-time economy. What type of decisionintelligence will give your company the velocity to achieve excellence in all areas

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IT Enabled SCM of your business. Representing a natural extension of i2’s recognized leadershipin optimizing business processes RHYTHM provides advanced planning andoptimization of the following key processes:

i) Product Life Cycle Management: Rhythm product life-cycle managementsolution ensures product innovation for maximum market share andprofitability. Companies that use their product lifecycle management solutionwill increase market share, increase profit margins and will reduce researchand development costs.

ii) Supply Chain Management: Rhythm’s supply planning optimizes the matchof supply to demand. Their SCM customers are able to reduce unnecessaryexpenses, improve revenue and meet fulfillment commitments.

iii) Customer Management: Rhythm’s customer management enablespersonalized, full-service eBusiness by managing all customer issues throughone solution. Customer management offers companies the opportunity tomaximize revenue, increase market share, reduce cost-of-sale and increasecustomer satisfaction.

iv) Inter Process Planning: to integrate the above three processes, maximizingresource utilization and profitability.

v) Strategic Planning: for accurate long-term decision-making and scenario-based analysis of competitors.

Tradematrix Solutions

Success in connecting the participants in a supply chain has been the drivingforce behind i2’s most exciting solutions. TradeMatrix participants are able toharness the power of the Internet, create a competitive advantage and deliver ontheir promises to the customer.

With innovative solutions and core competencies, i2 is uniquely qualified to deliverthe most robust eMarket places to the industry. TradeMatrix offers the followingsolutions.

1) TradeMatrix Procurement Solutions

TradeMatrix Procurement services is a hosted procurement service that reducesthe cost of purchasing and procurement effort, while lowering inventory anddecreasing the time-to-market for new products.

2) TradeMatrix Commerce Solutions

TradeMatrix commerce service enables personalized service. eBusiness bymanaging all customer issues through one solution. The commerce service allowsparticipants to maximize revenue, increase market share, reduce cost-of-sale andensure customer satisfaction.

3) TradeMatrix Fulfillment Solutions

TradeMatrix Fulfillment solution optimally responds to customer requests andintelligently manages customer orders. Its fulfillment solution allows participants toimprove customer service and increase margins and profitability.

4) TradeMatrix Customer Care Solutions

The TradeMatrix Customer Care solution allows participants’ customer to assessinformation quickly, resolve problems and receive support instantly.

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IT Packages in SCM5) TradeMatrix Retail Solutions

The TradeMatrix retail solution gives companies an opportunity to capture moredemand, minimize product obsolescence and maximize storage effectiveness.

6) TradeMatrix Planning Solutions

TradeMatrix Planning solution is a service that enables companies to make betterdecisions across the entire value chain, increase revenues, decrease costs andimprove ROA.

7) TradeMatrix Product Development Solutions

TradeMatrix Product Development solution allows companies to accelerateproduct innovation for maximum market share and profitability. Companies gainproduct margins, increase market share and show a reduction in R&D costs.

Activity 2

Fix an appointment with marketing personnel of either SAP, BaaN, or TCSsoftware companies. Discuss in detail about ERP, i2, and SCM softwareproducts. This discussion may enlighten your knowledge on the price,implementation strategies, training, features and limitations of the softwarepackages, and hardware requirements to run the applications for a company.Now, prepare a report on how to select software for a company’s applications?

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10.7 CONTRIBUTION OF THE SOFTWAREPACKAGES TO THE SCM

On the front lines between manufacturers and their customers, competition formarket share has never been fiercer. In the past, strategies for improving corporateprofitability and competitiveness have shifted from marketing-focused (1960’s) tofinance-focused (1970’s) to operations-focused (1980’s) methods. But in each case,as these methods were adopted and gained widespread acceptance, companiesgradually reached parity, and these methods generated diminishing returns.

Today, corporations are looking beyond their “internal enterprise” to the extended“virtual enterprise” – the collection of trading partners who cooperate to provideproducts to customers – as the new frontier for improving responsiveness tocustomers and increasing market share. Pioneering efforts adopted in the early1990’s in the apparel industry (Quick Response) and grocery industry (EfficientConsumer Response) are now being applied in other industry segments, such asindustrial machinery, metals, paper, automotive, and consumer electronics.Competitive initiatives are being formed between the members of extended supplychannels to protect their position against alternative competing channels.

In order to enhance the competitiveness of its customers, the software developingcompanies intend to establish a leadership position as the premier provider ofsupply chain management software. Among many, i2, BaaN, SAP, etc. are the

64

IT Enabled SCM few companies committed for the contribution of the software packages to theSCM. For example, BaaN’s vision of supply chain management extends forbeyond traditional enterprise requirements planning (ERP) or advanced planningand scheduling (APS) capabilities, and includes customer interaction, sales forceautomation, demand management, vendor managed inventory (VMI),transportation planning, and web enablement applications.

It may therefore, be expected that the supply chain solutions provides the abilityto optimize supply chain activities, monitor events based on actual execution,proactively visualize potential problems, and determine corrective action usingadvanced simulation and evaluation capabilities. The results of this analysis arethen propogated upstream and downstream throughout the supply chain to keepmaterial, production and transportation resources synchronized.

Activity 3

Visit any Manufacturing Organization, which proposes to go for ERP orequivalent software package. Discuss with the systems Manager to find out whatpreparations are required before implementation of software package. Prepare areport of your discussion.

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10.8 SUMMARY

For a company experiencing accelerated growth, increasing the efficiency andvisibility of the supply chain is the key to increasing productivity. Companypressures are creating significant impact on today’s manufacturer. There areconcerns for providing the customer with quality service, competitive prices, andtimely product. More than ever, the company’s competition is driving to findalternative ways to achieve these goals without sacrificing the quality of product.

The supply chain solutions discussed in this unit will completely integrate multi-plant planning and scheduling, and provide the ability for both centralized andcollaborative planning and scheduling. This will enable supply-chain planning toexceed beyond the boundaries of a single corporation, and will feature “totalscalability and configurability” which will address in a single solution therequirements of large manufacturers as well as those of mid-tier and smallmanufacturers. Technologies such as publish-and-subscribe over the Internet, aswell as message passing are utilized.

Finally, the anticipated benefits of IT packages in SCM include:

1. Enterprise Benefits:

· Better management of complexity across the entire supply chain.

· Improved visibility and decision support for long-term capacity planningand capital investment.

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IT Packages in SCM2. Financial Benefits:

· Reduced inventory costs.

· Reduced operating costs through better utilization of resources.

· Less waste, with better alignment of production with demand.

3. Shop floor Benefits:

· Improved inventory management and control

· More efficient production through optimized scheduling, enabling longerruns and fewer changeovers.


1) What are the deciding factors for a manufacturing organization to switchfrom the current work practice to that of IT based?

2) What is the right technology that protects investment in a changingenvironment? Give your answer specific to an Indian ManufacturingOrganization.

3) Identify suitable IT packages to suit small, medium, and large manufacturingorganizations. Give your choices with justifications – both technical andeconomical.

4) What are the various modules of SAP R/3? Briefly discuss the content ofeach module.

5) Explain briefly each module of BaaN IV.

6) Compare and contrast ERP software products of at least two establishedbrands.

7) Give important benefits of Manufacturing, Finance, and Distribution modulesof BaaN IV.

8) How is the Project module of SAP R/3 comparable to that of BaaN IV?

9) How is the right ERP Package selected for a medium sized manufacturingorganization?

10) Can ERP software package be applied in (i) Process Industry (ii) ServiceIndustry? Why and why not?

11) Discuss i2 Technology software products for manufacturing applications.What salient features are found in i2 products?

12) Compare and contrast ERP software package of either SAP or BaaN withi2 package.

13) BaaN and SAP have ventured to enhance their software products for supplychain management environment. Is this a right approach? Why and why not?

14) What steps are to be followed while implementing IT software packages forsupply chain management? Do these steps vary from package to package?How are they standardized?

15) In the IT based supply chain management, what criteria can berecommended to measure the performance of manufacturing organization?Explain the merits and demerits of your recommendations.

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IT Enabled SCM10.10 REFERENCES AND SUGGESTED FURTHER

READINGS


2) Copacino, W.C.: Supply Chain Management: The basics and beyond, St.Lucie Press, 1997.

3) Dave Garwood: Bills of Material: Structured for Excellence, DogwoodPublishing Company, Inc., 1997.


5) Jonathan Blain, et. al., : Using SAP R/3, Prentice-Hall of India Pvt. Ltd.,1998.

6) Lambert, D.M., Stock, J.R., and Ellram L.M.: ‘Fundamentals of LogisticsManagement’ Mc-Graw Hill- Irwin, 1998.

7) Lucas, H.C., Jr.: ‘Information Technology for Management’, TheMcGraw-Hill Companies, Inc. 1997.

8) Martin, A.J.: ‘Distribution Resource Planning: The Gateway to trueQuick response and continual replenishment’, John Wiley and Sons, Inc.,1995.


10) Oden, H.W., Langen Walter, G.A., and Lucier, R.A., Hand Book of Materialand Capacity Requirement Planning, McGraw Hill, Inc., 1993.





COST AND PERFORMANCE MEASUREMENT IN SCM

Unit 11Cost Analyses and Measurement 5

Unit 12Best Prictices and Benchmarkin for SCM 13

Unit 13Performance Measurement and Evaluation of SCM 25

4Block



Chain Management
















December, 2004


ISBN-81-






















BLOCK 4 COST & PERFORMANCEMEASUREMENT IN SCM

Unit 11: Cost analyses & measurement discusses about Cost analyses &measurement in terms of Logistics. It describes cost drivers and Activity BasedCosting (ABC) etc. It illustrates the costs that are incurred due to logistics. It alsogives some insights on customer profitability analysis

Unit 12: Best practices & Benchmarking for SCM comprehends the role ofbenchmarking in business. It identifies the reasons for the requirement ofbenchmarking. It recognizes the process in which benchmarking can effectively bebrought about. It also addresses the challenges faced in bringing about benchmarkingprocess. Finally it comprehends what elements are involved in bringing about changemanagement.

Unit 13: Performance measurement & evaluation of SCM deliberates the needfor performance measurement in a supply chain. It makes you familiar with theunderlying performance measurement concepts. It draws out the potential benefits ofperformance metrics exercise. It also describes various methods and techniques thatcould be employed for the performance measurement of Supply Chain Management.Finally it illustrates barriers to effective Performance Measurement and exploresfuture directions in performance measurements.

4


5

Cost Analyses andMeasurementUNIT 11 COST ANALYSES & MEASUREMENT

Objectives


· discuss Cost analyses & measurement in terms of Logistics;

· define Cost drivers and Activity Based Costing (ABC) etc.;

· illustrate Logistics cost; and

· have an insight from customer profitability analysis.

Structure

11.1 Introduction

11.2 Cost Drivers

11.3 Activity Based Costing (ABC)

11.4 Logistics Cost

11.5 Customer Profitability Analysis

11.6 Summary



11.1 INTRODUCTION

Many a times it so happens that even if a company has good products, it offers goodservice like delivering the products on time. It has plethora of satisfied customers.The company has sufficiently good productivity and growth levels. Even then it failsto achieve sufficiently good profitability levels. Many reasons are cited for this likelack of sales, harder times, competitiveness etc. However in reality, the main reasonfor this is the lack of knowledge of possible losses. It is here that one finds the needfor determining the “true” cost for a cost object (product, job, service, or customer).This is important in order to generate opportunities for cost improvement for probableobjects that are generating losses. It is also important to prepare a business plan andimprove strategic decision-making. Major factors for determination of market priceare competitors (those who are offering a similar product) and customer value. Thereare many ways to determine object cost like intuition, guessing, traditional costaccounting and activity based costing. Total cost for a cost object is determined bythe direct cost (e.g. labor, material, transportation etc.) and the overhead cost.

In this unit we will discuss about cost drivers and Activity Based Costing (ABC). Wewill also study about the logistics cost and ways to reduce them.

11.2 COST DRIVERS

As businesses have become more complex, the elements of cost also have becomecomplex. Overhead costs are replacing the direct costs of labor and purchasedmaterials. These overhead costs are incurred on technology and the managers whomaintain productivity and production. As managers attempt to understand andmanage cross-functional business processes, organizations are finding that traditionalapproaches for managing these costs are ineffective.

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Business processes need to be mapped so that the activities and associated driversare identified and their relationships analyzed. Analysis like ABC helps to understandvariable cost behavior and cost-of-quality for activities and processes.

The most useful way to analyze costs is to do it in terms of the various stages of theoverall value chain of which the firm is a part. Gattorna (1998) defined cost driver asfactor that creates of influences cost. Cost-driver analysis identifies the cause ofcost, e.g. the number of customer orders received in a specific period. A positive costdriver results in a revenue, production or support related activities that generateprofit. A negative cost driver causes unnecessary work and reduces profitability. Acost pool is a grouping of costs caused by related cost drivers and activities. Gattornaillustrated the concept of cost drivers with an example (Figure 11.1), which comprisedof identifying activities and the cost drivers & cost pool associated with them.

The need of identifying the cost drivers arose due to the dissatisfaction with theconventional cost accounting. These problems were summarized by Christopher(1998) as follows:

· There is general ignorance of the true costs of servicing different customertypes/channels/market segments.

· Costs are captured at too high a level of aggregation.

Figure 11.1: Identifying activities, cost drivers and cost pools within the value chainSource: Gattorna & Walters (1996)

ActivitiesOrder GenerationOrder EntryInventory CheckingCredit CheckOrder (Backorder)AcknowledgementGenerate picking instructionsInvoicingPayment ProcessingCredit Adjustments

Cost DriverNo. of orders receivedNo. of orders processedNo.of itemsNo. of customer accountsNo. of orders processedNo. of picking documentsNo. of invoicesNo. of items per invoiceNo. of cheques, etc.No. of credits.

Cost Pool: Order Administration

ActivitiesOrder PickingOrder PackingOrder CheckingReturns (Handling)

Cost DriverNo. of items pickedNo. of items packedNo. of items returned

Cost Pool: Order Assembling

ActivitiesPromotions & AdvertisingSelling Activities

Cost DriverNo. of enquiriesNo. of Sales calls

Cost Pool: Marketing

ActivitiesOrder SchedulingOrder LoadingOrder DeliveryRetrurns (Pickup)

Cost DriverNo. of OrdersNo. of Customers DeleveriesNo. of Unit LoadsDistance/ DeliveryNo. of Return Journeys

Cost Pool: Order Delivery

ActivitiesInstallationMaintenanceRectification

Cost DriverNo. of InstallationsNo. of Maintenance CallsNo. of visits

Cost Pool: Service

PRIMARY ACTIVITES (LOGISTICS)Product Service CustomisationDesign and DevelopmentSpecific ServicesSpecific Equipment

Cost Allocated toSpecific Customers

COST DRIVERS

SECONDARY ACTIVITIESCost Pools* Inventory* Facilities

Cost Driver* No. of items held in "stock"*No. of Order movements through the facility

COST DRIVERS

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Cost Analyses andMeasurement

· Full cost allocation still reigns supreme

· Conventional accounting systems are functional in their orientation rather thanoutput oriented.

· Companies understand product costs but not customer costs- yet products don’tmake profits, customers do.

The above discussion highlighted lack of visibility in costs as they are incurred invarious stages in logistics. Christopher(1998) stressed the need for capturing thecosts as products and orders flow towards the customer. It is here that ActivityBased Costing (ABC) comes into picture and the key to ABC is to define the “costdrivers” from the logistics point of view.

11.3 ACTIVITY BASED COSTING

It is a more accurate cost management methodology. It focuses on indirect costs(overheads). It identifies each expense category to the particular cost object andmakes “indirect” expenses “direct”. It is based on the fact that cost objects consumeactivities and activities consume resources. It is this consumption of resources thatdrives costs. One can use ABC when overhead is high, products are varied, cost oferrors is high and competition is hard. ABC also makes it easier to understandvariable cost behavior and cost-of-quality for activities and processes.

Litt in one of his articles commented, “Activity based costing (ABC) is an accountingtechnique that utilizes cost attachment rather than cost allocation to determine theactual cost of products and services”. ABC has the ability to clearly define thecritical attributes of today’s business processes. The real beauty of an ABC model isthat it forces organizations to adopt a cost management paradigm that focuses onunderstanding their processes. Once an organization accepts this paradigm, theysoon recognize that their products or services are produced through cross-functionalbusiness processes. These processes contain a wide variety of activities that not onlydefine the process, but also more importantly, reflect how effectively the processperforms.

The ABC can be performed by:

· Identifying activities

· Determining cost for each activity

· Determining cost drivers (Cost drivers are the factors that affect the cost of anactivity, e.g. poor quality)

· Collecting activity data

· Calculating product cost

Activity based costing (ABC) highlights the customer characteristics in terms of thebuying behavior and distribution requirements. It depicts the cost attached at eachlevel of activity and thus decides about the true cost. ABC uses a more logical basisfor allocating the costs. Let us take an example of a manufacturing company, whichsells its products through a network of dealers to the industrial users. We would firstuse the traditional cost accounting method and then use ABC to demonstrate thedifference.

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Table 11.1: Traditional Cost Accounting Method

Sno. Traditional Cost Bases Cost (in thousands)

1 Salaries 889

2 Wages 926

3 Depreciation 400

4 Rent/Electricity/Telephone 1100

5 Maintenance 225

6 Fuel 375

Total 3915

You can see that in table 11.1 that the costs are functional in their orientation ratherthan output oriented. There is a lack of visibility of the costs across from the logisticspoint of view. In the table 11.2, you will see the difference. This costing is based oncosts of each activity and thus a representative of the true cost.

Table 11.2: Activity Based Costing (ABC)

S.No. Activity Cost Bases Cost Drivers Cost (in thousands)

1 Order Administration No. of orders received 525

No. of orders processed

No. of items

No. of customer accounts

No. of orders processed

No. of picking documents

No. of invoices

No. of items per invoice

No. of cheques, etc.

No. of credits.

2 Order Assembling No. of items picked 425

No. of items packed

No. of items returned

3 Order Delivery No. of Orders 1075

No. of Customers Deliveries

No. of Unit Loads

Distance/ Delivery

No. of Return Journeys

4 Marketing No. of enquiries 625

No. of Sales calls

5 Service No. of Installations 485

No. of Maintenance Calls

No. of visits

6 Inventory/ Facilities No. of items held in “stock” 950

No. of Order movements through

the facility

Total 4085

One can see that once you got the idea of true-costs you can save a possible loss ofRs 170,000/- as shown in the table 11.1 and table 11.2. The ABC model thus forcesorganizations to adopt a cost management paradigm that focuses on understandingtheir processes and prevent losses.

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Activity 1

IGNOU is a service industry in its own right. One can visualize this organization froma supply chain perspective also. Its Material Production and Distribution Division(MPDD) prints and dispatches the study material to the students, Schools develop thecourse material, Regional Services Division (RSD) supports the students and StudentRegistration and Evaluation Division (SRED) keeps the students records andevaluations. Do an activity based costing (ABC) for the fees of a course for themanagement program of IGNOU.

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11.4 LOGISTICS COST

The performance of a supply chain can be illustrated with the help of total logisticscost. Since logistics begins from start and continues till the end, the costs associatedwith it are of immense importance in the supply chain. There is a need of a trade-offbased cost accounting system that is activity based and a change in any process isfollowed by a change in the costs.

To define the logistics cost one must define the desired outputs from the logisticssystem and then seek to identify the costs associated with providing those outputs.Christopher (1998) defined the concept of “mission”. In context of logistics, a missionis a set of customer service goals to be achieved by the system within a specificproduct/market context. Missions are specific to the type of market served. Thesuccessful achievement of defined mission goals involves inputs from a large numberof functional areas and activities. A good logistics costing system is thus based on thetotal systems cost of meeting desired logistic objectives (the ‘output’ of the system)and the costs of the various inputs involved in meeting these outputs. This approach iscalled “Mission Costing”.

The cost of logistics varies from industry to industry e.g. building material say brickswill have very high logistics costs as compared to Pharmaceuticals. It is generallybelieved that logistics costs are 15-20% of the turnover. Logistics becomes more andmore expensive as the cost of fuel, land, safety, environmental conservation andhuman resources increase. However there is also a general belief that newproductive models and good practices are effective in reducing the cost of logistics.Logistics has an impact on the overall financial performance of a company. It has aneffect on return on assets (ROA).

Let us discuss some expense saving strategies for the logistician (Ashcroft, 2004).

Companies who have yet to squeeze all possible benefits from their supply chain,significant low hanging benefit opportunities may be waiting in the Logistics area.This is especially true with respect to mergers or acquisitions. For a Lowest CostLogistics approach to succeed, it must begin by addressing two key starting points,firstly, a clear identification of the firm’s Customer Service / Business Goals; andsecondly a detailed, accurate and complete calculation of current Logistics costs. Thetask of identifying the customer service targets and business goals must be acollaborative effort including all stakeholders within the organization and even key

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customers, carried out on a participative basis to ensure consensus and buy-in on theresults.

Logistics costs identified by incorporating all business costs incurred due to logisticsfunctions, support costs and transfer credits. Once these cost numbers are known tobe accurate and truly representative, the next step is to Benchmark them againstcompanies in similar business and industry areas (you will read it in more detail in thenext unit). Another approach to drive these costs down is to utilize ABC Costingmethodologies (as discussed earlier).

11.5 CUSTOMER PROFITABILITY ANALYSIS

Earlier accounting systems were unable to add value to a particular customer. Ascustomer profitability was calculated on the basis of gross profit only. These systemswere based on the formula given below:

Customer Profitability = Net sales revenue generated by the customer in a givenperiod – Costs of goods sold for actual product mix purchased.

To derive the real profitability of customers many other things are to be taken intoaccount. Customer profitability analysis illustrates the cluster of customers who arenot worth serving or in other words are not providing profits. Many of the costs likecost of service, order processing costs and transport costs, material handling costs,inventory and warehousing costs that depends on the customer characteristics. Thebasic principle of customer profitability analysis thus depends on identifying the costsaving opportunities if business is done only with ‘good’ customers only. Christopher(1998) gave a checklist of costs, which should be included when doing an analysis.

Table 11.3: The Customer Profit and Loss Account (source: Christopher (1998))

Revenues · Net Sales Value

Less

Costs

(Attributable costs only) · Cost Of Sales (Actual Product Mix)

· Commissions

· Sales Calls

· Key Account Management Time

· Trade Bonuses and Special Discount

· Order Processing Costs

· Promotional Costs (Visible And Hidden)

· Merchandising Costs

· Non-Standard Packaging/ Unitization

· Dedicated Inventory Holding Costs

· Dedicated Warehouse Space

· Material Handling Costs

· Transport Costs

· Documentation/Communications Costs

· Returns/Refusals

· Trade Credit (Actual Payment Period)

Christopher (1998) also presented a model for customer profitability analysis. Themodel is presented in figure 11.2. It explains the deductions from the gross sales

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value of the order like the discounts, direct costs, attributable indirect costs etc. Afterall these steps one gets the customer’s gross contribution. Any other customerrelated costs like trade credit, returns etc are subtracted to give a net contribution tooverheads and profit.

The main purpose of doing this exercise is to get an idea of the less profitablecustomers vis-à-vis more profitable customers. It can guide the managers to derivestrategies for managing customers with high servicing costs. Customer profitabilitymatrix is another approach for getting some generalized guidance for makingstrategic decisions. The main idea behind all these approaches is to develop anaccounting system that routinely collects data on customer’s profitability.

Fig 11.2: Customer Profitability Analysis: A Basic Model

source: Christopher (1998)

11.6 SUMMARY

It is evident from the discussions in the sections of this unit that logistics costs have ahuge impact on the total costs. It is therefore important to manage them well. It hasbeen proved over a period of time that the traditional approaches to costing results inbusiness losses. This unit has highlighted another approach to costing that is activitybased costing (ABC). By ABC one can generate opportunities for cost improvementfor probable objects that are generating losses. We have studied about cost drivers inlogistics. A positive cost driver results in a revenue, production or support relatedactivities that generate profit. A negative cost driver causes unnecessary work andreduces profitability. Finally this unit has touched upon logistics cost and customer

GROSS SALESVALUE

NET SALESVALUE

PRODUCTIONCONTRIBUTION

MARKETINGCONTRIBUTION

CUSTOMER GROSSPROFITABILITY

CUSTOMERCONTRIBUTION TO

COMPANY OVERHRADPROFIT

TRADEDISCOUNT

PRODUCTIONCOSTS

MARKETINGCOSTS

DISTRIBUTIONSERVICE COST

DIRECTINDIRECT

CUSTOMERRELATED

COSTS(DIRECT)

*SALES CALLS*IN-STORE

PROMOTIONS*BONUSES

*MERCHANDISING

OVERHEADCOSTS(INDIRECT)

*SALESFORCEMANAGEMENT*NATIONAL AD

CAMPAIGN

CUSTOMERRELATED COSTS

(DIRECT)

*TRANSPORTATION*PACKAGING

*STOCKHOLDING*WAREHOUSING*TRADE CREDIT

*ORDERPROCESSING

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profitability analysis. In the subsequent unit you will be studying about thebenchmarking and best practices and methods of measuring the performance of asupply chain.


1) “Logistics Management impacts not only upon the profit and loss account ofbusiness but also upon the balance sheet?” Comment!

2) When Christopher says that “supply chains compete, not companies” whatexactly does he mean. Evaluate this statement from the cost point of view.

3) What were the reasons for the fall of management accounting? Explain activitybased costing and mention the benefits it had over the management accounting.

4) What are cost drivers in a supply chain? Take the case of a papermanufacturing company and portray all its cost drivers.

5) What is Customer Profitability Analysis? Why it has gained importance in therecent times. Is it ethical to deny a customer that is not profitable?


1) Bowersox, Closs & Cooper (2002), Supply Chain Logistics Management,McGraw-Hill (International Edition)

2) Bradley S. Litt(2001), “Learning the ABCs of Cost Analysis”, at http://www.gantthead.com/article.cfm?ID=18628

3) Christopher Martin (1998), “Logistics and Supply Cain Management:Strategies for reducing cost and improving Service”, 2nd edition, Financialtimes, Pitman Publishing.

4) Gattorna J.L. & Walters D.W. (1996), “Managing the Supply Chain: AStrategic Perspective”, Palgrave Macmillan, Indian Reprinted ed. 2004.

5) Harrison, Hoek (2002), Logistics Management and Strategy, PearsonEducation

6) Jeff Ashcroft(2004), “Lowest Cost Logistics”, http://logistics.about.com/od/strategicmodeling/a/aa071604.htm

7) Waters Donanld (2003), “Logistics: An Introduction to Supply chainManagement”, Palgrave Macmillan, Indian Reprinted ed. 2004.

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Cost Analyses andMeasurementUNIT 12 BEST PRACTICES & BENCHMARKING

IN SCM

Objectives


· understand the role of benchmarking in business

· empathize reasons why benchmarking is required.

· recognize the process in which benchmarking can effectively be brought about

· address the challenges faced in bringing about benchmarking process

· comprehend what elements are involved in bringing about change management.

Structure

12.0 Objectives

12.1 Introduction

12.2 Importance and Role of Benchmarking

12.3 Methodology for Benchmarking

12.4 Change Management and Benchmarking

12.5 Challenges Faced in Implementation of Benchmarking

12.6 Case Studies

12.7 Summary



12.1 INTRODUCTION

David T Kearns, CEO: Xerox Corporation once said, “Benchmarking is thecontinuous process of measuring product, services and practices against the toughestcompetitors, or those companies recognized as industry leaders”. Benchmarking is anexternal focus on internal activities, functions or operations in order to achievecontinuous improvement. Starting from an analysis of existing activities and practiceswithin an organization, the objectives are to understand existing processes, oractivities and then to identify an external point of reference, or standard, by whicheach activity can be measured or judged. A benchmark can be established at anylevel of the organization, in any functional area. The ultimate goal is to be better thanthe best i.e. to attain a competitive edge.

Organization that introduces benchmarking correctly can use it to make a quantumleap in their performance, and develop a culture in which managers and staffconstantly searches for improvements. Within logistics and supply management,benchmarking can be used for a number of different purposes, from assessing theperformance of the entire operation, through prioritizing improvements, to searchingfor the off-the-shelf improvement strategies in a specific area of a logistics or supplychain activity. In some senses, benchmarking is imitation and stealing – “creativeswiping”! At its best it is skillful appropriation and adaptation requiring imaginationand innovation; at its worst it can be an expensive and time – consuming piece ofcorporate tourism. It is a long-term process, requiring senior management’scommitment, with the emphasis upon continuous improvement and organizationallearning. The focus is primarily upon the role, strategic issues, processes and

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practices, rather than on the bottom line and numeric measure of performance. Themere comparison of operations and costs is not sufficient; considerable attention mustbe paid to how the activities are organized and performed. This will provide goodunderstanding of how superior performance has been achieved, rather than just themagnitude of the performance gap.

Benchmarking targets the critical success factors (CSF’s) of a specificorganization. What needs to be done to ensure long-term success? Where domanagement see the potential for competitive advantage? Benchmarking helps toidentify those features critical to ongoing success, as well as those parts of theorganization that are less important and from which resources may be diverted. InBenchmarking, a “role” describes in essence what a person or function does for anorganization. What responsibilities, services and tasks are offered to a customer orclient by the organization? How do these compare with other organizations in termsof process architecture, structure or capability? Roles, in this instance are bundles ofservices provided either to external customer or to an internal customer. Questioningthe roles within an organization leads to the question, “ Are we doing the rightthings?” – in other words, the question of effectiveness – while assessing processesraises concerns about whether things are being done right – in other words, thequestion of efficiency. Every process within any organization consumes resources. Toleverage the most value from processes, an organization must eliminate Non-Value-Adding Activities (NVA) in the process itself. Benchmarking supports the targetingof processes or process elements, that are of high importance to the business, but areperceived to be operating sub-optimally. While every process can be improved, anoften-overlooked issue is getting the most value out of every rupee spent on processimprovement. Only through the process of continuous benchmarking a processagainst itself, and with other external sources, can this be truly assessed.

The identification and the setting of new goals, projects or ventures are fundamentalto the long-term success of any business. The environment within which anyorganization operates changes rapidly; cost reduction targets that were deemedaggressive months ago can quickly become the Industry norm. Benchmarking thencan be used to target strategic issues, gain enough information to prioritize competingprojects and establish an overall program of events geared towards achievingoptimum economic value added.

12.2 IMPORTANCE AND ROLE OF BENCHMARKING

Benchmarking provides the basis for meeting and exceeding stakeholderexpectations. Understanding its potential benefits requires understanding the type ofbenchmarking to be deployed and the purpose of conducting such an exercise. Whilebenchmarking can be performed at any time, it is often undertaken as a response toan information need associated with a project or issue within the organization. Thesituations that may trigger the benchmarking process are:

· Operations / Logistics and Supply Chain improvement efforts.

· Management / Organizational changes

· Merger & Acquisitions

· Competitive Threats

· Cost Reduction Initiatives

Benchmarking in any of these situations is a logical step in developing new objectives,setting new performance standards and metrics and redesigning process andprocedures.

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A company benchmarks because it wants to be the best. To this end, benchmarkingshould not be considered as an optional activity. It is more so a call of the day forcompanies to maintain their competitive advantages.

Internal Benchmarking is the analysis of existing processes and practices withinvarious departments or divisions of an organization. The objective is to identify andanalyze best performance within the confines of the organization’s own boundary, anddrive performance to this level or beyond. The process will facilitate an understandingof the basic activities that constitute the processes within the organization and thedrivers associated with these. Drivers are the causes of work, the triggers that set inmotion a series of activities. In conducting Internal Benchmarking, the management islooking at itself first before thinking about comparisons outside. Significantimprovements are often made through Internal Benchmarks and these are often thefirst steps in a benchmarking process.

While Internal Benchmarking focuses on specific functions or processes,Competitive Benchmarking looks outwards in order to understand how directcompetitors are performing. Knowing the strengths and weaknesses of competitors isimportant to strategic decision-making. Competitive benchmarking helps to level theplaying field, but it is less likely to provide that innovative, step-out improvement thatso many organizations are searching for today. Industry Benchmarking looksbeyond the competitive relationship and looks for trends.

The technique of benchmarking can be focused on specific processes, activities orfunctions, but this is only part of the answer. An associated issue is the depth towhich the analysis is to be performed. Studies can be focused vertically uponfunctions and department, or horizontally upon specific processes or activities. Whileearly forays into the world of benchmarking might be constrained to functional ordepartmental performance, the goal has to be a cross-functional view of the valuechain needed to meet customer expectations in an efficient and effective manner.

A well-planned, systematic and structured benchmarking program can provideorganizations with a number of important benefits. In essence, the search for industrybest practices and subsequent efforts to maintain competitive superiority effectivelyprovide the basis for superior performance. Almost any study that requires detailedexamination of the organization’s operations results in a greater understanding of howthe business works; it’s critical success factors (CSF’s) and the key performanceindicators (KPI’s). But here again it is important to bear in mind that any form ofcontinuous improvement in one part of the business does not just push to another areaof operation – a phenomenon known as the “waterbed effect”.

Most organizations can learn from the experience of others, even though they mayhave very different customer requirements and competitive environments. Much canbe gained by making comparisons with organizations that have to adopt afundamentally different approach to the same or a similar task.

12.3 METHODOLOGY FOR BENCHMARKING

In most companies traditional measures are based on fiscal and legal requirements.These are then often used for planning purposes to facilitate comparison. Theproblem with these measures is that they are based upon derived information andhave no clear relationship to the organization’s operational data. On the other hand,operations develop their own set of KPI’s and measures – that may be unrelated tothe financial results – to identify levels of customer satisfaction and market needs.This division often leads to conflict in the evaluation of performance. This has led tothe development of the Balanced Score Card Concept (Kaplan & Norton, 1996)

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Measurements can either be quantitative (numeric) or qualitative (opinion based).Quantitative and qualitative benchmarks are not being viewed as isolated categories,though.

At one end of the continuum are highly qualitative measurements, for exampleassessment of customer or employee satisfaction. At the other end of the range arehighly quantitative measurements such as cost per unit, or productivity measures.There are many tools for approximating qualitative characteristics with numbers, butthese techniques will never have precision to back them up. As part of the continuumof measures it is important to recognize that qualitative measures are a mid- point interms of ‘hardness’ or reality. Hard measures make the user feel as though they arereal. Facts with numbers attached to them take on a life of their own; they appear topossess certain “magic” and people tend to believe these hard numbers. But, witheach gain in precision, relevance is sacrificed. Therefore in developing benchmarkmeasurement the goal is to develop a metric that is as “hard” as it can get withoutlosing vital insights provided by the “softer” more intuitive qualitative indices.

A Systemic Approach

Many organizations have developed their own process. All approaches arefundamentally the same and are based on Deming’s Plan–Do–Check–Act (PDCA)cycle.

Step 1: Prioritize what to Benchmark

The first step focuses on the processes and activities that the organization believeswill yield the maximum benefit. In any supply chain there are too many activities andprocesses to benchmark all of them in one go, therefore improvement effort cannotbe spared too thinly, and all areas cannot be addressed simultaneously.

Step 2: Identify Comparable Companies

Benchmark partner selection can be determined by a benchmarking mechanism, forexample through an existing benchmarking network or through an industry tradeassociation. When this is not done, a number of issues need to be considered:

· Should competitors be approached? If so, how will confidentiality be addressed?Are they likely to have significantly better activities and operations?

· Can best–in-class organization be easily identified and what can be offered tothem in exchange which is of interest to them?

· How many benchmark partners are required?

· Which organizations have similar requirements for operational processes, but arelikely to have developed better processes to deal with them?

· How should the different areas of interest of partner organizations beaccommodated within the process?

Step 3: Data and Information Collection

Once it has been decided what to benchmark, and the organization is identified andgained agreement from partners, the next step is to determine the process for dataand information collection. The key here is to achieve commonly agreedunderstanding of the activities, processes, definition, terminology and time periods.Failure to achieve this will result in major problems in both the analysis andcomparison activities, which ultimately may lead to rejection of the output by keymanagers.

All the participants must sign off the common understanding and a forum needs to beestablished to discuss and resolve any queries that arise during the process.

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Deadlines for each stage of the data and information collection need to be set,monitored and adhered to otherwise it would be considered a lengthy process.

Step 4: Determine current performance gap

Once the data and information have been collected, the analytical stage needs tobe converted into useful outputs. High-level analysis should be used to sense-check the data and information provided. Queries should be addressed to thesupplying organization and resolved quickly. Data might be aggregated andparticular attention should be paid to the following:

· Data normalization methods;

· Root cause analysis;

· Best practice characteristics identification;

· Identification of relevant process enablers.

When all the data and information have been accepted and analyzed,comparisons need to be made and gaps analyzed. The analysis should utilize anagreed framework, focusing on the key areas of interest. These could be pointsof greatest difference or similarity and should be presented in a way that willfocus the recipients upon the required actions. The output should:

· Assess the overall comparisons in the areas of interest;

· Seek to explain whether there are broader business reasons for some of thedifferences;

· Identify the major performance gaps where the real opportunities for majorimprovements lie;

· Set targets and realistic time-scales;

· Outline what is required to close the gaps.

Step 5: Project future performance levels

Analyzing the benchmark performance gap can be done as a snapshot or as atrend over a period of time. Either method may be appropriate for the function orprocess being studied. Indeed, both may be applied simultaneously. When cost,productivity or quality is the metric under study, sometimes it is useful to look atthe historical trend as well as the current gap. Additionally, projecting futureperformance levels of productivity within your own organization against that ofthe benchmark partner’s – given the current rate of improvement for eachcreates projected targets for improvement. This approach helps the intent toincrease the rate of innovation and improvement within the organization.

Step 6: Communicate findings and gain acceptance

It is a known fact that people do not like change, especially change that appearsto be for ‘change sake’. In order to ensure the success of any benchmarkingprogram it is imperative that a detailed communication plan is created and revisedregularly during the course of the initiative.

Even with the support of senior management, there may be resistance to changefrom lower organizational levels. This resistance to change primarily stems fromfear; fear of job losses, loss of status, control, resources and so on. In order toplan for and mitigate against such events, a stake-holder or field analysis might beused to identify potential areas of resistance and methods of overcoming anysuch concerns.

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Step 7: Establish functional goals

Once outline targets have been drawn up, detailed functional (or cross-functional)goals can be established. The secret in using benchmarking to achieve breakthroughchange is to synthesize key actions taken after consideration of all informationavailable, to generate innovative approaches. After the enablers of performancewithin a specific organization environment have been assessed, careful considerationshould be given to the adaptability of these enablers to the organization’scircumstances.

Step 8: Develop action plans

The action plans describe each of the key actions at a functional level required toachieve the desired goals. Action plans can be as detailed as required; in someinstances they can even identify the core tasks, the desired levels of performancerequired, and the changes in the process, behavior or systems required to supporttheir achievement.

Step 9: Implement and monitor

All the time and effort expended to this stage is worth very little if the output does notprovide clear plans for change, and these are not implemented in real and lastingimprovements. Having achieved a successful implementation, the organization mustcontinue to monitor the operational performance, and assess whether there are otherorganizations that have now developed superior processes or practice.

Step 10: Recalibrate benchmarks

The continuous search for improvement will inevitably result in further developmentof the processes and practices, and some revisiting of benchmarking efforts.

Activity 1

Many organizations have developed their own methodology for benchmarkingprocess. Visit an organization of your choice and study its benchmarking process. Dotheir process is also based on Deming’s Plan–Do–Check–Act (PDCA) cycle?

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12.4 CHANGE MANAGEMENT AND BENCHMARKING

Clearly the process of benchmarking focuses on customers and performanceimprovement with the potential for significant advances in efficiency andeffectiveness. Benchmarking is used extensively by many organizations to helpunderstand their relative positioning and efficiency of operations. Benchmarkingnetworks; full time benchmarking manager and consulting assignments are evidenceof the continuing interest in this area.

Benchmarking raises an organizations consciousness. It provides an external focus onthe internal activities and derives an organization to the conclusion that there are

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always opportunities within every organization to learn something new. To achieveoperational excellence an organization needs to experiment in all parts of thebusiness. Everyone – from top management to down below – has to be willing to rolltheir sleeves up and get their hands dirty, constantly asking ‘why?’ The role ofbenchmarking in this environment is to provide the creative spur and to unearth a paththat has worked for others in achieving operational excellence.

Benchmarking is about learning from others as well as learning by doing. It cannot belearned from a book or a seminar; it has to be practiced. The more the practice thegreater is the potential for innovation within your business.

As described earlier Benchmarking has four distinct phases:

····· Phase 1: Planning

Identifying what to benchmark, selecting comparative companies or indeed partsof your business and determining how the data collection activities are to beperformed.

····· Phase 2: Analysis

Analyzing internal levels of performance and comparing these with the targetorganization’s performance. Also, projecting future performance levels andsetting targets in order to attain less time–perishable levels of competitiveadvantage.

····· Phase 3: Integration

Communicating benchmark findings and helping the organization come to termswith what needs to change in order to achieve new and lasting levels ofperformance. Developing realistic and achievable functional goals to enable thisvision.

····· Phase 4: Action

Managing Change and developing specific action plans in order to make thedesired levels of change a reality. Once implemented, the monitoring of progressvia a set of clear KPI’s is of paramount importance, allaying any drift back to oldhabits. Finally a recalibration of benchmarks is required in order to lead thebusiness to the next level of operational excellence.

Good benchmarking is about managing continuous improvement strategically;identifying stakeholders and ensuring their interests are being met by any benchmarkbased initiative and managing change. Benchmarking is a tool for enacting change.The critical success factor for any change is the creation of additional value in theeyes of the stakeholders of the business. Benchmarking is all about finding new waysof enacting business processes and using companies precious resources to serve itsstakeholders needs in a better way. To achieve this change benchmarking studieshave to be very specific, comparable and have a predefined set of performancedrivers and KPI’s. Without any one of these a benchmarking study cannot hope to beeffective.

In putting benchmarking to work in the supply chain it is worth keeping in mind thatchange will occur once the process has started. By its very nature it will causeparticipants to look at their new world with a new set of eyes. Problems will beuncovered and new and creative solutions will be developed.

Benchmarking removes some of the politics and guesswork out of the developmentof continuous improvement targets within organizations. This is due to the external,politically neutral, nature of the analysis. Some people like to know exactly wherethey stand and what is expected of them. If measures are used to guide or assess

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performance these must not be vague or non-descript. Metrics without clarity canlead to individuals incorporating these into a workable framework of their own. Theproblem is that this framework might not be what management had in mind!

Effective continuous improvement starts with a rigorous analysis of process flows –what work is done where and why is it done in way it is done. Report outputs areanalyzed and the ‘why’ question is repeated many times. Continuous improvementmust be managed strategically with all those involved clearly understanding why aparticular course of action is being followed, where improvement targets have comefrom and how and by whom it is expected that the improvements will beimplemented.

Benchmarking solves this problem. It develops a set of objective measures within anorganizational framework, stabilizes the improvement program and provides all partieswith a clear understanding of why a particular course of action is being followed,customer surveys, completed as a part of a benchmarking exercise, will pointspecifically to the areas that need improvement. Benchmarking if managedeffectively holds the key to unlocking an individual’s defenses. It creates a logical,prioritized and importantly achievable path to good practice and operationalexcellence. Unlocking the power vested in individuals and teams in this fashion is thecatalyst for organizational creativity and innovation.

12.5 CHALLENGES FACED IN IMPLEMENTATION OFBENCHMARKING

Irrespective of the type and scope of benchmarking, the critical factors that areneeded to be ensured are as follows:

····· Senior management supports the process of benchmarking and are committed tocontinuous improvement.

····· The objectives are clearly defined at the outset.

····· The scope of the work is appropriate in the light of the objectives, resources andtime available and the experience levels of those involved.

····· Sufficient resources are available to complete projects within a given timeframeand that projects are selected based upon a prioritization linked to theachievement of competitive advantage.

····· Benchmarking teams have a clear picture of their organizations performancebefore approaching others for comparisons.

····· Stakeholders, particularly staff and their representatives are kept informed ofthe reasons for benchmarking and the progress made throughout the course ofprojects. Wherever practical, staff should be involved in undertakingbenchmarking to make most of the opportunities for learning from otherinitiatives.

As with many management techniques and processes, benchmarking providesorganizations with problems as well as benefits. These occur as consequence of:

····· The existing organizational culture

····· Incorrect application of the techniques

····· The nature of the process

Benchmarking applications may be limited by the management culture.Benchmarking takes a normative approach to the management – there are industry

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best practices that can be generalized between sectors and organizations. As withmost programs that require major organizational change, considerable inertia may beexperienced from individuals and departments, especially those with the most toloose. These are inevitable issues around the identification of best practices and theadoption of processes that are not valued by that particular organization’s customers.There is however difficult judgment calls to make around the introduction of newpractices where quantum jump is required. Incorrect benchmarking can often lead towrong conclusions. Benchmarking may lead to a culture of imitation rather thaninnovation; to adopt rather than adapt and to achieve parity rather than superiority.This type of approach will never result in competitive advantage.

When the process is approached for the first time, it is worthwhile learning fromothers who have built up experience of applying benchmarking within their ownoperations. This is where membership of benchmarking clubs and network provesinvaluable.

In general it is important to avoid:

· Benchmarking for benchmarking sake.

· Focusing entirely on comparisons of ‘hard’ performance measures rather thanthe ‘softer’ processes and activities that enable the attainment of good practice

· Spending too long on one part of the process at the expense of others

· Expecting that benchmarking would be quick or easy

· Expecting to find benchmarking partners comparable in all respects to your ownorganization

· Asking for information and adapt without being prepared to share it with othersat conversely expecting organizations to share information that is commerciallysensitive

12.6 CASE-STUDIES – BENCHMARKING IN ACTION

····· Case 1: Supply Chain structures and responsibilities

As a part of the broader organizational change program, a multinational fastmoving consumer goods (FMCG) manufacturer, XYZ Inc. wanted to investigatedifferent approaches to the management of its supply chain activities across thecountry. The company had developed a country-based structure but recognizedthat there were significant opportunities to be gained from changing at leastsome of this structure. The company wanted to look at how businesses indifferent sectors approached the fundamental management issues that were keyto their success. These included:

· Division of responsibilities

· Central versus regional management structures

· Support for customer facing operations

· Information systems

· Implementation and change management

Given the sensitivity of the area of interest and the need to assure potentialpartners of confidentiality, a consultancy was engaged to act as the intermediaryand run the process. Initial discussions produced a preliminary document; thiswas then developed into a questionnaire that could be used in face-to-faceinterviews. A number of potential partners were identified, approached andsubsequently engaged. All participants were taken through the same interview

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process to ensure consistency of approach, terminology interpretation andresponse. At the conclusion of the process, all data was analyzed, comparisonswere drawn and the key finding identified. The summary report was thancirculated to all participants and a presentation given to the FMCGmanufacturer’s management group of XYZ Inc.

This process allowed the company’s management group to compare and gaininsights into how companies with similar challenges had developed differentroles, responsibilities and structures. The management group then prepared anevaluation of strategic options and gained agreement to conduct follow-up.Face-to-face benchmarking meetings with the two most benchmarking partners.

The output of this second stage process formed major part of the proposals tochange the supply chain responsibilities and structures. The proposal wasaccepted and gradual implementation process provided for progressivecentralization of responsibilities.

····· Case 2: Outsourcing logistics – Benchmarking for success

A major sportswear and accessories manufacturer was considering outsourcingits logistics operations to a third party logistics (3PL) service provider. One ofthe key concerns held by the management team was the achievement ofimproved levels of operational performance at lower cost. How was this goingto be assessed, how should the 3PL service provider be selected and how couldits performance be measured on an ongoing basis? In order to gain answers tothese questions the manufacturer engaged a consultancy to develop anassessment framework. The brief was to design a set of processes to enable theorganization to construct and manage a sourcing relationship based on a numberof balanced, benchmarkable, metrics Initially a model describing the logisticsfunction and its associated activities was developed. This covered activities suchas:

Goods receiving inspection

Warehouse operations

Dispatch inspection

Shipping

Distribution planning and control

Transportation management

Support

Management and administration

Data was then requested internally covering cost drivers, resources consumed –including FTEs (full time equivalents), capital equipment and volumes – and qualityand performance metrics. This data, once harvested and validated, enabled anddevelopment of detail set of performance metrics characterizing the organizationscurrent logistics function performance. These measures were both quantitative andqualitative, covering unit costs, productivity, cycle times and quality and performancemetrics.

The next step was to compare these data with a reference group of data fromorganizations with a similar set of operational characteristics. The consultingorganization engaged to support this initiative already had a significant database fromprevious engagements and was therefore able to provide reference group data tosupport this phase of the project.

The analysis that followed identified the areas where the organizations performancewas better than that of the reference group mean and where there was opportunity

23


for improvement. This latter set became improvement challenges for the chosen 3PLservice provider. This exercise also provided the base case upon which to assess andselect the appropriate 3PL service providers offering. It also enabled a frameworkupon which a set of ongoing, balanced performance metrics could be developed inorder to manage the sourcing relationship over time.

Negotiations with the selected 3PL service provider led to a three-year sourcingcontract, with clearly identified performance improvement objectives agreed betweenboth parties at the outset. The manufacturer also had a management framework inplace that could be used to assess the competitiveness of the service providersofferings on an ongoing basis, providing information to ensure full value was achievedfrom the service provider / service recipient relation they had created.

12.7 SUMMARY

Benchmarking is designed for action, rather than just to answer the question “Howare we doing?” It is a means to an end and not the end itself and is most powerfulwhen used as a tool to develop best practices rather than to solve a specific problem.

To benefit from this approach, organizations must first recognize that always thereare others who can perform activities and tasks better than they currently do and thatlessons can be learnt from how they do this. Ultimately the greatest benefits maycome from a better understanding of the business and a change in culture to aproactive, creative organization that strives for supply chain excellence andcontinuous improvement.

When used correctly, benchmarking is a powerful management tool that provides amuch-needed external view of the organizations environment and especially therequirements of its customers. Above all else, the application of benchmarkingprocess can lead to competitive advantage through cost-leadership and differentiationbased upon excellent customer service.


1) Define Benchmarking. Define it’s role in improvement of organizationalefficiencies

2) What are various kinds of challenges faced during the process ofbenchmarking?

3) Benchmarking is a continuous process. Express your opinion in favor or againstit giving reasons.

4) What the various challenges especially in the area of Human Resources facedduring Benchmarking process?

5) Highlight the Key issues in Benchmarking Case 1.

6) Highlight the Key issues in Benchmarking Case 2.


1) Handfield Robert B & Nichols Jr. Earnest L (1999), “Introduction to SupplyChain Management” Prentice Hall.

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2) Christofer Martin (1999), “Logistics and Supply Chain Management:Strategy for reducing cost & improving service”, 2nd Ed., Pitman Publishing,London.

3) Sahay, B.S., “Supply Chain Management”, Asian Books Publication.

4) Kaplan, R.S. and Norton, P.D. (1992), “The balanced scoreboard-measures thatdrives performance’’, Harvard Business Review, January-February, pp. 71-9.

5) Stewart, G. (1995), “Supply chain performance benchmarking study revealskeys to supply chain excellence”, Logistics Information Management, Vol. 8No. 2, pp. 38-44.

6) Hausman Warren H. (2000), “Supply chain performance metrics”, The Practiceof Supply Chain Management, Dec.

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Cost Analyses andMeasurementUNIT 13 PERFORMANCE MEASUREMENT AND

EVALUATION OF SCM

Objectives


····· Justify the need for supply chain performance measures

····· Describe supply chain performance measurement systems

····· Compare supply chain performance measurement systems

····· Select measures for measuring the supply chain performance

Structure

13.1 Introduction

13.2 Need For Supply Chain Performance Measures

13.3 Measurement Systems

13.4 Supply Chain Performance Measurement Systems13.4.1 Supply Chain Balanced Scorecard

13.4.2 Hierarchy Based Measurement System

13.4.3 Function Based Measurement System

13.4.4 Perspectives Based Measurement System

13.4.5 Supply Chain Operations Reference Model

13.4.6 Dimension Based Measurement System

13.4.7 Interface Based Measurement System

13.5 A Comparison of Measurement Systems

13.6 Selecting Measures

13.7 Methods for Setting Performance Targets

13.8 Total Cost of Ownership

13.9 Summary

13.10 Self-Assessment Questions


13.1 INTRODUCTION

In today’s world, Supply Chain Management (SCM) plays a key strategic role inincreasing organizational effectiveness and accomplishment of organizational goalssuch as enhanced competitiveness, better customer service and increasedprofitability. Today’s management can’t afford to focus only on company’sperformance in a vacuum; there is an emerging requirement to focus on theperformance of the extended supply chain or network in which company is apartner. An extended supply chain is one that involves not only tier one buyersand suppliers, but also the end supplier (suppliers’ suppliers) to end buyers(buyers’ buyers). The competition is at a chain or network level, i.e. supply chainvs. supply chain, with emphasis on continuous improvement across the extendedsupply chain.

There is a shift in focus from an intra organizational performance to interorganizational integrated supply chain performance. Firms have now realized thepotential of SCM, but many of them still lack in selecting the proper performancemeasures for a fully integrated supply chain.

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In a supply chain the problem lies at the interfaces that is at the boundary oftwo organizations. The reason for this is the high level of interdependenceintermingled with independence and autonomy of the firms in an integrated SC.Every member is fully autonomous but highly dependent on the performance ofother members. Supply chain performance measures differ from traditionalperformance measures as it crosses company boundaries i.e. it includes suppliersand distributors. Supply chain performance also crosses all functional links likeprocurement, manufacturing, sales and distribution etc. This makes the choice ofsupply chain performance measure(s) difficult.

Single performance measure for entire supply chain is not adequate for effectivesupply chain because it will not cover all pertinent aspects of the supply chain. Inmany companies, the metrics that management refers to, as supply chain metricsare primarily internally focused functional measures like lead-time, inventory levelsetc. In many instances, these measures are purely financial (for example returnon assets, overall profits etc.), but they do not indicate how well key processeshave been performed or how effective the supply chain is in meeting the primaryobjective like customer satisfaction.

In an increasing number of instances, the organizations have started measuringperformance beyond the traditional boundaries of firm, but it is limited tomeasuring the performance of immediate SC i.e. tier one buyers and suppliers.These measures do not capture how the extended supply chain has performedand fail to identify areas of improvement in competitiveness, stakeholders’ valuefor each firm in the extended supply chain.

Like in any other case, in order to evolve an efficient and effective supply chain,SCM needs to be assessed for its performance. However, there is often lack ofinsight for the development of effective performance measures and measurementsystem needed to achieve a fully integrated extended supply chain. The processof choosing appropriate supply chain performance is difficult due to thecomplexities of supply chain. This complexity is due to many factors and one ofthem is the objective of SC itself. The objective of managing the supply chain isto synchronize the needs or demands of the customers with the flow of materialsfrom suppliers to achieve a balance between the conflicting goals of customerservice and satisfaction and low supply chain cost. These conflicting goals cannotbe accomplished together at a time and hence there is a need to strike a balancebetween them, which makes the decision of selecting the right performancemeasures more difficult.

Supply Chain Performance refers to the extended supply chain’s activities inmeeting end-customer requirements, including product availability, on-time delivery,and all the necessary inventory and capacity in the supply chain to deliver thatperformance in a responsive manner.

Supply chain performance crosses organizational boundaries since it include rawmaterial components, subassemblies and finished products and distribution throughvarious channel to the end customer. Supply chain performance also crossestraditional functional linkages such as procurement, manufacturing, distribution,marketing &sales and R&D etc. Figure 13.1 shows the evolution of performancemeasures for SC from single enterprise single measure to multiple enterprisesmultiple measures.

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Figure13.1: Evolution of performance measures for supply chain

13.2 NEED FOR SUPPLY CHAIN PERFORMANCEMEASURES

To excel and win in the today’s competitive environment, supply chain needcontinuous improvements. To achieve this goal, performance measures that supportglobal supply chain performance measurement and improvement are needed, ratherthan narrow company-specific or function-specific measures, which inhibit chain-wide improvement.

Several factors that contribute to management’s need for new types of measures formanaging the supply chain include:

· The lack of measures that capture performance across the entire supply chain.

· The requirement to go beyond internal metrics and take a supply chainperspective.

· The need to determine the interrelationship between corporate and supply chainperformance.

· The complexity of supply chain management.

· The requirement to align activities and share joint performance measurementinformation to implement strategy that achieves supply chain objectives.

· The desire to expand the “line of sight” within the supply chain.

· The requirement to allocate benefits and burdens resulting from functional shiftswithin the supply chain.

· The need to differentiate the supply chain to obtain a competitive advantage.

· The goal of encouraging cooperative behavior across corporate functions andacross firms in the supply chain.

Organizational boundary

Cross Enterprise

Single

Dimensions

Multi

Source: Warren H. Hausman (2000)

Single Enterprise

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Recent studies indicate that supply chain performance affects more than 85 percentof a manufacturer’s costs and a large percent of its revenues (Supply chain council1998). Monitoring SC performance through proper measurements is, therefore,necessary and can help the organizations to identify opportunities for optimization.The successful companies are reengineering their supply chains to decrease costsand improve customer satisfaction. Effective reengineering requires an in-depthunderstanding of the supply chain processes and their linkages. An in-depthunderstanding can only permit the development of a performance system and thesetting of improvement goals against benchmarks.

13.3 MEASUREMENT SYSTEMS

Management veterans argue that measurement is a key to continuous improvement.And this lead to variety of maxims like “ you can’t manage what you don’tmeasure “ and “anything that gets measured gets done”.

Measurement systems have been used in process management, and Ljungberg(1994), who focused on the order process in his work, has suggested the followingdefinition of a measurement system:

A set of related measures – described by rules and procedures for the collection,compilation and communication of data—that in combination reflect key performanceaspects and characteristics of the process in question effectively enough to admitintelligent analysis, if called for to action.

Characteristics of effective measurement system

An effective measurement system is one that has following characteristics (Beamon1996):

· Inclusiveness: measurement of all pertinent aspects

· Universality: allow for comparison under various operating conditions

· Measurability: data required are measurable

· Consistency: measures consistent with organization goals

13.4 SUPPLY CHAIN PERFORMANCEMEASUREMENT SYSTEMS

A performance measurement system can be defined as the set of metrics used toquantify both the efficiency and effectiveness of action. Following questions must beaddressed to create a sound performance measurement system.

· What to measure?

· How are multiple individual measures integrated into a measurement system?

· How often to measure?

· How and when measures re-evaluated?

In recent past quite a few supply chain performance measurement system arereported in literature, some of the important ones are discussed in the next section.

13.4.1 Supply Chain Balanced Scorecard

A measurement system based on balance scorecard (Kaplan and Norton 1992) usesfour perspectives, namely financial perspective, customer perspective, innovation andlearning perspective, internal business perspective.

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When a supply chain point of view is embedded within the balance scorecardframework the internal perspective of the scorecard is extended to include both theinter-functional and inter-organizational partnership perspectives. The balancescorecard incorporates integrated measures, in addition to nonintegrated measure,that motivate employees to view their firm’s success as dependent upon the successof entire supply chain of which they are part, rather then solely upon their firm itself.

SC balance scorecard emphasizes the interdependent as well as independent natureof supply chain and reorganizes the need to ascertain the extent to which firmseffectively work together and functions are coordinated and integrated. It alsostimulates management to create other measures appropriate to their uniquecircumstances but it lacks in aligning overall supply chain objectives with objectivesfor companies.

Brewer and Speh (2000) have developed a model for a balance scorecard in thesupply chain context, which is shown in figure 13.2. This model describes the links ofdifferent perspective to goals of SCM and then what are the measures to be adoptedin each perspective.

Customer Perspective

Goals Measure

1) Customer view of 1) Number of customerproduct/services contact points

2) Customer view of 2) Relative customertimeliness order response time

3) Customer view of 3) Customer perception offlexibility flexible response

4) Customer values 4) Customer value ratio

Figure 13.2: Supply Chain Balanced Scorecard Framework (Brewer and Speh, 2000)

Internal business perspective Innovation and learning Perspective

Goals Measure Goals Measure

1) Waste reduction 1) Supply chain 1) Product/process 1) Product finalization Cost of ownership innovation Point2) Time compression 2) SC cycle efficiency 2) Partnership 2) Product category3) Flexible response 3) No. of choices/ management commitment ratio avg response time 3) Information flows 3) No. of shared data4) Unit cost reduction 4) % of SC target set/ total data set 4) Threats and 4) Performance trajectories

Cost achieved of competingsubstitutes technologies

Financial Perspective

Goals Measure

1) Profit Margin 1) Profit margin by SC partner

2) Cash flow 2) Cash to cash cycle3) Revenue growth 3) Customer growth

and profitability4) Return on assets 4) Return on SC

assets

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13.4.2 Hierarchy Based Measurement System

Under hierarchical framework measures are classified into strategic, tactical andoperational levels of management. This is done to assign them where they can bebest dealt with by the appropriate management level, and fair decisions can be made.As shown in table 13.1, the accuracy of forecasting techniques, assigned to thetactical level based on an overall system decision in a supply chain, can be used andmanaged by the middle management. A similar explanation can be given for the restof the metrics given in table 13.1.

Table 13.1: Hierarchical Based Measurement System (Gunasekaran 2001)

Level Performance metrics Financial Non-financial

Strategic Total supply chain cycle time *Total cash flow time * *Customer query time * *Level of customer perceived value of product *Net profit vs. productivity ratio *Rate of return on investment *Range of product and services *Variations against budget *Order lead time *Flexibility of service systems to meet particular customer needs *Buyer supplier partnership level * *Supplier lead time against industry norm *Level of supplier’s defect free deliveries *Delivery lead time *Delivery performance * *

Tactical Accuracy of forecasting techniques *Product development cycle time *Order entry methods *Effectiveness of delivery invoice methods *Purchase order cycle time *Planned process cycle time *Effectiveness of master production schedule *Supplier assistance in solving technical problems *Supplier ability to respond o quality problems *Supplier cost saving initiatives *Supplier’s booking in procedures *Delivery reliability * *Responsiveness to urgent deliveries *Effectiveness of distribution planning schedule *

Operational Cost per operation hour *Information carrying cost * *Capacity utilization *Total inventory as:- Incoming stock level- Work in progress-Scrap level-Finished goods in transit *

Supplier rejection rate * *Quality of delivery documentation *Efficiency of purchase order cycle time *Frequency of delivery *Driver reliability for performance *Quality of delivered goods *Achievement of defect free deliveries *

The metrics are further distinguished as financial and non-financial so that a suitablecosting method based on activity analysis can be applied. In some cases, a metric isclassified as both financial and non-financial. For example, the buyer-supplierrelationship can be quantified in terms of financial performance achieved, such ascost savings, and in terms of tangible and intangible benefits, like improved quality,flexibility and deliverability.

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Hierarchy based measurement system ties together the hierarchical view of supplychain performance measurement and maps the performance measure specific toorganization goal. A clear guideline can’t be made in such a system to put themeasures into different levels that can lead to low level of conflicts among the supplychain partners.

13.4.3 Function Based Measurement System

In this system the measures are aggregate to cover the different processes in thesupply chain. The figure 13.3 below shows the customer order path and then itcovers what are the measure available in each process.

Function based measurement system covers the detailed performance measuresapplicable at different linkages of supply chain. Approach is easy to implement andtargets can be dedicated to individual departments. It doesn’t provide the top-levelmeasures to cover the entire supply chain with the company strategy. Looks at theentire chain in isolation, which gives the localized benefits that may harm the totalsupply chain benefits.

13.4.4 Perspectives Based Measurement System

This system presents six unique sets of metrics to measure performance of SCM.The different approaches to SCM lead to different awareness of what should bemeasured to assess performance. The six different perspectives as shown in table13.2 are: System Dynamics, Operations Research/Information Technology, Logistics,Marketing, Organization and Strategy.

Sales andmarketingfunction

Customerorder status

Shipcustomer

order

Customerorder

Inventoryfile

Processorder

Inventoryavailable

Production Shippingdocumentation

Invoice

Creditcheck

Purchasing

Productionschedule

Back order

Accounting

Warehousewithdrawal

Transportingschedule

Figure 13.3: Customer Order Path (Christopher 1992)

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Table 13.2: Six perspectives of SCM (Otto and Kotzab 2002)

Perspective Purpose of SCM Performance measures

System Dynamics Managing the trade-offs along Capacity utilization, inventory level,the complete supply chain. stock-outs, time lag for demand

information, time to adapt change indemand

Operation Research Calculating optimal solutions with Logistics cost per unit, service level,a given set of degree of freedom time to deliver

Logistics Integrating generic processes Integration, lead times, order cycle time,sequentially, vertically and flexibilityhorizontally

Marketing Segmenting products and markets Customer satisfaction, distribution costand combine both using the right per unit, market share, channel costdistribution channel.

Organization Determining and mastering the need Transaction cost, density ofto coordinate and manage relationshiprelationships

Strategy Merging Competencies and ROI, Time to marketrelocating into the deepestsegment of the profit pool

Perspective based measurement system looks the supply chain in all possibleperspectives and provides measures to evaluate each perspective. It also provide adifferent vision to look supply chain .How to link different perspective to optimizeglobal supply chain perspectives and there can be trade off exist between measure ofone perspective with the measure of other perspectives.

13.4.5 Supply Chain Operations Reference Model

One way to understand a supply chain is to use a process model. The Supply ChainCouncil created the SCOR model which is a framework for examining a supply chainin detail, defining and categorizing the processes that make up the supply chain,assigning metrics to the processes, and reviewing comparable benchmarks. Manycompanies use the SCOR model to understand and improve their supply chains.These companies include aerospace and defense manufacturers, large consumerproduct manufacturers, and third-party logistics providers. The SCOR model is theonly supply chain framework that links performance measures, best practices, andsoftware requirements to a detailed business process model.

SCOR models integrate the well-known concepts of business process reengineering,benchmarking, and process measurement into a cross-functional framework.

SCOR defines supply chain as the integrated process of plan, source, make, deliverand return spanning suppliers’ supplier to customers’ customer, aligned withoperational strategy, material, work and information flows.

The heart of the SCOR system is a pyramid of four levels (Figure 13.4) thatrepresent the path a company takes on the road to supply-chain improvement.

SCOR spans:

All customer interactions, from order entry through paid invoice

All product (physical material and service) transactions, from your supplier’ssupplier to your customer’s customer, including equipment, supplies, spare parts,bulk product, software, etc.

All market interactions, from the understanding of aggregate demand to thefulfillment of each order

P1.1Identify, Pictureize &

aggregate SCRequirements

33


Figure 13.4: Three levels of SCORSource: Supply Chain Council)

SCOR does not attempt to describe following business process or activities:

· Sales and marketing (demand generation)

· Research and technology development

· Product development

· Some elements of post-delivery customer support

· Links can be made to processes not included within the model’s scope, such asproduct development etc.

SCOR assumes but does not explicitly address:

· Training

· Quality

· Information Technology (IT)

SCOR provide the detailed and exhaustive list of performance measure for eachactivity and process, aligns the detailed performance measures with the strategicobjectives and provides the best practices and IT sources for each measurement. Itrequires a well-defined infrastructure, resources and project based completionapproach. Implementation of such an exhaustive system requires fully dedicatedmanagerial resources and continuous business process reengineering to align thebusiness with the best practices.

Comments

Level 1 defines the scope and contentfor the Supply Chain OperationsReference-model. Here basis ofcompetition performance targets are set.

A company’s supply chain can be“configured-to-order” at Level 2 fromcore “process categories”. Companiesimplement their operations strategythrough the configuration they choosefor their supply chain.

Level 3 defines a company’s ability tocompete successfully in its chosenmarkets, and consists of:· Process element definitions· Process element information inputs,

and outputs· Process performance metrics· Best practices, where applicable· System capabilities required to

support best practices· Systems/Tools· Companies “fine tune” their

Operations Strategy at Level 3

Companies implement specific supply-chain management practices at thislevel. Level 4 defines practices toachieve competitive advantage and toadapt to changing business conditions.

Description

Top Level(Process Types)

ConfigurationLevel (Process

Categories)

Process ElementLevel

(DecomposeProcesses)

ImplementationLevel

DecomposeProcess

Elements)

P1.4Establish and

Communicate SCPlans

P1.3Balance ProductionResources with SC

RequirementsP1.2Identify, Access &

Aggregate SCResources

P1.1Identify, Picturize &

Aggregate SCRequirements

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13.4.6 Dimension Based Measurement System

This system suggests that any supply chain can be measured on three key dimensions(source: Hausman 2000)

A) Service

B) Assets

C) Speed

Service relates to the ability to anticipate, capture and fulfill customer demand withpersonalized products and on-time delivery; Assets involve anything with commercialvalue, primarily inventory and cash; and Speed includes metrics which are timerelated, they track responsiveness and velocity of execution.

Every supply chain should have at least one performance measure on each of thesethree critical dimensions.

A) Service Metrics

The basic premise for service metrics is to measure how well the company is serving(or not serving) its customers. Generally it is difficult to quantify the cost of stockouts or late deliveries, so the targets are set on customer service metrics. Also, thebuild-to stock situation differs from the build-to-order situation, so related but differentmetrics are used in these environments. Table 13.3 contains some common servicemetrics used in these two environments. These are time-tested measures, whichcontinue to be valuable customer service metrics for supply chains.

The Line Item Fill Rate is the percentage of individual “lines” on all customer orders,which are filled immediately, while the Order Fill Rate counts as a success only thosecustomer orders in which all “lines” have been filled.

“Aging” refers to maintaining data on how long it takes to fill a backorder, or howlong it takes to complete an order, which is late. Tracking this data and maintaining itin an accessible database enables its periodic recall.

Table 13.3: Customer Service Metrics (Hausman 2000)

Build to stock (BTS) Build to order (BTO)

Line item fill rate Quoted customer response time

Complete order fill rate % on-time completion

Delivery process on time Deliver process on time

$ Backordered/Lost sales $ of Late Orders

No. of backorders No. of late orders

Aging of backorders Aging of late orders

Freq.

In the IT and especially Internet era, extensions of the customer order response timeinclude the on-line service response time of a website as well as the response timerequired to complete delivery of the product or service.

B) Assets Metrics

The major asset involved in supply chains is inventory throughout the chain. Twometrics generally used for inventory are:

Duration Duration

Freq.

35


1) Monetary Value ($, Yen, Euro, et cetera)

2) Time Supply or Inventory Turns

Inventory can be measured as a time supply, for example a 3-week supply ofinventory, or as inventory turns, defined as

Turns = (Cost of goods sold)/(Inventory Value)

The Time Supply or Turns measures relate to inventory flows; the Value of inventoryrelates to inventory as an asset on the firm’s Balance Sheet. Inventory Turns arecalculated in isolation, by accountants with access to financial and inventory data butwithout corresponding access to customer service data.

C) Speed Metrics

There are a series of metrics related to timeliness, speed, responsiveness andflexibility

· Cycle (flow) Time at a Node

· Supply Chain Cycle Time

· Cash Conversion Cycle

· “Upside” Flexibility

Cycle Time Reduction- i.e. lowering lead-time and WIP inventory levels.

The Supply Chain Cycle Time - measures the total time it would take to fulfill a neworder if all upstream and in-house inventory levels were zero. It is measured byadding up the longest (bottleneck) lead times at each stage in the supply chain.

The Cash Conversion Cycle (or Cash to Cash cycle time) attempts to measure thetime elapsed between paying the suppliers for material and getting paid by thecustomers. It is estimated as follows, with all quantities measured in days of supply:

Cash Conversion Cycle = Inventory + Accounts Receivable - Accounts Payable

Upside flexibility refers to requirements in high-tech industry, that a vendor beprepared to provide say 25% additional material above and beyond the committedorder, in order for the buyer to be protected when the buyer’s demand is higher thanforecasted.

Dimension based measurement system tries to cover the different dimension of thesupply chain and also provide the detailed measure for each dimension. The systemhas limitation to provide the strategic alignment of different dimension and to measurethe effect of different trade off between the dimensions.

13.4.7 Interface Based Measurement System

This framework aligns performance at each link (supplier customer pair) within thesupply chain. The framework begins with the linkages at the focal company andmoves outward a link at a time. The link-by-link approach provides a means foraligning performance from point-of-origin to point-of-consumption with the overallobjective of maximizing shareholder value for the total supply chain as well as foreach company. (Pohlen and Lambert 2001)

The framework consists of seven steps:

· Map the supply chain from point-of-origin to point-of-consumption to identifywhere key linkages exist.

· Use the customer relationship management and supplier relationshipmanagement processes to analyze each link (customer supplier pair) anddetermine where additional value can be created for the supply chain.

36


· Develop customer and supplier profit and loss (P&L) statements to assess theeffect of the relationship on profitability and shareholder value of the two firms.

· Realign supply chain processes and activities to achieve performance objectives.

· Establish non-financial performance measures that align individual behavior withsupply chain process objectives and financial goals.

· Compare shareholder value and market capitalization across firms with supplychain objectives and revise process and performance measures as necessary.

· Replicate steps at each link in the supply chain.

Interface based measurement system looks at the supply chain as a series ofdifferent links and to optimize the total supply chain a win-win approach is required atall linkages. Conceptually it looks good but in actual business setting it requiresopenness and total sharing of information at every link of the chain, which seem to bedifficult to implement.

13.5 A COMPARISON OF MEASUREMENT SYSTEMS

Different measurement systems described above have different views for integratingthe supply chain performance measures. These systems can be compared using fivedimensions (1) Hierarchy (Strategic, Tactical and Operational), (2) Results (Financialand Non-financial), (3) Linkages (Integrated and Isolated), (4) Determinants (Quality,Flexibility and Time), and (5) Stability (Static and Dynamic). It is evident from theabove explanations that supply chain balanced scorecard covers all the parameters.The system is easy to implement if the company strategy is well defined. Hierarchicalbased measurement system encompasses all parameters but at one time it tries tocover only one perspective, so a hybrid model of balance score card and hierarchicalcan be an another alternative i.e. at each hierarchical level we define the measure foreach perspective. Perspective based system also sees the measures in isolatedmanner but it covers some unique perspectives which are not covered in balancescorecard like system dynamics and operation research which provides a great helpin measuring dynamic capability of supply chain. SCOR covers all relevantparameters required in the system and tries to cover the whole supply chain instandard set of processes. It also covers the different dimensions at each level of thesupply chain. The model applicability is easier where ERP and BPR practices are inprogress and large set of data collection software’s are already in place. In SMEsand especially in Indian context applicability is questionable due to extra cost ofmaintaining such an exhaustive system. Interface based measurement system doesn’tcover the non-financial measures and strategic links to different linkages is notpossible. The system gives more emphasis on strengthening the internal and externallinkage to improve the overall supply chain.

13.6 SELECTING MEASURES

While the approaches described above provide guidance for supply chainmeasurement, they provide less help in assessing specific metrics to be used. In thisregard, a key driving principle is that measures should be aligned to strategicobjectives. Supply chain strategy depends upon its current competencies and strategicdirection, which differs for every company. Companies, for example, can generallyfall into the following developmental stages that will dictate the types of measuresand the degrees to which they will need to focus:

· Functional Excellence - a stage in which a company needs to develop excellencewithin each of its operating units such as the manufacturing, customer service, or

37


logistics departments. Metrics for a company in this stage will need to focus onindividual functional departments.

· Enterprise-Wide Integration - a stage in which a company needs to developexcellence in its cross-functional processes rather than within its individualfunctional departments. Metrics for a company in this stage will need to focus oncross-functional processes.

· Extended Enterprise Integration - a stage in which a company needs to developexcellence in inter-enterprise processes. Metrics for a company in this stage willfocus on external and cross-enterprise metrics.

Most companies have focused their performance measurement on achievingfunctional excellence. With the advent of Supply Chain Management (SCM)principles aimed at integrating their supply chains, many have objectives to increasetheir degree of enterprise-wide integration and extended enterprise integration. Inorder to achieve these types of objectives, their performance measurement systemswill need to align to them.

13.7 METHODS FOR SETTING PERFORMANCETARGETS

An important issue in performance measurement is how a company can usemeasures to gauge its supply chain’s performance. To do this effectively, a target foreach measure needs to be established, providing the framework for determining theanswer to three questions that arise when evaluating a performance metric:

· Has the metric improved from the last time it was reviewed?

· By how much?

· How close is the metric to where it should be?

In order to make this evaluation more meaningful the direction of improvement needsto be established. Also, performance targets need to be jointly, not individually,developed. To achieve objectives some metrics may need to increase and others mayneed to decrease. Each metric in the set has to be viewed in relation with the othersto determine its proper target. Hence, while there a variety of ways in whichperformance targets can be set, they should always be jointly set in the context ofstrategic objectives. Generally, there are four methods that can be used to setperformance targets (1) Historically based targets, (2) External benchmarks, (3)Internal benchmarks, (4) Theoretical targets.

13.8 TOTAL COST OF OWNERSHIP

The concepts of total cost, life cycle costing, product life cycle costs, and total cost ofownership are all related constructs for procurement valuation, which suggest thatsupply managers adopt a long-term perspective, not a short-term, initial-priceperspective, for the accurate valuation of buying situations. There are three ideas thatsupport all of these procurement valuation constructs. First, cost must be examinedfrom a long-term perspective and should include elements other than initial purchaseprice. Second, supply managers must consider the impact of other business functionson the valuation of a specific purchase. Third, to value a purchase situationaccurately, a supply manager must understand, and measure, the cost impact of allthe activities associated with the purchase. (Ferrin and Plank 2002)

38


Total cost of ownership (TCO) was originally developed in the late 1980s by theresearch firm Gartner to determine the cost of owning and deploying personalcomputers. Their initial findings, that PCs cost an enterprise nearly $10,000 per year,raised a serious concern in the technology community and among CFOs. Theirmethodology was carefully examined and has now been accepted as a standardmethod of evaluating costs. In simpler words, TCO consists of the costs (direct aswell as indirect), incurred throughout the life cycle of an asset, including acquisition,deployment, operation, support and retirement.

TCO in Supply Chain

Cavinato (1991, 1992) used the total cost concept to examine cost structures acrossthe supply chain. Ferrin and Plank (2002) examined cost indicators and suggested 13cost driver categories (shown in bold words in figure 13.8). Comparing supply chainentities based on these cost indicators can provide a basis for assigning specificsupply chain processes and the firms can reduce their total supply chain costs byassigning specific supply chain processes to those firms in the supply chain whosecost structures are well suited to support the assigned processes.

13.9 SUMMARY

In this unit, the performance measurement and evaluation of SCM has beendiscussed with special focus on various common SC measurement systems used inpractice. The discussion brings out the need for SC performance measurement andshows that managers need to understand the SCM properly in order to choose andadapt a particular measurement system and the performance metrics. A shortcomparison of various methods is also given along with a guideline to select measuresand set performance targets. Finally the concept of TCO as applied to SC isdiscussed.

Table 13.4: Categorization of identified TCO cost drivers (Ferrin and Plank 2002)

Operations Cost Quality Logistics Technological advantage

Manufacturing Durability Freight Design Obsolescence

Machine Efficiency Replacement Packaging Suitability for intended use

Production to Field Failure Customer Service Flexibility for new useSchedule

Labor savings Customer Downtime Availability Technology

Assembly Cost Inspection Handling Changing Technology

Operating Supplies Cost of Quality Instability in freight rates Long term advantage

Long-Term Operating Calibration Cost Outbound Cost Supplier Ability to ChangeCosts technology

Capacity Utilization Rework TariffsScrap Lead time

Increase In Customer Returns On-Time Delivery Supplier Reliability andProduction Output Capability

Equipment Speed Rejection Cost Supplier managedinventory

Cost In Use Quality Inventory Partnering CostsImprovement

Line speed Unplanned Time to Schedule Team costsDowntimeOut-of-Service Warehousing TrustCosts Duties

Area of the countrycustomer must order fromImport feesEntry and harbormaintenance fees

39


Maintenance Inventory cost Life cycle Initial price

Supplies Safety stock Long term usage Unit cost

Training Design/procurement Projected life cycle Initial purchase pricefor inventoryreduction

Downtime Storage Life of product Long term price stability

Costs Perishability Life cycle stability Initial capital expenditure

Labor Turnover Cost savings over life Customer relatedof product

Parts Transaction cost Useful life User satisfaction

Spare parts Administration of Redesign cost Customer perceptionspost purchaseagreements

Long term Ease of transaction Life cycle obsolescence Customer specificationsmaintenance costs cost

Repair frequency Supplier conversion Opportunity costcost

Reliability Small orders Cost of money

Preventive Procurement Overheadmaintenanceschedule

Transactional activity

Long term savingsMiscellaneous

Taxes Salary, benefits Installation Total installed price

Value chain Indirect labor Ease of operation Lease rate factors

Warranty Product use Noise level Flexibility of the supplier

Product design Depreciation Technical support Tooling and fixtures

Availability Lease or buy Validation/registration Environmental issuesfrom supplier costDisposal costs Supplier cost Overall competition

drivers (fromrequisition toreceipt)

Liability and Safety Service costindemnification

Obsolescence cost Support costs Disposal valueUtility costs Currency exchange rates

Direct labor


1) Why is Supply Chain Performance required to be measured?

2) “Today’s management can’t afford to focus only on company’s performance ina vacuum; there is an emerging requirement to focus on the performance of theextended supply chain or network in which company is a partner”. Comment!

3) What is the need for Supply Chain Performance Measures? What are thefactors that contribute to management’s need for new types of measures formanaging the supply chain?

4) Discuss in detail about the supply chain performance measurement system.Highlight the similarities/ dissimilarities in any two of these measures.

40


5) What is the essence of the Balance Scorecard method of PerformanceMeasurement?

6) Compare different measurement systems described in the unit by using fivedimensions discussed in Section 13.5.


1) Andreas Otto and Herbert Kotzab (2002), “Does supply chain managementreally pay? Six perspectives to measure the performance of managing a supplychain”, European Journal of Operational Research, Volume 144, Issue 2,Pages 306-320.

2) Beamon, B.M. (1996), “Performance measures in supply chain management ”,Proceeding of the 1996 conference on agile and intelligent manufacturingsystems, Rensselaer Polytechnic Institute, Troy, New York, NY, 2-3 October.

3) Beamon, B.M. (1998), “Supply Chain Design and Analysis: Models andMethods”, International Journal of Production Economics, 55, pp.281-294.

4) Brewer P. C. and Speh T. W. (2001), “Adapting the Balanced Scorecard toSupply Chain Management,” Supply Chain Management Review.

5) Brewer, P. C. and Speh T.W. (2002), “Using the Balanced Scorecard toMeasure Supply Chain Performance”, Journal of Business Logistics, Vol.21,No.1, No. 1, PP. 75-93.

6) Cavinato, J.(1991), “Identifying interfirm total cost advantages for supply chaincompetitiveness”, International Journal of Purchasing and MaterialsManagement, 27 (4), pp. 10-15.

7) Cavinato J. (1992), “A total cost/value model for supply chain competitiveness”Journal of Business Logistics, Vol. 13, No. 2, pp. 285–301.

8) Christopher, M. (1992), “Logistics and Supply Chain Management”, PitmanPublishing, London.

9) Christopher M (1999), “Logistics & supply chain management strategies forreducing cost and improving performance”, 2nd edition , Pitman Publishing,London.

10) Ferrin, Bruce G. and Plank, Richard E. (2002), “Total Cost of OwnershipModels: An Exploratory Study”, The Journal of Supply Chain Management:A Global Review of Purchasing and Supply, Volume 38, Number 3, pp. 18-29.

11) Forrester Jay W. (1958), “Industrial dynamics – a major breakthrough fordecision makers”, Harvard Business Review, July-August, pp 37-66.

12) Gunasekaran A. (2001), “Performance measurement and metrics in a supplychain environment”, International journal of operations and productionmanagement, Vol 21,No 1/2, pp71-87.

13) Kaplan, R.S. and Norton, P.D. (1992), “The balanced scoreboard-measures thatdrives performance’’, Harvard Business Review, January-February, pp. 71-9.

14) Ljungberg A., (1994), “Measurement of Service and Quality in the OrderProcess thesis for the degree Licentiate in Engineering”, Department ofEngineering logistics, Lund University, p. 56.

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15) Mapes, J., New, C. and Szwejczewski, M. (1997), “Performance trade-offs inmanufacturing plants”, International Journal of Operations and ProductionManagement, Vol. 17 No. 10, pp. 1020-33.

16) Neely A.D. (1995), “Performance measurement system design”, InternationalJournal of Operations and Production Management, vol No.15, No.4, pp 80-116.

17) Pohlen, Torrence L. and Lambert, Douglas M. (2001), “Supply chain metrics”,International Journal of Logistics Management, Volume 12. No.1.

18) Slack, N., Chambers, S., Harland, C., Harrison, A. and Johnston, R. (1995),“Operations Management”, Pitman Publishing, London.

19) Stevens (1989), “Integrating the supply chain”, International Journal ofPhysical Distribution and Materials Management, Vol 19, No. (8), pp3-8.

20) Stewart, G. (1995), “Supply chain performance benchmarking study reveals keysto supply chain excellence”, Logistics Information Management, Vol. 8 No. 2,pp. 38-44.

21) Warren H. Hausman (2000), “Supply chain performance metrics”, The Practiceof Supply Chain Management, Dec.

22) Wild, R. (1995), “Production and Operations Management”, CassellEducational Limited, London.

23) “Supply Chain Operations Reference Mode (SCOR)”, Supply Chain Council,http://www.supply-chain.org/public/scorbasics.asp

DISTRIBUTION NETWORK PLANNING

Unit 14Transportation Mix 5

Unit 15Locational Strategy 22

Unit 16Logistics and SCM Environment 34

5Block



Chain Management
















December, 2004


ISBN-81-






















BLOCK 5 DISTRIBUTION NETWORKPLANNING

Units 14: Transportation Mix explains the tools, techniques of cost reduction anddepicts the modes of transportation. It elucidates MTO (multi-modal transportoperation) and describes methods of selection of carrier. It throws light on routing,scheduling & fleet sizing. It also discuss about the futuristic trends & achievingtransportation efficiency

Unit 15: Location Strategy talks about the steps in location planning. It discussesthe interdependence of location decision and distribution decision. Finally it describesvarious measures for warehouse location

Unit 16: Logistics and SCM Environment thrashes out the commercial and legalissues concerning logistics. It describes the sales laws in detail. It illustrateswarehouse operations and renders documentation procedures such as Insurance,Octroi and Sales tax

4

Distribution NetworkPlanning

5

Transportation MixUNIT 14 TRANSPORTATION MIX

Objectives


· describe the tools, techniques of cost reduction;

· depict the modes of transportation;

· elucidate MTO (multi-modal transport operation);

· describe methods of selection of carrier;

· throw light on routing, scheduling & fleet sizing; and

· discuss the futuristic trends & achieving transportation efficiency.

Structure

14.1 Introduction

14.2 An Illustration

14.3 Transportation Briefly

14.4 Warehousing

14.5 Tools & Techniques of Reducing Costs

14.6 Transportation Costs

14.7 Method of Selection

14.8 A Transportation Decision

14.9 Number & Size of Depots

14.10 Fleet Sizing & Configuration

14.11 Routing and Scheduling

14.12 Futuristic Direction in Transportation

14.13 Summary



14.1 INTRODUCTION

Transportation happens to be the most fundamental part of strategic logisticmanagement (unit 4). Transport costs include all costs associated with movement ofproducts from one location to another. The average transport costs ranges from 5 to6% of the recommended retail price of the product. Transportation is the movementof products, materials and services from one area to another, both inbound andoutbound. It can also be said as movement from one node of the supply chain to theother.

‘The ideal organization following the MTO is the Indian Army; with the principle,wherever you are we reach you, in time, and in the best and cheapest modeavailable’. Indian Army is a typical example of ideal transportation mixes in ourcountry. It uses the aerial, land, sea and rail routes to maintain its forces strewn allover the country and abroad. The logistics is enormous and the various modes oftransport are, aircraft, train, trucks, animals, and human beings. It transports supplies,ration, fuel, oil lubricants, arms, ammunition, clothing and personal loads over vastdistances and over varied terrain and climatic conditions.

6

Distribution NetworkPlanning 14.2 AN ILLUSTRATION

Assume the movement of kerosene oil from one of the central depots in Central Indiato the Northern sector, say, Jammu and Kashmir at a place called Kupwara. Theinitial movement is by rail to the nearest railhead and that is Jammu. From there thebulk is transferred to BPL lorries and moved to the forward depots by road.Depending upon where it has to go the same is further broken at the depots anddistributed as per demand and requirement to the forward areas, either by trucks oranimal transport, human labor or by airdrops; a versatile mix of transport system,which is unique in being. One got to see it to believe it, and experience it, to realize ittoo. Such a shift does take time, but within the available resources and timeconstraints this the best that can be organized to maintain an even logistics chaindown to the end user. It is a time-tested system in vogue since pre-world war days.Let us see this with the help of a figure 14.1.

Figure 14.1 : An Ideal Transportation Mix Network

This can also be validated by an advertisement of Indian Oil, which shows elephantscarrying oil barrels to the consumers at unreachable areas. Therefore, before westart with the theoretical aspects of transportation and its nuances and applicability,you as a supply chain manager must understand the practical side of it too. Asdiscussed in unit 4 and 5 earlier, transportation plays an important role in thelogistics channel and will continue to do so. Selecting the right transport for theright material, time factor, demand per se, cost and related factors of urgency is theultimate aim of the supply chain manager. He has to deliver, and how he does itwithin the constraints of environmental realities is his job too. Therefore, let ussee a rundown on the transportation in general even at the cost of repetition, since;if you understand transportation in the SCM, you have understood 75% of thesystem.

FUEL, OIL &LUBRICANTS

BY RAIL BY ROAD

INTERMEDIATEDEPOTSBULK BREAKINGCONTAINERISATION

END USER

EX CENTRALDEPOTS

BY ROADANIMAL, HUMAN,

HALF TRUCKS

AERIAL DROPS

AIR LANDED

WATERWAYS

RAILHEAD

7

Transportation Mix14.3 TRANSPORTATION BRIEFLY

You have already studied in unit 4 that transportation is the most fundamental part ofstrategic logistic management. Transport costs include all costs associated withmovement of products from one location to another. The average transport costsranges from 5 to 6% of the recommended retail price of the product.

Transportation is the movement of products, materials and services from one area toanother, both inbound and outbound. It can also be said as movement from one nodeof the supply chain to the other. As Deshmukh & Mohanty (2004) says, “ byproviding for the swift and uninterrupted flow of products back and forth through thechain, transportation provides a sort of lubrication to run the chain smoothly. It alsopermits deeper penetration of newer markets far from the point of production.”1

Therefore, in order to effectively manage this transportation system the first stepwould be to establish a cost effective transportation mode. In other words highestcustomer service in lowest price, leads to company growth.

Transportation system has a strategic bearing on a company’s operation efficiency.Therefore, failure to identify the best transportation mode can directly affect thegrowth of a company. Since, higher transport costs will raise prices, which willdirectly affect the customer satisfaction in a negative way. The three factors asmentioned by Gattoma & Walters required to consider are:

· Customer

· Environment

· Product & company

Organization, which involves physical movement of goods require transport servicesthat varies from mode to mode. The best suitable mode is required to be identifieddepending upon the nature of product that has to be moved. Like if coal or carbonhas to be moved use the railways from the source to the production unit directly, soas to minimize losses, time & cost factor. Therefore, in order to identify the righttransport system the following have to be considered:

· Impact of the transport system on the supply chain.

· Factors that determine the choice of transport mode.

· Who are the customers to your product per se?

· What are the environmental factors?

· What is the product?

· What is your company profile?

· Feedback and reporting both from within and the environment on the choice oftransport, and rectify in case you went wrong the first time.

· Your foresight, flexibility & integration of available resources in planning stagewill be one of the crucial factors that will dictate the choice of transport.

Activity 1

Visit a carrier company and document your understanding about the practicalities ofemploying these carriers.

.............................................................................................................................

.............................................................................................................................

.............................................................................................................................

1 Mohanty & Deshmukh (2004) in Essentials of Supply chain Management, chapter 7,pp. 118-119.

8


Considerations influencing transportation

· Customer communications: In order to obviate delays in transportation andhandling of logistics both the suppliers and distributors are relying more andmore on electronic transfer systems, IT & the Internet. This will help inconsiderable reduction in time delays and ensure better cooperation between thechains.

· Market coverage: Transportation costs influence the size of markets coveredin a big way. The characteristics are: costs, flexibility, reliability and availability.The product per se will influence the economics of the decision. A low volumeand high value product will be able to support higher costs, which meansextended delivery distances and increase in delivery frequency.

· Sourcing decisions: The geographical dimension of the source markets can beinfluenced by low cost transportation system, i.e. ‘reliable bulk freight servicescould extend the source markets,’ says Mohanty & Deshmukh. Companiestherefore have to consider a trade off between price and quality and the costsinvolved in delivering to the processing point, i.e. volume and cost oftransportation.

· Manufacturing operations: Cost of transporting has a direct bearing on thelocation of the manufacturing market center. That is why, extraction based unitsare close to the source of raw materials and the products related to customersatisfaction are closer home, i.e. near to the customer hub center.

· Pricing decision: Transportation happens to be the important component ofproduct costs. Therefore, selection of the appropriate transportation mode willhave a direct bearing on the product costs per se, with more relevance toexports. Increase in transportation costs increases the product pricing.

· Customer service decisions: Both customer service policy and transportationdecisions go hand in hand and hence one cannot be considered in isolation of theother. Moreover, the type of market will also dictate the decision and will varyconsiderably. Therefore, it is pertinent to overrule the cost factor while servicingthe medical customers, since speed is more important than cost in selecting thetransport mode.

Activity 2

Correlate the practical problems and factors influencing transportation of a companyor a carrier.

.............................................................................................................................

.............................................................................................................................

.............................................................................................................................

.............................................................................................................................

An effective selection system

Transporter selection can effectively be resolved by adhering to the five stages ofselection framework:2

· Stage I: identification of those factors affecting the choice of transport selection.

· Stage II: categorize the significant factors and identify the potential risks.

· Stage III: determination of the distribution network depending upon the numberand size of the depots.

2 Deshmukh & Mohanty in Essentials of SCM, pp130-131.

9

Transportation Mix· Stage IV: application of matrix analysis for selecting the right transport.

· Stage V: measure and monitor costs continuously.

Before we move further, let us see warehousing as a part of recapitulation what wehave studied in Unit 4.

14.4 WAREHOUSING

This happens to be another important facet of logistics chain and works side-by-sidewith transportation. It is that segment of logistics function that deals with storage andhandling of inventories starting from supplier receipt to consumption point. Themanagement of this includes the maintenance of accurate and timely informationrelating to inventory status, location and disbursement. Factors influencing thewarehousing decisions are:

· Type of distribution

· Value of the firm

· Quantity and potential for obsolescence

· Competitiveness

· Economic condition

Warehousing performs a variety of roles as mentioned below:

· Material handling: It consists of receiving, storing and shipping.

· Storage: This maximizes customer services by improving product and locationpositioning.

· Transfer of information: This ensures timely and accurate information oninventory status, space utilization, equipment and manpower availability andtransport capacity.

In order to develop an effective warehousing strategy the following has to beaddressed:

· Documentation of existing warehouses operations.

· Documentation of the storage facilities and put forth requirements over theplanning horizon.

· Identify the shortfalls within the warehouses that are available including thedeficiencies.

· Alternate warehousing plans to meet contingencies in strategy.

· Selection of the best recommendation.

· Update the warehouse strategic plan.

With that as a backdrop to our study let us see the design and management of SupplyChain Management, since logistics happens to be the key of SCM.

14.5 TOOLS & TECHNIQUES OF REDUCING COSTS

As a logistics manager one has to dwell considerably on the correct selection of thefleet, which will further aid in reducing costs and indirectly help in reducing the costof the product to the end user. The following functions are the domain of the logisticsmanger:3

3 Deshmukh & Mohanty, pp. 124 in Essentials of SCM

10


· Negotiating routes and rates

· Selecting route and fleet

· Evaluation of the carrier performance

· Analyze transport costs and services

· Operating company owned means of freight and transportation

· Filing loss and damage claims

· Auditing freight bills

The ultimate choice depends upon such factors as financial policy, customer servicepolicy, the control required by the company and the competition intensity of themarkets.

Table 14.1 gives the characteristics of transport infrastructure in India.

Table 14.1: Transport Infrastructure of India

Transportation CharacteristicsTypes

Railways 62,000 Kms. of network, with 7000 stations, 3 gauges, 12 millionpassengers, 1 million tonnages of freight/day

Road 34,000 Kms. of primary roads (NH), 1,28,000 Kms. of StateHighways, 27,00,000 Kms of miscellaneous roads and tracks and30 million vehicles approximately.

Water A coastline of 6000 Kms, with 11 major and 139 minor portshandling 230 million tonnages of cargo/day

Air A massive cargo service with 6 International airports and 86domestic ones, in addition there are a hoard of transport aircraftsof Indian air force catering to emergencies and natural calamities,which can effectively be pressed into service in contingencies.

Actually the entire selection process is a very complex one and should aim atidentifying the right attributes required to implement the company’s customer servicepolicy. The main attributes are (Deshmukh & Mohanty):

· Current performance as regards delivery accuracy and reliability

· Responsibility acceptance to guarantee the service product offered

· Offering flexibility so as to respond to criticalities and emergencies

· Information for purpose of controlling

· Financial stability to ensure continuity of service and for up gradation ofequipment

· Integration to the maximum into customer business, sharing confidence, problemsand capabilities

What is therefore the significance of this choice factor? Actually, transport costsinclude all costs directly associated with the movement of product from one locationto the other, therefore, to identify the choice of transport mode, it is mandatory todetermine the impact of transport upon the overall supply chain. This could well beachieved by analyzing the existing transport cost, realization of the profit leverageeffect and analysis of the impact of transport upon other elements of the distributionsystem.

11

Transportation Mix14.6 TRANSPORTATION COSTS

Transport costs vary from less than 1 per cent (for machinery) to over 30 per cent(for food) of the recommended selling price of products, depending upon the natureof the product range and its market. However, the average transport costs is between5 to 6 per cent of the recommended retail price of a product.4 With inflation transportcosts also rise because the major components are the workforce (labor), fuel &maintenance, spares, drivers cost. Similarly, transport represents a direct cost addedto the price of the product and any reduction in transport costs would lead to anincrease in profit, with price remaining constant. The impact of reducing transportcosts is as shown below:

Assumption: that a company X has a 10 per cent profit margin on sales turnoverand with fixed prices.

· A cost reduction in transport expense of Rs. 1,00,000 is equivalent to increase insales turnover of Rs. 1,00,000;

· If transport costs are estimated at 20% of total costs, in that case a 1 per centreduction in transport costs will correspondingly give a 2 per cent increase inprofits.

Transportation rates are almost linear with distances and not with volume, be it road,rail, water or air. We distinguish here the transportation costs associated with both aninternal and external fleet. Transportation costs for company owned fleet is simpleand is evolved by annual cots per truck, annual mileage, amount delivered and truckseffective capacity. All this information could be effectively utilized to calculate costper mile per SKU. Whereas, incorporating transportation cost for external fleet iscomplicated, since; hiring of transport in India is different to that of USA. In India,transport rates are governed by respective RTO (Road Transport Office) of everystate and differ from state to state. It ranges anything between Rs 5/- to 32/-, withdifferent rates for commercial and private vehicles. For example, hiring of a privatetaxi in Kolkata/Delhi could be Rs 6/- but at Ooty it would be anything between 8 to10 owing to the type of terrain in that region. Similarly, hiring of a full truck fromWest Bengal to Assam could be ranging from 14000/- to 25000/- depending upon thedelivery point, lower Assam/Upper Assam. That is how it differs. In USA, the TL(truckload carriers) subdivides the country into zones, with every zone conforming toa state. Except for Florida or New York, which are partitioned into two zones. Forexample, to calculate TL cost from Chicago, Illinois, to Boston, Massachusetts, oneneeds to get the cost per mile for this pair and multiply it by distance from Chicago toBoston. An important property of the TL cost structure is that it is not symmetric;that is, it is typically more expensive to ship a full loaded truck from Illinois to NewYork than from New York to Illinois. In the LTL (less than truck load) industry, therates are classified under class, exception and commodity. The class rates arestandard rates that can be found for almost all products or commodities shipped.They are found with the help of classification tariff that provides each shipment arating or class.

Once the rating is established, it is necessary to identify the rate basis number. This isthe approximate distance between the load’s origin and the destination. Withcommodity rating or class and the rate basis number the specific rate per hundredpounds can be obtained from a carrier tariff table or freight tariff table.

In India, the rates are fixed and are reviewed every 3 months depending upon thepetrol and diesel prices prevailing in the country at that point in time. A truck movingfrom Meghalaya to Delhi will charge lesser than from Delhi to Meghalaya, why? Theprimary reasons could be:

4 Deshmukh & Mohanty 2004, Essential of SCM, pp 124-125

12


· Assam is a troubled state and incoming traffic to the state faces problems inentering the state, one has to cross Assam before entering Meghalaya.

· Certain parts of the state are hilly and rates are fluctuating.

· Return load for the trucker ex Meghalaya is more difficult visa vie Delhi.

· Most of the truckers moving towards Northeastern areas of the country chargefor the return trip ab-initio.

Such aspects and rules are pre-mentioned in the contract documents and thecompanies and the trucker based on environment factors sign up for a minimum termof one year extendable to 2 years or more.

India is a very versatile country. One trucker could agree to take your load for 30grand while the other for 45 at the same time, from and to the same place. Manyother factors like reliability and reputation aspects are to be considered before hiring,we have seen this earlier on.

Supply chain systems

Transport is vital to the overall gambit of SCM operation and therefore cannot beconsidered in isolation. The entire transportation process is to be monitored, in orderto gauge the exact location and state of the materials being transported. Transport, isthe process, which transports materials between 2 or more stations, and therefore,the form of transport to be used should not only be responsive and compatible to theterminal stations, but also with the operating environment through which the productmoves. In order to achieve the best, it is therefore mandatory that sufficientinformation be made available to enable the movement to be monitored by theproducer, consumer, agencies, financial institutions and relevant groups.

Transport profile

Operating characteristics dictate the transport requirements of an organization. Thetransport requirement depends on the different and versatile nature of tasks that areto be performed. Therefore, to generalize, an organization, which doesn’t haveversatility and varieties in operating its transport for varied tasks, will operate muchbelow the optimum level of efficiency.

Operational factors

Operational factors that determine the transport mode are:

· Environmental factors

· Characteristics of alternate transport modes

· Combination approach

We will see this with the help of a flow chart as shown in figure 14.2.

The various characteristics of alternative transportation mode are:1

· Useful load: physical capability and maximum load as a percentage of grossweight.

· Density: cargo density, i.e. weight per cubic unit.

· Overheads: fixed costs as a percentage of total cost.

· Productivity: calculated in tonne-miles per direct man-hour.

It is very important to establish and determine the accurate operating characteristicsof each available transport mode, so that suitability of matching these to the operatingfactors can be established. Each type of transport offers different characteristics andas a supply chain manager you have to understand the efficacy of these aspects:

1 Deshmukh & Mohanty, Essentials of SCM, Transportation, pp 117-127

13

Transportation Mix

Figure 14.2: Operational Factors for Deciding the Transport Mode (Deshmukh andMohanty, 2004)

· The 10-12 tonne truck (Punjab Body) offers the highest useful load.

· The cargo vessel offers the highest density.

· Freight trains have the highest overheads, though ODC clearance have to takenfrom the railways if the goods are not of standard specifications and are beingtransported in open BOM’s/KF’s.

· The cargo aircraft has the highest productivity.

Each of these transport modes has their peculiar characteristics that affect thepreparation of the product before movement, e.g. movement by sea will requirebetter packaging than those by air, mainly in the international and intercontinentaltraffic utilizing multi modal transport.

Channelisation - Multi-modal Transport Operations

The choice of transport mode is not only a choice between type of transport, butbetween a system or a process of transportation, between manufacturer or seller andcustomer or buyer. It involves separate sectors i.e. between production line to go-downs/warehouses, material handling interfaces at each terminal facility and thedocumentation process to support the product. The complete market channel has tobe defined and each sector demarcated and analyzed separately for transportrequirements, in coordination with customer characteristics, volume, and the operatingenvironment through which the operation is carried out. Each of the sector wouldrequire separate transport mode, to be precise. Let us understand the type of channelwith Figure 14.3.

If that were so, then what are the factors to be considered when analyzing thetransport requirement of each sector? What should be the basic guidelines? They are(essentials of SCM, Deshmukh & Mohanty):

· Control, ownership, finances, security to include documentation and product andresponsive information system

· Movement of product, handling, requirement of stocks at each levels, packaging,and safety standards

· Market factors

· Labor

OPERATIONAL FACTORS

CUSTOMERCHARACTERISTICS

ENVIRONMENTAL PRODUCT

CHARACTERISTICS OF TRANSPORTMODES

CUSTOMER SERVICELEVEL

COSTS

CHOICE OF TRANSPORTMODE

COMPANY

ROAD RAIL AIR WATER

14


Fig 14.3: Depicting the Types of Channel

· Training

· Turnover of both goods and manpower

· Risk factors, competitiveness, and profit potential

· Environmental realities.

Therefore, in order to maximize the usage of transport being offered, the transportcompanies should be able to match and synchronize the market requirements, whichwill then have a major influence on the choice of transport mode.

Specialization is created by the impact of channel costs, which are incurred eitherbefore or after transportation, where the introduction of specialization reduces themechanical handling costs, packaging costs and related expenditures mainly duringterminal activities.

The very objective, by which the transport mode could be chosen, depends uponwhether the company is using revenue or capital to buy the transport. In case ofrevenue, minimum cost throughout the transport operation should be the objective,and in case of capital, maximum tax return upon capital should be the objective, sincethis give maximum return.

In certain case, both revenue and capital expenditure will be included in the operation.In such cases, the combination of the minimum expenditure and maximum after taxrevenue could be calculated by determining the net cash flow after tax for the life ofthe capital asset. The criteria for choice will then become the maximum discounted

REGIONAL GODOWN

CAPITAL GOODS EXPENDABLE/PERISHABLEGOODS

CONSUMER DURABLES

FOOD PRODUCTS BREAD EATABLES CONFECTIONARIES

GENERATORS TRANSFORMERS HEAVY

EQUIPMENTS

TV FRIDGE MUSIC SYSTEM WASHING MACHINE HOUSEHOLD

APPLIANCES

MANUFACTURERS

CONSUMERS/END USERS

COMMODITY MARKET

WHOLESALER

RETAILER

RETAILER

CENTRAL WAREHOUSE

15

Transportation Mixreturn or minimum discounted cost in terms of net cash flow, calculated with adiscount rate equivalent to the cost of capital.6

· Revenue expenditures incurred during utilization of particular mode, as inpackaging and labour should be considered along with:

· Capital expenditure incurred in utilization of a particular mode as in mechanicalequipment at the terminals.

· Associated risks with any capital asset with a life of over 2 years, where theasset would require changes and modification.

Inspite of determining a method of assessment, the correct decision can only be taken,once the degree to which the calculations are taken have been considered in detail.

14.7 METHOD OF SELECTION

The selection procedure for the transport mode could vary from the simple decisioneither to identify one feasible method of distribution or to follow the competitor’sprocedures, to the complex decision that calculates the cost incurred and produces anoptimum solution. The three potential methods are:7

· Judgment: Identification of the important factors affecting the transport problemby the transport manager, and the transport mode from a list of alternativesavailable, so that the important features of the transport requirements are met.The shortcomings are tremendous in such a process, since; transport isconsidered as a service rather than a distribution system.

· Cost trade-off: It is where the impact of transport is calculated in relation toimmediate terminal objectives and activities, and the total cost of distributionsystem is optimized. This particular approach acknowledges the existence oftrade-off within the numerous alternative approaches in an attempt to assess thesituation to minimize total costs.

· Distribution models: This identifies and explains the interrelationships betweenthe components of the distribution system at various levels of daily, weekly ormonthly demands. These models could be built to examine the impact ofalternative transport modes and methods, as either the demand changes or thecomponents in the system change.

Therefore, in order to carry out a systematic selection of the transporter aframework consisting of the following stages is recommended: (Figure 14.4)

Figure 14.4: The Selection System

6 Deshmukh & Mohanty in Essentials of SCM, p 1297 Deshmukh & Mohanty in Essentials of SCM, pp 130

SYSTEMATIC SELECTION

IDENTIFICATIONOF

FACTORS

CATEGORIZING &IDENTIFICATION OFPOTENTIAL RISKS

DETERMININGDISTRIBUTION

NETWORKS

MEASURE&

MONITOR COSTS

MATRIX ANALYSISTO SELECTION

STAGE 1 STAGE 2 STAGE 3 STAGE 4

STAGE 5

16


· Stage 1: identifying the factors affecting the choice of transport selection

· Stage 2: categorizing the significant factors and identifying the potential risks

· Stage 3: determining the distribution network in terms of number and size ofdepots

· Stage 4: applying the matrix analysis to select the most appropriate transportmethod

· Stage 5: measuring and monitoring cost factors.

14.8 A TRANSPORTATION DECISION

Determining an organization’s transport requirement will be based on the followingunderlying considerations, (Figure 14.5)

· The available depots, their sizes including movement requirements of rawmaterials to manufacturing units and finished products to the warehouses and onto the consumers.

· The best choice of mode available depending on the distance involved.

· Product characteristics that will further dictate the type of transport mode to beemployed.

· The choice of equipment in terms of type of transport for each requirement.

· The financial option that could be employed in terms of individual type ofequipment.

· The operation needs in terms of usage of the equipment for maximum utilizationand minimum operational costs.

Figure 14.5 : Decision Framework

We have to understand that transportation operations cannot be seen in isolation, andhence warehousing and depot locations are equally important to understand thechoice of transport selection process.

DECISION FRAMEWORK

NUMBER & SIZE OFDEPOTS TOINCLUDE

MOVEMENT OFRAW

MATERIALS/FINISHED PRODUCTS

CHOICE OFTRANSPORT MODECOINCIDENTAL TOEACH POTENTIAL

MOVEMENT INDISTANCETRAVELED

THE CHOICE OFEQUIPMENT

SPECIFICATIONSON TYPE OFTRANSPORTDEFINED BY

PRODUCTCHARACTERISTICS

CHOICE OFFINANCIAL

OPTIONSAVAILABLE

CHOICE OFOPERATIONAL

NEEDS ASREGARDS

EQUIPMENTS TOMAX UTILISATION& MINIMISE COSTS

17

Transportation MixThe total number and sizes of depots and warehouses will also have a directbearing on transport operations of all companies across the board. Let us seethese in more details.

14.9 NUMBER & SIZE OF DEPOTS

Depots/warehouses and storehouses define the distribution network of amanufacturing company. More the numbers, larger is the distribution networks.The network of depots will be defined by the numbers, size and location which,when combined, minimize the cost between ex-factory delivery and localdistribution depot delivery for each order, (Deshmukh & Mohanty). Essentially,the distribution depots provide the resources to balance the cost to achieveoptimum ex-factory loads and optimum local delivery loads. Once this is defined,it is possible to classify the transport operational requirements into tasks, as under:

· Management of raw materials of factories

· Inter-factory movements

· Delivery to warehouses

· Delivery to third-party transport facilities

· Delivery to satellite depots

· Delivery to consumers based on normal, priority or emergent.

A decision matrix approach helps in identifying the most appropriate transportoption from the substantial range available. This approach uses the followingsteps:

· Selection of initial decisions required based upon known alternatives; like,choice of transport mode, choice of equipment specification, choice offinancial options and operational needs.

· To select two options (factors) so that a matrix can be formulated using onein vertical axis and the other on horizontal.

· Selection of basic alternatives, which adequately cover the conditions,imposed by the vertical and horizontal axes.

· Determination of organization needs by analysis of the important factorsgenerated to produce the matrix and use of the matrix to select the optionsrequired.

· Selection of the resources required by considering the results of the matrixanalysis plus other factors of importance.

· The combination of the matrix solutions to provide an effective and efficientprofile, which identifies the transport tasks and appropriate resources for thetasks.

This approach will require imagination to develop the selection of the initialdecisions, to determine the important factors to use for the vertical and horizontalaxes on the matrix, and to construct the matrix. Yet, the majority of the questioncould be answered by a combination of brainstorming, analysis and categorizationof important factors, which affect the choice of transport selection.

Choice of mode

One of the ways to identify the appropriate choice of transport mode is to selectthe most significant attributes affecting the decision. These could be the size ofthe order (cubic meters or weight) and the distance to be traveled in miles fromthe concerned supplying depots and related factors. Let us see this with anillustration.

18


Let the attributes be x1, x2, and x3 etc. The weight of these attributes be denoted byw1, w2, and w3 etc. Let the transport alternatives be denoted by X1, X2, and X3 etc,with each of the alternatives scaled from 0 to 10 for each of the attributes. Computethe aggregate score for each of these alternatives (w1 s11 + w2 s12…etc). Selectthat alternative which has got the maximum score (figure 14.6). This form of analysiswill help in identifying when each transport mode is appropriate.

Scores for alternatives

Attributes weights A1 A2 A3

x1 w1 s11 s21 s31

x2 w2 s12 s22 s32

x3 w3 s13 s23 s33

x4 w4 s14 s24 s34

Aggregate score S1 S2 S3

Figure 14.6 : Decision Matrix

Alternatively, an elaborate framework such as Analytic Hierarchy Process (AHP)can be applied to rank the transport alternatives on a set of tangible/intangibleattributes. Therefore, in order to test the efficacy of this selection process, at themacro level certain measures have to be instituted based on ratio including cost perton or cost per cubic meter, and cost per delivery. Actually a target has to beestablished to each transport activity in order to determine the actual area where thedifference occur, and at the same time monitor these aspects as part of effectivedecision making processes.

14.10 FLEET SIZING & CONFIGURATION

Fleet sizing objective is to employ through ownership, hire, lease and or rental thefewest possible trucks to manage the company’s load profile/shipping requirements.This decision is akin to the decision of how much inventory is to be made available tothe consumers/customers. In fleet sizing, increased availability yields fewer lost sales,shorter customer cycle times, improved customer services but higher fleet costs.Fleet sizing projections should be developed a few times during the year and at anytime when a major shift in demand pattern occurs. In certain cases, the cost ofvehicle shortages can be estimated and a cost of shortages versus cost of ownershipanalysis can be made to determine the optimal fleet size. Fleet size can be regulatedand minimized by:8

· Utilizing standard size pallets and transport containers.

· Vigorously monitoring fleet utilization levels annually.

· Maintaining total fleet visibility, including loading times, unloading, transit timesand maintenance times.

· Choosing low-use periods to conduct routine maintenance.

· Monitoring and charging for demiurges for fleet detention by suppliers, customersand carriers.

· Utilizing alternative coverage means during super peak periods to avoid carryingthe burden of an oversized fleet.

8 EH Frazelle, in Supply Chain Strategy, pp 210-211

19

Transportation MixTherefore, it can be seen that whatever be the fleet size, the company has to use itjudiciously and constantly monitor its progress for optimum utilization of the availableresources and at the same time cut down costs of maintenance and time lag.

Fleet maintenance is one means of reducing the ownership cost of the fleet bydelaying potential replacements and improving customer service through improvedreliability.

14.11 ROUTING AND SCHEDULING

India is one of the best examples of routing and re-scheduling, wherein such activitiesare optioned in the shortest possible time. Roadblocks, damages to bridges and roadsowing to natural calamities are the major reasons for such re-routing. We can planour travel plans well in advance but then criticalities are criticalities and one has toaccept such contingencies. Everything doesn’t happen as planned and thereforeevery company should gear for alternative arrangements involving alternate routes,modes and schedules in case the movement of the shipment is emergent.

Delay in delivery due to routing problems increase costs of goods manifold.Therefore, to tide over this the company has to plan these activities well in advancewith detailed coordination and judicious and realistic planning. India is a versatilecountry with equally versatile terrain and climatic condition. Companies have to gearitself to such changing scenarios and terrain since the very inception. Efficient versusinefficient routing can save tremendous amount of money in fuel, labor, and capitalexpenditures and significantly enhance customer satisfaction. The objective should beto minimize:

· Total route costs

· Number of routes

· Distance traveled

· Route time

The constraints are:

· Customer requirements and time available

· Balancing of the route for the driver, to minimize overtaxing

· Maximum route time

· Vehicle capacity

· Start & stop points enroute

· Infrastructure constraints.

Routing problems are some of the most difficult criticalities encountered, and cannotactually be solved optimally.

14.12 FUTURISTIC DIRECTION IN TRANSPORTATION

One salient aspect that we all have to understand that with e-services our lead timeto delivery has reduced considerably, but somehow the movement of the product andraw materials perforce cannot move through e-services and have to restrictmovement to roads, rail, air and waterways. Yes, the order can be placed throughe-services in a faster mode and so can payment be but the products cannot bephysically moved through the net. A truck, rail wagon or a ship or the cargo aircrafthas to move it from the place of origin to the consumer’s destination.

20


Transportation too, has improved considerably with the advent of technology andmechanical developments within a short span. Certain programs and organizationshelp in coordinating transportation in a better way and as time passes they are boundto improve transportation in a big way. They can be clubbed under as follows:

· Carrier relationship management: Speedy movements across the globe havealso given rise to lack of coordination and planning resulting in criticalities too.However, through carrier relationship management programs we can bind thetransporters and those working with it under one roof/enterprise. Theseprograms are designed to formalize communication, partnering, negotiating, andperformance monitoring aspects of carrier management. At the heart of mostcarrier relationship management programs is a set of guidelines for selecting corecarriers, the minority of carriers who carry a majority of the enterprise’s weight,cube and shipments.9

· Corporate traffic councils: These help in bringing together all personnelworking in the area of transportation within an enterprise. The traffic council setscorporate transportation policy and explores opportunities for leveragingtransportation spending across the corporation.

· Training and certification: Corporations should aim at making and maintaintransportation as a value added activity. For this everyone should be in one planeand therefore, such training activities are carried out to get all under oneplatform.

· Driver quality: Improvements in drivers with better working environment andbetter wages will help in a big way to improve the driver’s capability andcapacity in the long run.

· Joint Procurement: Significant cost reduction can be carried out if thepurchase and negotiation of transportation services is consolidated across bothinbound/outbound transportation activities within a business unit, across units andeven with non-competitors.

· Logistics compliance & security officer: Forming the chief logistics securityofficer will enable a company to cope with global logistics law and to anticipatesecurity lapses within the logistics network.

14.13 SUMMARY

We have in this unit discussed on transportation mix, techniques of cost reduction,modes of transportation, multimode transport operations, carrier selection etc. It isevident that transportation is one of the important facets of logistics and equallyimportant in the process of SCM, because they impact the customer services andother areas of cost. These decisions are prominent within the purview of companylogistics decisions due to the factor of trade off potential that exists betweenalternative modes of transportation and other logistics functions within the firm.Therefore, an understanding of costs and benefits of alternative transport modes,together with an in-depth evaluation of overall corporate implications is mandatory.Transportation costs will always have a direct bearing on the product costs, i.e.increased transport costs will have risen prices and vice versa. Therefore,appropriate selection of the right transport mode is necessary for optimum customersatisfaction and a balanced logistics system of the firm.


1) Explain transportation mix with relevant examples.

2) What are the various techniques of cost reduction?

9 EH Frazelle, in Supply Chain Strategy, pp 220-222

21

Transportation Mix3) Explain MTO in detail with specific examples from those outside the unit.

4) Explain the procedure of transport and carrier selection. Why is it carried out andwhat are the major characteristics?

5) Why is fleet sizing necessary? Elucidate with relevant examples.

6) What is routing and scheduling? Explain in the Indian context.

7) What are the different constraints of routing?

8) Suggest a futuristic transport profile for a growing company.


1) Frazelle, E.H., Supply Chain Strategy, McGraw-Hill, New York.

2) Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House,Mumbai.

3) Handfield, R. B. and Nichols, E. L. (1999) Introduction to Supply ChainManagement, Prentice Hall, New Jersey.

4) Waters Donald (2003), Logistics: An Introduction to SCM, Palgrave McMillan(Indian Edition), NY.

22

Distribution NetworkPlanning UNIT 15 LOCATION STRATEGY

Objectives

After reading this unit you would be able to

· discuss the steps in location planning;

· discuss the interdependence of location decision and distribution decision; and

· describe various measure for warehouse location.

Structure

15.1 Introduction

15.2 Plant Location

15.3 Distribution Problem

15.4 Warehouse Location

15.5 Retail Facility Location

15.6 Summary



15.1 INTRODUCTION

Facilities and their locations are major issues in an organization’s logistics systemefficiency and its ability to successfully implement its competitive advantage. Facilitylocation decisions are of major importance to a company’s ability to compete in themarket. Determining appropriate locations for facilities such as plants, warehouses,retail stores, hospitals etc. represents an important strategic decision.

The choice of location for the place of business is one of the earliest problems facingmanagement. Location decisions come under the category of long-term decisions.They involve long-term commitments. A plant location decision cannot be revieweduntil after quite sometime as they involve huge investments. Location decisions alsohave effect on the operating costs/revenues. For example, a bad location decisionmay call for excessive transportation costs, shortage of skilled workforce, loss ofcompetitive advantage, inadequate supply of raw materials etc.

Organizations are involved in location decisions for a variety of reasons such as thefollowings:

· Expansion of existing facilities

· Addition of new facilities

· Closing down the plant at one location and moving to another.

Firms may experience growth in business and wish to increase the plant capacities.Addition of new plants to complement an existing system is often contemplated.Firms such as banks, supermarkets, retail stores consider location as a marketingstrategy and look for locations that will help them in expanding their markets.

Let us look at the importance of location in the context of business logistics. Businesslogistics refers to the management of all move-store activities that facilitate productflow to the point of final consumption. Figure 15.1 presents the key elements of alogistics system or the production / distribution system.

23

Transportation Mix

Flow of Goods

Flow of Information

Figure 15.1: Production / Distribution System

The key elements of the production/distribution system are: transportation, inventoryand order processing. Raw materials are ordered from the suppliers. These aretransported to the manufacturing plant for production into finished goods. Finishedgoods are shifted to warehouse (also called distribution centers) and finally to retailstores from where they are made available to customers. In order to have aneffective production and distribution system, business logistics coordinates theproduction and marketing efforts. One of the important goals of marketingmanagement is to make the product available to customers at the right place and theright time. Thus the decision of where a product is produced and stored is veryimportant. Production management, on the other hand, is concerned with maintaininghigh productivity at low cost. A product mix that seeks only to satisfy marketinggoals may lead to inefficiencies in production. Similarly, decisions that consideronly production efficiencies may lead to high distribution costs and low customerservice.

The main objective of location decisions is to position each element of the production/distribution system with respect to the overall system. A manufacturing plant mustbe strategically positioned between its supplies and customers. The location problemis more complex for large firms; they must position both plants and warehousesimultaneously with respect to suppliers, retail outlets and each other. Rarely, all thesefacilities are located simultaneously.

The typical case involves locating a new plant with respect to suppliers and a givennumber of warehouses or locating a set of warehouses with respect to manufacturingplants and markets.

We shall discuss here the problems of plant location, warehouse location, in thedistribution system and the special cases of locating retail stores and emergencyservices.

Suppliers

ManufacturingPlant

Warehouse

Customers

Retail Store

24

Distribution NetworkPlanning 15.2 PLANT LOCATION

Choice of location for a plant is one of the earliest problems facing management. Butlocation, perhaps, is one of the most neglected aspects of business, although themanufacturing and distribution costs may vary by over 10 percent simply by virtue ofchoice of location. The golden rule of business applies to location decisions as well.The Golden Rule of Business states that the ones with gold make the rules.

There are two types of factors (or criteria) on which location decisions are based:quantitative (or objective) factors and qualitative (or subjective) factors. Theobjective factors involve cost of land, transportation costs, utilities rates etc. Thesubjective factors include labour availability, climate, community environment, qualityof life, local politics etc.

The presence of objective and subjective factors results in greater degree ofcomplexity in the structure of the plant location problem as well as its solution. Adecision made on these factors is difficult as they are consistent over all locations.For example, a plant may be located far from work but have lower utility bills relatedto the area closer to work. Some factors may be more dominant than others. Forexample, on mineral production plants, raw materials dominate the situations due towhich processing is located near mines. On the other hand, output oriented activities,such as service organizations tend to be located near consumers. Table 15.1 presentsa list of some of the important location factors.

Table 15.1: Location Factors Determining Plant Location

Transportation Utilities Labor Climate, Community, States and LocalFactors Factors Factors Environment etc. Political Factors

· Proximity to · Power · Labor supply ·Climate and living ·Taxation policiesraw material · Water · Labor management conditions ·Tax structuresources · Fuel relations ·Education

· Closeness to · Waste · Availability of ·Community attitudemarkets disposal skilled labor ·Religious factors

· Modes of · Labor coststransportation

· Transportationcosts

15.2.1 Steps in Location Planning

Location planning involves the following steps:

1) Determine the criteria to evaluate location alternatives (for example: minimizecosts)

2) Identify relevant location factors

3) Develop location alternatives

a) Identify the general region

b) Identify a small number of community site alternatives

4) Evaluate the alternatives and make a selection.

15.2.2 Evaluation of Location Alternatives

As stated earlier, the plant location problem involves both qualitative and quantitativefactors. Finding the best location alternative considering all the above factors is not an

25

Transportation Mixeasy one. Attempts have been made to combine the qualitative and quantitativefactors and score the alternatives. One of the scoring (or rating) models is outlinedbelow (Table 15.2).

The procedure starts by listing the various factors and assigning weight to each factorto represent the relative importance of various factors. The score for each alternativeis found by multiplying each factor’s score by its weight and summing the results.Table 15.2 gives the details of this rating approach for two locations A and B.

Table 15.2: Rating Approach

Location factor Weight Score (out of 100) Weighted Score

A B A B

1. Labor Costs 0.40 70 90 70 × 0.40=28 90 × 0.40=36

2. Water supply 0.10 80 90 8 9

3. Climate 0.15 80 90 12 13.5

4. Proximity to Raw 0.20 40 70 8 14Materials

5. Transportation Costs 0.10 80 90 8 9

6. Taxes 0.05 80 80 4 4

Total Score 68 85.5

From Table 15.2, we see that location B that has a higher score is preferred.However one has to be careful in the use of the rating approach because of theassessment of scores, which might have involved some amount of subjectivity. Forexample, if the total score for location B were 70, which is very close to that of A,one need to go for further analysis before arriving at the final decision.

15.3 DISTRIBUTION PROBLEM

The distribution problem is concerned with the allocation of goods flow to minimizeoverall distribution cost. Most distribution systems are three-tired structures in whichgoods start from the plant; flow to warehouse and ultimately to outlets. Warehousingplays a crucial role in the total distribution system. Consider for example, a largechain, which manufactures many products, maintains regional distribution centers andowns a large number of retail store (Figure 15.1). The firm has control over thelocation of all intermediate members of the logistics system.

In the absence of any warehouse, shipments of finished goods would have to bemade directly from the plant to the retail stores. If the plant is located far from theraw material sources, inbound transportation costs would be high and delivery timeswould be high, thereby increasing the chances of material shortage for production. Ifthe plant is located far from the group of retail stores, then also transportation costs(i.e. outbound transportation costs) would be high and it takes longer to deliver ordersto retail stores. This may result in out-of-stock situations thereby reducing the level ofcustomer service. Warehouses placed close to the market can provide quick andefficient delivery to retail stores, while still permitting the plants to be placed near rawmaterial sources. Warehouses and distribution centers play as importantintermediaries between plants and retail stores. They allow a company to storefinished goods for efficient distribution to points of use. The role of warehouses isillustrated in Figure 15.2.

26


Retail Stores Retail Stores

(a) Without Warehouse (b) With Warehouse

Figure 15.2: Role of Warehouse

It can be seen from Figure 2 that the provision of intermediaries like warehousereduces considerably the number of interactions from 10 (i.e. 2 x 5) to 7 (i.e. 2 + 5).There are other benefits associated with the provision of warehouses since theysupport both manufacturing as well as retail stores. For example, warehousefacilitates consolidation of orders.

A number of decisions should be made with regard to warehousing. Among the mostimportant warehousing decisions are the determination of number and location ofwarehouses. The other decisions include the following:

· Which products should be stored in each warehouse?

· Should public or private warehouses be used?

· What type of material-handling equipment should be used?

· Which customers should be assigned to each warehouse?

We shall discuss the warehouse location problem in the following section.

Activity 1

Write True or False against the following statements.

1. The facility location decision belongs to the tactical decision area.

2. In all location problems, there is a unique location that is superior to all others.

3. Business logistics and facility location are unrelated issues.

4. Logistics management refers to the management of transportation function.

5. In the location of a gasoline station, labor availability is one of the most importantfactors.

6. The location of aluminum reduction industry is energy-oriented.

7. For facility location, manufacturing costs are more important than transportation cost,since the latter are going to be incurred anyway.

8. For facility location, quality of life in a given location is an irrelevant factor.

9. Scoring models are used exclusively in location decisions.

10. There is no difference between location decisions for manufacturing and serviceorganizations.

11. The major criterion for location of a retail outlet is the volume of demand.

12. One of the principal disadvantages of computerized logistics modeling is the ability toeasily modify data and perform “what if” analysis.

13. The presence of organized labor unions is irrelevant to the location decision.

Plant 1 Plant 2Plant 1Plant 2

1 52 3 4 54321

Warehouse

27

Transportation Mix15.4 WAREHOUSE LOCATION

In this section we present method(s) for determining the location(s) forwarehouse(s). It is assumed that there are a number of existing facilities in place andwe wish to find the optimum location of a new facility (or new facilities). The existingfacilities could be plants, retail stores. The new facilities could be warehouse. Theapproaches take into account the locations of plants and markets, volume of goodsmoved and transportation costs. All these models focus on minimizing transportationcosts.

15.4.1 Measures of Distance

Two measures of distance for movement of items are commonly used: Rectilineardistance and Euclidean (straight line) distance.

The rectilinear distance (also known as metropolitan distance) recognizes that streetsusually run in a crisscross pattern.

Let the existing facility be located at the point (a, b) and let (x, y) be the location ofthe new facility. The rectilinear distance between (a, b) and (x, y) is |x – a | + | y – b|,whereas

The Euclidean distance is Ö(x–a)2 + (y–b)2

Figure 15.3 illustrates the two distance measures.

Rectilinear

(a,b) distance

Euclidean distance

(x,y)

Figure15.3 : Rectilinear and Euclidean Distance

Rectilinear distance is appropriate for many location problems such as in metropolitanareas. In many manufacturing situations, material is transported along aisles arrangedin rectilinear pattern. Fortunately, rectilinear distance problem is easier to solve thanEuclidean distance problem.

The problem of locating a simple new facility with respect to a number of existingproblems is known as the single facility location problem whereas the problem oflocating multiple new facilities is known as the multi-facility location problem.

15.4.2 Single Facility Location Problem

In this section you would learn about Single Facility Rectilinear Distance LocationProblem, Squared Euclidean Distance Problem (known as the Gravity Problem) andthe Straight-Line Distance Problem.

28


Single Facility Rectilinear Distance Location Problem

Let there be “n” existing facilities located at points (a1,b

1), (a

2,b

2)…………,(a

n,b

n).

The objective is to locate the new facility to minimize a weighted sum of therectilinear distance from the new facility to existing facilities. The goal is to find thevalues of x and y such that

minimize ¦(x,y) = i

n

=∑

1 w

i ( ½x – a

i½+ ½y – b

i½) , where

wi is the flow of material / goods between the new facility and i

th existing facility. The

optimum values of x and y can be determined separately.

ƒ(x,y) = g1(x) + g

2(y), where

g1 (x) =

i

n

=∑

1 w

i ½x – a

i½ and g

2 (y) =

i

n

=∑

1w

i ½y – b

i½

As we shall see, the x coordinate of the new facility will be same as x coordinate ofsome existing facility. Similarly y coordinate of new facility coincides with ycoordinate of same existing facility. An example of the single facility location problemcould be location of a new storage warehouse for a company with an existingnetwork of production and distribution centers.

Let us consider a case in which there are two existing facilities located at (5,10) and(20,30) as shown in Figure 15.4. Assume that w

i values are all equal to one.

(20,30)

y

(5,10)

X

Figure 15.4: Single Facility Rectilinear Location Problem - Two Existing Facilities

The values of g1(x) is equal to 15 for values of x between 5 and 20.

Similarly g2 (y) is 20 for values of y between 10 and 30.

For example, if x = 10 and y = 10

Then g1 (x) = ½ 5 – 10½+ ½20 – 10½ = 15

g2 (y) = ½10 – 10½ + ½30 – 10½ = 20

It can be seen that the optimum location for the new facility will be anywhere in thearea bounded by the lines x = 5, x = 20, y = 10 and y = 30.

Any value of x outside the closed interval [5, 20] and any value of y outside theclosed interval [10, 30] gives larger values of g

1 (x) and g

2 (y). Thus the optimum

solution is (x , y) where 5 £ x £ 20 and 10 £ y £ 30 .

The above analysis leads to the Simple Median model, which can be explained, withthe help of the following examples.

29

Transportation MixSuppose there are four existing facilities located at points ( 3 , 3), ( 6 , 9), ( 12 , 8)and (12 , 10) and the weights are all of value 1 ( w

1 = w

2 = w

3 = w

4 = 1). Rank the x

coordinate in increasing order: 3, 6, 12, 12.

A median value is such that half of values lie above it and half lie below it. Any valueof x between 6 to 12 is a median location and is optimum for this example problem.The optimum value of g

1 (x) is 15.

Similarly ranking the y values 3, 8, 9, 10 gives the median value as any value between8 and 9 and the minimum value of g

2 ( y) = 8. See Figure 15.5.

g1(x) g

2(y)

x y

Figure 15.5: Optimum Locations

Let us take another example where there are four existing facilities located at (3,3),(6,9), (12,8) and (12,10). The weightages are: w

1 = 2, w

2 = 4, w

3 = 3 and w

1 = 1.

The problem is equivalent to one where there are two facilities at location (3,3), fourfacilities at (6, 9), three facilities at (12, 8) and one facility at (12,10), with weightequal to 1.

The ranked x value are 3, 3, 6, 6, 6, 6, 12, 12, 12, 12

The median location is x = 6.

The ranked y values are: 3, 3, 8, 8, 8, 9, 9, 9, 9,10.

The median location is any value of y in the interval [8,9].

The optimum value of the objective function is 30 + 16 = 46.

A quicker method of finding the optimum location of the new facility is to computethe accumulated weight and determine the location (s) corresponding to half of theaccumulated weight as shown below.

Facility X Weight Cummulative Facility X Weight Cummulativecoordinate Weight coordinate

1 3 2 2 1 3 2 2

2 6 4 6 Optimum 3 8 3 5 optimum X = 6 Y is

3 12 3 9 2 9 4 9 between 8 and 9

4 12 1 10 4 10 1 10

(Half of total weight first exceeds at x = 6 (Optimum y is between 8 and 9)

Hence optimum x = 6)

30


Euclidean Distance Problems

Although the rectilinear distance measure is applicable in many location problems,there are situations in which the appropriate measure is the Euclidean or Straight-linedistance. Location of power generating facilities so as to minimize the total length ofelectric cable that must be laid out to connect the plant and customer is an examplewhere the Euclidean distance measure is appropriate.

We shall discuss here the squared Euclidean Distance Problem (known as theGravity Problem) and the Euclidean Distance Location Problem.

The Gravity Problem

The Gravity problem corresponds to the case where the distance measure is squareof the Euclidean distance. This measure is appropriate for location of emergencyfacilities. The objective is to find the value of (x, y) to minimize

¦ ( x, y) = å wi [ (x – a

i )2 + ( y – b

i )2]

The solution to this problem is straight forward and is often used as an approximationto the more common straight-line distance problem.

To find the optimum value of x and y, the partial derivatives of the objective functionwith respect to x and y are found and equated to zero.

We get ∂∂

f ( , )( )

x y

xw x ai i

i

n

= −=∑2

1

We get ∂∂

f ( , )( )

x y

yw y bi i

i

n

= −=∑2

1

Setting these partial derivatives equal to zero and solving for x and y, we get

X+ =

w a

w

i ii

n

ii

n=

=

∑

∑1

1

Y+ =

w a

w

i ii

n

ii

n=

=

∑

∑1

1

Thus X+ and Y+ are the weighted averages of x and y coordinates and hence thename Gravity problem.

The Straight-Line Distance Problem

The straight-line distance measure arises much more frequently than the Gravityproblem. The objective is to find (x, y) to minimize

¦ (x, y) = ∑=i

n

1 w

i Ö (x – a

i)2 + (y – b

i)2

31

Transportation MixUnfortunately, it is not easy to find the optimum solution mathematically. The partialderivatives become undefined when the location of the new facility coincides withthat of an existing facility. There are no known simple algebraic solutions; all existingmethods require an iterative procedure. The Gravity solution is usually selected as thestarting solution for this iterative process.

15.4.3 Multi-facility Location Problem

The problem of locating multiple new facilities with respect to existing facilities isknown as the Multi-facility Location Problem. For example, a countrywide consumergoods manufacturer might be considering where to locate four new regionalwarehouses. There is interaction among new facilities as well as between new andexisting facilities. In some special situations, multi-facility location problem can besolved as a sequence of single facility location problems.

Linear programming can be used to solve the multi-facility rectilinear distancelocation problem. Assume that there are “n” existing facilities located at points( a

1, b

1), ( a

2 , b

2),……(a

n , b

n). Suppose the new facilities are to be located at

(x1 , y

1), (x

2 , y

2), ……….., (x

m , y

m).

The objective function to be minimized is written as minimize ¦1 (x) + ¦

2 (y)

m n

Where ¦1 (x) = å V

jk ½x

j – x

k½ + å å w

ji ½x

j – a

i½

i £ j £ k £ m j=1 i=1

m nand ¦

2 (y) = å V

jk ½y

j – y

k½ + å å w

ji ½y

j – b

i½

i £ j £ k £ m j=1 i=1

Vjk

represents the interaction between new facilities j and k and wji represents the

interaction between new facility j and existing facility i. The optimum x and y valuescan be determined independently as in the case of single facility location problem.

Multi-facility gravity problems require the solution of a system of linear equations, sothat gravity problems involving large number of facilities are easily solved. Multi-facility Euclidean distance location problems are solved by using multi dimensionalversion of the iteration solution procedure described in the previous section.

Activity 2

Fill in the blanks

1) An approach to location analysis that includes both qualitative and quantitativeconsiderations is ……………………………………………

2) A major advantage of warehousing is that…………………………………………………………………..

3) The scoring model is both a ……………………………. and…………………………… model

15.4 RETAIL FACILITY LOCATION

The major criterion used for retail facility location is the volume of demand and henceestimates of demand must be known for potential locations. Statistical techniquessuch as regression analysis can be used to predict demand. For locating facilities thatare oriented toward sales, the principal factors are market related and the importantdata are demographic in nature. Other intangible factors, which affect retail location,are competition, zoning laws, traffic patterns and accessibility etc. Like in plantlocation, scoring models may be used to rank potential sites.

32

Distribution NetworkPlanning 15.4 SUMMARY

As we have seen, the location decision and distribution decision are interdependent.By considering only one of these, we get poor solutions. Both the problems should betreated comprehensively.

Comprehensive computerized logistics systems are available to assist management inachieving efficient solutions. Computerized systems help answering questions suchas: how many warehouses are needed and where they should be located? Howmuch of each product should be sent to each warehouse from each plant? Howshould customers be assigned to warehouse? What modes of transportation are mosteconomical? For answering such questions, management needs large amounts of dataregarding warehousing and inventory costs, transportation costs, production costs andso on.


1) “The most common method for evaluating non-economic factors in a facilitylocation study is to use a scoring model” Why? Justify your answer.

2) Is it true that subjective criteria in plant location models focus on long-run costeffects? If yes, Why?

3) Given the information below, which alternative would you recommend?

Factor Weight Location

A B C

Raw Materials 0.40 50 70 60

Market 0.20 40 40 80

Transportation Cost 0.10 90 70 50

Labor Cost 0.20 40 40 30

Construction Cost 0.10 10 60 30

4) Given the information below, which alternative has the lowest breakeven point?

Alternative Fixed Cost Variable cost/unit Revenue/ Unit

A 30000 10 40

B 40000 15 40

C 50000 20 40

D 60000 30 40

E 70000 40 40

5) Given the following evaluation of subjective factors, find the total score for thelocation.

Excellent = 8, Good = 6, Fair = 4, Poor = 3

Factor Rating Weight

Labor Supply Good 40%

Community Attitude Excellent 30%

Government Regulations Fair 20%

Quality of life Good 10%

33

Transportation Mix6) Using the following scoring model, select the best location

Location Attribute 1 2 3 4

Weight 10 25 35 30

A Good Very Good Bad OK

B OK OK Very Good Good

C Good Very Good OK Good

Very Good = 5 points, Good = 4 points, OK = 2 points, Bad = 1 point


1) Ballou R., (1985), Business Logistics Management, Prentice Hall.

2) Francis, R. L. & White J. A. (1974). Facility Layout and Location - AnAnalytical Approach, Prentice Hall.

34

Distribution NetworkPlanning UNIT 16 LOGISTICS AND SCM ENVIRONMENT

Objectives

· discuss the commercial and legal issues concerning logistics;

· describe Sales laws;

· illustrate Warehouse operations; and

· render Documentation procedures such as Insurance, Octroi and Sales tax.

Structure

16.1 Introduction

16.2 An Illustration

16.3 Preventing Litigation

16.4 Sales Law: An Overview

16.5 Environmental Realities: Implications on Supply Chain

16.6 Warehouse Operations

16.7 Warehouse Jurisdiction

16.8 Wages, Earnings and Hours of Work

16.9 Documentation: Insurance & Sales Tax

16.10 Introduction to Sales Tax

16.11 A Case Study

16.12 Summary



16.1 INTRODUCTION

We have learnt in detail that logistics forms a key to SCM, and happens to be themost important component in the entire channel. There are however, certainenvironmental realities that govern the smooth running of this SCM system and it’simperative for every manager dealing with it to learn and know about it.

Legal issues concerning the movement, storage and shipment of materials, insurancecoverage, payment of taxes, Octroi and sales taxes are important part ofdocumentation process. In the Indian context it is also referred as consignor note(Challan), delivery note, (delivery challan) etc.

Legal issues play a very important role in SCM, though the best one can do is toavoid legal disputes at all costs, based on the adage, one ounce of prevention is wortha pound of cure. Though, supply management professionals deal with two majoraspects of law; the law of agency and law of contracts, yet, they seldom get involvedin litigation, provided they are fortunate.

With this as a backdrop let us see an illustration, which will generally explain theentire process of SCM in which a supply manager is likely to get involved in law suits,legal hassles and how can he overcome or avoid it.

16.2 AN ILLUSTRATION

Let us take a company ‘A’, manufacturing soaps somewhere in outskirts ofMangalore. Whatever raw material it requires comes from areas around it, and its

35

Transportation Mixmain constituent Caustic (sodium hydro-oxide or potassium hydro-oxide) is beingsupplied by a chemical plant located in Kerala. The fat constituent is also availablefrom a nearby unit. The main supplier of caustic is, say company ‘X’. So ‘X’ is themain supplier of the constituents to ‘A’ and is hence governed by some legal issuesand laws of the SCM. ‘A’ can file a suit of litigation on ‘X’ for supplying lowergraded materials, for delay in dispatch of material, or unable to supply the goods afterinitial payment has been done and the contract signed. The companies can also be inlitigation with each other, in case there are disputes or complaints related to quality ofthe finished product from the consumers en-mass. At the same time any consumercan sue a company in the court of law or in consumer forum for necessarydemurrages accrued on usage of a particular soap, on health related matters, or sayin case if the quantity specified on the pack don’t match the actual weight, or eventhe advertisement theme and slogans don’t match the product quality. Actually, thereare number of places where a company could falter and be charged by law.Companies generally avoid this aspect, and go in for an out of court settlement withsuch consumers.

Similarly, there are other areas where legal aspects come into play like delayedpayments or non-payments. Well, this is better sorted out during the signing of initialcontracts and supplier selection processes. Next comes the transportation aspects,wherein insurance has to be catered to for the consignment against theft, loss,damages, fire etc. Sales tax for the goods and Octroi for utilizing the services andinfrastructure, differs from state to state. There are also various weighbridges wherethe vehicles are checked for the load being carried, and in case of discrepancies thecompanies are charged penalty for non-payment of taxes/less payment/fraudulent.This illustration has purposely been included, just to make you understand, where andhow we can go wrong and how best can we sort out these differences, either by lawor through negotiation. We will see all this and many such related aspects as we gothrough the unit.

The first step for all this is to prevent litigation, and how can we achieve this? Let ussee.

16.3 PREVENTING LITIGATION

The basic relationship between the supply manager and the buyer is like an agent forhis/her firm, and legally this is defined and governed by the law of agency.1 Apurchase represent formation of a purchase contract between the buyer and theseller, and any dispute resulting from this the dispute may enter the realm of disputeresolution governed by the laws of contract, and can be categorized as under:

· Negotiation

· Mediation

· Arbitration

· Litigation

The basic responsibility of a firm is to ensure smooth procurement based on businessrequirements and judgments, rather than on legal considerations. Getting into litigationnot only alienates a good supplier but leaves a scar on the buyer firm too. As a matterof fact litigation is generally the last order of the day, since most of the outcome ofcourt cases are uncertain and delays the complete process.

The very purpose of this unit is to give you a brief insight into legal concepts, as theyrelate to supply chain professionals across the board in just a nutshell. You shouldacquire in-depth knowledge of the commercial laws, as applicable both in India andinternationally.

36


Now let us see the four categories of dispute resolution as depicted in table 16.1:Dispute Resulution.

Category Remarks

Negotiation Disputes can best be resolved through negotiation and compromise to avoid furtherconfrontation, costs, complication, stress and damaging relationships

Mediation This is the next step to negotiation, and mediation involves introducing a thirdparty to resolve the issue. The mediator is expected to listen, sympathize, coax,cajole and persuade. He/she could also render suggestion or encourage suggestedsolutions. A mediator could do anything other than deciding, which is actuallyarbitration the next step to mediation.

Arbitration In this process the output of the dispute goes to the third party an arbitrator.Arbitration vests the decision-making authority with the arbitrator wherein hewould hear the testimony and study the evidences from both sides, and then take adecision based on facts and law.

Litigation This is the last stage of the process where the disputants have already lost thebattle. In fact, wastages tend to be maximized in this stage relating to time, effort,money, stress and damages to relationship. Knowing and understandingfundamental legal principles better, could help in avoiding such a stage.

Let us now see how the development of commercial laws took place across theworld with special reference to USA.

16.4 SALES LAW: AN OVERVIEW

Most of these are academic in nature and you, as a supply chain manager shouldknow them thoroughly. But, in practicality one must understand these aspects beforeventuring to SCM.

Historically, USA developed its own body of status and a common law for all statesto deal with the problem of dispute resolution and prevail uniformity. Thetransactions for the sale (and leasing) of goods are governed mainly by sales laws ofeach state. Every state, with the exception of Louisiana, has adopted, Article Two ofthe Uniform Commercial Code (UCC) as the main body of law regulatingtransactions in goods. Goods are defined as all things movable and identified to thecontract of the sale. It does not include secured transactions, leases, moneyexchanged as the price, or real property (land and property permanently attached to apiece of land). To be identified to the contract a good must exist and one of theobjects will be exchanged. Transactions between merchants and consumers andthose solely between merchants are regulated by Part Two. All transactions that arefor more that $500 must be in writing. Article 2 regulates every phase of atransaction for the sale of goods and provides remedies for problems that mayarise. It provides for implied warranties of merchantability and fitness. There is alsoa duty of good faith in the UCC that is applicable to all the sections. If a contractcontains unconscionable provisions a court may discard the contract or theprovisions.

Leases were traditionally governed by Article 2 or Article 9 (secured transactions) ofthe UCC. This caused confusion and disparate application of the law to leases. In1987 Article 2A was added to the UCC to regulate leases for goods. It has beenadopted, or is being considered for adoption, in a number of states.

1 WCSCM by TMH, Relationship management, chapter VI, pp. 555-557

37

Transportation MixFederal law has a limited impact on transactions for the sale of goods. TheBankruptcy Code regulates claims arising from sales transactions in bankruptcycases. The Magnuson-Moss Warranty, Act regulates explicit and implied warranties.The Consumer Credit Protection Act provides protection to consumers entering intoleases.

In 1988, the United States joined the United Nations Convention on Contracts for theInternational Sale of Goods.

16.5 ENVIRONMENTAL REALITIES: IMPLICATIONSON SUPPLY CHAIN

The significant impact that members of the supply chain have on organizations’environmental performance, either through their actions or the products theysupply, is increasingly becoming recognized throughout business. Examples oforganizations, which have faced legal action, financial loss, and damage tocorporate image as a result of their supply chain partners’ activities, arenumerous, and as environmental protection climbs the social and politicalagenda so the risks will increase.

In many cases action has been driven in response to specific events or pressure fromstakeholders (and commonly both) with the full value to the business of this actiononly being realised subsequently. To exert some influence over supply chain partners’approaches to environmental issues, control the associated risks, and realise furtherpotential benefits, companies have developed proactive environmental supply chainmanagement (ESCM) programmes to complement existing supply chain andenvironmental management activity.

However, it is not enough to blindly trust that general improvements in theenvironmental performance of supply chain partners will in turn improve theorganization’s environmental performance. Furthermore, the methodology employedso far is diverse in design and application, and the focus of initiatives is sometimesopen to question. The ESCM process must be structured, and concentrate ondelivering benefit for the initiating organization, while a commonly demonstrated by-product of this activity is the strengthening of supply chain partners, and therelationships with them.

16.5.1 Extent of Involvement

The extent of engagement in ESCM activity varies greatly across commercialorganizations and industrial sectors. It would be fair to say that many organizationshave demonstrated good ESCM practice within individual projects withoutrecognizing it as such, while others have realised environmental benefits throughgeneral SCM initiatives.

Business in the Environment (1999) have attempted to gauge environmentalengagement among the top 100 quoted companies in the UK since 1996 (andincluding the mid 250 quoted UK companies since 1998), across a range ofenvironmental management parameters. Supplier focused initiatives represent one ofthe parameters surveyed. The results of this survey have consistently shown supplierfocused initiatives to be the weakest parameter, that is, the least adopted (see table16.2).

38


Table 16.2: Environmental Incentives

Percentage of Respondent Companies Engaging in Supplier Focused Environmental Initiatives

Year of Survey Group of Companies Percentage Involvement

1996 FTSE 100 37

1997 FTSE 100 42

1998 FTSE 100* 57

1998 Mid 250** 30

* Response rate, 77%; ** Response rate, 19% (Source: BiE Index Report 1999).

* Adapted from Mackenzie 1999

Given the response rate to this survey, the true percentage involvement is probablylower than that stated, assuming that companies who have not responded are likely tobe less environmentally engaged on the whole.

Organizations can be categorized into five types when relating to ESCM involvement,namely:

· The Blissfully Ignorant

· Going Through the Motions

· Control Management

· State of the Art

· Ground Breakers

State of the art and groundbreaking organizations are few in number with theblissfully ignorant accounting for the majority. However, larger organizations arebeginning to respond to the need for ESCM programmes in increasing numbers andthe standard is steadily shifting up the scale.

16.5.2 Trends

Much of the work on ESCM conducted to date has concentrated on the upstream(supply side) relationships. This is as a consequence of a number of factors, namely:

· Influence is commonly greatest from customer to supplier (as opposed to viceversa).

· Environmental problems are best dealt with at source.

· Larger organizations potentially face the greatest risks (particularly in terms ofcorporate image) but tend to posses the most influence over the supply chain,both upstream and downstream.

· Organizations tend to come under greater scrutiny the closer in the chain theyare to the end user.

· Buying power has been seen as a tool for encouraging environmental activityamong smaller enterprises by governments.

· There is not as much evidence of organizations initiating dialogue with customersover the environmental probity of their products outside of a focusedenvironmental marketing strategy. Given some of the demands made by buyingorganizations on their suppliers to demonstrate environmental probity however, aproactive approach could well be advantageous by:

· Raising company profile.

· Improving company image.

39

Transportation Mix· Building relationships and possibly dependency.

· Creating new criteria and standards for the sector/competitors.

· Helping the customer to shape ESCM strategy.

· Prompting knowledge exchange.

· Potentially avoiding prescriptive requirements imposed by customers.

The techniques applied in ESCM vary greatly in their sophistication and resourcerequirement. At the most basic level organizations tend to initiate activity on areactive basis dealing with a specific issue in response to legislative, financial ormoral pressures or crisis.

The first stages of ESCM are typified by environmental surveys and questionnairesof varying sophistication and levels of required detail. While potentially useful forassessment purposes the questionnaire has limitations and requires careful design andevaluation. In the majority of cases questionnaires concentrate almost exclusively onenvironmental management activity, ignoring actual performance, aspects or impacts.

The use of ISO14001 accreditation as a proxy for environmental probity in supply hasbecome popular due to its international recognition and independent verification.However, the shortcomings of this approach are becoming realised and ESCMsystems are being developed to move away from ISO14001 or EMAS as an all-encompassing measure. It is worth noting that this change is only just beginning andsome industry sectors (e.g. the motor industry) are still requesting (and starting torequest) accreditation to a formal EMS standard.

Audit and independent verification of supply chain partners is commonly applied tosubstantiate information gathered, albeit that the extent of this activity will begoverned by the level of perceived risk, and the availability of resources andcompetencies. Some organizations have built this process into existing health safetyand quality audit processes to reduce resources requirements with varying degrees ofsuccess. This approach is highly resource intensive and not always practical orjudicious.

Beyond the techniques mentioned above some organizations are beginning to developpartnerships with key suppliers in line with the current supply chain managementvogue. The thrust of these partnerships is to improve stability and understanding inthe relationship linking to risk reduction and financial performance improvement.Meetings and seminars can prove useful tools for developing the partnershipapproach and facilitating subsequent action. There is evidence however that thetendency to develop partnership approaches is beginning to revert to more adversarialones, particularly in the most competitive markets. This could well set the tone forESCM strategy also.

The most advanced organizations have taken ESCM beyond addressing purelycommercial drivers in favour of looking at sustainability issues as embodied throughproduct stewardship, life cycle thinking, and design for the environment. Theinitiatives of such “ground breaking” organizations encompass social and ethicalissues along with the environment, and support clearly defined corporate valuesrelating to these issues.

16.5.3 Future Developments

ESCM has presented difficulties for many organizations with regard to finding apractical and cost effective way of managing out the environmental risks andimproving performance. The use of environmental performance indicators for

40


supplier, service or product evaluation has, arguably, always been present. Theselection, and analysis of the indicators which truly reflect performance though, hasbeen lacking and as such has left a hole in any risk assessment process.

The publication ISO14031 (international standard for environmental performanceevaluation) does provide a framework that could be applied to the selection ofindicators by which to evaluate supplier environmental (and potentially ethical)probity. In view of this, a UK government sponsored ISO 14031-demonstrationproject is currently under way to assess the feasibility of this approach to ESCM,under the management of 14000 & ONE Solutions Ltd.

The use of performance indicators will provide a more cost effective supplierevaluation tool than has generally been applied, as well as allowing for themeasurement of tangible and significant aspects of environmental performance, at apoint or over time, by the assessor and the supplier. Indicators will also allow forbenchmarking between suppliers and bolster overall company data availability. Inaddition it is likely that the introduction of environmental performance indicators willencourage wider use and allow for the tailoring of indicator sets as appropriate to thesupplier’s resources and capabilities, an issue currently overlooked by many ESCMinitiatives.

Social and ethical issues are commonly intertwined with environmental issues asdemonstrated in sustainability thinking. In view of this there is a growing trend toincorporate ethical and environmental issues together in ESCM activity. Health andsafety issues are also being brought in, but recent experiences with introducing qualityissues has prompted many companies to resist this.

16.6 WAREHOUSE OPERATIONS

Warehousing is a very important operation of SCM system and without correctunderstanding of this you as a supply chain manager will often find it difficult tocoordinate both ends. Today, under the influence of e-commerce, supply chaincollaborations, globalization, quick response and just in time, warehouses today arebeing asked to2

· Execute more, smaller transactions

· Handle and store more items

· Provide more product and service customization

· Offer more value added services

· Process more returns

· Receive and ship more international orders

But, the warehouses today have

· Less time to process an order

· Less margin for error

· Lesser young, skilled, and English speaking personnel

· Less warehouse management system (WMS) capability

A warehouse manager today has to do more with a resource crunch. Theenvironment is changing rapidly and is almost difficult to keep pace with the changingscenario. With this as a backdrop let us see in nutshell the various warehousefundamentals.

2 Warehousing Operations in Supply Chain Strategy by Edward H Frazelle pp 224

41

Transportation Mix16.6.1 Warehouse Fundamentals

The missions of warehouses are:

· Component warehouses: hold raw materials at or near the manufacturing unit orthe consumer markets.

· Work in process: hold partially manufactured assemblies at various points or nearthe assembly lines.

· Finished goods warehouses: hold goods to balance the time variation between theproduction schedule and demand.

· Distribution warehouses: a centrally located point, which holds goods from onefirm or many firms but for a common customer.

· Fulfillment centers: receive, pick and deliver small orders for individualconsumers.

· Local warehouses: to shorten the transportation distances and create rapidresponse to customer demands.

16.6.2 Functions in Warehouses

Let us see this with a block diagram, figure 16.1.

Figure 16.1: Ware housing Activities (Adapted from Frazelle EH (2004)

In a nutshell the various functions are:

· Receiving: a collection of activities involving receipt of materials, qualityassurance and disbursing of materials to appropriate places.

· Prepackaging: to break bulk and pack for single unit delivery in merchandisablequantities with other parts to form assortments.

· Put away: for placing the merchandise in storage.

· Storage: physical containment of merchandise.

· Order picking: process of removing items from storage to meet specific demand.

· Packaging and pricing: this is done when it’s required, just before sale.

· Sortation and accumulation: this is carried out when the order is more than oneitem and accumulation is not done as the picks are made.

· Packing and shipping: the final stage before shipment of orders, which includechecking for completeness, containerization, documentation, weighing,accumulating orders for outbound carrier, and loading of trucks.

RECEIVING PUT AWAY STORAGE

ORDER PICKINGSORT & ACCUMULATESHIPPING

CROSS-DOCKFLOWS

SUPPORT FUNCTIONS

42

Distribution NetworkPlanning 16.7 WAREHOUSE JURISDICTION

The dictionary meaning of the word jurisdiction is ‘the area over which the legalauthority of a court or other institution extends’. Be it warehouse or any immovableproperty they are governed by a set of taxable laws governed by the individual stateand differs from one country to the other. At times the countries get into a joint tie/league with each other in order to facilitate easy import and export activities andwarehouse activities.

These are once again very academic in nature, and as a supply manager you willhave to be in the know of these aspects in order to avoid legal hassles at a later time.Some of these are as listed below.

India and Netherlands Article 5

Permanent Establishment

1) For the purposes of this Convention, the term “permanent establishment” meansa fixed place of business through which the business of an enterprise is wholly orpartly carried on.

2) The term “permanent establishment” includes especially:

a) A place of management;

b) A branch;

c) An office;

d) A factory;

e) A workshop;

f) A mine, an oil or gas well, a quarry or any other place of extraction ofnatural resources;

g) A warehouse in relation to a person providing storage facilities for others;

h) A premises used as a sales outlet;

i) An installation or structure used for the exploration of natural resourcesprovided that the activities continue for more than 183 days.

3) A building site or construction, installation or assembly project constitutes apermanent establishment only where such site or project continues for a periodof more than six months.

4) Notwithstanding the preceding provisions of this Article, the term “permanentestablishment” shall be deemed not to include:

a) The use of facilities solely for the purpose of storage or display of goods ormerchandise belonging to the enterprise;

b) The maintenance of a stock of goods or merchandise belonging to theenterprise solely for the purpose of storage or display;

c) The maintenance of a stock of goods or merchandise belonging to theenterprise solely for the purpose of processing by another enterprise;

d) The maintenance of a fixed place of business solely for the purpose ofpurchasing goods or merchandise or of collecting information, for theenterprise;

e) The maintenance of a fixed place of business solely for the purpose ofadvertising, for the supply of information, for scientific research, or for otheractivities which have a preparatory or auxiliary character, for the enterprise;

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Transportation Mixf) The maintenance of a fixed place of business solely for any combination ofactivities mentioned in sub-paragraphs (a) to (e), provided that the overallactivity of the fixed place of business resulting from this combination is of apreparatory or auxiliary character.

5) Notwithstanding the provisions of paragraphs 1 and 2, where a person - otherthan an agent of an independent status to whom paragraph 6 applies - is acting inone of the States on behalf of an enterprise of the other State, that enterpriseshall be deemed to have a permanent establishment in the first-mentioned State,if -

a) He has and habitually exercises in that State an authority to concludecontracts on behalf of the enterprise, unless his activities are limited to thepurchase of goods or merchandise for the enterprise; or

b) He has no such authority, but habitually maintains in the first-mentionedState a stock of goods or merchandise from which he regularly deliversgoods or merchandise on behalf of the enterprise.

6) An enterprise of one of the States shall not be deemed to have a permanentestablishment in the other State merely because it carries on business in thatother State through a broker, general commission agent or any other agent of anindependent status, provided that such persons are acting in the ordinary courseof their business. However, when the activities of such an agent are devotedwholly or almost wholly on behalf of that enterprise, he will not be considered anagent of an independent status within the meaning of this paragraph if it is shownthat the transactions between the agent and the enterprise were not made underat arm’s-length conditions.

7) The fact that a company which is a resident of one of the States controls or iscontrolled by a company which is a resident of the other State, or which carrieson business in that other State (whether through a permanent establishment orotherwise), shall not of itself constitute either company a permanentestablishment of the other.

With South Africa & India

Article 5: Permanent establishment

1) For the purposes of this agreement, the term “permanent establishment” means afixed place of business through which the business of an enterprise is wholly orpartly carried on.

2) The term “permanent establishment” includes especially, -

a) A place of management;

b) A branch;

c) An office;

d) A factory;

e) A workshop;

f) A mine, an oil or gas well, a quarry or any other place of extraction ofnatural resources, including an installation or structure used for theexploration or exploitation of natural resources; and

g) A warehouse, in relation to a person providing storage facilities for others.

3) A building site, a construction, installation or assembly project or any supervisoryactivity in connection with such site or project constitutes a permanentestablishment only if it lasts more than six months.

4) Notwithstanding the preceding provisions of this Article, the term “permanentestablishment” shall be deemed not to include, -

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a) The use of facilities solely for the purpose of storage, display or delivery ofgoods or merchandise belonging to the enterprise;

b) The maintenance of a stock of goods or merchandise belonging to theenterprise solely for the purpose of storage, display or delivery;

c) The maintenance of a stock of goods or merchandise belonging to theenterprise solely for the purpose of processing by another enterprise;

d) The maintenance of a fixed place of business solely for the purpose ofpurchasing goods or merchandise, or for collecting information, for theenterprise;

e) The maintenance of a fixed place of business solely for the purposes ofcarrying on, for the enterprise, any other activity of a preparatory orauxiliary character, and

f) The maintenance of a fixed place of business solely for any combination ofactivities mentioned in sub-paragraphs (a) to (e), provided that the overallactivity of the fixed place of business resulting from this combination is of apreparatory or auxiliary character.

5) Notwithstanding the provisions of paragraphs 1 and 2, where a person other thanan agent of an independent status to whom paragraph 6 applies is acting onbehalf of an enterprise and has, and habitually exercises, in a Contracting Statean authority to conclude contracts in the name of the enterprise, that enterpriseshall be deemed to have a permanent establishment in that State in respect ofany activities which that person undertakes for the enterprise, unless theactivities of such person are limited to those mentioned in paragraph 4 which, ifexercised through a fixed place of business, would not make this fixed place ofbusiness a permanent establishment under the provisions of that paragraph.

6) An enterprise shall not be deemed to have a permanent establishment in aContracting State merely because it carries on business in that State through abroker, general commission agent or any other agent of an independent status,provided that such persons are acting in the ordinary course of their business.

7) The fact that a company which is a resident of a Contracting State controls or iscontrolled by a company which is a resident of the other Contracting State, orwhich carries on business in that other State (whether through a permanentestablishment or otherwise), shall not of itself constitute either company apermanent establishment of the other.

Article 6: Income from immovable property

1) Income derived by a resident of a Contracting State from immovable property,including income from agriculture or forestry, situated in the other ContractingState may be taxed in that other State.

2) The term “immovable property” shall have the meaning which it has under thelaw of the Contracting State in which the property in question is situated. Theterm shall in any case include property accessory to immovable property,livestock and equipment used in agriculture and forestry, rights to which theprovisions of the general law respecting landed property apply, usufruct ofimmovable property and rights to variable or fixed payments as consideration forthe working of, or the right to work, mineral deposits, sources and other naturalresources. Ships, boats and aircraft shall not be regarded as immovable property.

3) The provisions of paragraphs 1 shall apply to income derived from the direct use,letting or use in any other form of immovable property.

4) The provisions of paragraphs 1 and 3 shall also apply to the income fromimmovable property of an enterprise and to income from immovable propertyused for the performance of independent personal services.

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Transportation MixArticle 7: Business profits

1) The profits of an enterprise of a Contracting State shall be taxable only in thatState unless the enterprise carries on business in the other Contracting Statethrough a permanent establishment situated therein. If the enterprise carries onbusiness as aforesaid, the profits of the enterprise may be taxed in the otherState but only so much of them as is attributable to that permanent establishment.

2) Subject to the provisions of paragraph 3, where an enterprise of a ContractingState carries on business in the other Contracting State through a permanentestablishment situated therein, there shall in each Contracting State be attributedto that permanent establishment the profits which it might be expected to make ifit were a distinct and separate enterprise engaged in the same or similar activitiesunder the same or similar conditions and dealing wholly independently with theenterprise of which it is a permanent establishment.

3) In determining the profits of a permanent establishment, there shall be allowed asdeductions expenses which are incurred for the purposes of the permanentestablishment, including executive and general administrative expenses soincurred, whether in the Contracting State in which the permanent establishmentis situated or elsewhere, in accordance with and subject to the limitationsprescribed in the taxation laws in that Contracting State.

4) As it has been customary in a Contracting State to determine the profits to beattributed to a permanent establishment on the basis of an apportionment of thetotal profits of the enterprise to its various parts, nothing in paragraph 2 shallpreclude that Contracting State from determining the profits to be taxed by suchan apportionment as may be customary. The method of apportionment adoptedshall, however, be such that the result shall be in accordance with the principlescontained in this article.

5) No profits shall be attributed to a permanent establishment by reason of the merepurchase by that permanent establishment of goods or merchandise for theenterprise.

6) For the purposes of the preceding paragraphs, the profits to be attributed to thepermanent establishment shall be determined by the same method year by yearunless there is good and sufficient reason to the contrary.

7) Where profits include items of income, which are dealt with separately in otherArticles of this Agreement, then the provisions of those Articles shall not beaffected by the provisions of this Article.

Article 8: Shipping and air transport

1) Profits of an enterprise of a Contracting State from the operation of ships oraircraft in international traffic shall be taxable only in that State.

2) For the purposes of this Article, profits from the operation of ships aircraft ininternational traffic shall include:

a) Profits derived from the rental on a bare boat basis of ships or aircraft usedin international traffic,

b) Profits derived from the use or rental of containers, if such profits areincidental to the profits to which the provisions of paragraph 1 apply.

3) For the purposes of this Article, interest on funds connected with the operation ofships or aircraft in international traffic shall be regarded as profits derived fromthe operation of ships or aircraft and the provisions of Article 11 shall not apply inrelation to such interest.

4) The provisions of paragraph 1 shall also apply to profits from the participation ina pool, a joint business or an international operating agency.

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Article 9: Associated enterprises

1) Where, -

a) An enterprise of a Contracting State participates directly or indirectly in themanagement, control or capital of an enterprise of the other ContractingState; or

b) The same persons participate directly or indirectly in the management,control or capital of an enterprise of a Contracting State and an enterprise ofthe other Contracting State, and in either case conditions are made orimposed between the two enterprises in their commercial or financialrelations which differ from those which would be made betweenindependent enterprises, then any profits which would, but for thoseconditions, have accrued to one of the enterprises, but, by reason of thoseconditions, have not so accrued, may be included in the profits of thatenterprise and taxed accordingly.

2) Where a Contracting State includes in the profits of an enterprise of that State –and taxes accordingly – profits on which an enterprise of the other ContractingState has been charged to tax in that other State and the profits so included areprofits which would have accrued to the enterprise of the first-mentioned State ifthe conditions made between the two enterprises had been those which wouldhave been made between independent enterprises, then that other State shallmake an appropriate adjustment to the amount of the tax charged therein onthose profits if that other State considers the adjustment justified. In determiningsuch adjustment, due regard shall be had to the other provisions of thisAgreement and the competent authorities of the Contracting States shall ifnecessary consult each other.

16.8 WAGES, EARNINGS AND HOURS OF WORK

A discussion on daily wagers is very important since such activities are very commonin SCM and warehouse handling. As a responsible supply chain manager you must beaware of the rules and regulations in handling the wages of workers and keepyourself updated on this count regularly. This will help you in negotiating any kind oflitigations at a later date.

The Minimum Wages Act, 1948 is both a protective and beneficial legislationguaranteeing the payment of minimum rates of wages to the workers in the variousScheduled Employments scattered over different parts of the country. Although theAct does not provide for registration of establishments, yet it is applicable toemployments where the workers are particularly vulnerable to exploitation, due toignorance, poverty, illiteracy and lack of bargaining power. The workers in bidiindustry are scattered over large areas and do not have collective bargaining power.Therefore, they are in need of protection. The Act empowers both the Central andthe State Governments to fix and revise the minimum rates of wages in theScheduled Employments falling under their respective jurisdictions. The bidi makingestablishments, fall under the Scheduled Employment “Tobacco”, (including BidiMaking) manufacturing in the State Sphere. Therefore, the responsibility forimplementation of the provisions of the Minimum Wages Act, 1948 rests with theState Governments. They notify the minimum wages for bidi workers within theirjurisdiction.

In Madhya Pradesh, the rates of minimum wages for Bidi Rollers are fixed on apiece rate basis (number of bidis rolled), the traditional measure being per thousandbidis. However, fixation and revision of minimum wages is of no consequence unlessthese are actually paid to them.The problems of the bidi workers continue to be a

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Transportation Mixcause of concern for the labor administrators and enforcement authorities as theworkers often complain of the unfair treatment at the hands of manufacturers,contractors and agents in matters of rejection of finished products, issue ofinadequate quantity and poor quality of raw material (tendu leaves, tobacco, thread,etc.) as well as the violation of the provisions of the Bidi and Cigar Workers(Conditions of Employment) Act, 1966, the Minimum Wages Act, 1948 and the EqualRemuneration Act, 1976.The Regional Labor Ministers Conference held during 1994-95 had endorsed the recommendations of the Ministry of Labor for the Constitutionof a Tripartite Standardization and District Level Vigilance Committee and had madethe following recommendations in respect of bidi workers:-

· The minimum quantity of raw material to be issued should be 800 grams of tenduleaf of standard average quality and 300 grams of tobacco for 1000 bidis ofstandard size.

· The wage loss due to rejection should not be more than 2.5 percent instead of5 percent.

· Alternatively, the rejected bidis should be returned to workers after deductingproportionate cost of tendu leaf and tobacco issued to them at the rates to befixed by the State Governments from time to time alongwith wages.

· The State Governments as well as Welfare Commissioners have been requestedto give wide publicity to the statutory provisions of the Bidi and Cigar Workers(Conditions of Employment) Act, 1966, pertaining to rejection of not more than2.5 percent bidis of sub-standard quality and ensure that employer/Contractorsupplies tendu leaf of the optimum quality to the workers. *

Prescribed rates of Minimum Wages

‘Tobacco (including bidi making) Manufactories’ is a Scheduled Employmentoriginally included in Part-I of the Schedule appended to the Act. The minimumwages applicable to the bidi workers at the time of the Study were notified by theState Government of Madhya Pradesh as provided under Section 3(1)(b) and Section5 of the Minimum Wages Act, 1948.prior to 1953, Minimum Wages were fixed at Re.0.62 to Rs. 1.37 per thousand bidis. These wages were revised to Rs. 2.00-2.25 forthe first time in 1966.Since then they have been revised several times. The latestwage revision, which was in force at the time of the study, had become effectivefrom 1st October, 2000 vide notification No. 1/9/A/5/97/32759-33288 dated 12-10-2000.The minimum rates of wages for various categories of employees in Tobacco(including Bidi Making) Manufactories appearing in Part I of the Schedule werelinked to the Consumer Price Index Numbers (Industrial Workers). The revised ratesof minimum wages applicable during the period of study are given below: -

Table 16.3: Prescribed Minimum Rates of Wages for Piece Rated Employees

Class of Employees Minimum Wages ( in Rs.)

1) Bidi Rolling 36.17(per thousand bidis)

2) Wrapping/Packing/Labeling

a) Pasting of Slips on Bidi bundles

i) Labeling, Puda Making etc. Rs. 19.65 per thousand bundles

ii) Labeling on both sides of bundles Rs. 22.00 per thousand bundles

b) Wrapping and Labeling

i) Thin paper labeling Rs. 15.85 per thousand bundles

ii) Thin paper sticking Rs. 11.26 per thousand bundles

iii) Labeling Rs.4.76 per thousand bundles

iv) Puda Making Rs.5.01 per thousand bundles

Source: Annual Report 1999-2000, Ministry of Labour, Government of India, p.93

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Distribution NetworkPlanning c) Wrapping on 1000 bundle (each bundle of 25 bidis)

i) Wrapping of Horizontal & Vertical Strips Rs. 68.35 per lakh bidis

ii) Wrapping/Pasting of paper Rs. 81.05 per lakh bidis

iii) Wrapping and Pasting of Trade Mark Rs. 81.05 per lakh bidis

In Bidi making industry all the time-rated (monthly/daily paid) workers other than theabove-mentioned piece rated categories have been classified into three broadcategories as Skilled, Semi-skilled and Unskilled workers. The occupations’, whichcomprise these three skill categories, are as under (Table 16.4):

Table 16.4 : Workers in BidiMaking Industry.

1. Skilled Driver (Heavy Vehicle), Accountant, Munim, Cashier, Store Keeper,Head Clerk, Godown keeper

2. Semi-Skilled Sorter/Checker, Bhattiwala, Driver (Light Vehicle), Typist, Billman,Clerk

3. Unskilled Loader, Un-loader, Puda Maker and Chowkidar.

Prescribed rates of Minimum Wages (including V.D.A.) for time rated employeeswere as below:

Sl. No. Skill Category Monthly Wages (Rs.) Daily Wages (Rs.)

1. Skilled 1995.44 76.75

2. Semi-Skilled 1828.30 70.32

3. Unskilled. 1662.80 63.95

N.B.- The wages includes the variable dearness allowance.

These wages have been linked to 1206 points of the Labour Bureau Series of All-India Consumer Price Index Numbers for Industrial Workers (Base 1960=100).TheVariable Dearness Allowance (VDA) is payable at the rate of 1 paisa per point foran increase of 930 points over 1206 points upto 30.09.2001.

The revised rates of minimum wages are subject to the following conditions:-

· The variable dearness allowances shall be calculated on 1st October of everyyear on the basis of the average indices for twelve months i.e., July to June ofthe preceding year.

· The revised rates of daily wages are to be worked out by dividing the monthlyrates by 26 days.

· Wherever the prevailing wages are higher, the revised wages will not haveadverse effect on any employee in any case and the higher rates shall continueto be paid.

· An employee shall be entitled to a guaranteed minimum wage of Rs.178.00 incase the employer fails to supply sufficient quantity of raw material for rolling5600 bidis per week.

· The guaranteed wage will include the actual number of bidis made by anemployee during a week from the raw material supplied to him.

· An employee shall not be entitled to the guaranteed wages if he fails to makefull use of the raw material supplied to him while the raw material so supplied issufficient for rolling 5600 bidis per week.

In case an employer fails to supply raw material due to certain conditions like fire,distress, epidemic etc., which are not under his control, an employee shall not beentitled to the guaranteed wages.

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Transportation Mix16.9 DOCUMENTATION: INSURANCE & SALES TAX

Everything under the sun can be insured today, thanks to the various insurancecompanies that have reached out to the environment in a big way. The age-old adage,‘a stitch in time saves nine’ is very important for us to follow in letter and spirit.Why should we insure? Very simple indeed, because a material/product that isinsured comes under the purview of Insurance act of 1938 (we will see later) andthat enables the consignor to claim the cost of the product in the event of any damageto the product, which may occur, either during storage or transit. Every supply chainmanager should therefore understand the nuances of insurance, the risk covered andthe benefits accrued of insurance, unless you believe in, ‘penny wise and pound-foolish’. Risk factor has enhanced tremendously with the turn of the century andtherefore remains covered under the protected wings of insurance and achieve themaximum benefit that is available to you and your company. Let us see them as weprogress through the unit.

The Insurance Act, 1938 had provided for setting up of the Controller of Insuranceto act as a strong and powerful supervisory and regulatory authority for insurance.Post nationalization, the role of Controller of Insurance diminished considerably insignificance since the Government owned the insurance companies.

With the opening up of the insurance industry to the private sector, the need for astrong, independent and autonomous Insurance Regulatory Authority was felt. As theenacting of legislation would have taken time, the then Government constitutedthrough a Government resolution an Interim Insurance Regulatory Authority pendingthe enactment of a comprehensive legislation.

The Insurance Regulatory and Development Authority Act, 1999 is an act toprovide for the establishment of an Authority to protect the interests of holders ofinsurance policies, to regulate, promote and ensure orderly growth of the insuranceindustry and for matters connected therewith or incidental thereto and further toamend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and theGeneral insurance Business (Nationalization) Act, 1972 to end the monopoly of theLife Insurance Corporation of India (for life insurance business) and GeneralInsurance Corporation and its subsidiaries (for general insurance business).

The act extends to the whole of India and will come into force on such date as theCentral Government may, by notification in the Official Gazette specify. Differentdates may be appointed for different provisions of this Act.

The Act has defined certain terms, some of the most important ones are as follows: -

Appointed day means the date on which the Authority is established under the act.

Authority means the established under this Act.

Interim Insurance Regulatory Authority means the Insurance RegulatoryAuthority set up by the Central Government through Resolution No. 17(2)/ 94-lns-Vdated the 23rd January, 1996.

Words and expressions used and not defined in this Act but defined in the InsuranceAct, 1938 or the Life Insurance Corporation Act, 1956 or the General InsuranceBusiness (Nationalization) Act, 1972 shall have the meanings respectively assigned tothem in those Acts.

Insurance Regulatory Authority

Establishment and incorporation of Authority

With effect from such date as the Central Government may, by notification, appoint,the Insurance Regulatory and Develop is to be constituted. The Authority shall be a

50


body corporate, having perpetual succession and a common seal with power, subjectto the provisions of this Act, to acquire, hold and dispose of property, and to contractand can be sue or be sued in its own name. The head office of the Authority shall beat such place as the Central Government may decide from time to time and it mayestablish offices at other places in India.

Composition of Authority

The Authority shall consist of the following members, namely

a) A Chairperson;

b) not more than five whole-time members;

c) not more than four part-time members, to be appointed by the CentralGovernment from amongst persons of ability, integrity and standing who haveknowledge or experience in life insurance, general insurance, actuarial science,finance, economics, law, accountancy, administration or any other disciplinewhich would, in the opinion of the Central Government, be useful to theAuthority:

The Central Government while appointing the Chairperson and the whole-timemembers must ensure that at least one person each is a person having knowledge orexperience in life insurance, general insurance or actuarial science respectively.

Tenure of office of Chairperson and other members The Chairperson and everyother whole-time member shall hold office for a term of five years from the date onwhich he enters upon his office and shall be eligible for reappointment.

However, no person shall hold office as such Chairperson after he has attained theage of sixty-five years and no person shall hold office as such whole-time memberafter he has attained the age of sixty-two years.

A part-time member shall hold office for a term not exceeding five years from thedate on which he enters upon his office.

A member may:

a) Relinquish his office by giving in writing to the Central Government notice of notless than three months; or be removed from his office in accordance with thefollowing provisions.

Removal from Office

The Central Government may remove from office any member who: -

a) is, or at any time has been, adjudged as insolvent;

b) has become physically or mentally incapable of acting as a member;

c) has been convicted of any offence which, in the opinion of the CentralGovernment, involves moral turpitude;

d) has acquired such financial or other interest as is likely to affect prejudicially hisfunctions as a member;

e) has so abused his position as to render his continuation in office detrimental tothe public interest.

No such member shall be removed under clause (d) or clause (e) unless he has beengiven a reasonable opportunity of being heard in the matter.

Comprehensive Policy

This insurance policy also known as a Comprehensive policy covers all the liabilitiesof the insured vehicle under the Motor Insurance Act. No vehicle can be usedwithout insurance cover. Use of the vehicle without insurance cover is a penaloffence.

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Transportation MixThis insurance policy protects the motor vehicle owners from these liabilities:

· Fire, Explosion, Self-Ignition and Lightning.

· Burglary, Housebreaking and Theft.

· Riot, Strike, Malicious and Terrorism Damage.

· Earthquake.

· Flood, Typhoon, Hurricane, Storm, Tempest, Inundation, Cyclone, Hailstorm.

· Accidental External Means.

· Transit by road, rail, inland waterway, lift, elevator or air.

· For motorcycles and commercial vehicles, the risk of Frost Damage is alsocovered.

From the above coverage, for all classes of vehicles, the risks of riot, strike, maliciousand terrorism damage, earthquake, flood and storm can be opted out of with aconsequent discount in premium. In addition to these, cover is also available forprotection, removal costs and authorization of repairs.

Section II covers the liabilities towards third parties, i.e. liabilities of bodily injuries andproperty damage.

For commercial vehicles, however, an additional Section III covers the vehicle whileit is being used for the purpose of towing disabled vehicles. This section covers thirdparty liabilities that the insured vehicle or the one being towed may incur as a resultof an accident. This is provided the towed vehicle is not towed for reward/remuneration. Further, the insurance company is also not liable for damages to thetowed vehicle or any property being conveyed thereby.

Compensation Offered

This insurance policy would provide compensation for the motor vehicle owners fromthese liabilities unlimited liability towards bodily

· Injury to any third party.

· Unlimited liability towards bodily injury to passengers of the vehicle.

· Liability towards third party property damage, limited to Rs.6,000/- only.

· Liability towards employees of the owner of the insured vehicle while travellingor using it, against bodily injury to the extent required by the Workmen’sCompensation Act.

If a motor vehicle is disabled as a result of loss or damage due to the perils mentionedabove, the insurance company bears the reasonable cost of protection and removal tothe nearest repairer and the cost of redelivery to the owner/insured subject to amaximum limit, in respect of any one accident. The limits for various classes ofvehicles are as follows:

· Motor cycles/Scooters: Rs.300

· Private Car & Taxies: Rs.1500

· Other Commercial Vehicles: Rs.2500

Motor Vehicle Insurance Act

This insurance policy is essential for all motor vehicle owners since it protects themfrom legal liabilities that might arise during their vehicle operation. This insurancepolicy also known as the Act Only policy covers the act liability of the insured vehiclethat forms a compulsory requirement of the Motor Insurance Act. No vehicle can beused without this insurance cover and use of the vehicle without this insurance coveris a penal offence.

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Risks Covered

This insurance policy protects the motor vehicle owners from the risks of:

· Fire, Explosion, Self-Ignition and Lightning.

· Burglary, Housebreaking and Theft.

· Riot, Strike, Malicious and Terrorism Damage.

· Earthquake.

· Flood, Typhoon, Hurricane, Storm, Tempest, Inundation, Cyclone, Hailstorm.

· Accidental External Means.

· Transit by road, rail, inland waterway, lift, elevator or air.

· For motorcycles and commercial vehicles, the risk of Frost Damage is alsocovered.

From the above coverage, for all classes of vehicles, the risks of riot, strike, maliciousand terrorism damage, earthquake, flood and storm can be opted out of with aconsequent discount in premium. In addition to these, cover is also available forprotection, removal costs and authorization of repairs.

Section II covers the liabilities towards third parties, i.e. liabilities of bodily injuries andproperty damage.

For commercial vehicles, however, an additional Section III covers the vehicle whileit is being used for the purpose of towing disabled vehicles. This section covers thirdparty liabilities that the insured vehicle or the one being towed may incur as a resultof an accident. This is provided the towed vehicle is not towed for reward/remuneration. Further, the insurance company is also not liable for damages to thetowed vehicle or any property being conveyed thereby.

Compensation Offered

This insurance policy would provide compensation for the motor vehicle owners fromthese liabilities Unlimited liability towards bodily

· Injury to any third party.

· Unlimited liability towards bodily injury to passengers of the vehicle.

· Liability towards third party property damage, limited to Rs.6,000/- only.

· Liability towards employees of the owner of the insured vehicle while travellingor using it, against bodily injury to the extent required by the Workmen’sCompensation Act.

If a motor vehicle is disabled as a result of loss or damage due to the perils mentionedabove, the insurance company bears the reasonable cost of protection and removal tothe nearest repairer and the cost of redelivery to the owner/insured subject to amaximum limit, in respect of any one accident. The limits for various classes ofvehicles are as follows:

· Motor cycles/Scooters: Rs.300

· Private Car & Taxies: Rs.1500

· Other Commercial Vehicles: Rs.2500

16.10 INTRODUCTION TO SALES TAX

Sales tax is a tax on sale of goods. The liability to pay sales tax arises on makingsales of goods. In India, the law for levying sales tax is provided in the Central Sales

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Transportation MixTax Act, 1966. This act was passed by the Parliament and applies to the entirecountry. The main objects of this act are: -3

1) To formulate the principles for determining as to when sale or purchase of goodstakes place (i) in the course of inter-state trade or commerce or (ii) outside astate or (iii) in the course of import into or export from India.

2) To provide for the levy, collection and distribution of taxes on sales of goods inthe course of inter-state trade or commerce.

3) To declare certain goods to be of special importance in interstate trade orcommerce.

4) To specify the restrictions and conditions in respect of State laws which imposetaxes on the sale or purchase of such goods of special importance.

The CST Act, being a Central Act passed by the Parliament regulates and providesfor levy of sales tax on the sale and purchase of goods made in the course of inter-state trade or commerce. The sales tax law of each individual State regulates salesand purchases made within a State, e.g., in the State of Maharashtra, the BombaySales Tax Act, 1959 provides for the levy of sales tax on sales made within the Stateof Maharashtra. Similarly, other States will also have their own sales tax laws forlevying sales tax on intra-state sales or purchases of goods. Generally the CST Actdoes not deal with sales made intra-state. However, in respect of certain declaredgoods oil seeds, sugar, pulses, crude oil, etc, the CST Act imposes restrictions on thepowers of State Governments to levy sales tax even in respect of intra-state sales.

Accordingly, Sales can broadly be classified into 3 categories

· Intra-state sales i.e. sales within the state

· Sales during import and export

· Inter-state sales

The provisions of the CST Act apply only in respect of inter-state sales and not intra-state sales or import or export sales.

Definitions

It is essential to understand the meaning of certain terms used in the CST Act. Forthe purposes of the Act, certain terms have been defined in the Act itself and themeaning of these terms will be as per the definition only and not as per the ordinarymeaning of the term. However, where a particular term has not been defined, it willhave the same meaning as ordinarily understood.

Business includes

· Any trade, commerce, manufacture or any adventure or concern in the nature oftrade, commerce or manufacture, whether or not such trade, commerce,manufacture, adventure or concern is carried out with the motive to make gain orprofit and whether or not, any gain or profit accrues from such trade, commerce,manufacture, adventure or concern.

· Any transaction in connection with or incidental or ancillary to such trade,commerce, manufacture, adventure or concern.

Dealer means any person who carries on, whether regularly or otherwise, thebusiness of buying, selling, supplying or distributing goods, directly or indirectly, forcash or for deferred payment or for commission, remuneration or for other valuableconsideration and includes: -

· A local authority, body corporate, company, co-operative society or other society,club, firm, Hindu Undivided Family (HUF) or other Association of Persons(AOP) which carries on such business.

3 Shilpa Pandey in Indian sales tax site downloaded from the website www.salestax.com

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· A broker, commission agent or any other mercantile agent, by whatever namecalled and whether of the same description as herein before mentioned or not,who carries on the business of buying, selling, supplying or distributing goodsbelonging to any principal, whether disclosed or not. An auctioneer who carrieson the business of selling or auctioning goods belonging to any principal, whetherdisclosed or not and whether offers of the intending purchaser is accepted byhim or by the principal or by the nominee of the principal.

· A government, whether or not in the course of business buys, sells or supplies ordistributes goods, directly or otherwise, for cash or for deferred payment or forcommission, remuneration or other valuable consideration shall except in relationto any sale, supply or distribution of surplus, unserviceable or old stores ormaterials or waste products or absolute or discarded machinery or parts oraccessories thereof is deemed to be a dealer for the purposes of this Act.

Sale means any transfer of any property or goods from one person to another forcash or for deferred payment or for any other valuable consideration and includes thetransfer of goods on hire purchase or other system of payment by installments butdoes not include a mortgage or hypothecation or charge or pledge on goods.

Accordingly, consignments to agents or transfers of goods to branch or other officesdo not amount to sale for the purposes of the CST Act. Sale Price means an amountpayable to a dealer as consideration for the sale of any good less any sum allowed ascash discount according to the practices normally prevailing in the trade but inclusiveof any sum charged for anything done by the dealer in respect of goods at the time ofor before the delivery thereof. However, it does not include freight or delivery cost orcost of installation where such cost is separately charged.

Declared Goods means goods declared under section 14 to be of special importancein inter-state trade or commerce. In section 14 there is a list of goods of specialimportance, which are often called, declared goods. The important ones among themare: -

Cereals

Coal in all forms excluding charcoal

Cotton in un-manufactured form

Cotton fabrics and cotton yarn

Crude oil

Hides and skin

Iron and steel

Jute

Oil seeds

Pulses

Man made fabrics

Sugar

Un-manufactured tobacco

Woven fabrics of wool, etc.

The CST Act has imposed certain restrictions on the powers of state government toimpose tax on declared goods inside the state.

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Transportation MixSale or purchase in the course of inter-state trade or commerce

A sale or purchase of goods shall be deemed to take place in the course on inter-state trade or commerce if the sale or purchase occasion’s movement of goods fromone state to another or is effected by the transfer of documents of title to the goodsduring their movement from one state to another.

Explanation 1

Where the goods are delivered to a carrier or other bailer for transmission, themovement of goods shall, for the purpose of clause 2 above, be deemed tocommence at the time of such delivery and terminate at the time when delivery istaken from such carrier or bailer.

Explanation 2

Where that movement of goods commences and terminates in the same state, it shallnot be deemed to be a movement of goods from one state to another by reasonmerely of the fact that in the course of such movements, goods pass through theterritory of any other state.

An Illustration

X of Ambala sells goods to Y of Bangalore in Ambala. Such sale is not an inter-statesale since the goods do not move from one state to another. X of Mumbai sells anddispatches goods to Y of Calcutta. This is inter state sales of goods since goods movefrom one state to another under the contract of sales. X of Delhi sends goods byrailways to Y of Mumbai. Y sells the goods to Z of Mumbai and transfers thedocument of title (railway receipt) during their movement from Delhi to the state ofMaharashtra. This is inter state sales since documents of title are transferred whilethe goods are being moved from one state to another.

Sale or purchase inside the state

A sale or purchase of goods shall be deemed to take place inside the state if thegoods are within the state.

· In case of specific or ascertained goods, at the time the contract of sale is made(Specific or ascertained goods means goods which are identified and agreedupon at the time when contract of (sale is made) and

· In case of unascertained or future goods, at the time of appropriation of contractof sale by the seller or by the buyer, whether the ascent of the other party is prioror subsequent to such appropriation.(eg agreement to buy mangoes which arestill growing on the trees at a future date )

Explanation: Where there is a single contract of sale or purchase of goods situatedat one or more places the provisions of this subsection shall apply as if there wereseparate contracts in respect of the goods at each of such places.

A sale or purchase of goods, which is not within the state as per the above provisions,will be treated as taking place outside the state. The purpose of determining whetherthe sales have taken place within the state or outside the state is very important forlevying central sales tax since under the CST Act, tax is leviable only on sales in thecourse of inter-state trade or commerce.

Inter-state sales involve two or more states. It is necessary to determine the state inwhich the sale or purchase of goods takes place since that becomes the appropriatestate for the purpose of levying and collecting central sales tax.

Sale or purchase of goods in the course of import or export

A sale or purchase of goods shall be deemed to take place in the course of exports ofgoods out of the territory of India only if:-

1) The sale or purchase results in such exports; or

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2) Is effected by the transfer of documents of title after the goods have crossed thecustoms of India.

A sale or purchase of goods shall be deemed to take place in the course of import ofgoods into the territory of India only if:-

1) The sale or purchase either results into such imports; or

2) Is effected by a transfer of documents of title to the goods before the goodshave crossed the customs frontiers of India.

In other words, location of goods when contract of sales is made is very important fordetermining where the sale took place.

Types of excise duties

Under the excise laws, the following are the various types of duties, which are levied:

Basic duty: This is the basic duty levied under the Central Excise Act.

Special excise duty: This special duty is levied under special circumstances wherethe levy of such additional duty is justifiable or found necessary to protect otherindustries.

Additional Duty in lieu of Sales Tax: It can be charged on all goods by the centralgovernment to counter balance exemptions from sales tax granted by various StateGovernments to the detriment of industries in other States.

Additional Duty on specified items under the Act: If the Tariff Commission setup by law recommends that in order to protect the interests of industry, the CentralGovernment may levy additional duties at the rate recommended on specified goods.The notification for levy of such duties must be introduced in the Parliament in thenext session by way of a bill or in the same session, if the Parliament is in session. Ifthe bill is not passed within six months of introduction in Parliament, the notificationceases to have force but the action already undertaken under the notification remainsvalid. Such duty will be payable upto the date specified in the notification. Such dutymay be cancelled or varied by notification. Such notification must also be placedbefore Parliament for approval as above.

It is noteworthy that “basic excise duty” is different from “special excise duty” or“additional duty of excise”. Therefore an exemption from basic duty does not meanthat exemption from special duty or additional duty has also been granted unless thereis an express provision to that effect regarding the exemption in the notification.

Important definitions

Excisable Goods means goods specified in the schedule to the Central Tariff Act,1985 as being subject to a duty of excise. The basic conditions to be satisfied by anygoods to be called excisable goods are:-

· The goods must be movable.

· The goods must be marketable i.e. saleable in the market as such goods. Actualsale of goods in the market is not necessary because excise duty is chargeableon manufacture and not on sales.

· The goods must be specified in the Central Excise Tariff Act

Factory means any premises including the precincts thereof, wherein excisablegoods other than salt are manufactured or wherein any manufacturing processconnected with the production of these goods is being carried on or is ordinarilycarried on.

Manufacture includes any process:

· Incidental or ancillary to the completion of a manufactured product; and

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Transportation Mix· Which is specified in relation to any goods in the section or Chapter note of theSchedule to the Central Excise Tariff Act, 1985 as amounting to manufactureand the word “manufacturer” shall be construed accordingly and shall include notonly a person who employs hired labor in the production of manufacture ofexcisable goods but also any person who engages in their production andmanufacture on his own account such as on contract basis or job work basis.

Once manufacture of goods is complete, excise duty is payable, whether the goodsare sold or self-consumed. Excise duty does not depend on the end use of the goods.

Sometimes, a particular process may not actually amount to manufacture but if it hasbeen specified that it amount to manufacture in the Schedule to the CETA, it will bedeemed to be manufacture and all the provisions applicable to manufacture will applyto such process. Like repackaging of goods from bulk packing to small packing unitsdoes not normally amount to manufacture. However, repackaging from bulk packingto retail pack of pan masala will amount to manufacture on which excise duty has tobe paid.

Basis of charge and classification

Excise Duty is a tax on manufacture of goods but for the sake of administrativeconvenience, it is collected only on removable of goods from the factory.

Excise duty may be levied in any of the following manner:-

Ad-valorem Duty: is levied as a percentage of value of the commoditymanufactured. For example excise duty could be 10 per cent of the cost of goods.Most of the excise duty is levied on ad-valorem basis.

Slab System: Under this system, duty varies with the change of the value from oneslab to another. Thus for the first 1,000 kg, excise duty is Rs500, for next 1,000 kg itis Rs750 and for production in excess, it is Rs1, 000 for every 1,000 kg manufactured.

Specific Duty Under this system, a specific rate of duty is fixed per unit rate or perquantity item of the product manufactured, for example Rs10 per unit manufactured.

Compounded Duty: Under this system, Duty is levied on productive capacityirrespective of the actual production. For example if a unit has installed capacity tomanufacture 10,000 ton, excise duty is Rs50, 000, whatever be the number of unitsproduced.

Once the liability to pay excise duty has been established on manufacture ofexcisable goods, it is necessary to quantify the amount of excise duty payable. Forthis purpose, it is necessary to find out, under which particular sub-group heading ofCETA do the goods in question actually fall. Since the rates of duty for each sub-group are given in CETA the categorization of goods into sub-group headings isknown as classification of goods.

The Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 20sections and 96 chapters. Each of these sections is related to a particular class ofgoods. Thus section 1 is on animal products, section 2 on vegetable products, so onand so forth. Each section is divided into chapters and each chapter is sub-dividedinto groups and sub-groups of excisable goods. This tariff schedule is based on theinternationally followed product coding system “Harmonised System of Non-clementure” (HSN)

Excise Duty is payable at the rate specified in CETA against the sub-group headingunder which the product falls. However, benefit of exemptions or concessions maybe claimed under various notifications if the conditions specified in the notification aresatisfied.

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Valuation

Since most of the excise duty is levied on ad-valorem basis i.e. at a percentage ofvalue of goods, the value of goods must be determined. Section 4 of the CentralExcise Act, 1944 provides for the determination of the value of goods for excisepurposes. The following are the provisions in this connection:-

· The value of excisable goods is the normal price of goods. The normal price ofgoods means the price of goods at which the goods are normally sold in thecourse of wholesale trade. However recent provisions have been introduced inthe Central Excise Act wherein certain specified articles are to be taxed on thebasis of the maximum retail price and not the wholesale price. Wholesale trademeans sales to dealer, industrial consumers, Governments, Local Authorities andother buyers who purchase their requirements in bulk and not on retail basis.

· In determining the wholesale price, care should be taken that the buyer is not arelated person and the sale is for delivery at the time and place of removal. If thebuyer is a related person and this relationship has affected the price for sale,suitable adjustments are to be made in arriving at the fair price. Similarly, if thesale is not for delivery at the time and place of removal of goods, suitableadjustments for other expenses such as freight and insurance of goods while intransit from the place of removal to the place of sale must be made. Relatedpersons means a person who is so associated with the assessee that they haveinterest, directly or indirectly in the business of each other and includes a holdingcompany, subsidiary company a relative and a distributor of the assessee and anysub-distributor of such distributor.

· The price is the sole consideration for the sale. If there are other considerationsfor the sale, suitable adjustments must be done in order to arrive at theassessable value.

· If goods are sold at different wholesale prices to different classes of buyer (notbeing related persons), each such wholesale price is deemed to be assessablevalue. Therefore excisable goods can have more than one assessable value.

· If goods are sold in the course of wholesale trade at prices fixed by law or atprices being the maximum chargeable under any law, such fixed price is taken asthe assessable value.

· If the assessee arranges that he does not generally sell goods in the course ofwholesale trade except to or through a related person, the price at which suchrelated person sells the goods is taken as assessable value.

· Expenses incurred on primary packing i.e. packing for making the productactually saleable in the market are part of the assessable value. However thepacking expense on secondary or special packing or on durable packs, which arereturnable by the buyer, is not to be included in the value of the goods for thepurpose of calculation of excise duty.

· If the normal price of goods is not ascertainable because such goods are not soldor for any other reason, the nearest equivalent price will be determined in themanner provided in the Central Excise Valuation Rules, 1975.

· If the price at the time of removal of goods from the factory is not known but itis dependent on the time and place of delivery, such price less cost oftransportation from the place of removal to the place of delivery will be take tobe the assessable value.

· If excisable goods are consumed within the factory, the value of comparablegoods produced by another person or the normal wholesale price of such goodswill be treated as assessable value.

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Transportation Mix· The assessable value does not include the amount of excise duty, sales tax andother taxes, if any, payable on such goods and subject to rules made in thisbehalf, the trade discount allowed under normal wholesale business practices atthe time of removal.

· In case law has specified a tariff rate, the assessable value must be calculatedon the basis of such tariff rate.

· Excise duty is paid on the basis of normal price even if free samples are given.

· For example ABC Ltd manufactures toys which are chargeable to excise @ 10percent. Cost of production is Rs10, 000 and profit margin is Rs1,000. Sales taxis five percent. In this situation, excise duty is Rs1,100 ie 10 percent of Rs11,000.Sales tax is included for the purpose of excise duty.

Valuation on retail price basis

The Central Government may notify goods by publication in the OFFICIAL Gazetteon which duty will be payable on the basis of the retail selling price. The following arethe provisions in this connection: -

1) The goods should be covered by the provisions of Standard of Weights andMeasures Act.

2) The Central Government may permit reasonable deductions from the “retail saleprice”. The Central Government takes into account excise duty, sales tax andother taxes payable on the goods for allowing such reductions.

3) If more than one “retail sale price” is printed on the same packing, the maximumof such retail price will be considered.

4) The “retail sale price” must be the maximum price at which excisable goods inpackaged forms are sold to the ultimate consumer. The retail sale price includesall taxes, freight, transport charges, commission payable to dealers and allcharges towards advertisement, delivery, packing, forwarding charges, etc.

5) The price is the sole consideration for the sale.

e.g. Notification Nos. 18/97-CE(NT) and 19/97-CE(NT) both dt. 19-6-97 state thatexcise duty on “cosmetics and toilet preparations” will be payable on the basis ofMaximum Retail Price printed on retail carton after allowing a deduction of 50%.

The following excisable goods have been covered under this scheme:

· Cosmetics and toilet preparations - deduction 50%

· Paints & Varnishes - deduction 40%

· Footwear and parts - deduction 40%

· Aerated waters - deduction 50%

· Colour television sets - deduction 30%

· Tooth powder & tooth paste - deduction 30%

· Detergents, Soaps etc - deduction 35%

· Chocolates - deduction - 35%

· Preparation of Malt, Cereals, Flour, Starch or milk - deduction 35%

· Pan masala in retail packs of 10 gms and more - deduction 50%

· Chocolates - deduction 35%

· Perfumes and toilet waters, beauty preparations, shaving preparations -deduction 50%

· Glazed Tiles - deduction 50%

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· Cooking appliances and plate warmers - deduction 40%

· Razor and Razor Blades - deduction 40%

· Primary cells and primary batteries - deduction 40%

· Electromechanical domestic appliances, shavers, hair clippers with self containedelectric motor - deduction 40%

· Radio and transistors set - deduction 40%

· Electric filament or discharge lamps - deduction 40%

Modvat

Modvat stands for “Modified Value Added Tax”. It is a scheme for allowing reliefto final manufacturers on the excise duty borne by their suppliers in respect of goodsmanufactured by them. For example, ABC Ltd is a manufacturer and it purchasescertain components from PQR Ltd for use in manufacture. POR Ltd would havepaid excise duty on components manufactured by it and it would have recovered thatexcise duty in its sales price from ABC Ltd. Now, ABC Ltd has to pay excise dutyon toys manufactured by it as well as bear the excise duty paid by its supplier, PQRLtd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can takecredit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABCLtd.

The scheme was first introduced with effect from 1 March 1986. Under this scheme,a manufacturer can take credit of excise duty paid on raw materials and componentsused by him in his manufacture. Accordingly, every intermediate manufacturer cantake credit for the excise element on raw materials and components used by him inhis manufacture. Since it amounts to excise duty only on additions in value by eachmanufacturer at each stage, it is called value-added-tax (VAT)

The modvat credit can be utilized towards payment of excise duty on the finalproduct.

When the scheme was first introduced, it covered only some excisable goods.Gradually, the scope of the modvat scheme has been enlarged from time to timeunder various notifications. From 16 March 1995, all excisable goods can take thebenefit of the scheme except those mentioned below:-

In case of inputs

· Tobacco and Manufactured Tobacco Products

· Matches other than pyrotechnics articles of heading number 36.04 of CETA

· Cinematograph Films

· Motor Spirits, Special Boiling Spirits, High Speed Diesel

· In case of final products

· Tobacco and Manufactured Tobacco Products

· Matches other than pyrotechnics articles of heading number 36.04 of CETA

· Cinematograph Films

· Woven fabrics classified under chapter 52,54 & 55 of CETA other than cottonfabrics, man made fibre fabrics and filament yarn fabrics

Advantages of Modvat

· It reduces the effects of taxation at multiple stages of manufacture.

· It facilitates duty free exports.

· It increases the tax base.

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Transportation MixDisadvantages of Modvat

· It increases paper work and leads to multiplicity of records.

· It leads to corruption.

· It leads to litigation.

The modvat scheme is regulated by Rules 57A and 57U of the Central Excise Rulesand the notifications issued thereunder.

Rule 57A This rule specifies the scope and applicability of the modvat. The modvatscheme applies to all finished excisable goods which have been notified by theCentral Government in the Official Gazette for this purpose. The modvat schememay be made applicable in respect of certain goods or classes of goods withrestrictions and conditions.

For the purposes of the modvat scheme, input includes:-

· Inputs which are manufactured and used within the factory of production in or inrelation to the manufacture of the final product.

· Paints and packing material

· Inputs used as fuel

· Inputs used for the generation of electricity, used within the factory of productionfor manufacturing of final products or for any other purpose, but does notinclude:-

Machines, machinery, plant, equipments, apparatus, tools or appliances which areused for production or processing of any goods or for bringing about any change inany substance in or in relation to the manufacture of the final products. However, onand from 1994-95, the benefit of modvat has been extended to excise duty paid onseveral capital goods like plant, machinery, equipments, etc which are used for themanufacture of the finished product.

As long as the capital goods are used in the factory of production, credit of modvatwill be allowed. No modvat is available in respect of capital goods not used within thefactory of production.

· Packing Material in respect of which any exemption to the extent of excise dutypayable on the value of packing material is being availed of for packaging of finalproducts.

· Packing materials of the cost of which is not included or had not been includedduring the preceding financial year in the assessable value of the final products.

· The manufacturer can avail of the benefit of modvat credit on the final productto the extent of specified duties paid on the inputs. The benefit of modvat will beavailable only if the final product is an excisable goods. Modvat credit will not beavailable if the final good is not an excisable goods or is exempt from duty or ischargeable at nil rate of duty. However, benefit of modvat will be available to thefinal goods manufactured by a unit in a Free Trade Zone or in an 100 percentEOU where no excise duty is payable on final goods which are exported.

For example ABC Ltd purchased raw materials of Rs9,900 inclusive of excise duty@ nine per cent and sales tax @ 10 percent. Modvat credit available will be Rs743(Cost excluding sales tax will be Rs9,000 out of which excise duty will be Rs743 ie9000/109*9)

Rule 57D Modvat credit will not be denied or varied just because some of the rawmaterials and other inputs in respect of which excise has been paid become waste orscrap in the course of the manufacturing process.

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Similarly, modvat credit will not be denied or varied just because in the course of themanufacturing process of an excisable final product, an intermediate product which isnon-excisable or which is chargeable to excise at nil rate of duty or which is exemptfrom excise duty is created.

Intermediate products are those products which get produced in the course ofmanufacture of the final product. e.g. in the manufacture of alcohol from sugarcane,first molasses are produced from which alcohol is produced. In such a situation,molasses are an intermediate product, which are charged to excise duty. The benefitof modvat will not be withdrawn if the intermediate product created is non-excisableor is chargeable to excise at nil rate of duty or is exempt from excise duty. Whether aproduct is an intermediate product or a final product depends on the facts andcircumstances of each case. The product may be intermediate so far as a particularprocess of manufacturing is concerned but may be a final product for anothermanufacturing process.

Rule 57E If the excise duty paid on modvatable inputs is subsequently increased orrefunded, the modvat claimed on the basis of those inputs will also be increased orreduced, as the case may be. If any amount is found due as a result of such increase,he with the excise authorities or in cash shall recover it from the manufacturer eitherfrom the balance maintained.

Rule 57F The modvatable inputs must be used in or in relation to the manufacture offinal products for which they have been brought into the factory. However, the inputsmay be removed from the factory for home consumption or for export under bond butonly after intimating the Assistant Collector having jurisdiction over the factory andobtaining a dated acknowledgement of the same. Where the inputs are removed forhome consumption, excise duty must be paid, at least of an amount equal to themodvat credit claimed in respect of such inputs.

The modvatable inputs can also be removed from the factory to a place outsideeither, as such or after they have been partially processed in the course ofmanufacture but only after intimating the Assistant Collector having jurisdiction overthe factory and obtaining a dated acknowledgement of the same for any of thefollowing purposes:-

· For testing, repairs, refining, reconditioning or carrying out any other operationrequired for the manufacture of final product provided that after such work, theinputs are returned to the factory to be further used in the manufacture of finalproduct. The waste generated in such operation must also be returned to thefactory.

· For export of inputs under bond without payment of excise duty.

· For home consumption of inputs on payment of excise duty.

· For manufacture of intermediate products necessary for the manufacture offinal products provided that after such manufacture, the intermediate product isbrought back to the factory to be further used in the manufacture of finalproduct. The waste generated in such operation must also be returned to thefactory.

· For export of the intermediate products under bond without payment of exciseduty.

· For home consumption of the intermediate products on payment of excise duty.

However, waste is not required to be returned in case appropriate excise duty is paidon the waste.

The main manufacturer as well as job worker are required to maintain register givingdetails of materials sent, challan number, etc. similar to a stock register showing

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Transportation Mixgoods lying with the job worker, goods returned by the job worker, etc. Generally, thegoods sent must be returned to the main manufacturer within 60 days. If the job is notcompleted within 60 days, the period may be extended for another 60 days.

The benefit of this rule is available only if the main manufacturer does a certainamount of processing or value addition to make the final product. There must not becomplete manufacturing outside the factory by the job worker.

Modvat credit can be utilized for the following purposes:

· Towards payment of excise duty on the final product.

· Towards payment of excise duty on waste arising in the course of manufactureof final product.

· Towards payment of excise duty on inputs themselves where they are clearedfor home consumption.

· Modvat credit in respect of finished products exported without payment of duty(like goods manufactured by units in a Free Trade Zone or by 100 percent EOUsor by units in an Electronic Hardware Technology Park or by units in a SoftwareTechnology Park) may be utilized for discharging duty liability on similar finalproducts cleared for home consumption. If the manufacturer does not have anyexcise liability, the modvat credit may be refunded to him provided he has notavailed claimed drawback of duty under the Central Excise Rules.

Any waste arising from processing of modvatable inputs in respect of which credithas been availed may:-

· Be removed by payment of duty if such waste is produced in the factory.

· Be removed without payment of duty where permitted by order of thegovernment.

· Be destroyed in the presence of a proper officer on application made by themanufacturer and if found unfit for further use or not worth the duty payablethereon provided the manufacturer informs the appropriate authorities at least 7days in advance in writing as regards the quantity of waste and the date onwhich it is supposed to be destroyed and after complying with all the conditionsas may be prescribed by the Collector of Central Excise in this behalf.

The manufacturer may transfer or utilize modvat credit from one of his factories toanother with approval from the Collector of Central Excise provided application ismade by him in this behalf and all conditions imposed by the Collector are satisfied.

Rule 57G For availing the benefit of modvat, the manufacturer must carry outcertain procedures. He must file a declaration with the Assistant Collector of CentralExcise having jurisdiction over his factory indicating the description of final productmanufactured in the factory giving details of the inputs used for such purpose in eachof the said products. He must also give detailed information required by the AssistantCollector of Central Excise and must obtain dated acknowledgement for suchdeclaration.

The manufacturer may avail of modvat credit only after he files the abovedeclaration. However, he cannot take credit unless the inputs are accompanied withan invoice prepared as per Central Excise Rules, Form AR-1. In case of importedgoods it must be accompanied with triplicate copy of Bill of Entry or Certificate ofAppraisal by Custom posted in a foreign post office. In other words, the goods mustbe accompanied with proof that duty has been paid on them.

The Central Government has the power to direct that modvat credit on specifiedinputs may be allowed at such rate and subject to such conditions as it may directwithout production of documents evidencing the payment of duty.

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Where copy of invoice meant for the purpose of claiming modvat is lost or misplaced,the manufacturer can claim modvat credit on the basis of or misplaced, themanufacturer may claim modvat credit on the basis of the original invoice subject tothe satisfaction of central excise authorities.

A manufacturer of final products shall maintain:-

· An account in form of RG 23A - Part I and Part II in respect of duty payable onfinal product. Part I is a record of inputs and subsequent utilization in themanufacturing process. Part II is a record of modvat credit pertaining to suchinputs.

· An account current to cover the excise duty payable on the final product clearedat any time.

· A manufacturer of final products must submit within five days after the close ofeach month to the Superintendent of Central Excise, the following documents:-

· Original documents evidencing payment of duty

· Extract of RG 23A Part I and Part II

After verifying their genuineness, the Superintendent shall deface the documents andreturn them to the manufacturer. The Collector may, having regard to the nature,variety and extent of production or frequency of removal provide for a period shorterthan 1 month for submission of such return in respect of any assessee or class ofassessees. He may also permit filing of the aforesaid return by an assessee within aperiod not exceeding 21 days after the close of each month. He may also permit filingof the aforesaid return by an assessee within a period not exceeding 21 days after theclose of each quarter where the assessee is availing of an exemption based on thequantity of clearances during a financial year.

In case the manufacturer is not in a position to file the aforesaid return on time forsufficient cause, the Assistant Collector may allow the manufacture to take credit ofduty paid on inputs, condoning the delay and giving reasons in writing for suchcondonation. The Assistant Collector must see that the following conditions aresatisfied before giving allowing such modvat credit: -

· Input in respect of which credit of duty is allowed are received in the factory notbefore six months from the date of filing declaration and not before date ofeligibility for modvat credit.

· Amount of duty for which credit is sought has been actually paid on these inputs.

· Inputs have actually been used or are to be used in manufacture of finalproducts.

· The persons issuing invoices for modvatable inputs must follow certainprocedures and must get registered with the Central Excise authorities. He mustmaintain stock account in the RG 23D. He shall make entries in RG 23D at theend of the day of receipt and issue of excisable good and:-

· Shall enter the date of entry

· Correctly keep such book, account or register in the manner required

· Shall not cancel, obliterate or alter any entry therein except for correction oferrors

· Keep such book, account or register open for inspection by the concernedauthorities and allow such inspection

· Allow the concerned officer to take copies or extracts or send the recordsto the concerned officer.

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Transportation MixSuch person shall issue serial-wise invoice containing details as prescribed by theCentral Board of Excise and Customs or by the Collector of Central Excise inquadruplicate as follows:-

· Original copy is for the buyer.

· Second copy is for the transporter.

· Third copy is for the excise department.

· Fourth copy is to be retained by the issuer.

The invoice contains the following details:

· Evidence showing proof of payment of excise duty.

· Rate of duty paid, amount of duty, duty debit entry in the PLA, date and numberof such entry.

· Postal address, range and division of the excise officer under which themanufacturer falls, name and address and code number, excise registrationnumber of the factory and also the name and address of the consignee,description and certification of goods, number of packages, total quantity ofgoods, total price of goods, total assessable value, rate of duty, total duty paid,serial number of debit entry in the personal ledger account, date and time ofremoval of goods, mode of transport, motor vehicles registration number andcertificate duly signed by authorized person stating that what is stated above istrue.

· A working partner or managing director or secretary must authenticate eachinvoice book.

· Each invoice shall bear a printed serial number running for the whole financialyear beginning on the 1st. April each year. The registered person for removal ofexcisable goods at any one time shall use only one invoice book of each typeunless otherwise specially permitted by the collector in writing.

· The owner or the working partner or the managing director or the companysecretary shall authenticate each foil of the invoice book, as the case may be,before being brought into use by the registered person. The serial number of theinvoice before being brought into use shall be intimated to the Assistant Collectorof Central Excise and the registered person shall retain dated acknowledgementof receipt of such intimation. When the invoice is generated through computer,serial number likely to be used in the forth-coming quarter shall be intimated tothe Assistant Collector of Central Excise and as soon as the same is exhausted,a revised intimation must be send. Records and invoices generated throughcomputer are also recognized. Such registered dealer shall send details insoftware used including the format for information to the Assistant Collector ofCentral Excise.

Rule 57I The excise authority may disallow modvat credit, which has been wronglyavailed or incorrectly utilized. In case modvat credit has been taken on account oferror or misconstruction, the proper officer may send notice to the manufacturerwithin 6 months from the date of filing of return to show cause why such modvatcredit should not be disallowed. In such cases, where modvat credit has already beenutilized, show cause notice must state the utlized amount must not be recovered fromthe assessee.

In case such wrong modvat credit is on account of willful mis-statement, collusion orsuppression of facts on the part of manufacturer, instead of the aforesaid period of 6months, notices may be sent for a period within 5 years from date of availment ofmodvat credit. The period of stay by court order will not be considered whiledetermining the aforesaid period.

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The proper officer must consider the representation of the manufacture with regardto the show cause notice and thereafter to determine the amount of disallowance, ifany.

Introduction of the Cenvat Scheme

The Modvat system, which has been operating in the country, has now become theCenvat Credit Scheme and the Modvat Rules have been replaced with a new set ofCenvat Rules, combined for inputs and capital goods effective from 1.4.2000.

The scope of definition of inputs/capital goods has been widened. A majordisappointment of industry is that H.S.Diesel has been specifically kept outside thepurview of the Cenvat Scheme.

Cenvat credit on capital goods imported under Project Imports are now allowed @100 % full instead of 75%. However, this credit can be claimed in a phased mannerof more than 1 year, provided the capital goods are still in the possession and use ofthe manufacturer.

It is not necessary to avail Cenvat Credit only after installation of the capital goods.Cenvat Credit on capital goods received after 1.4.2000 will be allowed only to theextent of 50% of the duty paid. The balance credit can be availed in any subsequentfinancial year, provided the capital goods are still in the possession and use of themanufacturer.

In case of capital goods which have been received prior to 1.4.2000 but have notbeen installed prior to 1.4.2000, Cenvat Credit @ 50% can be claimed in the financialyear 2000-2001 and balance in subsequent financial years.

The Modvat Credit on inputs or capital goods accrued prior to 1.4.2000 and remainingunutilized on 1.4.2000 can be carried forward as Cenvat Credit.

Cenvat credit on items such as lubricating oils / grease, coolants are now covered inthe definition of inputs.

The procedure for defacing of the duty paying documents by the Central Exciseofficers has been dispensed with, thereby giving assessees administrativeconvenience.

The procedure for maintaining RG-23A Part-I Register has been dispensed with,provided the assessee maintains all the required records as part of his normalaccounting system in a manner in which he finds suitable and all the relevantinformation is contained in the records.

Inputs and semi-finished goods can be removed from the factory for furtherprocessing or sub-contracting without debiting duty @ 10% of value of the inputs.Such goods must however, be received back within 180 days. Otherwise, the entireCenvat Credit claimed will have to be reversed. The Cenvat Credit can be claimedagain when the goods are received back.

The scheme for issue of invoices by registered dealers upto second stage dealers hasbeen continued. However, the procedure for authentication of the invoices by CentralExcise Officers in case of importers has been dispensed with. The procedure ofauthentication of invoices issued by the second stage dealer or an by first stagedealer in respect of the imported materials has also been continued.

The procedure for filing Modvat Declaration under rule 57G and rule 57T(1) hasbeen dispensed with. However, the onus of proving admissibility of Cenvat Credit isnow on the assessee.

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Transportation MixThe procedure for movement of the inputs under the existing rule 57 f(4) and formovement of capital goods under rule 57S has been dispensed with. The assesseecan now use his own challans, memos or any other document evidencing that thegoods sent to job-workers have been received back.

A Manufacturer of the goods failing under Ch.39 of Central Excise Tariff Act andmanufacturing the dutiable goods as well as exempted goods will now be required to:

i) Either maintain separate accounts for receipt, consumption and inventory ofinputs used in the manufacture of exempted goods and exempted goods and takecredit only for those inputs used in the manufacture of dutiable goods ;or

ii) To debit 8% of the value of exempted goods at the time of clearance of suchexempted goods.

Cenvat Credit may be claimed on the basis of invoice, bill of entry or any otherprescribed document indicating payment of duty.

Service Tax

The major change as far as service tax is concerned is that the Supreme CourtJudgement has now been over ruled by amending the law with retrospective effect.The Central Excise Department can now recover service-tax collected by the usersof the services. With the result no refund of service-tax paid on the services of goodstransport operators and clearing and forwarding agent would be granted.

Customs Duty

The peak rate of Customs Duty has been reduced from 40% to 35%. Special CustomDuty of 10% of basic Custom Duty is being continued with and it is applicable to thepeak rate of 35% also.

SAD @ 4 % is now being made applicable to imports of goods by traders also.

In this year’s Budget the Finance Minister has attempted to make several changes inthe Modvat Scheme, firstly calling it “Cenvat” (Central Value Added Taxes), andthese new set of Rule 57A to 57I were introduced in Budget 2000 vide Notification11/2000 (N.T.) dated 1.3.2000, which now are suddenly replaced vide an entirely newset of Rule from 57AA to 57AK vide Notification No. 27/2000 (N.T.) dated31.3.2000.

It is rather unfortunate that this notification was released just one day before the rulesbecome applicable due to which many of the assessees were not even aware of suchamendments. Even now, the industries are so confused that they are yet to get thehang of all the procedures and documentations to actually say the procedures areeasy.

These new set of rules are welcome to the industry as they are based on the variousrepresentations to remove the lacunas in the earlier rules but unfortunately still someof the major procedures present under the Modvat Scheme were missing in thesenew set of rules.

Under this new Cenvat Scheme, the assessee need not file any declaration todepartment and he can now avail credit under Rule 57AB for the goods ie. Inputsand capital goods as mentioned in the list, thus making only one set of rules for inputsas well as for capital goods.

Moreover there are no prescribed documents and records to be maintained. This wasa welcome scenario but soon it is realised that this is a rather dangerous situation aseach one will have different types of records and each one will call it with a differentname. Hence the entire onus it is on the assessee, regarding correct documentation.According to me this will lead to a very strict audit by the department and there are

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more chances of flaws now than earlier, as these audits (Canadian Audit/EA-2000)are not only restricted to Excise but also all the related areas.

The new Cenvat rules have been amended such that the earlier crucial rules, whichwere not included, are included now. But, still there remain some gray areas whichare not yet covered under the revised Cenvat rules like, there is no mention of thewords waste and scrap, even when it arises during the course if manufacture of thefinal products; or in respect of waste and scrap arising during jobwork.

There is no mention of intermediate product as the earlier Modvat Rule 57D.

Even adjustment of credit under Rule 57E is not provided, where if the differentialduty is paid, whether the assessee is allowed to avail Cenvat or not is not clear.Though under the new Cenvat Rule 57AG(2), it is mentioned that when themanufacturer upto for exemption from whole of the duty in respect of goodsmanufactured under any notification based on value or quantity of clearances in afinancial year, and if is availing credit of duty paid on inputs before such option isexercised, he has to pay an amount equivalent to credit allowed to him in respect ofinputs lying in stock or used in any excisable goods lying in stock on the date of suchoption and excess credit if any shall lapse. However, no provision is made to takecredit when the manufacturer opts for Cenvat Scheme for the first time or at anytime during the financial year in respect of inputs lying in stock on the date he opts toavail Cenvat.

Moreover, there is no provision provided for direct delivery of inputs to the job workeras earlier 57J, or even in case of sending material from one job worker to another.There is no provision to store inputs outside the factory.

After all the hue and cry re-drafting of the new set of rules and bringing inNotification 11/2000 dated 1.3.00, it was a pity that industries started following thescheme, without being aware of the revised Cenvat rules, this is bound to create ascope for unnecessary litigation. And I hope that the Central Board of Excise andCustoms provides instructions for not taking any actions for not following the newCenvat Rules with immediate effect.4

4 Shilpa Pandey, Excise and Service tax Consultant

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Transportation MixAppendix ‘A’

State Wise Document Required for Goods Transports

States Sales Tax Form Local Sales Tax No. Octroi RemarksPermit No.

Andhra Pradesh Not Required Consignee GST / CST Mandatory No Note

Assam Note Required No Note

Bihar 28B (R Permit) Required No Note

Chandigarh Not required Required No Note

Delhi Not required Required No -

Gujarat Not required Consignee GST / CST Mandatory Yes Note

Goa Not required Required No -

Haryana Not required Required No Note

Karnataka Not required Consignee KST/CST Mandatory No Note

Kerala Note Consignee KGST / CST Mandatory No Note

Madhya Pradesh Note Required No Note

Maharashtra Not required Required Yes -

Orissa Waybill No.32 Required - Note

Pondicherry Not required Required No -

Punjab Not required Required Yes Note

Rajasthan Form 18A Required Yes Note

Tamil Nadu Not required Consignee GST / CST Mandatory No Note

Uttar Pradesh Form 31/32 Required No Note

West Bengal Note Required No Note

Chattisgarh Form 59 A Required No Note

Jharkhand Note Required No Note

Uttaranchal Note Required No Note

General Requirements

· Invoices: Minimums of four copies are required.

· Central Sales Tax (CST) / Local Sales Tax (LST) Numbers: All invoices musthave both the sender’s as well as the recipient’s Central Sales Tax (CST)/LocalSales Tax (LST) numbers printed.

· Most of the states do not accept the 10% CST as a criteria to allow entry ofshipments in their states without the local sale tax numbers.

· Octroi: An entry

· For Assam form 22/24 is required

Kerala: Only an original copy or a carbon copy of the invoice is acceptable.Photocopies are not acceptable. The consignee’s KGST3 (Kerala Government SalesTax) and CST number must appear on the invoice.

Form 27 A is no longer required for a non-registered party, but the party should give adeclaration in duplicate the reason for the purchase of the goods outside Kerala. Thedeclaration should be on its letterhead and should accompany the shipment intoKerala.

If the items categorized below are sent to the Consignee without a KGST3 number,an entry tax would be applicable:Product Tax(%)

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Air Conditioner/Refrigerator/Washing Machine 12%Iron and Steel 4%Granite 8%Marble 10%Furnace Oil 10%Generator/Inverter 12%Photocopier/Fax Machine/Scanner 8%

Entry Tax is not applicable to: Computers, components and spares/Other machinery

Computation of Tax: Tax is computed on: - total invoice value + freight + handling andclearing charges. These should be shown on the invoice.

Entry Tax is exempted if:

The Consignee is a registered dealer having KGST (Kerala Government Sales Tax)numbers. These numbers should be printed on the invoice.

The Consignee is a Central Government body i.e. Railways/Postal/All DefenseServices/Telecom/CBI/Account General Offices. The rest of the Central and StateGovernment bodies are subject to applicable taxes. Any shipment traveling out ofKerala has to be accompanied by Form 26 in the absence of a regular commercialinvoice.

Activity1

As supply chain managers please read the laws, rules and regulations governinginsurance, sales tax as applicable to India and neighboring countries. Criticallyexamine these laws in the present scenario.

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16.11 A CASE STUDY

India, Switzerland and the United States: How Countries Avoid Liability afterDisaster (Bhopal gas Tragedy)

(Downloaded from the Internet site Disaster management By Karyn Keenan)

Mass disaster, illustrated by the tragic Bhopal accident, often affects multiple parties,both individuals and nation states, and involves several legal jurisdictions. To resolvesuch a legal conundrum, it is instructive to examine which parties escape liability aswell as those who fall prey. Significantly, in several of the worst internationalaccidents involving hazardous technologies and activities, nations that were arguablyresponsible for the damage sustained, at least in part, escaped liability. This paperexplores how both importers and exporters of dangerous technology avoidaccountability, and whether or not the legal apparatus exists for their prosecution.

IMPORTING COUNTRIESOn December 2, 1984, forty tons of methyl isocyanate (MIC) leaked from the UnionCarbide India Limited (UCIL) plant in Bhopal, India. Considerable evidence indicatesthat India was at least, in part, responsible for the accident. Government regulation of

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Transportation Mixindustrial hazards is generally ineffective in this country. Inspection departments areunderstaffed; those agents who are employed are poorly trained; and funds arescarce. In addition, regulatory legislation is largely ineffective. Implementingprocedures for requirements had not yet developed, set out under the Factories Actof 1948. (Castleman et al, 1985). Similarly, the Water Act of 1974 and the Air Act of1981 both designed to control pollution, are neither implemented nor enforcedeffectively. Moreover, there is a deficiency of meaningful health and safetyregulations, which are actively enforced. Violations of what little law does exist aremet with paltry fines and take years to prosecute (Abraham et al, 1991).

India’s failure to adequately plan for the plant’s associated risk became obvious in theaftermath of the accident. Medical facilities were unprepared for the disaster, and thelocal community had been given no information regarding the risk inherent in plantoperations. Neither warning nor emergency procedures had been established(Cassels, 1991). Moreover, the Indian Government failed to respond when the risk ofserious incident became known. A series of leaks, one involving the death of anemployee, preceded the December 1984 accident.

Significantly, Indian financial institutions owned approximately twenty per cent ofUCIL stock (Cassels, 1991). In addition, Muchlinski (1987) reports that originally,UCC preferred not to construct a plant in India, but rather, to import pesticidesmanufactured in the United States. India desired self-sufficiency in pesticideproduction and accordingly, opposed UCC’s proposal. UCC gave in to India’srequests and agreed to construct the Bhopal plant.

India’s failure to draft, implement, and enforce effective regulatory legislation, itsneglect for government inspection departments, its failure to respond to obvious signsof impending crisis, its poor performance in anticipating and planning for potentialaccidents, its interest as a minority owner in UCIL, and finally, its responsibility forthe establishment of the plant, point to certain liability in connection with the Bhopaldisaster.

Despite compelling evidence of culpability, India’s liability toward disaster victims wasnever considered in the litigation. Following the accident, Americans initiated suits intheir domestic courts on behalf of thousands of Indian litigants. In response to theextraordinary circumstances of the situation, including the enormous number oflitigants, their inability to effectively seek relief, and the international character of theincident, The Bhopal Gas Leak Disaster Act (Bhopal Act) was passed. This Actgave the Indian federal government parens patriae control of the case, allowing it toappropriate the exclusive right to act on behalf of any person who wished to make aclaim with respect to the accident (Abraham et al, 1991). Absolute control over thelitigation allowed India to ignore any claim brought against itself. Moreover, as therepresentative plaintiff, it’s questionable whether it would be possible for India to sueitself!

This unprecedented act did not pass unnoticed. Bhopal victims claimed that thestatute unfairly denied them of control over the proceedings. Others argued thatbecause India was potentially liable both as a shareholder in UCIL, and with respectto its regulatory duties, conflict of interest barred it from acting as the victimrepresentative. Furthermore, the Act jeopardized all future judicial decisions.American courts hearing the case or enforcing an Indian decision were likely toquestion the legality of the Bhopal Act. It is suggested that the Act both infringesupon individual rights and fails to meet acceptable standards of due process, andaccordingly, would prevent a successful claim of the parens patriae doctrine (Cassels,1991). Post settlement, the constitutionality of the Act was challenged. In December1989 the Supreme Court of India upheld the statute, explaining that the Government’suse of the parens patriae power was justified, considering the imbalance in available

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resources between UCC and the victims. The Court also stated that the interests ofthe victims were sufficiently protected by the Act (Cassels, 1991).

The Indian Government’s ability to pass legislation granting it exclusive, parenspatriae power to control the Bhopal litigation precluded any inquiry into its culpability.The ruling of the nation’s most exalted judiciary fortified this position. However, Indiacould not legislate away the counter-claim of its defendant. UCC counter-sued thegovernments of both Indian and Madhya Pradesh in the Southern District Court ofNew York. The suit was maintained following relocation to India. However,settlement between India and UCC prevented the resolution of this counter-claim(Koh, 1989).

On October 31, 1986, fire broke out in the warehouse of the Swiss pesticidemanufacturer, Sandoz. Due to the absence of an established catchments area, fire-extinguishing efforts washed thirty tons of the chemicals into the Rhine. In contrast tothe Bhopal disaster, the corporation utilizing hazardous technology in this case wasdomestic, and the accident caused trans-boundary damage. However, both casesinvolve international claims. In both situations, the plaintiffs privatized their claims,and the nation that was home to the dangerous activity avoided liability.

Through inadequate supervision over both the development and implementation ofSandoz’s emergency plans, as well as its storage methods, Switzerland breached itsobligations under the Berne Convention on the Protection of the Rhine againstChemical Pollution. Furthermore, Switzerland failed to satisfy its obligations underArticles 7 and 11 of the Rhine Chemicals Convention, regarding the storage ofchemicals, containment of spills, and the notification of the International Commissionfor the Protection of the Rhine (ICPR) (D’Oliveira, 1991).

Despite these breaches of both its international legal obligations and domesticresponsibilities to regulate industry, no claims were brought against Switzerland, eitherby the foreign governments, which were affected, or by private citizens whosustained damage. Instead, all responsibility was placed, in accordance with thepolluter pays principle, on the shoulders of Sandoz. The most important claims fromforeign litigants were those made by the Governments of the Netherlands, Franceand Germany. These countries channeled all claims from their nations directly to theSwiss Government, who transferred them to Sandoz. The Swiss Prime Ministerpersonally pledged the support of Swiss offices for the purpose of reachingsettlement. The claim channeling strategy was extremely efficient and by mid-1988,over ninety percent of claims had been processed. The majority of unsettled claimswere Swiss.

The Swiss strategy was to create an efficient government-clearing house for claims,which dealt preferentially with foreign claims. This strategy likely includedGovernment pressure on Sandoz to quickly resolve the claims through settlement, inorder to avoid litigation that could easily have involved the Swiss. It is conceivablethat Sandoz received some form of compensation for its compliance. Althoughsuccessful, no strategy, regardless of its efficiency in concluding settlement, wouldhave deterred litigation if the injured parties were determined to sue. D’Oliveira(1991) suggests that the Netherlands, Germany and France were aware of thesignificant possibility that any one of them could find itself in Switzerland’s position inthe future. By ignoring Swiss liability, it is probable that they anticipated comparablefuture treatment. Furthermore, these countries wished to maintain friendly relations atthe ICPR.

The Indian and Swiss governments adopted different, but equally effective strategiesfor avoiding liability. Exclusive legislative power and unacceptable high probability offuture European accidents were the tools handily wielded by India and Switzerland.

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Transportation MixEXPORTING COUNTRIES

Great discrepancy existed between the standards of operation, which were enforcedat the UCIL plant in Bhopal and those at the UCC plant in Institute, West Virginia.The Bhopal plant was designed less safely than the corresponding facility in Institute.A May, 1982 safety audit of the Bhopal plant by the Union Carbide headquartersengineering group revealed dangerous operating conditions, which would havemerited immediate corrective action in the U.S.A.

Nothing was done in India. The corporate safety and health audit, which revealed thisinformation, was the only one of its kind for Bhopal in seven years of operation. Incontrast, American plants were audited every two years. Furthermore, otherindustries manufacture MIC using a far less toxic process than UCIL. Still othermanufacturers choose not to use MIC, or store it in small amounts only, converting itto product as quickly as possible (Castleman et al, 1985).

Based on the few examples listed above, it is clear that UCC took advantage of theforeign locale of its subsidiary and failed to enforce U.S. standards of industryregulation on UNIL. What is at least as significant, however, is the failure of theUnited States to enforce the implementation of those standards on UCC. Despitearguable liability on the part of the United States for the unsafe operation of UNIL,India failed to bring a claim for American breach of international law, or to seek abilateral agreement for reparation. India instead privatized its claim. By characterizingitself as an injured state to which UCC owed liability, rather than as an internationalplaintiff, India avoided vulnerability to counter-suits in international law.

The Amoco Cadiz supertanker grounded in the territorial waters of France in March1978, spilling dangerous quantities of crude oil. The American company owned theship, through various subsidiaries, Standard Oil. The Spanish company, AstilleresEspanoles, designed and constructed the ship. The Government of France joined byother injured parties, initiated litigation in the American court system. Standard, itssubsidiaries, and Astilleres Espanoles were found liable for negligent design,construction and maintenance of the ship. However, no claims were made against theUnited States for its failure to regulate the extraterritorial operations of Standard.

Scovazzi (1991) argues that it is doubtful that a principle of customary internationallaw has been established which requires states to regulate the activities of theirMNCs abroad. This uncertainty in the law may have discouraged France frombringing an action. Moreover, like India, France may have feared exposing itself topossible counter-suit as the host country within whose jurisdiction the accidentoccurred.

Handl (1985) supports Scovazzi’s assertion, and states that under customaryinternational law, a country which authorizes the export of a hazardous technology isnot liable for accidental damage occurring in the use of said technology. In theabsence of international law, Handl (1985) looks to the criterion of control over thetechnology to determine responsibility. He argues that practically, the host countryexercises this control. However, control can be defined expansively. Maritime lawillustrates the principle. Generally, vessels are deemed to be in the control of theirstates of origin (Flag State), despite the fact that they may be found in the territory ofanother. This is especially true with respect of those areas of operation over whichthe host country exercises no control, such as construction of the ship and theoperation of its equipment. Applying this principle to MNCs in place of ships, theUnited States would be held responsible for damage occurring as result of inadequatesafety measures regarding those aspects of operation over which it had greatercontrol than India. Considering that the U.S.A. controlled the plant design andconstruction, as well as the technology utilized in the plant, its prescriptive jurisdictionover UNIL operations is a convincing reason for holding the United States liable.

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In its document, Liability for Injurious Consequences Arising Out of Acts NotProhibited by International Law, the International Law Commission argues that anexporting state should be subject to strict liability for damage arising out of accidentsconcerning an area over which it has prescriptive jurisdiction. Smith (1988) arguesthat the appropriate standard is due diligence, but that if an exporting country isaware that the host lacks the technical and administrative capabilities necessary toprevent the dangers associated with the technology, due diligence may requireprohibiting exportation.

Francioni (1991) contends that the argument used by home countries that they lackthe jurisdiction to enforce domestic safety and environmental standards on MNCslocated abroad is hypocritical. Exporting countries have successfully applied theirantitrust laws, fiscal and currency regulations, and trade union laws, among others, toMNCs.

This author further argues that international law provides a basis for home countryliability. Principle 21 of the Stockholm Declaration on the Human Environment statesthat nations are responsible to ensure that activities, which are within their jurisdictionor control, do not cause environmental damage. Francioni (1991) argues that theconcept of control includes the type of power exerted by parent corporations overtheir subsidiaries. He also looks to international human rights law. Severalinternational instruments proclaim the right of individuals to a healthy environment. Ifthe export of a hazardous technology jeopardizes the health of the host country’senvironment, the exporter could accordingly be found liable in international law.

Although several convincing arguments exist for holding exporting nations liable,developments in the regulation of MNCs do not support this contention. Internationalorgans are increasingly involved in the drafting of MNC codes of conduct. Neitherthe U.N. Draft Code of Conduct on TNCs, nor other similar instruments provideexporting state responsibility for noncompliance of parent companies (Handl, 1985).

Until the ability of government to legislate absolute control over MNC accidentlitigation is challenged and potential plaintiffs overlook their self-interest as futurepolluters, importer liability will be avoided. Similarly, despite the possible legalfoundations described above, exporter liability remains undeveloped. This weaknessmust be addressed in order that countries such as India, Switzerland, the UnitedStates are held responsible for their reprehensible behaviour.

An important could know fact and figures from Labour Bureau has been includedbased on bidi workers in India as per minimum wages act of 1948.

16.12 SUMMARY

Legal issues play a very important role in SCM. Supply management professionalsdeal with two major aspects of law: - the law of agency and law of contracts. Thisunit has attempted to explain the entire process of SCM in which a supply manager islikely to get involved in lawsuits, legal hassles and how can he overcome or avoidthese. The unit covers an overview of the sales laws, environmental realities and theirimplications on supply chain, warehouse operations and jurisdiction. . It has discussedthe rules and regulations in handling the wages of workers Issues pertaining todocumentation: Insurance and Sales tax were also discussed.


1) As a supply chain manager critically evaluate the laws and regulations of bothIndia and EU countries.

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Transportation Mix2) How will you arrange for Insurance cover in case your vehicle meets with anaccident and causes extensive damage to the goods, in the State of Assam?

3) What are the relaxations of Sales tax on goods across the various states in ourcountry and can we overcome this by a single document procedure?

4) As a warehouse manager list out your duties from receiving the goods to itsdelivery to the manufacturer or to the end consumer.


1) Central excise and Sales Tax laws books.

2) Books on commercial laws

3) Case studies on Litigations and company legal proceedings.

4) Internet sites www.comerciallaws.com , www.salestax.com

EMERGING TRENDS

Unit 17Future Trends and Issues 5

Unit 18Design for SCM and Greening the Supply Chain 20

Unit 19SCM in Service Organization/Non-Manufacturing Sector 36

6Block


MS-55Logistics & SupplyChain Management
















December, 2004


ISBN-81-






















BLOCK 6 EMERGING TRENDS

Unit 17: Future trends and Issues chats about trends and issues in the managementof supply chains in the future. It discusses collaborative strategic alliances forenhancing supply chain effectiveness and talk about outsourcing services like thirdand fourth party logistics. It also describes integrating supply chain logistics throughthe use of IT and the Internet. Green supply chain strategies like reverse logistics aredealt in detail. Finally it portrays a vision of deploying world-class supply chains in thefuture.

Unit 18: Design for SCM and greening the Supply chain discusses various keyelements to be considered for designing of supply chain management. It reveals factorsinfluencing supply chain design decisions. It also discusses the emerging trends in thefield of supply chain management.

Unit 19: SCM in service organization/ non-manufacturing sector describes theSupply Chain Management of Products vs. Services. It further discusses theapplication of Supply Chain Management principles to a few broad industries in theservice sector.

4

Emerging Trends

5

SCM in ServiceOrganization/Non-

Manufacturing SectorUNIT 17 FUTURE TRENDS AND ISSUES

Objectives


· discuss the trends and issues in the management of supply chains in the future;

· discuss collaborative strategic alliances for enhancing supply chain effectiveness;

· discuss about importance of outsourcing services like third and fourth partylogistics;

· describe integrating supply chain logistics through the use of IT and the Internet;

· discuss green supply chain strategies like reverse logistics; and

· portray a vision of deploying world-class supply chains in the future.

Structure

17.1 Introduction

17.2 Collaborative Strategies

17.3 Vendor Managed Inventory

17.4 Third Party Logistics

17.5 Fourth Party Logistics

17.6 Enterprise Resource Planning

17.7 Internet and E-commerce

17.8 Supply Chain Agents

17.9 Green Supply Chain

17.10 Reverse Logistics

17.11 World Class Supply Chain

17.12 Summary

17.13 Self Assessment Exercises

17.14 References & Suggested Further Readings

17.1 INTRODUCTION

Management of the supply chain has evolved over the last two decades from anemphasis on integrating logistics and lowering cost to providing better products andservices that provide value to ultimate customers. Managing uncertainty andunderstanding customers in the global market is the challenge that current supplychain systems are facing the world over. Efforts are being made to manage demandflow, supplier collaboration and customer services using cutting-edge informationtechnology.

Traditionally, the focus of companies has been on the intra-organizational flows overwhich the organization had some control. However, companies are increasinglyrecognizing that supply chain management involves the management of the completechain starting from inbound logistics, processing, outbound logistics, marketing andsales, customer service and also reverse flow of unused materials and waste forsuccessful value reclaimation through reuse, remanufacturing and recycling etc. This

6

Emerging Trends involves a large and complex network of suppliers, transporters, manufacturers,distributors and customers. Successful supply chain flow requires synchronization ofoperations through effective collaboration among the various channel players.

Organizations must provide world-class services to remain profitable and continueserving the society in an effective manner in the ever-changing and turbulent marketspace. The following sections are devoted to a discussion of the issues and trendsthat supply chains are likely to adopt in times to come.

17.2 COLLABORATIVE STRATEGIES

In the future, supply chains must embark upon a collaborative strategy to managedemand flow and customer satisfaction through technology integration. Collaborationenables channel partners to jointly gain a better understanding of product demandflow and implement effective programs to satisfy customers through collaborativeproduct development, synchronized production scheduling, collaborative demandplanning and logistic solutions.

Effective collaboration among channel partners can help in aligning them to enhancethe value of the integrated activities in the supply chain. This can contribute to fasterproduct development through shared design development and modificationdocuments. It can also contribute to synchronization of production and deliveryschedules and smoothen the material flow process obviating inventory managementproblems. This can result in better capacity utilization, order fulfillment and customersatisfaction.

Down-stream collaboration with distributors, wholesalers and retailers can result inreal-time flow of point-of-sales (POS) data across the supply chain. This can help injointly formulating effective forecasting and replenishment schemes and smoothendemand variations along the supply chain. One of the crucial objectives ofmanufacturers is to meet in orders to reduce losses on account of inventory excessesor shortages. Collaborative forecasting strategy involving all channel partners cancontribute to effective demand planning. Each partner in the supply chain should beable to plan demand based on a single, reliable source of demand data. However, thiscan be possible through seamless data interchange among channel partners.

Reducing channel inventory pileups by reducing demand irregularities in the supplychain is an issue of primary concern as it can lead to improved efficiencies and lowercost. This can be tackled through collaborative efforts made through strategicpartnerships (SP) or strategic alliances (SA). Retailer-Supplier Partnerships (RSP),Vendor Managed Inventory (VMI) and Distributor Integration (DI) are examples ofstrategic alliances that can prosper through collaborative efforts. Such strategicalliances can help both partners by:

· Adding value to products through collaborative efforts.

· Improving market access.

· Strengthening operations by lowering costs and cycle times.

· Increasing technological strength and flexibility

· Enhancing strategic growth by pooling the combined expertise of partners

· Enhancing organizational competencies through mutual learning.

· Building financial strength by sharing costs and eliminating non-value addedactivities among partners.

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Manufacturing Sector

Collaboration can also enhance the logistics function in the supply chain. Transporterscan better organize inbound, inter-facility and outbound transportation to optimizecapacity utilization. Collaboration with third party (3PL) and fourth party (4PL)logistics organizations can also enhance supply chain effectiveness. Sustainablesupply chain configurations can be established by trading off cost, revenues, profits,market share and adaptability to new products and technologies through acollaborative approach.

17.3 VENDOR MANAGED INVENTORY (VMI)

VMI has been recognized as an effective strategy for combating irregularities in thesupply chain caused due to demand variability. In this system, the vendor plays anintermediate role between the manufacturer and the wholesaler/retailer. The vendorcollects point-of-sales (POS) data from the wholesaler/retailer and accordingly planstheir demand from manufacturers in order to manage the wholesaler’s inventory. Thiseliminates the wholesaler’s/retailer’s need for dual buffering against customerdemands on one hand and supply disruptions on the other. In fact, by adopting aprocess of just-in-time or continuous replenishment, the inventory can be reduced to abare minimum, thereby lowering both risks and costs.

Vendors are in an excellent position to manage inventory for the wholesaler/retailerbecause they are a middle link in the supply chain and can track the needs both fromthe supplier’s and the customer’s ends. Since the supplier/vendor understands his/herown product better than anyone else, they can handle the replenishment needs of theretailer who has to otherwise keep track of numerous products. The buyers’ role ofcreating purchase orders from sales and supply forecasts is eliminated as the vendordoes handle this on behalf of the wholesaler/retailer. The buyers’ role becomes oneof assessing the recommendations made by the supplier and providing adequateaggregate data and insightful information while collaborating on sales/demandforecasts. Once VMI has been implemented, customers can benefit from 30 to 40per cent reductions in inventory and 75 percent forecast accuracy.

When the supplier plays the role of a vendor, this strategy is called Supplier ManagedInventory (SMI). This is an offshoot of the Retailer-Supplier Partnership (RSP) thatcan be used to synergise the flow inventory between the retailer and the supplier.Accordingly, suppliers like Shell, a company manufacturing automotive lubricants etc.,integrate customer’s forecast, consumption data and inventory information to its ownproduction and shipping capabilities for creating rolling production schedules. Thisreduces inventory-carrying costs in the supply chain. This way, besides managing theinventory, Shell does not need to pad its own inventory in anticipation of varyingdemands from its customers. This technique can in-turn be carried upstream toShell’s suppliers. Similarly, Shell’s customers can now emulate the strategy and reapbenefits accruing out of reduced inventory in the supply chain.

Implementing VMI or SMI can be difficult when the supplier starts accounting forthe time and cost involved in managing the inventory. Some customers may not beusing computers and may be reluctant to allow suppliers to manage their inventory, ifit is a crucial business secret. Moreover, plant managers may be forced to stopproduction if they stock out and suppliers are not able to replenish them just in time.

However, these problems can be overcome with some patience in understandingcustomer’s and supplier’s inventory movement trends and building mutual trust. Sincebuyers are often trained not to disclose information related to their inventory, enoughtrust must be built to enable vendors and buyers to share inventory relatedinformation. Once inventory flows are understood, the initial implementation cost iswell offset by recurring savings in inventory carrying costs and gains through

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Emerging Trends optimum capacity utilization. For instance, Shell has reported returns of 10:1 on itsinvestment on SMIs.

Since data must be available on-line and is difficult to process manually, it isnecessary to use computers if this strategy has to be successfully implemented.Often, suppliers can provide customers with computer hardware and easy-to-usesoftware in order to obtain real-time customer’s inventory status that is crucial forpreparing rolling production forecasts and schedules. VMI or SMI can also beoffered to customers as a value added service and can help in locking-in customers.Once this cost-effective strategy is in place, all channel partners are able to reap richdividends and extend the strategy to other parts of the supply chain. Third party andfourth partly logistics form some of the other collaborative efforts being evolvedtowards effective management of supply chains.

17.4 THIRD PARTY LOGISTICS

Third-party logistics (3 PLs) is the use of an outside company to perform all or partof the company’s materials management and product distribution functions. Thecompetitive advantage for any company is to focus on their core competencies, andlet the 3PL firm handle those supply chain functions in which they specialize. In orderto provide truly value-added services, 3PL firms must interact with customers tounderstand their needs and then adjust their offerings to meet them.

It is obvious that companies can parcel out numerous supply chain processes toentities that specialize in the efficient performance of those processes. Outsourcing awide array of supply chain processes can generate greater value across the entiresupply chain because specialized firms performing the selected processes enjoy alevel of expertise and leverage, that would not be available to manufacturers,wholesalers or retailers. Transportation, warehousing, order processing andfulfillment, packaging, labeling, and bill payment are some of the key processes thatcan be outsourced to specialist firms called third-party logistics firms, or 3PLs. Ifthese firms are efficient and effective, then the entire supply chain can benefit fromimproved capacity utilization, enhanced service levels and lower costs.

3PLs can provide technological and other flexibility to client companies. For instance,channel partners may need to change their technology for implementing quickersystems. Similarly, they may have changing needs for warehousing and transportationfacilities. Such changing demands can be easily taken care of by third-party logisticscompanies.

Customers of 3PL companies look for four dimensions of value to be derived fromoutsourcing a process to a 3PL firm. These values include trust, information, capitalutilization and cost control. The 3PL’s customer orientation, level of specialization,asset ownership status and the price at which the service is offered form some of themain issues that a client will consider while selecting an appropriate service provider.

3PL companies must provide reliable services and solve channel problems so thatsmooth flow of goods and information can take place. This helps customers to trust3PL companies.

3PLs can create value for their customers in the accuracy, quality and timeliness ofthe information that they provide their clients, different channel partners and toultimate customers. This information can be electronically integrated into thecustomer’s MIS for direct access.

3PLs can help customers reduce inventory and fixed assets, such as buildings andequipment. This leads to better utilization and financial returns on both working and

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fixed capital. Although capital utilization is important to 3PL customers, reduction ofsupply chain costs and sharing the savings with customers is probably the most visible(though not the most important) value.

Each supply chain will have firms with different levels of expertise and 3PL mustcustomize their services according to their clients’ expectations. Firms using 3PLservices are seeking performance levels where the overall net benefits exceed theamount paid to the 3PL. Improving service-related benefits also produces value,particularly when combined with the reduction of logistics costs. Many CEOs nowsee this value as critical to business survival.

An important contribution of the 3PL is providing the leverage that its customerscannot generate by themselves via the provision of information, cost reductionactivities, service enhancements, or better asset utilization. In addition, by becomingmore integrated into its customer’s operations, the 3PL will be able to recognize andunderstand changes in the logistic needs of the customers.

An important disadvantage of third party logistics for companies is the loss of controlfaced by the company due to out sourcing a particular function. Engaging reliable3PL service providers can offset this problem. Moreover, 3PL companies can assuretheir clients of their reliability by integrating their activities seamlessly with latter’soperations. Painting clients’ logos on transport vehicles etc. can signify closeintegration between the client and the 3PL service provider.

All channel partners must be successful if meaningful and lasting value is to beachieved. This requires open communication and collaboration. If any element in thissupply chain relationship is neglected, the chain is broken and the value is lost.

Activity 1

Explain how a company can select a third party logistics (3PL) firm on the basis of

1) Customer orientation

2) Level of specialization

3) Asset ownership status

4) Price of the service

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Activity 2

Which of the above criteria is most important for a company manufacturing fastmoving consumer goods (FMCG)? Why?

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Emerging Trends17.5 FOURTH PARTY LOGISTICS

The term “fourth-party logistics provider” is a trademarked term owned by AndersenConsulting. It refers to the evolution in logistics from suppliers focused onwarehousing and transportation (third-party logistics providers) to suppliers offering amore integrated and value added solution. Among other services, fourth-partylogistics providers include supply chain management and solutions, changemanagement capabilities, and value added services as part of their offering. A 4PLcompany delivers a comprehensive supply chain solution and adds value byinfluencing the entire supply chain.

A 4PL leverages a full range of service providers (3PLs, IT providers, contractlogistics providers, call centers, etc.) along with the capabilities of the client and itssupply chain partners. The 4PL acts as a single point of interface with the clientorganization and provides the management of multiple service providers through ateaming partnership or an alliance. A 4PL adds value to the entire supply chain,through reinvention, transformation, and execution.

Reinvention implies synchronization of supply chain planning and executionactivities across all supply chain participants. This is achieved by:

· Leveraging traditional supply chain management skills,

· Aligning business strategy with supply chain strategy, and

· Creatively redesigning and integrating the supply chains of the participants.

Transformation efforts focus on specific supply chain functions including sales andoperations planning, distribution management, procurement strategy, customersupport, and supply chain technology. This is done by:

· Leveraging strategic thinking and analysis,

· Process redesign, organizational change management, and

· Technology to integrate the client’s supply chain activities and processes.

Execution of the supply chain integration strategy leads to increased revenue,operating cost reduction, working capital reduction, and fixed capital reduction whiletraditional approaches tend to focus only on operating cost reduction and assettransfer.

Revenue growth and customer satisfaction are driven by enhanced product qualityand product availability due to the elimination of stock-outs and ‘ship-complete’.Dramatic customer service improvements can be attained as the 4PL focuses on theentire supply chain and is not limited to increasing efficiencies associated withwarehousing and lowest-cost transportation. Operating-cost reductions are driventhrough operational efficiencies, process enhancements and procurement savings.Savings are achieved through the complete outsourcing of the supply chain functioninstead of only a few components as in the case of a 3PL solution. Savings are alsoachieved due to the economies of scale that accrue due to the large size of theoperations involved in the entire service chain.

Synchronization of supply chain activities by channel partners leads to operating-costreductions and a lower cost of goods sold, due to integration of processes, andimproved planning and execution of supply chain activities.

Technology is proactively used to manage order and inventory movement throughoutthe pipeline, thereby minimizing the amount of inventory required, and increases item

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availability to reduce cycle times. Thus, working-capital reductions can be realizedthrough inventory reductions and reduced “order to cash” cycle times. Fixed-capitalreductions result from capital asset transfer and enhanced asset utilization. 4PL’s canundertake the ownership of physical assets, thus freeing up assets held by variouscompanies that form part of the supply chain. This allows the client organization toinvest in its core competencies like research and design, product development,marketing and sales, etc.

A 4PL can use any of the three operating models to deliver supply chain solutions.

1) A partnership can be forged between the 4PL organization and a third-partyservice provider to market supply-chain solutions that capitalize on thecapabilities and market reach of both organizations. The 4PL provides a broadrange of services to the 3PL including technology, supply chain strategy skills,capability to go to market, and program management expertise.

2) The 4PL can operate and manage a comprehensive supply chain solution for asingle client. This arrangement encompasses the resources, capabilities, andtechnology of the 4PL and complementary service providers to provide acomprehensive integrated supply chain solution that delivers value throughout asingle client organization’s supply chain components.

3) As a supply chain innovator, a 4PL organization can develop and run a supplychain solution for multiple industry players with a focus on synchronization andcollaboration. The formation of industry solutions provides the greatest benefits;however, this model is complex and can challenge even the most competentorganizations.

The 4PL service provider needs to possess a comprehensive set of skills toeffectively deliver an integrated supply-chain solution. These include:

· Availability of a large body of trained supply chain professionals, globalcapabilities, reach and resources.

· Ability to manage multiple service providers.

· Ability to transition clients’ employees and other assets smoothly to the new 4PLenvironment.

· Strong relationship and teaming skills.

· Delivery of world-class supply chain strategy formulation and business processredesign.

· Strength in integrating supply chain technologies and outsourcing capabilities.

· Understanding of organizational change issues.

Fourth Party Logistics is the next generation of supply chain outsourcing. Supplychain activities are information-rich, complex and increasingly global. At the sametime, technology and e-enabled capabilities are racing ahead. To enable a firm tocapture all the benefits of supply chain collaboration and synchronization, a newgeneration of integration must be deployed, which is currently beyond the capabilitiesof traditional outsourcing methods.

Activity 3

Illustrate with examples, the three models that a 4PL company can adopt to deliversupply chain services.

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Emerging Trends17.6 ENTERPRISE RESOURCE PLANNING

Information technology (IT) has an ever-increasing role to play in providing fullyintegrated supply chain management solutions that incorporate supply chainconfiguration, demand planning, logistics and warehouse management. Thecontribution of IT has become imperative for capturing point-of-sales (POS) data andcalculating near-accurate demand forecasts. For instance, Modi Xerox uses IT toreduce their cash-to-cash cycle time through fast flow of order/demand data andtheir execution through shipment and delivery/installation confirmation. Varioussolutions are available ranging from enterprise resource planning (ERP) tools toInternet based e-commerce opportunities. Some of these tools are discussed in thefollowing sections.

Enterprise resource planning (ERP) tools are capable of capturing data andautomating financial, inventory and customer order tracking tasks. ERP systemsutilize a single data model and have an established set of rules for accessing data.Although this is possible within an organization, more complex systems like electronicdata interchange (EDI) are required for accessing data from various databasesstrewn along the entire supply chain.

EDI consists of a communications standard that supports inter-organizationalelectronic exchange of common business documents and information. It represents acooperative effort between buyer and seller. They can become more competitive bystreamlining the communication process through the elimination of many stepsinvolved in traditional information flows. The basic components of an EDI systemincludes:

1) A standard set of rules for formatting and syntax agreed upon by the user in thenetwork like the American National Standards Institute (ANSI) standards.

2) Software that can translate company specific database information into EDIstandard format for transmission.

3) A mail service responsible for the transmission of the document usually throughits own network or a third party value-added network (VAN).

Hence, the EDI involves three basic processes:

1) Collecting and receiving data from application programs in different computers,

2) Converting data from application program formats to standard format fortransmission over the network and reversing the same at the user end, and

3) Transmission of data between clients on the network.

For instance, a typical EDI inventory replenishment process could consist of thefollowing steps:

1) The buyer’s (customer’s) computer maintains a real-time inventory of eachproduct using automated technologies like bar-code readers.

2) It generates and delivers a predetermined purchase order to the supplier whenthe inventory is reduced to the re-order level. The information is simultaneouslytransmitted to accounts payable, warehouse and invoice files.

3) The supplier’s computer translates the purchase order into its own format andautomatically sends an acknowledgement to the customer.

4) A shipping note is electronically created with the fulfilled order and is sent to thecustomer. Upon receipt of the consignment, the receiver creates an electronicreceipt notice that is sent to accounts payable and the supplier.

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5) An invoice is then generated at the supplier’s end and sent to the customerwhere the purchase order, receipt notice and invoice are automatically reconciledand a payment authorization is created and sent to accounts payable.

6) On receipt of this authorization, payment is transmitted electronically from thecustomer’s bank to the supplier’s bank.

7) An electronic remittance advice is sent to the supplier and upon receipt, thisinformation is translated into accounts receivable and the buyer is given credit forpayment.

This process requires manual data entry at only three instances and reducespaperwork drastically, thereby increasing the efficiency of the supply chain.However, a significant investment has to be made by companies to implement EDIand use VAN services. Due to excessive automation, collaboration is usually notpossible, thereby alienating business processes from the EDI process. In order toovercome the difficulties that arose due to the use of EDI, companies, more recently,have started using the Internet for integrating and exchanging information across thesupply chain.

Activity 4

Illustrate how EDI can help information flow for replenishing the inventory held by awholesaler stocking consumer durables.

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17.7 INTERNET AND E-COMMERCE

In the concluding years of the last decade, the Internet, World Wide Web andelectronic commerce (e-commerce) have grown extensively due to their openstandards, rapid adoption, low cost and graphical user interface. Companies likeFedEx, and Cisco have used the Internet to communicate with channel partners andmaintain customer relationships. The Internet can be used for communicatinginformation, accessing databases and automating transaction processing.

The Internet can benefit a supply chain in the following ways:

1) Enhance collaboration among partners for quick product development, logisticsand marketing.

2) Help channel partners to log into each other’s ERP systems and datawarehouses for receiving real-time transaction processing data. It can enable on-line and real-time receipt of downstream demand signals for accurateforecasting, inventory management and synchronizing production schedules. Thiscan enhance capacity utilization and reduce channel blockages.

3) Reduce the time and cost of communicating, thereby enhancing customer servicequality and customer relationships. Also helps in receiving valuable customerfeedback for measuring supply chain effectiveness.

4) Increase the capability of reaching out to new customer segments and markets.

5) Purchase orders and shipping notices etc. can be received using the Internet.

6) Enables shipment tracking and tracing facilities thereby reducing uncertaintiesand ensuring better customer support.

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Emerging Trends 7) Smoothen and speed up order processing by integrating order requests andavailability modules thereby helping to send order confirmation, calculate leadtimes and shipment dates. Vendors, suppliers and manufacturers can be alertedabout received orders. Payment can be routed via the Internet in the form ofsecure money transfers.

8) Duplication and paper use can be minimized and limited to legal requirements.

9) Increases the visibility of the supply chain and enhances operationaltransparency. All partners are able to conduct business on a level playing fieldand are not at a loss due to lack of information.

10) Enhance organizational competitiveness through quick product development andmarketing, enhanced responsiveness to customer requirements leading tocustomer satisfaction, and lowering costs through synchronized production,channel efficiencies and process innovations.

Channel partners can use the Internet to create a customer-centric supply chain. Thisrequires clear vision, strong planning and technical insight into the Internet’scapabilities.

The Internet is being increasingly used in order to bring the supplier and customerscloser using the electronic media. This form of business over the electronic medium ispopularly known as e-commerce. E-commerce proceeds through the following fourstages:

1) Web presence

2) E-trading

3) Data delivery, and

4) Automation

Web presence involves uploading relevant information on a server hooked on to theworld-wide-web that allows browsing and downloading information anywhere andfrom any computer. Besides, company and product related information the web siteshould be good in appearance, be easy to use, allow search facilities within the website, contain contact information and allow users to provide feedback forimprovement and customization. It should also contain necessary links to usefulinformation both related to the company and outside it.

E trading involves using the company’s web site on which product features aredisplayed. The web site should have features that allow customers to compare andsee product previews, place orders, track their delivery and make payments. It shouldalso allow them to provide suggestions, feedback and complaints. It should allowthem to ask for after sales service and facilitate return of goods if desired. This stageis known as the e-commerce stage.

Data delivery implies updating and delivery of information related to the customeron the latter’s computer. This includes updating customer’s inventory data, andgenerating re-order alerts based on the information of inventory on-line from varioussources. In this way, the supplier and customer’s data are integrated to assist thecustomer in taking decisions regarding the supply chain.

All processes related to order placement and fulfillment between the supplier andcustomer are tightly integrated at this stage. Vital real-time information, like productrates, is available on the customer’s computer enabling it to support complexdecisions like vendor selection, etc.

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Manufacturing Sector17.8 SUPPLY CHAIN AGENTS

Software agents are being developed to be deployed by companies on the WorldWide Web to gather necessary information and initiate action by themselves.Intelligent agents are software entities that can carry out operations on behalf of auser or another program, with some degree of independence or autonomy while usingsome knowledge or representation of the user’s behavior, goals or desires. COOL(COOrdination Language), Java, KQML (Knowledge Query & ManipulationLanguage), Telescript and Tcl (Tool Control Language) are some of the computerlanguages being used to create agents, define their jobs and establish coordinationprotocols for communication and collaboration among multiple agents.

Some of the supply chain activities that e-Agents can take up include:

· Trading: e-Agents can collect required information on behalf of the supplier/customer by contacting them and conducting a variety of online businesstransactions and functions including negotiations. It has been widely felt thathuman negotiation performance falls significantly short of optimal performance inreal life while e-agent driven negotiations can offer significant benefits.

· Brokering: e-Agents can find information about products, sellers and prices,while providing privacy and protection. They can be instrumental in validatingpurchasers’ credit, billing, accounting, etc.

· Auction: e-Agents can help potential bidders search for specific auction items onthe internet, automatically update the latest item bid prices and notifying userswhen an auctions closes.

· Coordination: e-Agents can contact supply chain partners and conductteleconferences etc.

· Managing Customer Relationships: e-Agents can facilitate on-line searchand customer query handling.

In a nutshell, e-agents can act as smart assistants performing complex andcollaborative tasks. They reduce the amount of human-computer interaction. This canlead to considerable saving in time and cost for every partner in the supply chain. e-Agents can help channel partners collaborate and manage the supply chain toenhance customer satisfaction and reduce operational costs.

17.9 GREEN SUPPLY CHAIN

Green supply chain involves the management of materials and resources fromsuppliers to manufacturers, service providers to customers and back while protectingand conserving the natural environment.

A green supply chain involves the implementation of appropriate strategies toreconcile the supply chain to environmental protection and conservation on asustainable basis. Waste minimization and elimination of inessential non-value addedactivities is one of the most important strategies towards a green supply chain.Process wastage decreases efficiency and lowers productivity. Reduced output andblocked inventory decreases profitability and growth thereby making the businessprocess unsustainable in the end. Such business processes ultimately end up firingfuel and energy without delivering value to the society.

Another important green strategy is to automate processes by using the electronicmedia as far as possible. This reduces paper work, and eliminates non-value addedactivities involved in filing, storing, maintaining and retrieving documents.

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Emerging Trends Usage of materials must be limited to the extent required. Excessive trimming anddisposal of partially filled containers of materials is both wasteful and environmentallyharmful. Wastage can take place when materials or goods are unnecessarily storedbefore they can be used. Just-in-time delivery and usage of materials can reduce thewastage that can occur during multiple storage and handling.

While preventing and eliminating waste would be the best policy, some waste isinevitable at the customer’s end in the form of used containers, packaging etc.Recycling these materials helps to use them once again thereby reducing their role inenvironmental pollution. The process of recycling, renovating and reusing materialscan be undertaken through a separate supply-chain channel, collectively termed asreverse logistics.

17.10 REVERSE LOGISTICS

Reverse Logistics is the process of moving goods from the ultimate customer toanother point, for extracting value that is otherwise unavailable, or disposing themproperly. Goods returned to the supplier may be in the form of:

· Manufacturing returns from the production floor consisting of products havingunsatisfactory quality or left over materials

· Commercial returns arising out of contracts for taking back obsolete stocks ofshort-life products

· Product recalls arising out of the detection that defective products have beenreleased in the supply chain

· Warranty returns of defective products under warranty

· Service returns of products for servicing

· End-of-use returns for re-manufacturing or re-cycling

· End-of-life returns for appropriate disposal

Reverse Logistics activities include the following activities:

· Processing returned products

· Recycling packaging materials and reusing containers

· Reconditioning, remanufacturing and refurbishing products

· Disposing obsolete equipment

· Reuse or disposal of hazardous materials

····· Asset recovery

Reverse logistics is a part of the closed-loop supply chain as depicted in Figure 17.1.The reverse logistics parts of the supply chain starts with collection of returned goodsor refuse which then pass through sorters to reprocessing (reuse, recycle, recondition,remanufacture, refurbishing and asset recovery) or to disposal.

One of the main objectives of reverse logistics is to keep the cost of reprocessingreturned/refused materials lower than that of new products in order to keep theventure profitable. Accordingly, transportation and handling costs have to be kept to aminimum. Often the extra cost incurred in reverse logistics is added to the productswhen they are first sold new. Moreover, recycling and disposal procedures mustincorporate applicable government and environment protection laws.

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At most companies, returns are primarily managed through a series ofdisconnected and paper-intensive processes. As a result, it takes the averagecompany between 30 and 70 days to get a returned product back into the market,including return transportation, repair or refurbishing, and redistribution to thecustomer or market. Moreover, both companies and customers have limitedvisibility into the returns process. In fact, a manufacturer frequently finds outabout a return only after it lands on the receiving dock.

Long reverse logistics cycles are harmful for products that have short lifecyclessuch as high-tech products that can lose up to half their value in a single businessquarter. Moreover, Internet-based sales have increased the incidence of returnsto around 60%. Delays and lack of visibility into the reverse logistics process canresult in lost sales, customer dissatisfaction and inventory carrying costs.

Fig. 17.1: Closed Loop Supply Chain

Web-based applications are being developed that focus on automating andstreamlining the process and information flows associated with returnsmanagement, These application connect customers, collectors, manufacturers,and carriers while providing much needed visibility into, and control over, thereturns process. This can help suppliers maintain customer satisfaction levels.

17.11 WORLD CLASS SUPPLY CHAIN

World-class supply chains are capable of providing better value to customers thanthe competition while remaining financially healthy and environment friendly.They would be differentiated by the excellent quality of service that they provideto the customers. Their activities would be value driven, they would be responsiveto customers and continuous learning, improvement and innovation would be theirhallmark.

Re-Manufacturing

Warehousing

Consumption

Sorting

Manufacturing

Distribution

Returns/Refuse

Disposal

CLOSED LOOPSUPPLY CHAIN

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Emerging Trends Their employees would be empowered to think and act like owners and would go toany extent to keep their customers delighted. They would be provided with the rightenvironment, management support and training to ensure excellent performance.They would be fully involved and happy to meet organizational objectives.

World-class supply chain service providers would have a proactive management thatis balanced and consistent. Their management would be based on facts and analyzeddata. Activities and processes across the supply chain would be seamlessly integratedwith the help of IT, which would also be employed to assist decision-making, reducingwaste and remaining flexible. They would undertake a systems approach tomanagement. The leadership would establish unity of purpose and provide direction tothe organization. They would create an environment that provides continuouschallenge and rewards tied to performance and fair opportunities for growth.

They would collaborate and maintain strategic alliances with suppliers based onethics, honesty, professionalism and a win-win philosophy that can lead towardscombined growth of all the players involved in the supply chain.

Examples of some companies providing world-class services in the supply chain areFederal Express (Inventory Control), British Telecom (Billing and Collection), Xerox(Customer Service), Caterpillar (Information Systems), Wall-Mart (Logistics), Honda(Purchasing), 3M (Supplier Management) and L. Bean (Warehousing andDistribution). Managers and researchers agree that providing world-class servicescan prove to be a sustainable strategy in the long run.

17.12 SUMMARY

Effective management of large and complex supply chains necessitates theimplementation of new strategies in the ever-changing market space in the future.Keeping customers satisfied and happy by delivering greater value than thecompetitor would be the prime concern of organizations in the coming years. Supplychains having smooth product and information flow can continue to compete andgrow in the market space.

Strategic alliances among channel partners can be one way of enhancing supplychain effectiveness. Collaborative strategies like VMI, RSP etc. are gainingmomentum. Companies can outsource supply chain services to third party and fourthparty logistics companies in order to focus on their core-competencies. Informationtechnology and the Internet have become indispensable for adding value to traditionalsupply chain services.

Nations around the world are working towards the implementation of environmentfriendly supply chain activities. Reverse logistics closes the supply chain and cancontribute to environmental protection and conservation.

17.13 SELF ASSESSMENT EXERCISES

1) What are the advantages of collaboration among members in the supply chain?

2) How can vendor managed inventory contribute to supply chain effectiveness?

3) “In this era of outsourcing, third party logistics can add value to existing supplychains.” Explain this statement with examples.

4) What are advantages of fourth party logistics over third party logistics?

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5) What is the skill set required by 4PL companies to be able to effectivelyintegrate the supply chain for their client company?

6) Describe the role of the Internet in managing supply chains in the future.

7) What activities can be performed by e-Agents? How can e-agents help toenhance collaboration among channel partners?

8) How can reverse logistics cater to a green supply chain strategy in the future?

9) What do you understand by the term “world-class supply chain”?


1) Bloomberg, D. J.; Lemay, S. and Hanna, J. B. (2002) Logistics, Prentice Hall,New Jersey.

2) Burt. D. N.; Dobler, D. W. and Starling, S. L. (2002) World Class SupplyManagement: The Key to Supply Chain Management, Irwin McGraw-Hill,Singapore

3) Mohanty, R. P. and Deshmukh, S. G. (2001) Essentials of Supply ChainManagement, Phoenix Publishing House, New Delhi.

4) Monczka, R.; Trent, R. and Handfield, R. (2002) Purchasing and SupplyChain Management, 2nd edition, Thomson, Singapore.

5) Rogers, D. S. and Tibben-lembke, R. S. (1999) Going Backwards: ReverseLogistics Trends and Practices, Reverse Logistics Executive Council, USA.

6) Sahay, B. S. (Ed.) (2000) Supply Chain Management in the Twenty-firstCentury, Macmillan, New Delhi.

7) Simchi-Levi, D; Kaminsky, P. and Simchi-Levi, E. (2000) Designing andManaging the Supply Chain: Concepts, Strategies, and Case Studies, IrwinMcGraw-Hill, Singapore.

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Emerging TrendsUNIT 18 DESIGN FOR SUPPLY CHAIN

MANAGEMENT AND GREENING THESUPPLY CHAIN

Objectives

After reading this unit you will be able to:

· discuss various key elements to be considered for designing of supply chainmanagement;

· portray factors influencing supply chain design decisions; and

· discuss the emerging trends in the field of supply chain management.

Structure

18.1 Introduction

18.2 Factors Influencing Supply Chain Design Decisions

18.3 Sustaining Competitive Advantage

18.4 Good Business Model / Strategy

18.5 Demand Driven Supply Networks

18.6 Secret to Supply Chain Excellence is Balance

18.7 Supply Chain Design

18.8 Supply Chain Strategies

18.9 Hau Lee’s Uncertainty Framework

18.10 Aligning Strategies, Efficiency and Cost Savings in Supply Chain

18.11 Product and Process Design for Supply Chain Management

18.12 Design for Manufacturing

18.13 Design for Logistics

18.14 SCM –Trade off Curves

18.15 Greening the Supply Chain

18.16 Summary



18.1 INTRODUCTION

The rise of new technologies, new forms of competition, and new avenues to addcustomer value have begun to redefine the basis of supply chain designs andstrategies. Product life cycles are being compressed. Services are becomingcommodities in ever-shorter time spans. Intellectual capital and proprietarytechnologies, once protected by layers of patents and enshrouded in corporatesecrecy, have become widely available.

Building and sustaining competitive advantage requires firms to learn and adapt at anever-faster rate in order to distinguish themselves from competitors. Andy Grove, thechairman of Intel, in his popular book “Only the Paranoid Survive” uses the term‘inflection point’ to characterize the nature of the profound, sudden changes in theenvironment that often spell a major crisis for the firms.

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Inflection points signify the potential for a radical transformation of an industriesstructure. In view of above, to remain competitive, effective and robust designing ofsupply chain management gains tremendous importance.

To remain competitive, industrial organizations are continually faced with challengesto reduce product development time, improve product quality, and reduce productioncosts and lead times. Increasingly, the challenges cannot be effectively met byisolated change to specific organizational units, but instead depend critically on therelationships and interdependencies among different organizations (or organizationalunits). With the movement toward a global market economy, companies areincreasingly inclined toward specific, high-value-adding manufacturing niches. This, inturn, increasingly transforms the above challenges into problems of establishing andmaintaining efficient material flows along product supply chains. The ongoingcompetitiveness of an organization is tied to the dynamics of the supply chain(s) inwhich it participates, and recognition of this fact is leading to considerable change inthe way organizations interact with their supply chain partners. The development oftechniques and tools to enable modeling and analysis of emerging supply chainmanagement strategies and practices, and application of these tools to understandcritical tradeoffs is very important for designing supply chain management.

18.2 FACTORS INFLUENCING SUPPLY CHAINDESIGN DECISIONS

There are many factors that influence the design of supply chain. Some of them arediscussed in this section

Rising Importance of Knowledge Work

In many industries knowledge work has become the primary condition that defineshow well firms innovate and compete with one another. The shift towards knowledgework places a greater emphasis on how well managers can attract and retain talent.In places such as the Silicon Valley and other hot beds of innovation, the recruitment,training and development of knowledge workers shape a firm’s basis for futuretechnologies and product ideas. Often firms attempt to recruit technical talent fromtheir competitors, and from companies in other industries as well. This growing flowof people promotes rapid flow of ideas, insights and innovation.

Growth of Substitute Products and Services

Firms in related or neighboring industries often produce substitutes. The innovation ofsubstitute products creates opportunities for new entrants and innovators to changethe way firms must compete. For example, the rise of Internet based telephony,threatens traditional phone companies such as AT&T corp.; the growth of video ondemand threatens the infrastructure of many entertainment and network-based firms.

Rising Information Intensity

The growing information intensive nature of many industries means that the costs ofcreating and disseminating information are steadily declining over time. The costs ofcreating and transmitting information on wider scale, appears to be declining as theinformation content becomes richer. For example, the value of E –mail as a service tothe users grows as it becomes more pervasive and easier to use. The costs oftransmitting and delivering E-mail to the wider population is declining as newnetworking technology substantially lower the cost of each message.

Impact of the Shifting Landscape

As companies deal with the numerous changes and challenges posed by epicenters ofmassive change, it is important that managers broaden the scope of their skills toaccommodate and learn new insights that will help them become more effective.

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Emerging Trends We should expect to see the impact of frequent and massive change on an industry inthree ways.

a) Commoditisation of new technologies: One major trend reshaping a variety ofindustries is the growing availability of state of the art technology to any one whowants it. Today’s innovations are becoming commodity like products. Forexample, new technology products like virus-scanning software and fast modemsto connect with Internet are rapidly becoming standard features in many oftoday’s computer and electronics products.

b) Rapidly declining unit costs: Even some of the most sophisticated forms ofknowledge are becoming widely available on the Internet for a very low cost,and in several cases for free.

c) Burden of strategic commitment: Change often requires new managerialmindsets and a willingness to challenge assumptions about how to add value toemerging customer needs. Often established firms become wedded to ingrainedpatterns of behavior. Core competencies built and refined from an earlier timebecome shackles and blinders that constraint learning. It is important for firms tocontinue monitoring how their products and services are likely to evolve overtime.

From Physical To Virtual Value Chains

The perspective can be illustrated by the revolutions shaking the music recording anddistribution industry. Traditionally, the industry has been dominated by AOL TIMEWARNER, Sony etc., who signed long term royalty contracts with artists andentertainers, managed their own CD’s and controlled marketing programs to ensuresteady sales. With the advent of digital media formats and new technical standards,music firms must reconfirm their value chain approaches, by forming an array ofalliances with Internet service providers and Internet portals to reach preferredcustomers, digital retailers etc.

Rise Of Virtual Organizations

Emerging organizational designs will increasingly be based on new configurationswhere information, knowledge, innovation and marketing all converge together alonga shared network. This shared network brings together not only different parts of thefirm, but also different firms that may be from different industries as well. Thesenetworks evolve and complete on the basis of fast innovation, sharing of ideas andrapid product development. The rise of the so-called Virtual Organisation is just onemanifestation of this broader trend. As information, knowledge and value flow acrossmany firms, any firm operating within the virtual organization is a potential source forfuture innovation, learning and inflection point that can dramatically change the skillsand competencies needed to compete effectively.

18.3 SUSTAINING COMPETITIVE ADVANTAGE

Companies can only survive and prosper to the extent that they are able to change asfast or faster that the rate at which their industry is changing.

· They need to recognize that their customers are able to dictate prices andofferings, their products and services have already become commodities

· Companies are able to generate high profitability to the extent that they are ableto differentiate themselves in a significant way from their competitor.

····· They must balance their organizations designs to promote the kind ofinnovation, experimentation and thinking that will encourage self-renewal andreinvention.

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Companies from variety of industries have implemented some new strategies toembrace change in order to learn and craft new sources of competitive advantage.

1) Pursue self-cannibalization opportunities.

2) Buy out the threat or new entrants.

3) Learn from new entrants.

4) Manage parallel product teams.

18.4 GOOD BUSINESS MODEL / STRATEGY

Every viable organization is built on a sound business model. A successful businessmodel represents a better way than the existing alternatives. It may offer more valueto a discrete group of customers. Or it may completely replace the old way of doingthings and become the standard for the next generation of entrepreneurs to beat.Fargo’s business model changed the rules of the game, in this case, the economics oftravel. Traveler’s cheques remained the preferred methods for taking money abroadfor decades until a new technology—the automated teller machine—grantedtravelers even greater convenience.

But business model is not the same thing as a strategy, even though many people usethe term interchangeably. Business models, however, do not factor in one criticaldimension of business—competition. Sooner or later every enterprise runs intocompetitors. Dealing with that reality is strategy’s job.

A competitive strategy explains how you will do better than your rivals by beingdifferent. The success of Wall Mart Stores and the success of Dell Computers areexamples of superior strategies and timely changes in strategies to deal with newcompetitive realities, the underlying business model remaining the same.

18.5 DEMAND DRIVEN SUPPLY NETWORKS (DDSN)

Demand driven supply networks are supply chains driven by the voice of thecustomers. DDSN is a shorthand term for the next generation supply chain that hasbeen taking shape for sometime. It simply means building all supply chain processes;infrastructure and information flow to serve the down stream – source of demand-whether a consumer is in the super market or the department of defence.

Rather than the upstream supply constraints of factories and distribution system,pioneers have been doing it this way for a decade or more & in the processredefining what is possible in the 21st century supply chain practice.

DDSN Matters to Growth, Profitability and Valuation

Early adopters are already saving 5% of top live revenue compared to laggards. Thesaving can be seen in more granular matrices as well like getting paid by customer 70days sooner, holding half the inventory and delivering 92% perfect order verses thelaggards average 91%.

There is powerful and significant correlation between perfect order performancereturn on assets earnings / shares and perfect margins. The takeaway! Higher levelsof supply chain service (on time delivery order occurrence and in stockperformance) correspond with lower level of supply chain cost (inventory,transportation and material handling) for best performers.

DDSN give companies cost time and efficiency advantages that boost profits. It alsopositions winners to grow with dramatically faster response to business opportunities– at the level of lower stock outs for current products and as much as 70% faster

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Emerging Trends time to market for new products. More innovations with better perfect product launchperformance means more business opportunities seized as customer or marketdemand evolves.

DDSN Matters to the Decisions Made About Technology

1) Is radio frequency identification (RFID) just a costly tax dropped onmanufacturers by their mega customers or it is a unique opportunity to extendvisibility into consumer demand?

2) Is enterprise resource planning (ERP) consolidation & upgrade an expensive ITprojects with little clear benefit or is it a business backbone vital to supportingfuture growth?

3) Is product life-cycle management (PLM) an engineering jargon or is the criticalinfrastructure for accelerating product innovation?

Tackling such sweeping IT challenges without some guiding strategic principle isplaying professional Russian roulette. Simple minded truisms like “ business needsdetermine IT priorities “ does not help at all. Supply chain professionals better have afar more decisive basis for prioritizing the ‘to do’ list.

The right basis combines strategic direction, best practices & technology

1) Strategic direction: What is the long-term basis of competition for ourbusiness? Where will new growth come from, rather than just lower cost?

2) Best practices: What role do lean or demand pull management principles play?What role does supply chain collaboration play, including collaborative planning,forecasting & replenishment (CPFR) or sales & operational planning (S&OP)?What about product platform strategies or stage gate product development?

3) Technology: What existing supply chain execution (SCE) systems run in thewarehouses, distribution centers & field service operations that can be nervoussystem for the demand driven future? What information they do not provide?

Approaching technology choices with answers to these three sets of questions inhand we make the business case & roll out plan a lot easier.

DDSN Matters to the Global Economy and the Employment Base

The critical measure of supply chain’s importance to business is the impact on overallproductivity – not simply labor productivity, but multifactor productivity. This numberaverages 4.2% per year from 1995 to 2000 for durable manufacturing. Through boomand bust, war and peace & every other upheaval we have seen the past 10 years,this trend still looks robust.

The essential fact is that output per unit input of labor and capital is growing threetimes faster than population & at least twice as fast as it did through the entiretwentieth century. The steady march of supply chain efficiency from Ford’s RiverRouge mega factory to today’s network of contract manufacturers, third partylogistics services and outsource expertise is at an inflection point. Those, which donot keep the pace, will be acquired or closed and those, which do so, will consolidatetheir industries & built great corporate legacies.

For most of us this translates into more & better stuff with minimal or no inflation &high paying jobs. These will not be factory jobs, nor will they be white-collar backoffice functions all of which can be outsourced or automated with capital. These jobsare about translating customer needs into supply chain execution. Designers,marketers, coordinators, problem solvers, these are the kind of jobs behind the curtainof the new demand driven supply network.

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DDSN Matters Because Dell, Wall-Mart, & Procter & Gamble are doing itnow

Under the most impossible supply chain conditions imaginable –super short productlife cycles (consumers pc’s) and long lead time components (semiconductorsincluding processors) –Dell managed to build the first true demand driven supplynetworks. This network embraces demand variability (35% of home and smallbusiness, customers cancel in the first 24 hours) like no push supply chain everconceives. And it keeps getting better.

Also, Proctor and Gamble’s “moments of truth” and Wall-mart’s “everyday lowprices” provide powerful strategic principles to set a course for long-term supplychain excellence. Their financial performance shows that it works.

Recommendations

Start with demand and work backwards to define supply chain strategy. Constraintsare more fluid than ever, provided the visibility on demand is clear enough to quoteaccurate requirements backwards into the network. The notion of a “moment oftruth” helps many companies to define exactly what matters at instant where supplyneeds demand.

While looking to capitalize on existing supply chain applications in order management,warehouse management and the like, prepare positions on the four emerging cornerstones of technology that support DDSN:

· Unit Level Demand Visibility: RFID, POS, B2C, E- commerce, all representdemand at its most granular and therefore most precise. For some, this may beno different than bar fleeting spikes in demand.

· Demand Management: Forecasting, price, and revenue optimization,promotions management tools supporting these processes deepen the ability tomanage the supply / demand balance by tapping into demand variability as aresource. Such tools are also essential to weather the storm of data from unitlevel demand.

· Product Lifecycle Management: Design for X means, defining the product andits supply and service network for speed, reuse and compliance. 80% of supplychain costs are set during early design phase of new product development, PLMfocuses on getting this right.

· Executive Dashboards: Bench marking and balance performance,measurement is the ultimate expression of business judgment driving supply chaindecisions. What data populates the dashboards and how it differs by role is adeceptively thorny and potentially political issue.

18.6 THE SECRET TO SUPPLY CHAIN EXCELLENCEIS BALANCE

Most companies either keep costs down at the expense of service or keep servicelevels up at the expense of costs. The tradeoff shows up most clearly in two keymatrices.

1) Perfect order performance. (The percentage of orders that are complete,accurate, on time, and in perfect condition)

2) Supply chain cost.

Companies don’t have to trade cost for service or vice –versa. The top companieskeep their balance in the details, catapulting them to best overall.

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Emerging Trends Top performers do three things differently than every one else.

1) Aim for Balance: The best performers in costs and service are not best at eachof the sub components of costs or service, but are consistently good enough ateach sub component to add up to the best in total.

2) Increase Demand Visibility: Across industries, increasing demand forecastaccurately yields significant improvements in perfect order fulfillment.

3) Isolate High Costs: Top performers know where they hold their cost and focustheir best practice, technology and investments there.

To increase demand visibility, target the following best practices that connect youwith your trading partners and connect supply and demand internally.

· Getting the demand information possible from your key customers.

· Sharing it with your suppliers and logistics providers as early as possible.

· Using a sales and operations planning.(S & OP )process to connect demand withproduction internally .Use application technology to reduce your high cost areas ,but make sure you don’t just move costs around.

Demand visibility is a major barrier in developing demand driven supply networks.( DDSN’s).

Demand Visibility is Everyone’s Top Concern in Moving Supply ChainsTowards DDSN’s.

Improvement means attacking the problem at three levels.

1) Replenishment based demand.

2) Surge demand.

3) Future demand

In perusing this DDSN model, the first step is improving this demand visibility.Demand visibility is the ability to see undistorted and accurate demand within the timeframe necessary to react to it. Above three types of demand visibility must beconquered to achieve DDSN.

1) Replenishment Based Demand: The predictable demand that forms the baseline for forecasting and planning. This may be electronic data interchange (EDI)orders or some other form of pull replenishment on steady run products.Visibility can be system to system or supported with manual planning andreplenishment processes. For FMCG, replenishment level visibility is a definitetechnology issue that leaders are tackling with demand data hubs to consolidateand manage point of sale (POS) data.

2) Surge Demand: Sensing and managing events that change demand is more amatter of sophisticated demand modeling and forecasting and requirescombining POS or other actual historical demand data with intelligence aboutcustomer behavior unique to events like weather, fashion, network effects, andpromotions (yours and competitors). The role of technology is in the use ofalgorithm-based tools to model and prepare for such surge demand. Vendorswith applications targeting this problem include specialists like DEMANTRA,TERRA TECHNOLOGY, and LOGILITY as well as larger supply chain suitevendors like i2 Technologies and MANUGISTICS, and enterprise resourceplanning (ERP) vendors like SAP, PEOPLESOFT and ORACLE.

3) Future Demand: Strategic planning for future products and their effect onbuying behavior is another important aspect to ponder upon. Planning for futuredemand especially as it relates to manufacturers with long lead-time component

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and processes is really a matter for Product Portfolio Management (PPM). Withfuture products, demand planning depends mostly on working ways lead timerealities against marketing intent and attempting to build a supply chain that isready once orders starts rolling in. PPM applications are available fromspecialist like IDC or SOPHEON as well as with in the suits of most productlife cycles management (PLM) and ERP vendors.

DDSN starts with getting a handle on demand visibility. Supply chainprofessionals need to clearly define what demand visibility means to theirorganization on at least these three levels before buying tools to help improveforecast accuracy.

Key Skills

Following should fit into the skill set of modern supply chain design manager.

1) Define: integrated supply chain management, its components and how they areintegrated.

2) Understand: the impact of demand on the supply chain and the considerablecompetitive advantages that can result from managing demand acrosscompanies.

3) Define Value: from the perspective of customers and learn how to manage thesupply chain to deliver that value.

4) Learn: to manage the sourcing and information technology functions with in theglobal supply chain.

5) Understand: the importance of managing relationships with suppliers andcustomers to create differential advantage.

18.7 SUPPLY CHAIN DESIGN

Successful supply chain design requires several decisions relating to the flow ofinformation, product and funds. These decisions fall into three categories or phasesdepending on the frequency of each decision and time frame over which a decisionphase has an impact.

1) Supply Chain Strategy or Design: A company’s competitive strategy definesthe set of customer needs that it seeks to satisfy through its products andservices. The supply chain strategy includes supplier’s strategy, operationsstrategy, and logistics strategy. Decisions regarding inventory, transportation,operating facilities and information flows in supply chain are all parts of supplychain strategy. Various functional strategies cannot be formulated in isolation.They must fit and support each other if a company is to succeed. Achieving astrategic fit between a company’s competitive strategy and supply chain strategyis a key consideration. There are three basic steps to achieve this.

· Understanding the customer,

· Understanding the supply chain, and

· Achieving the strategic fit.

During the supply chain strategy design phase a company decides on how tostructure the supply chain. It decides what the chains configuration will be and whatprocesses each stage will perform. These decisions include the location andcapacities of production and ware housing facilities, products to be manufactured orstored at various locations, modes of transportation and types of information systemsto be utilized. Supply chain design decisions are typically made for long term and arevery expensive to alter on short notice.

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Emerging Trends 2) Supply Chain Planning: This starts with a forecast for the coming year ofdemand in different markets – with all the details of markets, supply locations,inventories, sub contracting of manufacturing etc.

3) Supply Chain Operations: The goal is to implement the operating policies in thebest possible manner.

18.8 SUPPLY CHAIN STRATEGIES

Let us see some supply chain characteristics and strategies

Demand and supply uncertainty characteristics

Hau Lee points out that in addition to important demand characteristics, there areuncertainties revolving around the supply side that are equally important drivers forthe right supply chain strategy.

Lee defines a stable supply process as one where the manufacturing process and theunderline technology are mature and the supply base is well established. In contrast,an evolving supply process is where the manufacturing process and the underlinetechnology are still under early development and are rapidly changing. As a result thesupply base may be limited in both size and experience. In a stable supply process,manufacturing complexity tends to be low or manageable. Stable manufacturingprocesses tend to be highly automated, and long-term supply contracts are prevalent.In an evolving supply process, the manufacturing process requires a lot of fine-tuningand is often subject to breakdowns and uncertain yields. The supply base may not bereliable, as the suppliers themselves are going through process innovations. Followingexhibit summarizes some of the differences between stable and evolving supplyprocesses.

Lee argues that while functional products tend to have a more mature and stablesupply process, but that is not always the case. For example, the annual demand forelectricity and other utility products in a locality tend to be stable and predictable, butthe supply of hydroelectric power, which relies on rainfall in a region, can be erraticyear by year. Some food products also have a very stable demand, but the supply(both quality and quantity) of the products depends on yearly weather conditions.Similarly, there are also innovative products with a stable supply process. Fashionapparel products have a short selling season and their demand is highly unpredictable.However, the supply process is very stable, with a reliable supply base and a maturemanufacturing process technology.

Table 18.1: Demand Uncertainty Characteristics

Sl. No. Functional Innovative

1 Low demand uncertainty High demand uncertainty

2 More predictable demand Difficult to forecast

3 Stable demand Variable demand

4 Long product life Short selling season

5 Low inventory cost High inventory cost

6 Low profit margin High profit margin

7 Low product variety High product variety

8 Higher volume Low volume

9 Low stock out cost High stock out cost

10 Low obsolescence High obsolescence

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Table 18.2: Supply Uncertainty Characteristics

Sl.No. Stable Evolving

1 Less breakdowns Vulnerable to breakdowns

2 Stable and higher yields Variable and lower yields

3 Less quality problems Potential quality Problems

4 More supply sources Limited supply sources

5 Reliable suppliers Unreliable Suppliers

6 Less process changes More process changes

7 Less Capacity constraints Potential capacity constraints

8 Easier to change over Difficult to change over

9 Flexible Inflexible

10 Dependable lead times Variable lead times

Types of Supply Chain Strategies

Lee characterizes four types of supply chain strategies as shown in the exhibit below.Information technologies play an important role in shaping such strategies.

1) Efficient Supply Chains: These are supply chains that utilize strategies aimedat creating the highest cost efficiency. For such efficiencies to be achieved, nonvalue added activities should be eliminated, scale economies should be pursued,optimization techniques should be deployed to get the best capacity utilization inproduction and distribution, and information linkages should be established toensure the most efficient, accurate, and cost effective transmission ofinformation across the supply chain.

2) Risk Hedging Supply Chains: These are supply chains that utilize thestrategies aimed at pooling and sharing resources in a supply chain so that therisks in supply disruption can be shared. A single entity in a supply chain can bevulnerable to supply disruptions, but if there is more than one supply source or ifalternative supply resources are available, then the risk of disruption is reduced.

3) Responsive Supply Chains: These are supply chains that utilize strategiesaimed at being responsive and flexible to the changing and diverse needs of thecustomers. To be responsive, companies’ use build to order and masscustomization processes as a means to meet the specific requirements ofcustomers.

4) Agile Supply Chains: These are supply chains that utilize strategies aimed atbeing responsive and flexible to customer needs, while the risk of supplyshortages or disruptions are hedged by pooling inventory and other capacityresources. These supply chains have strategies in place that combine thestrengths of “hedged” and “responsive” supply chains. They are Agile becausethey have the ability to be responsive to the changing, diverse, and unpredictabledemands of customers on the front end, while minimizing the back end risks ofsupply disruptions.

18.9 HAU LEE’S UNCERTAINTY FRAMEWORK

Let us consider some examples and types of supply chain needed. According to Lee,it is more challenging to operate a supply chain that is in the right column of the table18.3 than in the left column, and similarly, it is more challenging to operate a supplychain that is in the lower row of the exhibit than in the upper row. Before setting up asupply chain strategy, it is necessary to understand the sources of the underlying

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Emerging Trends uncertainties and explore ways to reduce these uncertainties. If it is possible to movethe uncertainty characteristics of the product from the right column to the left or fromthe lower row to the upper, then the supply chain performance will improve.

Table 18.3: Type of Supply Chain Needed

18.10 ALLIGNING STRATEGIES, EFFICIENCY ANDCOST SAVINGS IN SUPPLY CHAIN

Companies today are often presented with a myriad of supply chain strategies. Howcan we learn more about these strategies and decide which one will help us themost? Are we operating the most appropriate type of supply chain? Are we spendingtime and money on strategies that are not providing maximum benefits?

We will begin with looking at products and supply chain characteristics and learning aframe work for aligning the right strategies for your needs. We will then learnstrategies to improve efficiency and reduce costs. We will play a version of classicBear Game simulation used by business schools and executive training programs.Through simulation we will see first hand the causes of Bullwhip effect, which leadsto major supply chain inefficiencies, including unpredictable lead times, stock outs,miss trust between supply chain partners and higher manufacturing and transportationcosts. Once we have covered the causes of these problems we will learn the beststrategies to mitigate or remove them.

Then we have to understand what type of supply chain we should be targeting, acritical first step in any supply chain initiative because putting teams to work onwrong initiatives can cause us valuable time and money. However even with in acompany, several different types of supply chains may be called for, having acomplete understanding of a wide range of strategies is just as important. Then insome cases, responsiveness is more important than efficiency and we have tounderstand the ways to improve supply chain responsiveness.

Aligning strategies, efficiency and cost savings, we will explore set of concepts thatwill help improve customer responsiveness and deal with highly uncertain demand.We will learn a powerful tool for hedging demand uncertainty so that we minimizetotal cost by taking into account both the opportunity / cost of stock outs and costs ofaccess inventory then we will learn several advanced emerging strategies that applyto a wide range of supply chain. We will see how to understand and cope with supplychain uncertainty to make our product process more reliable, use active demandmanagement methods to minimize the impact of shortages and discover new types ofsupplier arrangements that share this among supply chain partners while providingbenefit to all players. Finally, we will see which of the strategies we’ve learnt are notsoftware intensive and understand how we should go about evaluating software forthose cases where it is a critical part of the improvement strategy. This can preventcostly mistakes that don’t move the company forward.

Supply

Uncertainty

Low (StableProcess)

High (EvolvingProcess)

Grocery basic apparel, foodOil and gasEfficient Supply Chain

Hydroelectric power, SomeFood produceRisk Hedging Supply Chain

Fashion Apparel,Computers, Popular musicResponsive SupplyChain

Telecom, high endcomputers, semiconductors

Agile supply chain

Demand Uncertainty

Low (Functional Products) High (Innovative Products)

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Manufacturing Sector18.11 PRODUCT AND PROCESS DESIGN FOR SUPPLY

CHAIN MANAGEMENT

Product design for supply chain management means building products that thrive inand enhance our supply chain architecture. Simply ‘giving customers what theywant’, which is fundamental to customer satisfaction, is rarely enough. Companiesmust be able to give customers the right products in the most resource effectivemanner with out sacrificing quality or service. If our supplier, manufacturing and postsales support networks are being stressed to the breaking point, if our productsrequire excessive inventories to maintain service levels, if our offerings are notattracting new buyers in a saturated market or if our need to reduce cost andcomplexity throughout the supply chain, designing products to take advantage of andstrengthen our supply chain can provide extra ordinary benefits.

Three fundamental concepts are to be explored.

1) Component commonality.

2) Modularity versus integral design.

3) Universality.

A framework for costs and benefits will help understand the value of these ideas andwhat to expect as we integrate them into our product design plans. We will see anexcellent example of postponement, a strategy that can enhance service levels withlower inventories. We will also learn how to quickly estimate the positive impact of apostponement strategy in the company with out analyzing sales data or using complexcalculations. We will see examples of how postponement can be implementedthrough software applied to product packaging and even how it can help during a newproduct launch.

Product design is not the only place we can make improvements. The productionprocess itself is often overlooked as an incredible opportunity for enhancement. Re-sequencing production operations, shifting the push pull points, or even something assimple as administrative postponement can all provide significant benefits.

Mass Customization is often a hybrid of product and process design finding ways tooffer unique items with little or no additional lead-time can increase market share andbreathe new life in our products.

Focus on Various Ways that Product Design Interacts with Supply ChainManagement

Firstly, consider various designs for logistics concepts, in which product design is usedto lower the cost of logistics. Product designs for efficient packaging and storageobviously costs less to transport and store. Designing products so that certainmanufacturing steps can be completed in parallel to cut down to manufacturing lead-time, leading to a reduction in safety stocks and increased responsiveness to marketchanges.

Secondly, postponing product differentiations enables risk pooling across productsleading to lower inventories and allows firms to use the information contained inaggregate forecasts more effectively. Another critical design /supply chain interactioninvolves integrating suppliers into the product design and development process. Thereare different ways in which the suppliers can be integrated into the developmentprocess and considered keys to managing this integration effectively.

Finally, advanced supply chain management helps to facilitate mass customization.Mass customization involves the delivery of a wide variety of customized goods orservices quickly and efficiently at low costs. This approach helps to provide firms

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Emerging Trends important competitive advantages and effective supply chain management is critical ifmass customization is to be success full. Mass customization or BTO (Built to order),means designing your production operation to allow for customer orders to bemanufactured quickly. This is a means of eliminating demand uncertainty entirely.

Following are the important tools for coping with demand and supply uncertainty.

1) Outsourcing

2) Global sourcing

3) Mass customization

4) Postponement

Demand and supply uncertainty is a good framework for understanding SupplyChain Strategy. Innovative products with unpredictable demand and an evolvingsupply process face a major challenge. Because of shorter and shorter product lifecycles, the pressure for dynamically adjusting and adopting a company’s supply chainstrategy is great. Therefore, the concepts of outsourcing, global sourcing, masscustomization and postponement should be explored fully. They are important toolsfor coping with demand and supply uncertainty.

However, a good supply chain design for one company may not work for another.How supply chain should be structured to meet the needs of different products andcustomer groups, is what supply chain design is all about.

A good supply chain design helps a firm to have competitive advantage. Weaknessesin supply chain design can affect the performance of a firm. Keeping the above inmind, strategic framework for supply chain management is developed.

Within the strategic framework, we identify the key drivers of supply chainperformance i.e.

· Inventory

· Transportation,

· Information, and

· Facilities.

Then these drivers are used on a conceptual level during supply chain design anddifferent supply chain Methodologies are used along with analytical tools andtechniques to design and improve supply chain performance.

18.12 DESIGN FOR MANUFACTURING

Earlier, design engineers worked on developing a product that worked and productthat used materials as inexpensive as possible. Then, they worked on how to makethis design efficient. Then a stage came when management’s realized that productand process designs were key product cost drivers and manufacturing process shouldbe taken into account early in the design process to make it more efficient.

Earlier, we assumed that product design decisions were already made and designedsupply chain design and operation based on this assumption. We also assumed thatthe supply chain involves determining the best way to supply existing productsusing existing manufacturing processes. Now, we realize that a much moreefficient effective supply chain is possible to operate if we take logistics and supplychain management concerns into account in the product and process design phaseitself.

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Manufacturing Sector18.13 DESIGN FOR LOGISTICS

Design for logistics concepts suggest product and process design approaches thathelp control logistics costs and increased service levels this concept should beincorporated into early phases of product development. This concept involvesconsideration of material procurement and distribution costs during the product designphase. Product packaging and transportation requirements need to be incorporatedinto the design process .How a product is designed and the design of the componentsand materials themselves can have a significant impact on the cost to deliver theproduct. In efficient supply chain design, heavy emphasis is given on minimizinginventory and handling costs.

18.14 SUPPLY CHAIN MANAGEMENT: TRADE OFFCURVES

One of the fundamental tradeoffs in supply chain management is that betweeninventory levels and customer service. For any given supply chain, increasing thelevel of service (product/spare part availability) typically means higher levels ofinventory. Most companies have discovered their “best place” on the curve,depending on what their customers require and what their competition offers.However, supply chain strategies can shift the entire curve, lowering your inventorylevels without adversely affecting your customers (or the reverse, improvingcustomer service levels with no increase in inventory). How might this work?Through effective supply chain management you may be able to reduce lead times.This would shift the curve to the right, speeding up customer response times withoutraising inventories. Supply Chain reviews a strategy called postponement, or riskpooling that can lower the curve allowing you to maintain (or enhance) service levelswith less finished-goods inventory.

Figure 18.1: Lowering the inventory/service trade-off curve provides better customer response with lower inventories

This tradeoff curve provides a perfect example of how silo behavior (in whichfunctional areas lose sight of cross-functional optimizations) can cause problems insupply chains. One of the first steps in improving a supply chain is making sure thatorganizational responsibility for inventory levels and customer service areappropriately managed. These two responsibilities should not be separated - in fact,they should report to the same desk. Doing so enables a company to set expectationsand properly manage this tradeoff, without costly swings from one place on the curveto another as different functional groups “fight” for either lower inventories or higherservice.

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Emerging Trends18.15 GREENING THE SUPPLY CHAIN

Greening the supply chain involves incorporation of environmental protection andconservation initiatives into existing supply chain management activities and design,procurement and distribution processes.

Involvement of suppliers in environmental initiatives and need to look beyond theirown facilities is being realized by growing number of companies to achieve theirenvironmental goals and satisfies stakeholders’ expectations. This involves

· Screening suppliers for environmental performance.

· Working with them on green design initiatives.

· Providing training and information to build suppliers environmental capacity.

This involves clear, constant, frequent two-way communication with them aboutenvironmental issues and performance expectations. Working with them onenvironmental issues not only generates significant environmental benefits, but alsoopportunities for cost containment, improved risk management and enhanced qualityand brand image. Customer and stakeholders do not always differentiate between acompany and its suppliers and hold the company accountable for suppliersenvironmental and labor practices. Therefore, many companies are working tostreamline their supply base and develop more cooperative long-term relationshipswith key suppliers to achieve the green design initiatives.

18.16 SUMMARY

Redefining the basis of supply chain designs and strategies is prevalent now becauseof rise of new technologies, new forms of competition, and new avenues to addcustomer value. You have studied many factors that influence the design of supplychain. This is important as companies can only survive and prosper to the extent thatthey are able to change as fast or faster than the rate at which their industry ischanging. You have studied Demand Driven Supply Networks (DDSN) that aresupply chains driven by the voice of the customers. DDSN is a shorthand term forthe next generation supply chain that has been taking shape for sometime. It simplymeans building all supply chain processes; infrastructure & information flow to servethe down stream – source of demand- whether a consumer is in the super market orthe department of defence. You further studied about balance in Supply Chains asmost companies either keep costs down at the expense of service or keep servicelevels up at the expense of costs. Successful supply chain design requires severaldecisions relating to the flow of information’s, product and funds, hence we havecovered effective supply chain strategies and Hau Lee’s uncertainty framework.Finally you learnt about various ways that product design interacts with supply chainmanagement and supply chain management trade off curves.


1) Identify and describe factors influencing supply chain network design decisions.

2) Describe how a company achieves strategic fit between its supply chain strategyand its competitive strategy.

3) Identify and describe the major drivers of supply chain performance.

4) Describe how outsourcing works. Why would a firm want to outsource?

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5) What are the advantages of using the Postponement Strategy?

6) What are the characteristics of Efficient, Responsive, Risk Hedging and AgileSupply Chains?

7) Can a supply chain be both efficient and responsive? Risk - Hedging and Agile?

Why or Why not?

8) What are the basic building blocks of an effective mass customization program?

9) What kind of company wide cooperation is required for a successful masscustomization program?


1) Simchi-Levi, D; Kaminsky, P. and Simchi-Levi, E. (2000) Designing andManaging the Supply Chain: Concepts, Strategies, and Case Studies, IrwinMcGraw-Hill, Singapore.

2) Chopra Sunil, Supply chain management: Strategy, Planning andOperations, Peter Meindl ,Pearson Education (Singapore) Pte . Ltd.

3) Richard B. Chase , F. Robert Jacobs , Nicholas J .Aquilano, OperationsManagement for Competitive Advantage , Tata Mc GrawHill PublishingCompany Ltd.

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Emerging TrendsUNIT 19 SUPPLY CHAIN MANAGEMENT IN

SERVICE ORGANIZATIONS / NONMANUFACTURING SECTOR

Objectives

After reading this unit, you should be able to:

· discuss supply chain management of products vs. services;

· discuss the application of supply chain management principles to arange broadindustries in different sectors.

Structure

19.1 Introduction

19.2 Supply Chain Management of Products vs. Services

19.3 Financial Services Sector

19.4 Hospitality

19.5 Transportation

19.6 Software

19.7 Communication

19.8 Healthcare

19.9 Consultancy

19.10 Education

19.11 Government

19.12 Retailing

19.13 Summary


19.15 References and Suggested Further Reading

19.1 INTRODUCTION

Though traditionally Supply Chain Management has been applied only for productsand hence in the manufacturing sector, it is increasingly being recognized that thebasic principles of Supply Chain Management are equally applicable in the service/non-manufacturing sector also. With the tertiary sector growing at a faster rate thanthe other two and occupying a dominant share of GDP even in developing economies,it is critical that Supply Chain Management professionals develop an expertise inapplication of Supply Chain Management principles to this sector in order to enabletheir organizations to develop a sustainable competitive advantage and contribute tothe economy by enhancing shareholder value. Though the basic principles of SupplyChain Management remain the same, the very nature of services makes it necessaryto modify or adopt the same, as some traditional Supply Chain Managementstrategies are infeasible in case of services.

Hence, before beginning a discussion on the application of Supply Chain Managementprinciples to services, it is important to understand the basic differences in the natureof products and services.

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Manufacturing Sector19.2 SUPPLY CHAIN MANAGEMENT OF PRODUCTS

VS. SERVICES

The essential differences in the supply chain management of products vs. servicesare discussed below.

· Simultaneous Production/Consumption: A large number of services can onlybe rendered when actually demanded e.g. banking, nursing etc. This leads to thesecond major difference i.e. absence of “inventory” concept.

····· Absence of “Inventory” Concept: As stated above it is not possible to “store”a number of services in order to do a capacity matching between demand andsupply, as is possible in case of products. Hence, this needs to be done bybuilding up resources rather than the services to do demand – supply matching.

····· Low/no Cost of Inventory/Production: In a number of services/products(typically software), the incremental cost of either production or holding“inventory” is very low (or nil) in comparison to the value of product.

····· “Instantaneous/Rapid” Production: In case of products/services, which canbe digitally duplicated/copied, it is possible to “produce” virtually instantaneouslyat a very low cost e.g. movie prints, photograph copies etc.

····· Rapid/low Cost Distribution: Similarly, in case of electronic digital distributionover channels such as Internet, the cost of distribution is very low and speedextremely rapid.

····· “Impossible” Distribution: On the other hand, in case of some services,“distribution” is not possible as consumption has to happen at the spot of“production”. (E.g. restaurants, hotels, etc.).

····· Instantaneous Value Destruction: Unlike physical goods, which may graduallyloose value over a time, services may incur sudden time related value destructionfor e.g. once an aircraft takes off, the value of the unoccupied seats drops tozero.

Apart from these and such related other differences, most other Supply ChainManagement principles and models (e.g. optimization, queuing theory, forecasting,DRP etc.) can be applied with suitable modifications to the service sector.

We will be discussing the application of Supply Chain Management principles to thefollowing broad industries in the service sector, as they comprise a major part of thevalue generated by the sector.

1) Financial services - including banking, insurance, stock trading, FOREX tradingetc. and allied services.

2) Hospitality - including hotels, restaurants, travel and tourism comprising road,rail, shipping and aviation industries pertaining to passenger transport.

3) Transportation - consists of goods transport by road, rail air or water includingcourier and post.

4) Software - though software may be considered a product also, we will look atthe software development and distribution process from a service prospective.

5) Communication - this will include the Telco providing POTS as well as ISP’s,mobile and satellite services etc. as well as broadcasting, telecasting andpublishing industries.

6) Healthcare - includes hospitals, pharmacies and allied services.

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Emerging Trends 7) Consultancy - this would include knowledge management activities as well.

8) Education - both classroom and distance.

9) Government - this would include municipal, administrative, defence, police,judicial etc. services.

10) Retailing - includes trading and value added reselling.

We will now look in detail at the emerging trends in the supply chain of the above-mentioned industries using a few examples from each sector.

Activity 1

Can you list some further differences in the supply chain characteristics of productsand services?

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19.3 FINANCIAL SERVICES SECTOR

In this section we will discuss about banking, online mortgages, credit cards andbrokerages.

Banking

How banks are cutting costs and improving customer service - simultaneously -by changing their supply chains from brick and mortar branches to ATM’s andphone and net banking

Electronic banking emerged in prototype form in 1975 and was introduced by somemajor banks as early as circa 1985. However, the absence of a critical mass of PCsand a PC friendly population stunted its growth. But today, there are 35 million plusPCs in US homes alone and the consumers there are now spending more on buyingPCs than TV sets. Home banking software has come a long way too. The best partabout e-banking is that, it cuts costs too (the estimated per transaction cost using anATM is estimated at just 10% of that using a manual teller and net banking cuts thatdown further by about 90%!).

The banks have been distributing their services using the conventional supply chainfor a long time. The key now is to understand that banking is a value addedinformation business. The winners will be those who use technology to make itcontinually easier for customers to manage their money anywhere anytime at lowertransaction costs.

Online mortgages

No brokers, no branches and lower costs - AFI shows the way

American Finance and Investment (AFI) is a new breed of lender with no branchesand brokers. It aims to deliver a totally new experience to mortgage shoppers – theability to finance a new house without setting foot outside the old one!

It’s as easy as point, click and borrow. First you input data about your finances andyour dream house. An online questionnaire then helps you choose from an array ofloan alternatives. Once you have decided, you are qualified for a loan and offered achoice of mortgages.

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As AFI sells mortgages directly to consumers, via the Internet and two call centers, ithas none of the overheads of physical branches. The salaried call center agents canprocess four times as many loans as commissioned agents in the field.

The typical AFI consumer saves about $1500 in upfront fees. This is an enormousadvantage as consumers who may have hesitated to borrow from a low –price, no-name may be more willing to do so now, given the huge cost advantage – a directresult of the reengineered supply chain.

Credit Cards

No forms, no waiting - Credit cards on top from NextCard

NextCard is an excellent example of using e-service to streamline the supply chain ofa financial product. Earlier for applying for a credit card, you had to fill out doublesided forms with lots of tiny boxes supposed to encompass your financial historyincluding account numbers, addresses (office and residence), income etc. Now, inthe US, an application for a NextCard Visa Credit Card can be made on-line in 30seconds. All you provide is your name, address, social security number, annualincome and a few minor details. NextCard has figured out how to integrate itswebsite with the databases of the major credit bureaus, so that in just seconds, itidentifies who you are, looks up your current credit balances, does a calculation basedon that information and actually suggests which balances to transfer in order to getthe lowest rate on NextCard. The application gets approved (or rejected) in just 30seconds!

Brokerage

Charles Schwab shows the route to e-biz

Schwab is the supreme e-broker with 67% of its customers’ trades going over theweb. It boasts $263 billion in online revenue. Schwab.com now provides a place notjust to trade stocks but also to write cheques, buy insurance and pay billselectronically. The potential exists for Schwab to go to the public and say, “why doyou need a bank?” – on the strength of its unique supply chain.

Activity 2

Give an example of innovation in supply chain management for FOREX trading.

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19.4 HOSPITALITY

In this section we will discuss about Hotels, Resorts and Airlines

Hotels and Resorts

WorldRes - How WorldRes adopted a business model that took it on the netstartup’s fast track and attracted $30 million from investors

Rather than just struggling to build a brand in a small niche, WorldRes raised andspent more than $10 million to build a reservation booking engine targeted at smallhotels, inns and resorts that don’t have enough business guests to justify a terminaland the costly links to global reservation systems like Sabre or Apollo.

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Emerging Trends Then, when the content sites, which serve such niches, had developed enough trafficthat they were ready to move to transactions, WorldRes was there ready with itsbooking engine.

It functions as a virtual cash register that lets people check in real-time, the room andfacilities of their choice and its availability at a particular time and make thereservation on-line.

Though, there are other booking engines available for the content sites to link up withWorldRes’ competitors, all carry the burden of being older businesses that havemigrated to the web while it is in the enviable position of being the only pure Internetplay in leisure lodging.

This unique supply chain advantage has led to high investor valuation of WorldRes’stock.

It hopes to make most of its money on its booking engine, being the unseen, butlucrative back-end for thousands of resorts and small hotels that can’t justify payingfor a terminal and link to the global reservation systems.

This segment accounts for 85% of all hotels and WorldRes has exploited theweakness in the existing distribution system for small hotels. They have handled thecomplexity of a booking engine and hidden it from small hotels that are not technicallysophisticated.

They have also made smart distribution deals with the portals like Expedia, to drivetraffic to the hotels. With a mix of competitive supply chain technology that can turncontent into commerce and high stock valuation to fuel acquisitions, WorldRes is anexample of a company that is changing the way business is done in the hospitalitysector to become a leading player in its chosen segment.

Airlines

Southwest Airlines - Their site is so easy to use that web travelers don’t justresearch flights - they buy tickets

13.8% of visitors to Southwest’s site book a ticket – a “look-to-book” ratio twice thatof the nearest ticket booking rival and higher than that of any traditional retailer onthe web.

This key to success in turning eyeballs into buyers is simple, to use web design.Instead of the infinity of choices offered by other dotcoms, Southwest delivers a pagewhere a transaction takes just 10 quick clicks to complete using a popup giving faresand options to help users get a better flight or better price.

Activity 3

What can the aircraft charter services do in terms of supply chain activities toeffectively compete with scheduled airlines?

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Manufacturing Sector19.5 TRANSPORTATION

In this section we will discuss about Package Delivery Services.

Package Delivery Services

Federal Express (FedEx) Logistics processes deliver over 99% of packagesaccurately and on time everyday, in spite of handling more than a millionpackages daily

In a highly competitive market, FedEx is the leader with 48% share. It launched itsFedEx ship customer premises tracking software in 1994 itself. The worldwidesupply chain consists of over 1,00,000 people, 500 jet aircrafts and 35,000 trucks. Atime variance of even 30 minutes can wreck the schedule.

FedEx operates a super hub at the Memphis, Tennessee airport on a 240-acre sitewith 8,000 workers, unloading and reloading 130 Jumbo Jets using 171 miles ofconveyer belts, countless trucks, cargo tags and forklifts exploiting robotic sorters.

There are relentless cost cutting efforts such as additional package sorting hubs tocreate less circuitous air routes. A product movement planner (a client/serversystem for planning air and truck schedules) employs a built-in algorithm that findsthe least costly way to get a package to its destination. Productivity applications helpfield-station managers in weekly forecasting, local courier scheduling and city routeplanning. This help make light duty days more cost efficient by enabling appropriatestaffing levels.

The renowned COSMOS package scanning/tracking system uses PC attachedscanning gun along with older more sophisticated handheld Super Trackers, to readparcel bar codes. Smarter sorting capabilities like automated overhead laserscanners are constantly being invested in to augment package-handling processes.Using the “document sort”, workers manually sort by region a minimum of 38 piecesper minute.

Such continuous improvements in the widely acknowledged best practices keepFedEx at the leading edge of excellence in Supply Chain Management.

19.6 SOFTWARE

How Resounding Technology is using a low cost approach to achieve wideglobal distribution

Resounding Technology founder, Adam Frankl, uses “viral marketing” to distribute hissoftware “Roger Wilco” that transmits voice over the Internet and lets users link upin virtual conference calls.

He posted a copy on a “freeware” website inviting anyone to give it a try andforward the web address to a dozen friends (who in turn would Zap it to dozen more– triggering a chain reaction).

Within 24 hours, 2,800 people in 46 countries had downloaded the software. In 30days, it had spread to 1,00,000 people and the year-end target is to breach the onemillion mark.

Though this does not result in profits, on the Internet, hits matter more than profitsand distribution alone creates wealth, as large companies are willing to buy reach at a

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Emerging Trends premium. Hence what matters is reaching the maximum number of users in theminimum amount of time.

To accelerate the effort, the company is now bundling its software with popularcomputer games giving it major distribution reach through retail outlets.

This innovative approach to Supply Chain Management has led to the company takinga lead in the highly competitive market space.

19.7 COMMUNICATION

In this section we will discuss about Internet, Voice Calls, Fax, Broadcasting andPublishing

Internet, Voice Calls, Fax

New technologies to deliver communication services - easier, faster, cheaper

The convergence of digital technologies, networks and telephones is delivering high-end capabilities with simplicity and prices that are affordable to even small businessand home users.

After the emergence of super-simple networking kits and servers, it’s time for high-speed Internet access. A new technology DSL or Digital Subscriber Line serviceprovides an inexpensive easy way for small businesses and home users to get fastaccess to the Internet at speeds, approaching those previously affordable only 10large corporations using costly dedicated leased lines. It is more than 50 times fasterthan an ordinary 56 KBPS modem and there is no waiting – the connection is alwayson.

Using the net to make phone calls is another way to reduce costs. It is estimated thatby 2002, 18.5% of all domestic phone traffic in the US will be carried over data linesup from just 0.2% in 1999.

A new piece of hardware called a gateway server is the technology, bringing aboutthe transition of moving long distance phone calls from traditional circuit switchednetworks to packet-switched networks like the Internet.

How it works is simple – First you dial the local or toll free number of the closestgateway server. You get an automated voice prompt and punch in the long distancenumber you want to reach. The server converts your voice signal into packet dataand routes your call over the Internet. A server at the destination reconverts the databack to voice and directs the call over local lines. You pay only for the localconnections on either end of the servers.

Internet fax services too are mushrooming. They save long distance charges neededto fax lengthy documents and are also a boon to the business traveler. He can dial upany of several on-line fax services from his laptop to send his document. Faxes canalso be received this way through your e-mail inbox. These services are very handyfor so-called broadcast faxing – sending one document to multiple fax machines allover the world.

Some of these services are free, while charges for others are nominal. Somesoftware’s even combine voicemail, multiple voice mailboxes, call tracking, faxing andpaging.

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Broadcasting to “Narrow casting”

The news you want, on your PC

A new piece of software brings personalized, updated news to the PC on yourdesktop - and as advertisers pay – it’s free. PointCast is personalized news –retrieval service that takes advantage of the fact that many offices PCs are alwaysturned on and connected to the network. Whenever the machine is idle for a fewminutes, PointCast commandeers the screen and starts flashing headlines, weatherreports and small-animated advertisements. A green ticker scrolls across the bottom,reeling off sports scores and the current prices of stocks – customized for individualinterest. Click on a headline and up pops the full story. Click on the weathersummary and you get a variety of weather maps and forecasts of specific cities ofinterest. Click on a stock price to get the current share price, a chart of the stocksrise and fall over the past month and a dozen or so stories about the company. Clickon an ad and you will be connected to the company’s website. The ads are alwaysvisible in one corner of the PointCast screen. They are animated, colorful andimpossible to ignore completely – advertising at its best. Like all great software,PointCast hides its technological complexity. First you download the software fromthe company’s website. Then you set your preferences by selecting categories ofnews you like, sports you want to follow and companies you want to track. You caneven set PointCast to supply lottery numbers and your horoscope. Every hour or so,the software connects via. the Internet to a PointCast server. It gathers up the kindsof stories requested from various news services. The stories are automatically storedon the PC hard-drive, so that the news you want will be instantly available on yourscreen when you want it.

Thus, a startup, by innovating the news supply chain today delivers the kind ofpersonalized news broadcast that big media companies have been trying to for years.

Publishing

How a fashion magazine launches its premier issue with 30,000 subscribers andexpects to cross the circulation mark of 1,50,000 by its first anniversary usinginnovative distribution

While other big publishers spend $30 for every new subscriber, Ralph Clermont’s“wink” averages just $2. Instead of relying on inefficient direct mail campaigns, heuses the Internet. Mass e-mails are sent and staffers make strategic postings inchatrooms operated by women oriented sites. These messages direct users to wink’swebsite where they can sign up for a year’s free subscription. On some days, dailysubscriptions top 1,700. Thus an innovative supply chain used to reach potentialsubscribers helped make success of an idea that had failed six years ago when itslaunch was attempted the traditional way.

19.8 HEALTHCARE

In this section we will discuss about Electronic transactions and on-line health relatedinformation, Marketing healthcare – on-line, Selling medical equipments on the netand digital medical information

Electronic transactions and on-line health related information

Using the power of computing and the Internet to revolutionize the healthcareindustry

The healthcare industry in US is the stingiest spenders on I.T. While most industriesspend 5-10% of operating budgets, healthcare averages just 2.5%. 95% of medical

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Emerging Trends records are on paper. It is estimated that the overall waste in the industry is $300billion that can be saved simply by using the Internet to cut paper jams andseamlessly link patients, doctors, hospitals, pharmacies and insurance companies (fore.g. the conventional cost of verifying a patient’s insurance eligibility is $10 againstthat of on the Internet – 40 cents.)

However, the trend is changing. 48% of adult Internet users search of healthinformation on-line. Healthcare business-to-business e-commerce is expected to jumpfrom $6 billion in 1999 to $178 billion in 2003.

The legendary Jim Clark, founder of Silicon graphics and netscape, foundedhealthcare in 1995. After its merger with webMD, a Microsoft funded on-line healthstartup; it has emerged as a leader in areas as diverse as consumer healthinformation on the web and electronic transactions between doctors and healthinsurers.

The supply chain benefits to its customers have been impressive for e.g. at a sevendoctor office, staffers had formerly worked overtime to write as many as 50physician referrals a day. After implementing Healtheon’s on-line system, a referralnow takes about 30 seconds to complete and send over the webMD portal.

At an independent practice association, which clears insurance claims for more than2,500 doctors, a year ago 34 employees, each entered about 150 paper insuranceclaims a day into computer databases. Huge manuals guided the employees throughthe clearing or denying of the claim. With more than 2,00,000 claims coming in eachmonth, the place was buried in paper. Today, a third of its claims arrive on Healtheon/ webMD’s network, which can process 3,500 claims in 45 minutes. The claimsprocessing staff has been cut to 25.

Marketing healthcare – on-line

HealthCare’s power Retailers

The supply side of the health-care industry is likely to see the emergence of newbusiness models, notably power retailers who will use the Internet to create vastamazon.com style health care superstores. In addition, the health-care providers willhave the chance to integrate functions that can lower the costs and risks ofdeveloping new sales channels and customer friendly servicing.

The process would work as follows:

An employee armed with an annual defined contribution from his employer willaccess an on-line retailer of health benefits and make a plan selection based on thefeatures, risks and pricing that best meet the employee’s needs. The on-line storeswould take care of enrollment, card issuance, provider selection and other front-endservices. Though the information requirements to provide an open and rationalmarket place for health-care benefits (e.g. provider panels, coverage, family structurecomplexities, high quality data etc.) are staggering, the benefits are enormous.

It is estimated that in US alone, $18 billion of current spending can potentially besaved ($5 billion that the health plans spend on sales and marketing, $3 billion paid tobenefit consultants for design, selection and other services and the $10 billionemployers spend on internal administrative costs – a hidden often overlooked burdenthat adds roughly 10% to the $100 billion paid annually in employee premiums andclaims – a direct cost of current supply chain inefficiencies).

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Selling medical equipments on the net

A site where hospitals can click to shop

Hospital purchasing agents spend up to 15% of a hospital’s total budget onequipments and furnishings. Locating and purchasing the items for a new room cantake six months. Neoforma hopes to cut that time by two-third. Its website is an on-line catalog for the $150 billion-a-year clinical products industry. It aims to be a fullyfunctioning exchange, selling most of the $1.5 million products in this category. Tohelp suppliers, whose product information exists only in paper form, Neoforma has 60odd workers in Bangalore, who will digitize their catalogs for them.

Hospital buyers can search the site by product or by the type of room that areoutfitting. They can see floor plans for more than 1,000 rooms at one of thecountry’s leading hospitals. On clicking on a room, a list of all the items that belong inthat room – from life saving medical equipment to trash cans – appears. Click on aproduct and up pop descriptions, pictures and prices from multiple suppliers alongwith links to their websites.

The sites search engine is equipped with the world’s most comprehensive taxonomyfor medical products. The site thus acts to connect suppliers to customers, they didnot even know existed. It has thus become a vital link in the supply chain of thiscrucial sector.

Digital medical information

Medicalogic, a dominant supplier of conventional systems for electronic medicalrecords is testing a system that enables physicians to record and review patientinformation over the web from any computer wherever they happen to be. The newproduct is not only better, it costs only $199 a month which includes use of a newcomputer. While doctors pay an average of $25,000 a piece for the company’spresent non-internet medical records system. Thus the web has allowed Medicalogicto eliminate a major obstacle in the healthcare documentation supply chain.

Also under development is a website that provides patients with free access to theirown records once again from any computer anywhere – records that are currentlyspread across dozens of pharmacies, doctor’s offices and hospitals, much of them inpaper form.

19.9 CONSULTANCY

Managing Knowledge – The Consultants way

Consultancy firms can essentially be defined to be in the “Knowledge Management”business using the latest IT tools to improve and optimize the knowledge supply chain,which may be described as create-clarify-classify-communicate-comprehend-create,can generate an enormous competitive advantage for such firms. KPMGInternational uses a global knowledge-sharing platform, KWORLD and invests 1% ofits US $10 billion revenue on Knowledge Management. This project involvedinternational standardization of IT (software and hardware platforms). The challengewas to get all the best practices from each of the local offices into one system wheneach of the offices were used to managing their own systems.

The benefits were improved (productivity due to standardized interfaces andintegration of e-mail with calendar, diary and scheduling). Offline mail access helpswith 70% of staff having portable equipment and able to access their mail fromclients’ sites, home or even airport lounges. The entire exercise also involved training

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Emerging Trends thousands of people, which was entirely handled internally (including writing thecourse). The results were spectacular. E-mail usage grew exponentially beforeplateauing out at 1,00,000 per week. More than 50% of users are covered by Internetbrowsing and all users can browse the Intranets.

Thus there is a complete linkage to the centralized Knowledge Management contentand a fully integrated practice management system – Nexus. This has resulted in anefficient, scam-less knowledge supply chain.

Major consulting firms, which are deeply concerned with the management ofresearch time, are also the lead users of a new technology-software that allowsInternet users to filter out extraneous information and zero in on the data they reallyneed. Their practice areas are defined by area experts who determine the context,the competitive theories and ‘hot’ topics in which information takes shape. Theyneed a technology that brings the highest quality content for each topic – technologythat is now beginning to become available.

The Boston based knowledge management firm, context media, has a distinctivetechnology that relies on ‘semantic tagging’. This entails a design intensive processin which software writers develop custom ‘recognition frameworks’ i.e. languagerules for each topic. The software, once, deployed, automatically tags continuingstreams of on-line documents every night.

This enables consultants to get documents that link to other documents on the sametopic without having to waste time going back up some search hierarchy. Thetagging software embeds invisible hooks into every article that downloads and acustom interface allows users in a particular working group to pull up selected articlesinstantaneously with a click. Such innovative net filters are helping to unclog theknowledge supply chain making it faster and more efficient.

19.10 EDUCATION

Delivering education through unconventional channels - triggered by theInternet, continuing adult education could become a great growth industry

Education is already grabbing a major chunk of GNP in developed economies. TheUS alone spends $1 trillion on education and training. This number will increaserapidly but the major growth is expected not in traditional schools (which currentlyaccounts for 10% of GNP – up to high school 6%, colleges and universities 4%), butin continuing adult education – triggered by a supply chain revolution – onlinedelivery. This opportunity has opened up, as knowledge is mobile, transferable andhighly marketable.

However, with a potential market for continuing adult education embracing at least40% of the typical developed country’s workforce, the conventional supply chainusing traditional institutions no longer suffices. It is too expensive and insufficientlyaccessible in a physical sense. Online teaching is not just time-efficient and cost-efficient, but also learning-efficient. It’s flexibility and interactivity allows the studentto control the content and pace and its ability to blend graphics and pictures with thespoken word and text gives it an advantage over the traditional classroom.Effectively, it gives a one-to-one teacher-student ratio, improving the productivity ofeducation enormously. This new channel of distribution will complement thetraditional media creating a new and distinct educational realm. This is the future ofeducation and a global market potentially worth hundreds of billions of dollars – allcreated and accessible through the new education supply chain.

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Manufacturing Sector19.11 GOVERNMENT

Electronic - Governance - The Information Age Government

The advent of information technology as a highly leveraged enabling tool for deliveryof services has by now been universally recognized. This has re-defined thefundamentals and has the potential to change the institutions as well as mechanismsof delivery of public services forever.

The objective of achieving E-Governance (EG) goes far beyond merecomputerization of stand alone back office operations. It means to fundamentallychange as to how the government operates and this implies a new set ofresponsibilities for the executive, legislature and the citizenry.

Within 5 years, a majority of the transactional services will be provided by way ofInternet. A government Intranet can ensure smoother flow of data, communicationsand access to information by different ministries and department. Transactionsbetween various departments of the government and other government organizations,if networked, can replace a substantial part of transfer of files and papers.

There should be a single web based front end for all government services to thepublic, with all departments and agencies operating websites that provide up to dateinformation. E-mail should be incorporated into the normal range of contact methodsand arrangements implemented for rapid response to e-mail queries. Use of locallanguage for access will go a long way in spreading the use of such services. Thepublic servants too need to be trained to bring about a change in mindset as well as inbasic computer usage. The manual office procedures also need to be redesigned.Appropriate investment in IT infrastructure need to be made. Information kiosks inpublic places can enhance accessibility to public. Effective cyber laws are needed tovalidate and enforce such transactions.

Effective implementation of such steps will revolutionize the supply chain ofgovernment services.

Activity 4

What will be the differences in the supply chain of services provided by thegovernment in a developed country (say the U.S.A) and a developing country (sayIndia)?

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19.12 RETAILING/TRADING

Freemarkets Inc. - How web auctions - a new B2B supply chain tool - arerevolutionizing the multi trillion-dollar market for industrial parts

Freemarkets Inc, the Internet auction company founded in 1994 for $50 million wasworth $7 billion in market capitalization within five years. It has lead to the rise of the

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Emerging Trends auction economy by implementing a break through idea that is having a seismicimpact on 21st century industry. Using it big, shrewd buyers like General Motors,United Technologies, Raytheon, Quaker oats who thought that they were alreadygetting rock bottom prices, have saved more than 15% on average buying parts,materials and services. Not only the prices, but the billions of dollars of transactioncosts incurred by companies as blizzards of faxes, invoices etc, can be eliminated byautomating orders, payments and products information by such electronic catalogs.However, unlike other auction sites holding sellers auctions’ (where buyers enter theirbids and the highest price wins) for standard processed materials, Freemarkets usedits insight to take the Internet into a much bigger far more complex kind of corporatepurchase – that for manufactured components. For manufacturers, 35% of sales (or5 trillion dollars worldwide!) go towards purchasing industrial parts.

Though, constituting the largest part of cost of goods sold, they were also traditionally,the most inefficient to buy. Traditionally, the manufacturer typically sends out“requests for quotations” (RFQ’s), a few months before the existing contract expires,problem was that these could be sent only to a limited number of candidates andoften did not spell out a lot of other important terms apart from the specifications. Asthese terms (e.g. delivery schedule, supplier inventory etc) can have an enormousimpact on the total acquisition cost, the bids typically also differ in the terms offered.Hence it’s extremely difficult to pick the best deal. Also, as the bids were sealed, thesuppliers have no idea what prices their competitors are offering. Hence, they had totake a blind guess at how low they must go to win.

Hence, largely most manufacturers choose the path of least resistance by keeping thecurrent supplier as long as he is willing to keep the price more or less flat.

Freemarkets unshackled the power of the purchaser by turning the once secretiveRFQ into an open bidding war. Standardizing absolutely every item in the RFQ,turning industrial parts into commodities, does this. All that remains is to find thelowest price, best done through an auction.

Freemarkets not only conducts the auction but also acts as a consultant showing newclients, how to spell out every possible requirement in their RFQ’s. It is also anexpert at finding and screening suppliers. The buyers can then shortlist the field tothose it wants to invite as bidders.

The auction itself is a tense 20 – 30 minute sweepstakes climax. These are called“buyer’s” or “reverse” auctions as the buyer quotes the initial starting price and thebids move downwards. Linked over the Internet, the sellers don’t have to guess attheir competitors’ bids as they can see exactly what the opposition is bidding, in realtime. Thus a revolution in the procurement end of the supply chain is cutting millionsoff the purchase bills of big buyers while at the same time offering a new businessopportunity to intermediaries like Freemarkets.

19.13 SUMMARY

Traditionally when we talk about Supply Chain Management we think for productsand manufacturing. The basic principles of Supply Chain Management are equallyapplicable in the service/non-manufacturing sector also. This unit has taken updiscussions on the application of Supply Chain Management principles to the broadindustries in the service sector viz. Financial services, Hospitality, Transportation,Software, Communication, Healthcare, Consultancy, Education, Government andRetailing. These industries comprise a major part of the value generated by thesector.

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Manufacturing Sector19.13 SELF ASSESSMENT QUESTIONS

1) What strategies can be used to desynchronize production and consumption incase of services?

2) How can one compensate for the absence of inventory to meet demandfluctuations in case of services?

3) Suggest some ways to make distribution possible in case of the “impossibledistribution” examples.

4) Suggest some supply chain strategies for treasury management.

5) List the supply chain principles embodied in a “debit card”.

6) What supply chain strategies can rail companies use to stop the erosion ofmarket share to air travel in case of passengers and road in case of freight?

7) How can telephone companies protect their markets from competition fromISP’s using supply chain strategies?

8) Which players in the healthcare sector are likely to die out as a result ofchanging supply chain scenario?

9) What are the peculiar characteristics of “knowledge” as a product relevant toits supply chain management?

10) What is the future of brick and mortar educational institutions given therevolution in the educational supply chain?

11) How can government overcome infrastructure bottlenecks to streamline itssupply chain?

12) Comment on the prospects of retailing of services as a future growth industry.

13) In the new banking scenario, branches are a liability – comment.

14) Outline a supply chain strategy for timeshare resorts to enable them to get acompetitive advantage over traditional hotels.

15) How can bulk freight carriers take advantage of technological innovations tostreamline their supply chain?

16) Why is software more a service than a product given its supply chaincharacteristics?

17) What impact will m-commerce (mobile commerce) and d-commerce (digitalcommerce) have on traditional e-commerce (electronic commerce)?

18) How can traditional book, music, television and film industry react to newdistribution technologies to enhance customer value delivery?

19) With more medical information available online than a human mind canassimilate, how will the role of doctors change in delivery healthcare services?

20) With information freely available on the Internet, the demand for consultants willreduce – comment.

21) What are the essential differences in a B2C and a B2B supply chain. List therespective characteristics that necessitate such differences?

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Emerging Trends19.13 REFERENCES AND SUGGESTED FURTHER

READING

1) Above The Crowd; Banking in the New Millennium, FORTUNE, 06/07/1999

2) American Association of Health Plans, Washington, D.C.: www.aahp.org

3) Bill Gates, Business @ the Speed of Thought, Warner Books, 1999

4) “Bringing Banks Online”, FORTUNE, 01/24/2000

5) Charles C. Poirier, “The Path to Supply Chain Leadership”, Fall 1998 SupplyChain Management Review

6) Christopher Helman </forbes/by/CHelmanx.htm>, “On A Wink And A Prayer”,from May 29, 2000 Issue </Forbes/00/0529/>

7) David Bovet and Yossi Sheffi, “The Brave New World of Supply ChainManagement”, Spring 1998 Supply Chain Management Review

8) eBenX, Minneapolis, Minn.: www.ebenx.com

9) For more discussion on health care’s new electronic marketplace, visit theStrategy + Business Idea Exchange at www.strategy-business.com/ideaexchange/

10) “Going, Going, Gone!” FORTUNE, 03/20/2000

11) Health Care Financing Association, Baltimore, Md.: www.hcfa.gov

12) James D. Krasner and Michael Soignet, CASE STUDY – “Strategic VisionDrives Domino’s Pizza Distribution”, Fall 1997 Supply Chain ManagementReview

13) James W. Michaels, “Drucker’s Disciple”, Forbes Global (05-15-2000), May16, 2000

14) J.Philip Lathrop and David C. Carlebach, “HMOs ‘R’ Us: A Prescription forthe Future,” Strategy+Business, Fourth Quarter 1998

15) John McCarron, “Stand By for the Next ‘Worst Leg’ of Our Health InsuranceTrip,” Chicago Tribune, February 14, 2000

16) Nicole Ridgway </forbes/by/NRidgway.htm>, “Plowing The Web”, From May29, 2000 Issue </Forbes/00/0529/>

17) “NEWS TRENDS; THE COMPETITION HEATS UP IN ONLINEBANKING”, FORTUNE, 06/26/1995

18) 18.Peter F. Drucker, Peter Drucker Is High On Webucation “Putting More NowInto The Internet”, Forbes Global (05-15-2000), May 16, 2000

19) Peter J. Metz, “Demystifying Supply Chain Management”, Winter 1998 SupplyChain Management Review

20) Robert E. Sabath and David G. Frentzel, Robert E. Sabath is vice president ofMercer Management Consulting Inc. David G. Frentzel is a consultant toMercer and principal of Northeast Logistics, “Go for Growth! Supply ChainManagement’s Role in Growing Revenues”, Summer 1997 Supply ChainManagement Review

21) Rayport, J. and Sviokla, J. “Exploiting the Virtual Value Chain” HarvardBusiness Review, November/December 1995.

22) Robyn Meredith </forbes/by/RMeredit.htm>, “Digital Drive”, On The Cover </forbes/Section/OnTheCov.htm>, From May 29, 2000 Issue </Forbes/00/0529/>

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23) Ron Winslow and Carol Gentry, “Companies Consider Letting EmployeesHandle Their Health-Benefits Decision,” The Wall Street Journal, February 8,2000

24) Silvia Sansoni </forbes/by/SSansoni.htm>, Technology </forbes/Section/Technolo.htm>, Internet </forbes/SubSect/Internet.htm>, “Word-of-modem”,Issue </Forbes/99/0705/>, July 5, 1999

25) Shailagh Murray, “Why Health Insurance That Works Still Fails to Catch onBroadly,” The Wall Street Journal, January 18, 2000

26) “The Trouble With Web Advertising”, FORTUNE, 04/12/1999

27) “The New Online Mortgages”, FORTUNE, 04/13/1998

28) Walter J. Doherty and Ahrvind J. Thadani, “The Economic Value of RapidResponse Time” <http://vmdev.gpl.ibm.com/devpages/JELLIOTT/evrrt.html>,1982 and 1997.

26619608 Notes Logistics Supply Chain Management Ignou

Documents

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government public enterprise

public enterprisesunit

management of finance

enterprise performanceblock

scope of public enterpriseunit

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scm integrationunit