Ch1 Week 1

7/27/2019 Ch1 Week 1

1/101

CHAPTER 1

INTRODUCTION TO LOGISTICS AND

SUPPLY CHAIN MANAGEMENT

7/27/2019 Ch1 Week 1

2/101

Himalaya Publishing HouseLogistics and Supply ChainManagement

K. Shridhara Bhat

Chapter 1

Introduction to Logistics

and Supply Chain

Management

Learning Objectives After reading this chapter, you should be able to:

Know what is a supplychainand what is supplychain management.

Discuss the process view of a supply chain.

Know what is logistics and what is logistics management. Understand what is meant by integratedsupply chains.

Describe the focus areas in supply chain management.

7/27/2019 Ch1 Week 1

3/101


K. Shridhara Bhat

Chapter 1


and Supply Chain

Management1.0 Definition

Supply chain management encompasses all activities associated with theflow and transportation of goods from raw materials to the end user, as well

as the associated information flows. Materials and information must

simultaneously flow both up and down the supply chain to leverage strategic

positioning and to improve operating efficiency.

Supply chain management is viewed today, as a critical business activity that

is integrated with the business planning process itself.

Both customers and suppliers today form the integral part of any supply

chain management strategy. World wide what most of the companies arefocusing on today is creation of a new effective value chain.

7/27/2019 Ch1 Week 1

4/101


K. Shridhara Bhat

Chapter 1


and Supply Chain

ManagementThe supply chain can be analysed in multiple dimensions,

of which the important or major dimensions are :

(i) The knowledge dimension

(ii) The information technology aspect and

(ii) The human interface

(i) The Knowledge Dimension: The company must remain completely informed

about itself, its suppliers and the customers. They need detailed information of thesupplier industry from which they are sourcing.

(ii)The Information Technology Aspect: Companies view Information Technology

as strategically important to supply chain management. With the proliferation of

Information Technology (IT), flow of information is no longer a bottle neck.Customised solution within ERP packages provide necessary critical leverage. ERP

has already revolutionised the way, companies are doing business today. There are

many third-party solution providers for supply chain management, for example,

companies like CSX corp, Camelot IS-2, i2 Technologies etc.

7/27/2019 Ch1 Week 1

5/101


K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

iii. The Human Interface: Because of the increased IT leverages, there is agradual shift of the human interface with a low transactional level to a much

higher decision making level.

1.1 What is a supply chain

A supply chain refers to the way that materials flow through different

organisations, starting with raw materials and ending with finished products

delivered to the ultimate consumer.

A supply chain is a sequence of suppliers, transporters, warehouses,

manufacturers, wholesalers/distributors, retail outlets and final customers.

Exhibit 1.1a illustrates a typical supply chain for a manufacturing

organisation and Exhibit 1.1b illustrates a typical supply chain for a service

organisation.

7/27/2019 Ch1 Week 1

6/101


K. Shridhara Bhat

Chapter 1


and Supply Chain

ManagementSupply Chain for a Manufacturing Organisation

Supply Chain for a Service Organisation

7/27/2019 Ch1 Week 1

7/101 Himalaya Publishing House

Logistics and Supply Chain

Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.2 Importance of Supply Chain Management

Of late, supply chain management is gaining growing importance because of thefollowing reasons:

i. The total time for materials to travels through the entire supply chain can be

quite long (say 6 months to one year or more).

ii. Many companies have drastically improved their internal operations and now

find it necessary to consider relations with external customers and suppliers inthe supply chain to gain further improvements in their operations.

iii. Supply chain thinking is an application of systems thinking and provides a basis

for understanding processes that cut across a companys internal department and

processes that extend outside the company as well.

iv. The goals of supply chain management are to reduce uncertainty and risks inthe supply chain, thereby positively affecting inventory levels, cycle time,

processes and ultimately end-customer service levels. The focus is on

system optimisation.

7/27/2019 Ch1 Week 1



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.3 Some definition of supply chain management1.Supply chain management is the integration of the various activities

encompassed by the supply chain through improved supply chain relationshipsto achieve a sustainable competitive advantage.

2.Supplychain management is defined as the systematic, strategic coordinationof the traditional business functions and the tactics across these businessfunctions within a particular company and across business within the supply

chain, for the purposes of improving the long-term performance of theindividual companies and the supply chain as a whole.

3.Supplychain management is the ability to get closer to the customer.

4.Supplychain management encompasses the planning and management of allactivities involved in sourcing and procurement, conversion and all logisticsmanagement activities. It also includes coordination and collaboration with

channel partners, intermediaries, third party service providers and customers.In essence SCM integrates supply and demand management within and acrosscompanies.

7/27/2019 Ch1 Week 1



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

What is Integrated Supply Chain Management?Integratedsupply chain management is a proven business strategy that has

gained wide acceptance in recent year due to increasing customer demands

for quality, delivery and speed. New and radical ways of communicating,

coupled with cost reduction and more interdependent supplier, provider and

customer relationships, have contributed to the emergence of an integratedsupply chain approach.

i. Supply-chain management has become a hot competitive advantage as

companies struggle to get the right stuff to the right place at the right time.

ii. Supply chain management builds a chain of suppliers that focus on both

minimising waste and maximising value to the ultimate customer.

7/27/2019 Ch1 Week 1



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.4 Overview of Supply Chain Management

1.4.1 How is Inventory Created? :A basic purpose of supply-chain managementis to control inventory by managing the flow of materials.Inventory is a stock of

materials used to satisfy customer demand or support the production of goods or

services.

Inventories may be held in the form of raw materials and bought out components,

work-in-process (WIP) and finished goods.

1.4.2 Materials Management :One area of operations and logistics playing a

major role in supply chain management is that of materials management, which is

concerned with decisions about purchasing materials and services, inventories,

production levels, staffing patterns, schedules and distribution, either directly or

indirectly.

Traditionally, organisations have divided the responsibility for materials

management among three departments : purchasing, production control and

distribution.

7/27/2019 Ch1 Week 1

11/101

Himalaya Publishing House


Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Many firms have restructured to centralise most materials management

tasks in one department called materials management department,although the name logistics management is also used sometimes. Thisapproach brings together all tasks related to flow of materials, from the

purchase of raw materials to the distribution of finished products orservices.

1.4.3 Supply Chains :A supply chain consists of all stages involved,directly or indirectly, in fulfilling a customers request. It not onlyincludes the manufacturer and suppliers, but also transporters,warehouses, retailers and customers themselves.

A supply chain is dynamic and involves the constant flow ofinformation, product and funds between different stages. Each stage of

the supply chain performs different processes and interacts with otherstages of the supply chain.

7/27/2019 Ch1 Week 1

12/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

A typical supply chain may involve the following stages :

Customers

Retailers

Wholesalers/distributors

Manufacturers and

Component/raw material suppliers.1.4.4 Objective of a Supply Chain :The objectives are :

(i)To maximise the overall value generated.

(ii) To achieve maximumsupply chain profitability.

(iii)To reduce the supply chain costs to the minimum possible

level.

7/27/2019 Ch1 Week 1

13/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.4. 5 Decision Phases in a Supply Chain

The three decision phases in a supply chain are :(i) Supply chain strategy or design

(ii) Supply chain planning and

(iii) Supply chain operation.

These three phases are briefly described in the following section.

i. Supply Chain Strategy or Design : Strategic or long-range decisions madeby companies include (i)The location and capacities of production andwarehousing facilities, (ii) Products to be manufactured or stored atvarious locations, (iii)Modes of transportation to be made available alongdifferent shipping legs and (iv)Type of information system to be utilised.The companysstrategic objectives must be supported by its supply chainconfiguration.

ii.Supply Chain Planning :The planning phase starts with a forecast for thecoming year of demand in different markets. Supply chain planningincludes decisions regarding the following.

7/27/2019 Ch1 Week 1

14/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

i. Which market to be served from which locations.

ii. The planned build up of inventories.

iii.The subcontracting of manufacturing.

iv.The replenishment and inventory policies to be followed.

v. Policies regarding back up locations in case of a stock out and

vi.The timing and size of marketing promotions.

iii.Supply Chain Operations : The supply chain operation aims at

implementing the operating policies in the best possible manner. Various

activities involved in this phase are : (i) Allocating individual orders to

inventory or production, (ii) Setting dates for fulfilling orders, (iii)

Generating pick lists at a ware house, (iv) Allocating an order to a

particular shipping mode or shipment, (v) Getting delivery schedules oftrucks and (vi)Placing replenishment orders.

7/27/2019 Ch1 Week 1

15/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

The design, planning and operation of a supply chain stronglyaffect the

overall profitability and success of a firm.

1.4.6 Process View of a Supply Chain

Two different ways to view the process performed in a supply chain are.

1.Cycle view 2. The push-pull view

1.Cycle View : According to this view, the processes in a supply chain aredivided into a series of cycles, each performed at the interface between two

successive stages of a supply chain. All supply chain processes can be broken

down into the following four process cycles:

(a) Customer order cycle, (b) Replenishment cycle, (c) Manufacturing

cycleand (d)Procurement cycle.

7/27/2019 Ch1 Week 1

16/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

ManagementExhibit 1.2 : Supply Chain Process Cycles

The four process cycles in the supply chain are briefly discussed

in the following section :

7/27/2019 Ch1 Week 1

17/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Customer Order Cycle : This occurs at the customer/retailer interface

and include customer arrival, customer order entry, customer orderfulfillments and customer order receiving.

(i) Replenishment Cycle : This occurs at the retailer/distributor interfaceand includes all processes involved in replenishing inventory of theretailer. The processes involved in the replenishment cycle include:

Retail order trigger, Retailer order entry, Retail order fulfillment andRetailer order receiving.

(ii)Manufacturing Cycle :This occurs at the distributor/manufacturerinterface and includes all processes involved in replenishing distributor(or retailer) inventory. The process involved in the manufacturing cycleinclude (a) Order arrival from the distributor, retailer or customer (b)

Production scheduling, (c) Manufacturing and shipping and (d)Receiving at the distributor, retailer or customer.

7/27/2019 Ch1 Week 1

18/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

iv.Procurement Cycle : This occurs at the manufacturer/supplier

interface and includes all processes necessary to ensure that materialsare available for carrying out manufacturing as per the schedule.

2. Push/Pull View of Supply Chain Process :All processes in the

supply chain fall into one of two categories: (i)Push processes and

(ii) Pull processes. Pull processes may be regarded as reactive

processes because they react to customer demand. Push processesmay be regarded as speculative processes because they respond to

forecast (speculative) demand rather than actual demand.

The push/pull boundary in a supply chain helps to separate, push

processes from pull processes.

7/27/2019 Ch1 Week 1

19/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.3 Push/pull Processes for a Personal Computer

Manufacturing Companys Supply Chain

7/27/2019 Ch1 Week 1

20/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.5Nature and Scope of Supply Chain Management

Three important activities involved in supply-chain management are (i)

purchasing, (ii) logistics, (iii) warehousing and expediting. These

activities form the framework for studying the nature and scope of

supply chain management.

1.5.1 Purchasing

Purchasing is responsible for obtaining the materials, parts and supplies

needed to produce a product or provide a service.

Purchasing Interfaces :Purchasing is the link between the

organisation and its suppliers. Operating units constitute the main

source of requests for purchased materials and close co-operation

between these units and the purchasing department is vital if quality,

quantity and delivery goals are to be met.

7/27/2019 Ch1 Week 1

21/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Accounting :is responsible for handling payments to suppliers, dataprocessing is handled by the accounts departments which keepsinventory records, checks invoices and monitors vendor performance.

Design and engineering : usually prepare material specifications whichmust be communicated to purchasing.

Receiving : checks incoming shipments of purchased items to determine

whether quality, quantity and timing objectives have been met andmoves the goods to temporary storage.

Suppliers or vendors work closely with purchasing to learn whatmaterials will be purchased and what kinds of specifications will berequired in terms of quality, quantity and deliveries.

7/27/2019 Ch1 Week 1

22/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

The Purchasing Cycle :The main steps in the purchasing cycle are :

i. Purchasing receives the requisition

ii. Purchasing selects a supplier

iii. Purchasing places the order with the vendor

iv Monitoring orders and

vReceiving orders. Value Analysis : Value analysis refers to an examination of thefunction of

the purchased parts and materials in an effort to reduce the cost and/orimprove the performance of those items.

Outsourcing : Outsourcing refers to buying goods or services from outsidesources instead of making the goods or providing the services within the

firm. The reasons for outsourcing are :

7/27/2019 Ch1 Week 1

23/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

i. Outside source can provide materials, parts or services better, cheaperor more efficiently (if they are large-scale producers having

economy of scale).

ii. Expertise and knowledge of outside sources.

iii. A supplier may hold a patent on a necessary part/component.

iv. To have the advantage of flexibility.When companies downsize and narrow their focus on core activities.

JIT Purchasing : Just-in-time manufacturing techniques requires just-in-time purchasing. The easy part of JIT purchasing include having to deal withfewer suppliers and forming long-term relationships with suppliers whoemphasise co-operative spirit than low price. On-time delivery is usually the

primary need of JIT manufacturers, followed by small lot sizes.

7/27/2019 Ch1 Week 1

24/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management Suppliers:Good suppliers are a vital link in the supply chain.

Choosing Suppliers : When choosing suppliers, the key considerations

are:i Quality of the products or services and

ii On-time delivery.

Evaluating Sources of Supply (Vendor Analysis)

Vendor analysis is the process of evaluating the sources of supply

in terms of price, quality, reputation and service. The main factors acompany takes into account when it selects a vendor are:

(i)Price :

(ii)Quality :

(iii)Services :

(iv)Location :(v)Inventory Policy of Supplier :

(vi)Flexibility :

7/27/2019 Ch1 Week 1

25/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Supplier Audits : Periodic audits of suppliers are helpful in gettingcurrent information on suppliers production capabilities, quality and

delivery problems and so on. Suppliers audits are also an important

first step in the supplier certification program.

Supplier Certification : Supplier certification is a detailed examination

of the policies and capabilities of a supplier. Supplier Partnerships : Nowadays, companies have become

increasingly aware of the importance of building good relationships

with their suppliers. Keeping good relations with suppliers helps in

maintaining a competitive edge. Many companies are adopting a view

of suppliers as partners. Suppliers can be a source of ideas thatcontribute to the competitiveness of an organisation.

Ch 1

7/27/2019 Ch1 Week 1

26/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management1.5.2 Logistics

Logistics refers to the movement of materials within a productionfacility, the shipment of incoming materials from suppliers and theshipment of outgoing products to customers.

Movement Within a Facility :The activities involved in the movementof materials within a production facility are :

(i)Removing materials from incoming vehicles and placing them on the

receiving dock.(ii) Moving materials from the receiving dock to inspections.

(iii) Moving materials from inspection to the warehouse and storing themuntil needed.

(iv)Retrieving materials from the warehouses and delivering them to

production operations when needed.(v) Moving materials between production operations.

Ch 1

7/27/2019 Ch1 Week 1

27/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

(vi)Moving finished products from final assembly and storing them in the

finished goods warehouse.(vii) Retrieving finished goods from the finished goods warehouse and

delivering them to packaging and shipping departments.

(viii)Moving packaged finished goods to the shipping dock and

(ix)Loading finished goods into outgoing vehicles at the shipping dock.

Incoming and Outgoing Shipments : Overseeing the shipment ofincoming and outgoing goods comes under the heading of trafficmanagement. This function handles schedules and decisions onshipping methods and times.

Ch t 1

7/27/2019 Ch1 Week 1

28/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Evaluating Shipping AlternativesA situation that arises frequently in some businesses is making a choice

between quicker (but more expensive) shipping alternatives such as

overnight and slower but cheaper alternatives. In some instances, there

is an overriding factor present that justifies sending a shipment by the

quickest means possible, so there is little or no choice involved.However, in many instances, urgency is not the primary consideration,

so there is a choice.

Ch t 1

7/27/2019 Ch1 Week 1

29/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.5.3 Warehousing and ExpeditingWarehousing is the management of materials while they are in storage. It

includes storing, dispersing, ordering and accounting for all materials and

finished goods from the beginning to the end of the production process.

Contemporary Developments in Warehousing

Bar Coding : Bar codes are patterns of alternating wide and narrow blacklines and white spaces and numbers and symbols that are seen on everyday

products at supermarkets and retail stores.

The use of EDI linkages with other organisations can be part of a strategy

to achieve a competitive advantage by leveraging logistics performance.

Chapter 1

7/27/2019 Ch1 Week 1

30/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Distribution Requirements Planning : Distribution requirements planning(DRP) is a system for inventory management and distribution planning.

JIT Deliveries : JIT systems often require frequent deliveries of smallshipments that can make a tremendous burden on the delivery system inseveral respects:

(i) The increased traffic that results.(ii) There is a likely increase in transportation costs per unit.

(iii) Any strike of transport services or postal services affect the deliveryschedules causing disruption of the JIT-based companies.

Chapter 1

7/27/2019 Ch1 Week 1

31/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.6 Managing the supply chain

Because supply chain management deals with the complete cycle of

materials as they flow from suppliers to production to warehousing to

distribution to the customer, there are many opportunities to enhance value.

Some of these opportunities are:

Postponement : Postponement means delaying any modification or

customization to the product as long as possible in the production process.

Channel Assembly : Channel assembly is a variation of postponement. It

sends individual components and modules, rather than finished products to

the distributor. The distributor then assembles, tests and ships the product to

the customers.

Chapter 1

7/27/2019 Ch1 Week 1

32/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Drop Shipping and Special Packaging : Drop shipping means the

supplier will ship directly to the end consumer, rather than to the seller,saving both time and shipping costs.

Blanket Orders :A blanket order is a contract to purchase certain items

from a vendor.

Invoiceless Purchasing :Invoiceless purchasing is an extension of good

purchasersupplier relations. In an invoiceless purchasing environment,there is typically one supplier for all units of a particular product.

Electronic Ordering and Funds Transfer :Transactions between firms

are increasingly done via electronic data interchange (EDI) which is a

standardised data transmittal format for computerised communications

between organisations.

Chapter 1

7/27/2019 Ch1 Week 1

33/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

Stockless Purchasing : Stockless purchasing means that the

suppliers maintain inventory that is delivered directly to thepurchasersusing department rather than to a store for stocking and

using later.

Standardisation : Standardisation means reducing the number of

varieties in materials and components as an aid to cost reduction.

Other Techniques :

a) establishing lines of credit for suppliers

b) reducing the time money is in transit,

c) co-ordinating production and shipping schedules with

suppliers and distributors,

d) sharing market research information and

e) making optimal use of warehouse space.

Chapter 1

7/27/2019 Ch1 Week 1

34/101



Management

K. Shridhara Bhat

Chapter 1


and Supply Chain

Management

1.7 A model of supply chain managementSupply chain management is the systematic, strategic co-ordinationof the traditional business functions and the tactics across these

business functions within a particular firm and across businesses

within the supply chain, for the purposes of improving the long-term

performance of the individual firms and the supply chain as a whole.Exhibit 1.4 shows the supply chain management model. Supply

chain management coordinates the product flows across functions

and across firms to achieve competitive advantage and

Chapter 1

7/27/2019 Ch1 Week 1

35/101



ManagementK. Shridhara Bhat

Chapter 1


and Supply Chain

ManagementExhibit 1.4 : A Model of Supply Chain Management

Chapter 1

7/27/2019 Ch1 Week 1

36/101




Chapter 1


and Supply Chain

Management

(SCM in short) whereas SCM considers additional issues beyond those ofproduct flow. For example, SCM consider manufacturing quality and

product pricing.

1.8 Business Logistics/Supply Chain Management

ActivitiesBusiness logistics/supply chain management process comprises various

activities (activity mix) that vary from firm to firm depending on a firms

specific organisational structure.

Chapter 1

7/27/2019 Ch1 Week 1

37/101




Chapter 1


and Supply Chain

Management1.1 : Activities Along the Supply Chain

Chapter 1

7/27/2019 Ch1 Week 1

38/101




Chapter 1


and Supply Chain

Management1.9 What is Logistics?Logistics is defined as the process of anticipating customer needs and

wants, acquiring the capital, materials, people, technologies, andinformation necessary to meet those needs and wants, optimising thegoods or service providing network to customer requests andutilising the network to fulfil customer requests in a timely manner.

1.9.1 Types of Logistics

Logistics should be viewed as a part of management and hasfour subdivisions :

i . Business Logistics :

i i . M il i tary Logistics :

i i i . Event Logistics :iv. Service Logistics :

Chapter 1

7/27/2019 Ch1 Week 1

39/101




Chapter 1


and Supply Chain

Management1.9.2 What is Logistics Management?

Logistics management is the process of planning, implementing, and

controlling the efficient, effective flow and storage of goods,services, and related information from point of origin to point ofconsumption for the purpose of conforming to customerrequirements.

The definition reflects the need for total movement from point ofmaterial procurement to location of finished product distribution. It

also includes the flow of materials and services in both themanufacturing and service sectors (such as the government, hospitals,

banks, wholesalers and retailers).

Because of the various diverse functions coming under the purviewof logistics management, it is also known by several other namessuch as the following: (i) Business logistics, (ii) Channelmanagement, (iii)Distribution management, (iv)Industrial logistics,(v)Physical distribution management, (vi)Supply management, (vii)Materials management, (viii)Quick-response system, (ix)Logisticalmanagement and (x)Supply-chain management.

Chapter 1

7/27/2019 Ch1 Week 1

40/101




p


and Supply Chain

Management

Additional Definitions of Logistics and Logistics Management Logistics is a function or activity concerned with getting products and

services where they are needed and when they are needed or desired.

Logistics involves the integration of information, transportation,

inventory, warehousing, materials handling and packaging.

Logistics integrates materials management with sales and distributionmanagement.

Logistics adds value by creating time utility and place utility.

Logistics management is concerned with creation of value for customers,

suppliers and stakeholders of the firm.

Chapter 1

7/27/2019 Ch1 Week 1

41/101




p


and Supply Chain

Management1.9.3 Scope and Importance of Logistics

Management :

Some of the activities encompassed under logistics umbrella areillustrated inExhibit 1.5

Chapter 1

7/27/2019 Ch1 Week 1

42/101




p


and Supply Chain

Management

Logistics management adds value when inventory is correctly maintained tofacilitate sales to meet the customer demand. Logistics typically accounts forone of the highest costs of doing business, next only to materials inmanufacturing or cost of goods sold in wholesaling or retailing. Therefore, itmay be inferred that Logistics while vital to business success, is quiteexpensive.

Benefits gained by firms having good logistics management include:

Capability to identify potential operational break downs and taking correctiveaction prior to failure of service to customers.

Performance above industry average in terms of inventory availability as wellas speed and consistency of delivery to customers.

Capability to monitor logistical performance on a real-time basis through

efficient information systems.

Chapter 1

7/27/2019 Ch1 Week 1

43/101




p


and Supply Chain

Management

High delivery performance (near perfect orders).

Commitment to continuous improvement.Firms having world-class logistical competency can become attractivesuppliers and ideal business partners.

1.9.4 Logistical Competency

Logistical competency is a relative assessment of a firmscapability to offercompetitively superior customer service at the lowest possible total cost.

The characteristics of firms having superior logistics performance orcompetency are: (i) alternative logistical capabilities, (ii) emphasis onflexibility, (iii) time-based performance, (iv) operational control and (v)commitment to perfect customer service performance.

Chapter 1

7/27/2019 Ch1 Week 1

44/101





and Supply Chain

Management

1.10 Competitiveness and Competitive Advantage

Competitiveness is a major factor that determines whether acompany prospers, barely manages to survive or ceases to exist sooneror later.

In a broader sense, competitiveness can be defined as thedegreeto which a nation can produce goods and services which meet the test ofinternational markets while simultaneously maintaining or expanding

the real incomes of its citizens.1.10.1 Dimensions of Competitiveness

Competitiveness refers how effectively an organisation meetsthe needs of customers relative to other firms which offer similar goodsand services.

The dimensions of competitiveness that measure the effectivenessof production function of a manufacturing firm are discussed briefly inthe following paragraphs.

Chapter 1

7/27/2019 Ch1 Week 1

45/101





and Supply Chain

Management

(i) Cost or Price :Price is the amount a customer must pay for the product

or service. profitability is related to the difference between price andcost. Hence most firms focus on lowering cost of goods and services

instead of accepting lower profits as a result of competing on price.

(ii)Quality :Quality refers to the ability of the product or service to meet

the requirements of customers and achieve customer satisfaction for the

firm selling the goods and services.(iii)Product or Service Differentiation : This refers to any special

features (such as design, cost, quality, availability, delivery speed,

convenience of use, warranty etc.) that cause a product or service to be

perceived by the customers as more suitable or attractive than the

product or service offered by the competitors.

Chapter 1

7/27/2019 Ch1 Week 1

46/101





and Supply Chain

Management

iv.Dependability as a Supplier : A supplier who has a reputation fordependability (i.e., keeping the promised delivery schedule) or who has

the capability to meet customer demand through off-the-shelf availability

of the product has a strong competitive advantage.

v. Flexibility/Service : This refers to the ability of a firm to respond to

changes demanded by the customers. A firm having higher flexibility isable to have a competitive advantage over other firms.

vi.Time :Time to perform certain activities refers to several aspects of an

organisationsoperations such as

(a) how quickly a product or service is delivered to a customer (i.e.,speed

to market or minimum lead time to supply).

Chapter 1

7/27/2019 Ch1 Week 1

47/101





and Supply Chain

Management

(b) how quickly new products or services are designed,developed and launched to the market (speed to market ofnew products or services).

(c) the rate at which improvements in products and processes

are made.

vii. Customer Service : Service might involve after-sales servicesthat are perceived by customers as value-added,

viii.Employee Productivity and Managerial Expertise :Managers

and workers are the people at the heart and soul of any

organisation. Competent and motivated employees including

managerial personnel can provide a distinct competitive edge bytheir expertise, skills and creative ideas.

Chapter 1

7/27/2019 Ch1 Week 1

48/101





and Supply Chain

Management

1.10.2 Strategy and Competition

To compete successfully in business, a firm requires a business strategy andseveral functional-area strategies.

The business strategyof a firm includes:

(i) the market in which the firm is to compete.

(ii) the level of investment the firm has to make and

(iii) the means of allocating resources and integrating variousbusiness units of the firm.

The functional area strategies include

(i) the marketing strategy

(ii) the financial strategy

(iii) the manufacturing strategy or the production and operations strategyand

(iv) the logistics and supply chain strategy.

Chapter 1

7/27/2019 Ch1 Week 1

49/101





and Supply Chain

Management

Three generic or business strategies classified by Michael Porter are:

i. Overall cost leadershipstrategy, (ii)Differentiationstrategy and (iii)

Focusor market segmentation strategy.

1.10.3 Competitive Priorities

There are five basic competitive priorities: They are

(i ) Cost :Providing low cost products.(ii) Quality :Providing high quality products.

(iii)Delivery :Providing products quickly.

(iv) Flexibility :Providing a wide variety of products.

(v) Service :How products are delivered and supported.

Chapter 1

d i i i

7/27/2019 Ch1 Week 1

50/101





and Supply Chain

Management1.10.4 Competitive Strategies

Competition is inevitable for all organisations, regardless of size,type or geographic location. Even not-for-profit organisationscompete for resources and customers.

Competitive advantage is defined as what sets an organisation apart- its competitive edge.

Competitive strategies are the strategies that are concerned withhow the organisation is going to compete in a specific business orindustry. The choice of competitive strategy is based on thecompetitive advantage that the organisation is able to develop. Thedesign of competitive strategy is all about-exploiting theorganisations competitive advantage by finding ways to use itsresources, capabilities and distinctive competencies to set itselfapart from competitors.

Chapter 1

I d i L i i

7/27/2019 Ch1 Week 1

51/101





and Supply Chain

Management1.10.5 Gaining Competitive Advantage Through

Logistics

Logistics can provide the firm with a distinctive competitiveadvantage. Logisticsservices and activities have opportunities to givethe firm an important advantage through (a)supply chain management,(b) quality of service, (c) outstanding information systems and (d)effective time-based competition.

Effective logistics management can provide a major source of

competitive advantage. The bases for success in the market place are (i)the customer, (ii) the competition and (iii) the company, popularlyknown as the three cs.

Exhibit 1.6illustrates the competitive advantage and the three cs.

Logistics management can provide numerous ways of increasing

efficiency and productivity and thereby contribute significantly toreduce unit cost of products.

Logistics management provides a value advantage to the firmimplementing the same.

Chapter 1

I t d ti t L i ti

7/27/2019 Ch1 Week 1

52/101





and Supply Chain

ManagementExhibit 1.6 : Competitive Advantage and the

Three cs

Chapter 1

I t d ti t L i ti

7/27/2019 Ch1 Week 1

53/101





and Supply Chain

Management

Customer service is an equally powerful means of addingvalue to the product.

Logistics management adds value when inventory is

maintained correctly to facilitate sales to meet customer demand

and achieve customer satisfaction.

1.10.6 The Concept of Value Chain

Supply chains are sometimes referred to as value chains, a

term that reflects the concept that value is added as goods and

services progress through the chain.

Chapter 1

I t d ti t L i ti

7/27/2019 Ch1 Week 1

54/101





and Supply Chain

Management

Exhibit 1.7 : Generic Value Chain

Chapter 1


7/27/2019 Ch1 Week 1

55/101





and Supply Chain

Management

The value chain concept had been developed as a tool for

competitive analysis and strategy by Michael Porter. The generic

value chain conceptualised by Michael Porter is illustrated in

Exhibit1.7.

Value chain activities can be categorised as (i) pr imary activities

and(ii) support activiti es. The primary activities comprise of activities

such as inbound logistics, operations, outbound logistics, marketingand sales and service. The support activity comprise of activities such

as firms infrastructure (plant and equipments, machinery, buildings,

warehouses, handling equipments etc.) human resource management,

technology development and procurement).

Logistics management integrates the planning and co-ordinating

of the flow of materials and information from source to the user.

Chapter 1


7/27/2019 Ch1 Week 1

56/101





and Supply Chain

Management1.11 Integrated Supply Chains

Definition

An integrated logistics/supply chain is a comprehensive systemwide view of the entire supply chain as a single process, from raw

materials supply through finished goods distribution.

A typical supply chain may involve several stages. They are : (i)

customers, (ii) retailers, (iii) wholesalers/distributors, (iv)

manufacturers and (v)component/raw materials/parts suppliers. Eachstage in a supply chain is connected through the flow of products,

information and funds. These flows may often occur in both

directions.

Since the objective of every supply chain should be to maximise

the overall value generated, it is necessary to integrate the activities ofthe various parties in the supply chain.

Chapter 1


7/27/2019 Ch1 Week 1

57/101





and Supply Chain

Management1.11.1Objective of integrated supply chain

The three major objectives of integrated supply chain are

(i) Establishing integration of the supply chain process taking intoconsideration customer requirements,sales argets, productspecifications and process speed.

(ii) Improving customer order cycle time by increasingcustomer response,

reducing requirement of assets, reducing set-up time forproduction, having flexible

and short- cycle manufacturing processes and

reducing bills receivables collection time.

(iii) Developing information communication through efficient and communication systems.

Chapter 1


7/27/2019 Ch1 Week 1

58/101





and Supply Chain

Management

Successful supply chain management requires a change from

managing individual functions to integrating activities into key supply

chain processes. Shared information between supply chain partners can

only be fully leveraged through process integration. Process integration

means collaborative working between buyers and suppliers, joint product

development, common systems and shared information

1.12 Supply Chain and Competitive PerformanceEffective supply chain management depends on both the flow of

information as well as the flow of raw materials and finished products.

Even though only some activities in the supply chain add value, all add

costs. The objective of the supply chain is to optimise performance of the

entire chain to add as much value as possible for the least possible totalcost.

Chapter 1


7/27/2019 Ch1 Week 1

59/101





and Supply Chain

Management

Supply chain management efforts have been motivated most directly

by two of the value attributes : cost and timeliness. Suppliers need toreduce their costs in order to lower the prices to customers. This creates aneed to eliminate non-value adding steps throughout the productionnetwork. Inventory levels can be reduced by quicker and more reliabledeliveries from suppliers. Also faster flow of information from customersto suppliers and vice versa also could be useful in reducing the costs and

improving the timeliness of supply.1.12.1The New Rules of Competition

The present era is the era of supply chain competition. Anorganisation can no longer compete as an isolated and independent entitywith other similar stand-alone organistions. Instead, there is a need to

create value delivery systems that are more responsive to fast-changingmarkets. Also, the system has to be much more consistent and reliable indelivering that value. This requires the entire supply chain (i.e., valuedelivery system) to be focused on the achievement of the neededobjectives and goals to compete successfully.

Chapter 1


7/27/2019 Ch1 Week 1

60/101





and Supply Chain

Management

Management of inbound and outbound logistics is one capacity now

regarded by many firms as most basic to success in the market place.

Excellence in logistics process performance is necessary to ensure higher

product availability for a multitude of consumer products at a large number

of retail outlets.

The transition from volume-based growth to value-based growth will

require a greater focus on the management of core processes. In the past thecompetitive model of a business firm was based on product innovation

whereas, in the present, the competitive model will have to be based on

processinnovation. Hence, the basis for competing in the present era will

be

To gain competitive advantage through logistics, three key issues which areto be considered are : (i) Responsiveness, (ii) Reliability and (iii)

Relationships.

Chapter 1


7/27/2019 Ch1 Week 1

61/101





and Supply Chain

Management

i. Responsivenessmeans the ability of a firm to respond to its customers

requirements.

ii. Reliability means suppliers ability to meet delivery promises and/or

meet the quality standards for the materials and components supplied

by them.

iii.Relationships : The current trend in sourcing is that customers are

seeking to narrow down their supplier base, i.e.,having a single sourceor as few sources as possible. Many firms develop long-term

relationships with their suppliers to gain the benefits of partnerships.

Supply chain management focuses on managing the relationships

across complex networks of firms which are legally independent but

interdependent in reality.

Chapter 1


7/27/2019 Ch1 Week 1

62/101





and Supply Chain

Management

1.13 Evolution of Logistics Toward Supply

Chain Management

A single firm generally is not able to control its entire product flowchannel from raw material source to points of final consumption. The

physical supply channelrefers to the time and space gapbetween a firmsimmediate material sources and its processing points. Likewise, thephysicaldistribution channel refers to the time and space gap between the firms

processing points and its customers. Due to the similarities in the activities

between the supply channel and distribution channel of a firm, physicalsupply management (commonly referred to us materials management) andphysical distribution management (usually the responsibility of salesmanagement department) are integrated into what is referred to as businesslogistics managementwhich is now popularly referred to as supply-chainmanagement.

Exhibit 1.8 shows the evolution of the management of product flows(i.e.,logistics) toward supply chain management.

Exhibit 1.9shows the activities to be managed that make up businesslogistics (Supply chain process).

Chapter 1


7/27/2019 Ch1 Week 1

63/101





and Supply Chain

ManagementExhibit 1.8 : Evolution of Logistics Toward

Supply Chain Management

Chapter 1


7/27/2019 Ch1 Week 1

64/101





and Supply Chain

ManagementExhibit 1.9 : Logistics Activities in a Firms

Immediate Supply Chain

Chapter 1


7/27/2019 Ch1 Week 1

65/101




g

and Supply Chain

Management

Activity Mix

1. Physical Supply :Transportation, inventory maintenance, order

processing, acquisition, protective packaging, warehousing,

materials handling, information maintenance and supply

scheduling.

2. Physical Distribution :Transportation, inventory maintenance,

order processing, product scheduling, protective packaging,

warehousing, materials handling and information maintenance.

Chapter 1


7/27/2019 Ch1 Week 1

66/101




g

and Supply Chain

Management

1.13.1 Need for Logistics Management

Todaysorganisations worldwide need logistics management more thanever because of the following: 1. Competitive Pressures, 2. InformationTechnology, 3. Channel Power and4.Profit Leverage.

1.Competitive Pressures : During the 1970s, logistics received moreattention as a major cost driver to offset the effect of rising interest ratesand increasing energy costs. In addition the logistics costs became more

critical for many multinational companies because of globalisation of theirbusiness.

2.Information Technology :With the explosion of information technology,organisations gained the ability to better monitor transaction intensiveactivities such as ordering, transportation (movement) and storage of goodsand materials. Computerised quantitative models along with information

technology increased the ability to manage material flows and to optimiseinventory levels and movements.

Chapter 1


7/27/2019 Ch1 Week 1

67/101




g

and Supply Chain

Management

3. Channel Power :The channel power shifted from manufacturers towholesalers, distributors and retailers. This has had a great impact on

logistics.

4. Profit Leverage :Any amount of money saved in logistics costs has

a greater impact on the organisations profitability than a similar

increase in sales revenue. Any savings in logistics costs directly addsto the companysprofit.

1.13.2 Value-Added Role of Logistics

Logistics adds to product value by increasing (i)form utility, (ii)

place utility, (iii)time utility and

(iv)possession utility.

Chapter 1


7/27/2019 Ch1 Week 1

68/101




g

and Supply Chain

Management

1.13.3 Logistical Activities

Logistics managers are responsible for the following activities: (i)

Traffic and transportation, (ii)Materials handling, (iii)Warehousing andstorage, (iv) Inventory control, (v) Industrial packaging, (vi) Orderfulfillment, (vii) Demand forecasting, (viii) Plant and warehouse sitelocation, (ix) Production planning, (x) Return goods handling, (xi)Purchasing, (xii)Parts and service support, (xiii)Customer service levelsand (xiv)Salvage and scrap disposal.

These activities are briefly discussed in the followingparagraphs:

(i) Transportation:In a logistics system, the major focus is upon thephysical movement or flow of goods or upon the network thatmoves the product.

Chapter 1


7/27/2019 Ch1 Week 1

69/101




and Supply Chain

Management

i iStorage : It involves warehousing and inventory management which areclosely related activities.

i i i Packaging : The type of transportation selected affects the packagingrequirements both for moving a finished product to the market and for theinbound materials.

i i i . Materi als Handling: Material handling is crucial for efficient warehouseoperation.

iv. Order Fulfillment : Order fulfillment consists activities involved withcompleting customer orders.

v. Order Fulfillment : Order fulfillment consists activities involved withcompleting customer orders.

vi. I nventory Forecasting :Accurate forecasting of inventory requirements and

materials and parts are essential for effective inventory control, especially infirms using a just-in-time (JIT) or material requirement planning (MRP)approach to control inventory.

Chapter 1


7/27/2019 Ch1 Week 1

70/101




and Supply Chain

Management

vii. Production Planning :It is closely related to forecasting in terms ofeffective inventory control. Once the forecast is developed and the

current inventory on hand and usage rate are assessed, productionplanning managers can determine the units to be produced to meetmarket demand. Production planning is integrated into logistics.

viii. Purchasing : Purchasing or procurement is included in logisticsbecause the transportation cost relates directly to location of thesupplier sources.

ix. CustomerService : Customer service levels in many ways gluetogether other logistics areas. Decisions about inventory,transportation and warehousing relate to customer servicerequirements.

x. Site Location :A change in the location of a manufacturing plant or a

warehouse could alter time and place relationships between plantsand markets or between supply points and plants

Chapter 1


7/27/2019 Ch1 Week 1

71/101




and Supply Chain

Management1.13.4 Objectives of Logistics Management

i.Theprimary or major objectiveis to efficiently and effectively move

the inventory in the supply chain in order to extend the desired levelof customer service at the least possible cost.

ii Thesecondary objectiveswhich facilitate achievement of the

primary or major objective are:

(a)To reduce inventory to the minimum possible level.

(b) To achieve reliable and consistent delivery performance to

enhance customer satisfaction and build long-term customer

relationship.

(c) To achieve maximum economy in freight costs.

(d) To ensure minimum or no damage to products during

transportation and storage.

(e) To ensure quick response to customer requirements.

Chapter 1


7/27/2019 Ch1 Week 1

72/101




and Supply Chain

Management

1.13.5 Role of Logistics in Supply Chain

Management

Supply chain management may be viewed as a logical

extension of logistics managementIt is also known as demand

chain management, demand flow management, value chain

management, value networks, and synchronisation management.

The terms supply chain, demand chain, value chain or value

network all used as synonyms. The generic value chain was

illustrated earlier inExhibit 1.10.

Chapter 1


7/27/2019 Ch1 Week 1

73/101




and Supply Chain

Management

Exhibit 1.10 : Logistics Supply Chain

Chapter 1


7/27/2019 Ch1 Week 1

74/101




and Supply Chain

Management

The outbound logistics involves physical distribution of finishedgoods (usually higher in value than raw materials). The inbound logistics

involves transportation of raw materials and component parts fromsuppliers to the firm, inventory requirements, warehousing, packagingand materials handling.

Logistics management added inbound logistics to the outboundlogistics of physical distribution.

1.13.6 The Role of Logistics in the EconomyLogistics plays a key role in the economy in two ways: (i)Logistics

is one of the major expenditures for businesses, thereby affecting andbeing affected by other economic activities, (ii) Logistics supports themovement and flow of many economic transactions and it is an importantactivity in facilitating the sale of virtually all goods and services.

Chapter 1


d S l Ch i

7/27/2019 Ch1 Week 1

75/101




and Supply Chain

Management1.13.7 The Role of Logistics in the Organisation

In recent years, effective logistics management has been

recognised as a key opportunity for the improvement of both theprofitability and competitiveness of organisations.

The relationship between logistics and three critical elements of

the marketing concept (customer satisfaction, integrated effort and

adequate corporate profit) are shown inExhibit 1.11.

Exhibit 1.11 : Logistics Supports Marketing

Chapter 1


d S l Ch i

7/27/2019 Ch1 Week 1

76/101




and Supply Chain

ManagementExhibit 1.12 : Cost-trade Offs Required in

Marketing and Logistics

Chapter 1


d S l Ch i

7/27/2019 Ch1 Week 1

77/101




and Supply Chain

Management1.14 Logistics Costs

Logistics costs are created by logistics activities such as customer

service, transportation, warehousing, order processing and information,

lot quantity and inventory carrying, which are discussed in the

following paragraphs:

i . Customer Service Level :The key cost trade-off resulting from varying

levels of customer service is the cost of lost sales. Expenses for

customer service support includes the costs of order fulfillment, parts

and service support and costs of return goods handling.

i i . Transportation Costs : These costs are determined by the activity of

transporting goods.

i i i .Warehousing Costs :These costs are due to warehousing and storage

activities and also due to warehouse and plant location selection

process.

Chapter 1


d S l Ch i

7/27/2019 Ch1 Week 1

78/101




and Supply Chain

Management

iv. Order Processing/I nformation Systems Costs :These costs are relatedto activities such as order processing, distribution communications anddemand forecasting.

v. Lot Quanti ty Costs :These costs are due to procurement and productionlot quantities. Lot quantity costs are related to purchasing or productionand these costs vary with changes in order size or frequency.

vi. I nventory Carrying Costs : Logistics activities that cause inventorycarrying costs include inventory control, packaging and salvage andscrap disposal.

1.14.1Total Cost Concept

The total cost concept is the key to manage logistics processeffectively. The organisation should have the goal of reducing the totalcostof logistics activities rather than merely focusing on each activity in

isolation.

Chapter 1


d S l Ch i

7/27/2019 Ch1 Week 1

79/101




and Supply Chain

Management

Exhibit 1.13 shows six major cost categories with which managementshould be concerned while making decisions regarding logistics activities

which drive these major cost categories. These six major cost categoriescomprise the fourteen key logistics activities listed below:

(i) Customer service

(ii) Demand forecasting

(iii) Inventory management

(iv) Logistics communications(v) Materials handling

(vi) Order processing

(vii) Packaging

(viii) Parts and service support

ix) Plant and warehouse site selection(x) Procurement

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

80/101




and Supply Chain

Management

(xi)Return goods handling

(xii)Reverse logistics(xiii) Traffic and transportation

(xiv)Warehousing and storage

1.15 Evolution of supply chain management

Eventhough the reference to supply chain management can be

traced to the 1980s, the supply chain management concept captured

the attention of senior level management in many organisations only

in the 1990s.

The era of physical, distribution management started in the

1960s and the focus was on the outbound side of the firmslogistics

system.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

81/101




and Supply Chain

Management

Exhibit 1.13 : Total Cost Concept

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

82/101




and Supply Chain

Management

During the early 1970s, the focus shifted on the systems

concept and total systems cost. The systems relationship amongtransportation, inventory requirements, warehousing, exterior

packaging and materials handling were recognised.

In the 1980s, the logists or integrated logistics managementconcept began to be used in many organisations. Logistics, to startwith added inbound logistics (i.e., raw materials transportation

form supply points and raw materials storage) to outbound logisticsof physical distribution. Because of global sourcing of materialsand suppliers for inbound system, the need for coordination withthe outbound logistics system became critical for success oflogistics systems.

During the 1990s, the concept of supply chain managementcame into vogue and has now become the focal point forimproving the global market place.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

83/101




and Supply Chain

Management

Logistics management integrates materials management and sales anddistribution management. Supply chain management integratesmanufacturing management with logistics management. Exhibit 1.14illustrates the above relations among materials management, sales anddistribution management, manufacturing management, logistics managementand supply chain management.

1.16 Importance of logistics/supply chain management

Logistics management is concerned with creation of value for customers,suppliers and stake holders of the firm. Logistics creates time and place utilityor value for the customers by making available the products customers needat the time and place desired by the customers. Good logistics managementviews each activity in the supply chain as contributing to the process of

adding value. The various reasons for increasing the importance of logisticsas a value adding process are:

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

84/101




and Supply Chain

ManagementExhibit 1.14 : Relationship between Supply Chain

Management and Other Areas of Management

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

85/101




and Supply Chain

Management

1. Significant Costs

2. Increase in Logistics Customer Service Expectations

3. Importance of Logistics/Supply Chain to Competitive Strategy of

the Firm

4. Logistics/Supply Chain Adds Significant Customer Value

5. Customers Want Quick and Customised Response

1.16.1 Difference Between Logistics Management and Supply ChainManagement

Logistics management integrates materials management (in-

bound logistics) with sales and distribution management (outbound

logistics) whereas supply chain management integrates logistics

management with manufacturing management.

Chapter 1


and Supply Chain1 17 Focus areas in supply chain management

7/27/2019 Ch1 Week 1

86/101




and Supply Chain

Management1.17 Focus areas in supply chain management

1.17.1Supply Chain Drivers

The drivers of supply chain performance (i.e.,supply chain drivers) are :(i )production,

(ii)inventory,

(iii)transportation, (iv)facility location,(v)information,

(vi)sourcing and (vii)pricing.

These drivers of supply chain are discussed in the following paragraphs:

(i ) Production :The performance of the supply chain is very much dependenton production i.e.,what is produced, how it is produced (the manufacturing

process used) and when it has to be produced.

(ii)Inventory :All raw materials, work-in-progress and finished goods within a

supply chain are referred to as inventory. Any change in inventory policiescan greatly affect the efficiency and responsiveness of the supply chain.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

87/101




and Supply Chain

Management

(iii) Transportation : Inventory has be moved from point to point in the

supply chain using transportation facilities taking the form of many

combinations of modes (multimodal) and routes, each having its own

performance characteristics.

(iv) Facility Location :Facilities are the places in the supply chain network

where inventory is stored, parts are fabricated and assembled into

finished goods. Decisions regarding the location of the facilities (plant),

their capacity and the flexibility of the facilities have a major impact on

the performance of the supply chain.

(v) Information : Information consists of data and analysis regarding

inventory, facilities (location, capacities etc.) transportation and

customers throughout the supply chain. Information affects each of the

other driver and hence is the biggest driver of supply chain performance.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

88/101




and Supply Chain

Management

(vi) Sourcing : Sourcing is another important area in supply chain

management. Sourcing is the activity of buying or procuring theright materials in right quantities of right quality, in right

condition, in the right time, at the right price from the right

supplier.

(vii) Pricing : Pricing is the process by which a firm decides how

much to charge customers for its goods and services.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

89/101




pp y

ManagementExhibit 1.15: Supply Chain Decision-Making

Frame Work

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

90/101




pp y

Management

Exhibit 1.15 illustrates the supply chain decision-making

framework indicating the role of supply chain drivers.

1.17.2 A Framework for Structuring Supply Chain Drivers

Supply chain strategy aims to strike a balance between

responsiveness and efficiency that results in strategy fit with the

competitive strategy of a business organisation.The role of the supply chain drivers in the supply chain and

how they re used by supply chain managers to drive supply chain

performance are discussed in the following section:

(i) The Role of Facilities (Manufacturing and Warehousing) in the

Supply Chain

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

91/101




pp y

Management

The facilities are concerned with where of the supply chain, while

inventory is what is being transported along the supply chain and

transportation is how it is moved. Facilities are the locations to or fromwhich the inventory is moved (facilities include manufacturing plants

and warehouses).

The supply chain performance in terms of responsiveness and

efficiency is greatly influenced by facilities and their capacities to

perform their functions. Decisions regarding number of facilities and their locations play a

crucial role in the design of supply chain. The various components of

facilities decisions a firm must analyse are (a) location,

(b) capacity, (c) manufacturing processes, (d) warehousing

methodology (stock-keeping unit storage, job lot storage and crossdocking).

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

92/101




pp y

Management(ii)Role of Inventory in the Supply Chain

Inventory occurs in a supply chain because of the mismatch between

supply and demand. Inventory plays an important role in the supplychain to increase the amount of demand that can be satisfied by having

the product ready and available when the customer wants it. Also

inventory plays a significant role in reducing the cost of the product by

exploiting any economics of scale that may exist during both production

and distribution.

Inventory has a significant role in the ability of a supply chain to

support a firms competitive strategy. The major inventory related

decisions to be made by supply chain managers to create more

responsive and more efficientsupply chains effectively are:

a. Cycle Inventory Decisionb. Another inventory related decision is determining how much safety

inventory to hold.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

93/101




pp y

Management

i i i )Role of Transportation in the Supply Chain

Transportation is concerned with the movement of the product between

different stages in a supply chain. Like inventory, transportation too has agreat impact on both responsiveness and efficiency of the supply chain.

Transportation has a major role to play in a firms competitive strategy

when the firm is considering the target customers needs it intends to

satisfy.

Both inventory and transportation may be used by a firm to increase itsresponsiveness or efficiency. The optimal decision would be to find the

right balance between the two.

The overall trade-off for transportation is between the cost of

transportation of a given product (efficiency) and the speed with which

that product is transported (responsiveness).

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

94/101




Management

(iv)Role of Information in the Supply Chain

Importance of information as a driver of supply chain performance has

grown recently because of the developments in information technology. Firms have increased the use of information to become more

responsive and efficient. However, information also has a level at

which trade-off between efficiency and responsiveness must take place.

Another key decision regarding information is what information is

most valuable in reducing cost and improving responsiveness within asupply chain.

The key components of information within a supply chain which

a firm must analyse to increase efficiency and improve responsiveness

within its supply chain are:

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

95/101




Management

a) Push Versus Pull Phase in the Supply Chain

b) Co-ordination and Information Sharing

c) Forecasting and Aggregate Planning

d) Enabling Technologie

(v)Role of Sourcing in the Supply Chain

Sourcing decisions play a crucial role in the competitive strategy of thefirm because they affect the level of efficiency and responsiveness that can

be achieved by the supply chain. The key sourcing decisions that are made

within the firm include (a)in-house or outsource to a third party, (b)supplier

selection and (c)structure of procurement. Sourcing decisions should facilitate increase in the overall supply chain

profits to be shared across the supply chain.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

96/101




Managementvi.Role of Pricing in the Supply Chain

Pricing plays a significant role in the supply chain performance as it affectsthe level of responsiveness required as well as the demand profile served by

the supply chain. Pricing decisions include the following key components: (i) Pricing and

economies of scale, (ii)Everyday low pricing versus high-low pricing, (iii)Fixed price versus menu pricing.

All pricing decisions should have the objective of increasing the profits of

the firm and that of the supply chain partners.1.17.3 Obstacles to Achieving Strategic Fit

To achieve strategic fit, a firm should be able to find a balancebetween responsiveness and efficiency of its supply chain along theresponsiveness spectrum which best matches with the type of demand

targeted by it. Over the years, the supply chain environment has changedconsiderably and the firms have been facing many obstacles that havecreated difficulty for the firms to achieve the ideal balance betweenresponsiveness and efficiency.

Chapter 1


and Supply Chain

Th b l

7/27/2019 Ch1 Week 1

97/101




ManagementThese obstacles are:

(a) Increasing Variety of Products

(b) Decreasing Product Life Cycles

(c) Highly Demanding Customers

(d) Fragmentation of Supply Chain Ownership

(e) Globalisation

(f) Difficulty in Executing New Strategies

All the obstacles discussed in this section are making it more difficultfor the firms to achieve a proper balance between responsiveness and

efficiency in their supply chain and therefore to achieve strategic fit.

1.17.4 Change Drivers

Another way of understanding the drivers of supply chain

management is through the understanding of the forces of change in the

dynamic business environment.

Chapter 1


and Supply ChainThese force of change are:

7/27/2019 Ch1 Week 1

98/101




Managementi The empowerment of consumer.

ii Shift of power in the supply chain.

iii Liberalization of economic policies of the government.iv Globalization of business and

v Technological developments or advancements.

These forces of change (or drivers of supply chain management) are

briefly discussed in the following paragraphs.

i The Empowerment of Consumer : In todays market place, consumersare enlightened and more knowledgeable. They are empowered by the

information available from the internet and from many other sources.

Because they have enough opportunity to compare price, quality, and

services of alternative products they are in a position to demand

competitive price, high quality, customised products, convenience,flexibility and responsiveness. They do not tolerate products of poor

quality.

Chapter 1


and Supply Chain

7/27/2019 Ch1 Week 1

99/101




Management

ii. Shift of Power in the Supply Chain :Traditionally, for consumer products,

manufacturers dominated the supply chain or distribution channels. Largemanufacturers led vendors/suppliers and wholesalers, distributors and retailers.

Product development, promotion and/or brand management were given more

importance than distribution and logistic systems. large retailers exerted

pressure back in the supply chain to force manufacturers to change their

logistics and supply chain strategies to include tailored pallet packages,

scheduled deliveries, continuous replenishment systems etc.

iii.Liberalisation of Economic Policies of the Government :Transportation,

communications, energy and financial systems are the four legsof business

operations on which the infrastructure of many businesses is based. Revolution

in communication industry introduced Internet, Email, Electronic Data

Interchange (EDI) etc., which improved the efficiency and effectiveness of

communication.

Chapter 1


and Supply Chain

M

7/27/2019 Ch1 Week 1

100/101




Management

ii.This has led to dramatic improvements and opportunities in logistics

and supply chains.iv Globalisation of Business :Probably globalisation is the most important

of the five change drivers, which had the biggest impact on logistics andsupply chain management.

v Technological Development or Advancements : Technology facilitateschanges at the micro level. But it can also be viewed as a change driver

on a macro or external basis. The revolution that has occurred intechnology-both hard ware and software has brought in major changesin the way companies do business.

Advancements in information technology has ushered an era ofInformation Age. Information technology has changed how buyersand sellers interact in the market place, both business-to-business (B 2

B) and business-to-customer (B 2 C) and how business operates.

Chapter 1


and Supply

Ch1 Week 1

Documents