Ch15

SDM – Ch 15 Tata McGraw Hill Publishing

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Chapter 15

Market Logistics & Supply Chain Management


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Learning Objectives• Principles of materials management, logistics

and supply chain management• Logistics interface with other functions• Inventory management principles and

systems• Warehousing management fundamentals• Transportation management practices• How IT enables the logistics function• Understand about the performance

measurement of the logistics function


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Materials Management

• Materials forms the largest single cost item in most manufacturing companies – needs to be carefully managed

• Materials management function includes planning and control, purchasing and stores and inventory control

• Materials management is the precursor to logistics and supply chain management

Logist ics……


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Logistics Defined

• Logistics means having the right thing, at the right place, at the right time

• The procurement, maintenance, distribution and replacement of personnel and materials – Webster’s Dictionary

• The science of planning, organizing and managing activities that provide goods or services – Logistics World, 1997


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Logistics

• Functions: planning, procurement, transportation, supply and maintenance

• Processes: requirements determination, acquisition, distribution and conservation

• Business: science of planning, design and support of business operations of procurement, purchasing, inventory, warehousing, distribution, transportation, customer support, financial and human resources


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Scope of Logistics

• Choice of markets• Procurement• Plant location and layout• Inventory management• Location and management of warehouses• Choices of carriers, mode of transport• Packaging decisions• Relevant to all enterprises: manufacturing,

Government, Institutions, service organisations


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Components of LOG Management

•Natural Resources

(land, facilitiesEquipment)

•HR•Finance

•Information

•Marketing Orientation

(competitive Advantage)•Time and Place utility

•Efficient moveto customer

Customer serviceDemand forecasting

DistributionCommunicationsInventory control

Materials handlingOrder processing

Parts and service supportPlants and warehouse selection

ProcurementPackaging

Return goods handlingSalvage and scrap disposalTraffic and transportationWarehouse and storage

Input OutputLogistics Activities


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Links and Flows

Customer’scustomer

Supplier’ssupplier

SupplierLead FirmCustomer

General cash flow

Information flow

Information flow

General material flow/ service flow

Inbound / Upstream logisticsOutbound / Downstream logistics

Source: ICFAI


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Logistics and Marketing• Interface on:

– Product design and pricing– Customer service policies– Sales forecasts and order processing– Inventory policies and location of warehouses– Channels of distribution and despatch planning– Transportation to reach products to customers

• Production wants larger production runs to minimise time spent on set up changes on the machines. Marketing wants smaller runs of a variety of products.


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The Value ChainCompany Infrastructure

Organisation, people, methods

Systems & technology

Procurement

Inboundlogistics Operations

Outboundlogistics

Marketing& sales

Service

Primary activities

SUPPPORT

margin

margin

Source: Michael Porter


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Logistics Plan Outline• Internal analysis (current position)

– Organisation– Human resources– Transportation– Relations with internal customers– Quality of product– Quality of Service

• External / situation analysis– Competitor logistics performance– Trends– External environment / economy– Public, private and contract warehouse– Public, private and contract carriage


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Principles of Logistics Excellence

Alling & Tyndall

Strategic Operational

Link logistics to corporate strategyOrganise comprehensivelyUse the power of informationEmphasise human resourcesForm strategic alliances

Focus on financial performanceTarget optimum service levelsManage the detailsLeveraging logistics volumesMeasure and react to performance


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Logistics Focus Areas

Customer service related Operations related

Packaging Order processingSpare parts and service supportAfter sales Customer service supportDemand forecastingDistribution communicationsReturn goods handling

Plant and warehouse site locationProcurement Inventory controlMaterials handlingSalvage and scrap disposalTraffic and transportationWarehousing and storage

Logist ics may be conf ined to the company whereas SCM extends beyond


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Supply Chain Management• Business context:

– Globalization of the market place– Advances in technology– Increasingly demanding, informed customer base– Purchase decisions on dimensions of quality, price

and time

• Innovative supply chain:– To meet customer driven challenges– To reduce costs– Improve service levels– Enhance speed to market


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Supply Chain Integration

• Optimising the supply chain requires supplier and customer involvement to integrate processes, policies, systems, database and strategies between diverse trading partners


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Integrated

Supply Chain

Management

Manufacturing/Re-manufacturing/

Assembly

Demand & Lead Time Management

Storage &

Transportation

Materials Management

Inventory Management and control

Customer Analysis

Purchasing/Supplier Partnering

Order Fulfillment

Supply Chain Integration

Inventory management…


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Why Carry Inventory?

• Support production requirements• Support operational requirements• Maximize customer service – ensure

availability when needed – protect against uncertainty

• Hedge against marketplace uncertainty• Take advantage of order quantity

discounts


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Functions of Inventory

• Inventory serves as a buffer between:– Supply and demand– Customer demand and finished goods– Requirements for an operation and the

output from the previous operation– Parts and materials to begin an operation

and the suppliers of the materials

The shock absorber of business !


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Factors Which Drive Inventory

• Target service level parameters

• Lot sizing practices

• Safety stock and safety time conventions

• Volume discounts and purchase arrangements

• Seasonal build up needs


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Categories of Inventory

• Anticipation – built in anticipation of future demand – peak season, strike, promotion

• Fluctuation (safety) – to cover random, unpredictable fluctuations in supply and demand and lead time – to prevent disruption in operations, deliveries etc

• Lot-size – to take advantage of quantity discounts, reduce shipping, set up and clerical costs – also called cycle stock


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Categories of Inventory

• Transportation – pipeline or movement inventories – to cover the time needed to move from one point to another – factory to distribution point for example

• Hedge – for materials where prices are volatile

• Maintenance, repair and operating supplies (MRO) – to support M and O – spare parts, lubricants, consumables etc


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Types of Inventory

• Obvious….– Raw materials– Work-in-process– Finished goods – of primary concern to

marketing– Maintenance, repair and operating (MRO)

supplies– In-transit, pipeline

Performance measures…


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Performance Measures

• Inventory turns = Annual cost of goods sold /average inventory in value

• Days of sales = inventory on hand / average daily sales


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Types of Inventory Systems

• Pure Inventory – when and how much to order. RM procurement. Simple manufacturing operations

• Production Inventory – finite production rates. Demand fluctuation. Products compete for manufacturing capacity

• Production – distribution Inventory – compete for production capacity. Geographic placement of inventory for best service of demand


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Types of Classification

• ABC category – most common for all• HML - high, medium, low - similar• FSND – fast moving, slow moving, non-

moving, dead – spare parts / FG• SDE – scarce, difficult, easy to obtain –

procurement / Spares• GOLF – govt, ordinary, local, foreign source –

procurement / Spares• VED – vital, essential, desirable – spare parts

/ FG• SOS – seasonal, off-seasonal - commodity


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ABC Inventory Analysis

• Based on Pareto’s law:– A – 20% items worth 80% of value– B – 30% items worth 15% of value

– C – about 50% items account for 5% of the usage

• Classify items based on the above criteria• Apply degree of control in proportion to the

importance of the group


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Inventory Related Costs• Unit costs – basic value of the item carried• Ordering costs – generating and sending a

material release, transport, any other acquisition costs

• Carrying costs – capital, storage, obsolescence

• Stock-out costs• Quality costs – non-conforming goods• Other costs – duties, tooling, exchange rate

differences etc


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Approaches for Controlling Inventory

• Continuous review:– Safety stocks and forecasting methods– Excess and obsolete inventory

• Part simplification and re-design• On-site supplier managed inventory• Use of supply chain inventory management

systems, Materials Requirement Planning, Distribution Requirement Planning etc

• Automated inventory tracking systems• Supplier – buyer cycle-time reduction

Warehouse management…


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Stores Management Objectives

• Providing efficient service to users• Reduce cost of carrying goods

• Providing correct, updated stock figures• Controlling inventory• Preventing damage to or obsolescence of

materials• Achieve all of the above with good

housekeeping


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FunctionsWarehouses

Material handling

Storage function

Customer service

Information transfer

Temporary Permanent Receive goodsIdentify goods

Sort goodsDespatch to storage

Hold inventoryRecall, select goods

Marshal the shipmentDespatch the shipmentPrepare records and

advices


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Purpose of Warehousing

• To provide desired level of customer service at the lowest possible total cost

• It is that part of the firm’s logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored

• Distribution warehousing relates mainly to FG


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Reasons for WarehousingService related Cost related

Maintain source of supplySupport customer service policiesMeet changing market conditionsOvercome time and space differentialsSupport JIT programs of suppliers and customersProvide customers with the right mix of products at all timesTemporary storage of materials to be disposed or re-cycled

Achieve production economiesAchieve transportation economiesTake advantage of Quantity Purchase discounts and forward buysLeast Logistics cost for a desired level of customer service


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Warehouses

• Support manufacturing

• Mix products from multiple facilities for shipment to a single customer

• Break-bulk

• Aggregate

• Used more as a ‘flow-thru’ point than as a ‘hoarding’ point


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Distribution Warehousing

• The objective is to set up a network of warehouses closest to the customer locations to service markets better and minimise cost

• Could be C&FA s, depots or distribution centers

• Macro location strategies:– Market positioned– Production positioned– Intermediately positioned


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Distribution Center

• Warehouse designed to speed the flow of goods and avoid unnecessary costs

• Speeds bulk-breaking to avoid inventory carrying costs

• Helps to centralise control and co-ordination of logistics activities

• Products can also be cross-docked (one vehicle to another)

Market posit ioned. .


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Market Positioned

• Warehouses located nearest to the final customer

• Factors influencing are:– Order cycle time– Transportation costs– Sensitivity of the product– Order size– Levels of customer service offered

Production positioned….


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Production Positioned• Warehouses located close to the production

facilities or supply sources• Not the same level of customer service as the

earlier one• Serve as points of aggregation / collection for

products made in a number of plants• Factors influencing are:

– Perishability of raw materials– Number of products in the product mix– Assortments ordered by customers– Transport consolidation rates ex; FTL

In between…


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Intermediate Positioned

• Mid point locations between the final customer and the producer

• High customer service levels possible even if products made in number of units

• Other macro approaches look at cost minimisation or cost and demand elements to maximise profitability

Transportation management….


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Transportation • Very important in the Logistics function:

– Movement across space or distance adds value to products

– Transportation provides time and place utility

• Role of transportation includes:– Provides opportunity for growth under competitive

conditions– Deeper penetration into markets– Wider distribution means greater demand– Can influence product prices favourably

Principles….


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Transportation Principles• Continuous flow• Optimise unit of cargo - stackability• Maximum vehicle unit – capacity utilization• Adaptation of vehicle unit to volume and

nature of traffic• Standardisation• Compatibility of unit load equipment• Minimum of dead weight to total weight• Maximum utilization of capital, equipment and

personnel

Process….


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The Selection Criteria

• Environmental analysis: shipper, carrier, government regulations, public influence

• Deciding objectives• Selecting mode• Select transport type within the mode• Define functions of transport• Evaluation and control – customer perception

/ satisfaction, best practice benchmarking


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Cost Factors

• Can be product related or market related.• Product related: density, stowability, ease or

difficulty of handling and liability• Market related: competition, location of

markets, Government regulations, traffic in and out of the market, seasonality of movements and impact on customer service

• Five prominent modes:– Road, rail, air, water and pipeline. – Sixth one is use of Ropeways


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Customer Service Factors

• Consistency, dependability

• Transit time

• Coverage – door-to-door for example

• Flexibility in handling a range of products

• Loss and damage performance

• Additional services provided Reverse logistics…


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Reverse Logistics

• Movement of goods from the market or customer back to the company

• The need:– Increased awareness of the environment– Stringent legislation – For some it is part of the business– Profitability of dealing with scrap, surplus

• Surplus, obsolescence can result due to:– Over optimistic sales forecasts, change in product

specs, errors in estimating material usage, losses in processing or overbuying based on incentives

Comparison of modes……


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Advantages of Rail

• Economy – more so for goods over long distances

• Efficiency of energy

• Reliability – not affected by weather conditions


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Disadvantages

• Uneconomical for small shipments and short distances

• Not suitable for remote stations

• Costly terminal handling facilities

• Inflexible time schedules

Road transport…..


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Road Freight Advantages

• Through movement – direct from consignor to consignee, no transshipment

• Flexibility – routes and loading routines can be easily altered, operate day and night

• Less capital costs – for own fleet + immunity from industrial action

• Fast turn-around – if articulated units like tractors and trailers are used

• Minimum delays


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Disadvantages

• Susceptibility to weather and road conditions – in spite of the best protection

• Unsuitability for heavy loads – rail transport more economical for bulk loads

• Unsuitability for long distances – again the rail telescopic rates are more favourable

Air transport….


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Air Transport Advantages

• Faster mode• Reduction in cost particularly inventory• Broad service range• Increasing capabilities• Disadvantages:

– High cost– Weather affects flight conditions– Limitations on heavy consignments

Water transport……


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Water Transport

• Advantages: – Mass movement of bulk– Lowest freight cost

– Preferred for long haul of low value commodities

• Disadvantages:– Not for quick transit– Suitable for certain types on commodities only

Pipel ine….


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Pipeline Movement

• Advantages:– Reliable, continuous, all weather transport– Low energy consumption – hence low cost– Low maintenance and operating costs– Underground, no space problem– Can traverse difficult terrain– Minimal transit losses– Operation round the clock, safe– Economies of scale – double the throughput for

only 30% additional cost• Disadvantage is in the investment cost

Ropeways….


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Ropeways• Advantages:

– In hilly or inaccessible areas– Long and circuitous routes with streams / deep

valleys– For commodities capable of movement in ropeway

buckets– Short haulages of less than 50 kms– Areas where other carriers are uneconomical

• Disadvantages:– Heavy investments– Limitations on size and quantity of haul

How to decide on the r ight carrier?


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Carrier SelectionTraffic Related Shipper related Service related

Length of haulConsignment weightDimensionsValueUrgencyRegularity of shipmentFragilityToxicityPerishabilityType of packingSpecial handling required

Size of firmInvestment prioritiesMarketing strategyNetwork of production and distribution Availability of rail sidingsStockholding policyManagement structureSystem of carrier evaluation

Speed (transit time)ReliabilityCost Customer relationshipGeographical coverageAccessibilityAvailability of special vehicles / equipmentMonitoring of goodsUnitisation Ancillary services – bulk breaking, storage


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Chart of Relative Merits

Parameter Weightage

Rail Road Air Water Pipeline

Rope way

Speed 30 5 6 8 4 3 3

Versatility 10 6 8 5 6 3 2

Reliability 20 6 8 5 5 7 4

Availability 10 7 8 5 6 3 2

Continuity of service

10 6 7 5 5 8 3

Distribution cost 20 4 5 6 6 7 8

Total score 10 5.4 6.7 5.1 5.1 5.1 4.0

Overall ranking 10 2 1 4 5 5 6


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Key Learnings

• Support to customer service has evolved from materials management to logistics and to supply chain management

• Production and marketing are the two internal customers of Logistics

• Logistics also has a direct impact on the financials of a company

• Three important functions of logistics are inventory management, warehousing and transportation


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Key Learnings• Inventory directly supports customer service

but also adds to the cost and has to be managed carefully

• Warehousing provides the place utility and works as a balance between production and meeting customer needs

• Transportation supports the place and time utility and uses different modes to reach the products to the consumer

• Modern day supply chains integrate the operations of a firm, its suppliers and customers

Ch15

Education

logistics functionunderstand

services logistics world

service supportplants

right place

right timethe procurement

right thing

location of warehouseschannels

product design