Global Logistics

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STUDY MATERIAL

COURSE : Global Logistics-Principles & Practices

COURSE CODE: BA 202

COURSE OBJECTIVE:

To understand the basics of supply chain and logistics

To understand the current & global practices of supply chain and logistics

To understand and develop different strategies for supply chain.

LECTURE 1

SCM is the collaborative design and management of seamless, value added processes to meet the

real needs of the end customer.

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What are the goals of SCM?

SCM is concerned with the efficient integration of supplier, factory, warehouse and stores so that

merchandise is produced and distributed:

In the right quantity

To the right location

In the right time.

In order to achieve:

minimize total system cost

Satisfy customer service requirements.

Consider the following:

Wal-Mart and K-Mart founded in the same year while k-mart declared bankruptcy in

2001 while Wal-Mart became the largest retailer in USA & worldwide.

DELL has been able to generate profits even when its competitors lost money on their PC

operations.

HONDA has established itself a dominant brand in automobiles

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What have these firms done? What is the secret of their success- Answer is Effective and

Efficient SUPPLY CHAIN MANAGEMENT STRATEGIES.

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LECTURE 2

Some Basic Terminologies:

Inventory: When goods are kept in warehouse to be released to the shop for selling it is called as

inventory. Goods when in warehouse are called inventory. Inventory is the phenomenon between

warehouse and selling point.

Stock: When inventory comes into the shop for selling to the ultimate consumer it is known as

stock. Goods when in shop are called stock. Stock is the phenomenon between shop and

customer.

Fleet Management: Fleet means Vehicle .It‘s the management of a company‘s vehicle fleet. It

includes commercial motor vehicles, such as cars, vans & trucks.

It includes a range of functions:

Vehicle Financing

Vehicle maintenances

Driver Management

Speed Management

Fuel Management

Health and Safety Management

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Lead Time: Lead Time is the time from the moment the customer places an order to the

moment it is received by the customer. For example, the lead time for ordering a new car from a

manufacturer may be minimum of 15 days. In industry, lead time reduction is an important part

of SCM.

Logistics-The term logistics comes from the Greek ‗logos‘ meaning speech, reason, ratio,

rationality, language & phrase, and more specifically from Greek word ‗logistiki‘, meaning

accounting and financial organisation.It‘s original use was to describe the science of movement,

supplying & maintaining of military forces in the field.

Later on it was used to describe the management of material flow through an organization, from

raw material through to finished goods. Logistics involves the integration of

information, transportation, inventory, warehousing, material handling, and packaging, and

occasionally security. Logistics is a channel of the supply chain which adds the value of time and

place utility.

Logistics as a business concept evolved in the 1950s due to the increasing complexity of

supplying businesses with materials and shipping out products in an increasingly globalized

supply chain, leading to a call for experts called supply chain logisticians.

Business logistics can be defined as "having the right item in the right quantity at the right time

at the right place for the right price in the right condition to the right customer"

The term production logistics is used to describe logistic processes within an industry. The

purpose of production logistics is to ensure that each machine and workstation is being fed with

the right product in the right quantity and quality at the right time. The concern is to streamline

and control the flow through value-adding processes and eliminate non–value-adding ones.

Logistics management

Logistics management is that part of the supply chain which plans, implements and controls the

efficient, effective forward and reverse flow and storage of goods, services and related

information between the point of origin and the point of consumption in order to meet customer

and legal requirements. A professional working in the field of logistics management is called

a logistician.

Logistics management is known by many names, the most common are as follows:

Materials Management

Channel Management

Distribution (or Physical Distribution)

Business or Logistics Management or

Supply Chain Management

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Lecture: 3

Supply Chain of Li & Fung

Magnitude of Supply Chain Cost Eg:Apparel Industry

Cost/ shirt %saving

Rs.527 0%

Rs.425 28%

Rs.204 62%

Manufacturer

Distributer Retailer Customer

Manufacturer Distributer

Retailer

Customer

Manufacturer Distributer

Retailer

Customer

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STUDY MATERIAL

LECTURE-4

EVOLUTION OF SUPPLY CHAIN MANAGEMENT AND LOGISTICS.

Logistics is seen to have developed as a society transported from the stage of human self-

sufficiency to the era of exchange which was needed in the socio-economic sytem.with the

transformation of business function itself, there has been transformation in the concept of

logistics, which has been systematically divided into four phases, namely:

1. Independent Business Function era (till 1950‘s)

2. Limited Internally Integrated Business Function era (1960-70)

3. Fully internally integrated Function Era (1980‘s)

4. Externally Integrated Business Function Era (1990‘s onwards)

Independent Business Function era (till 1950’s)

During the early phase of industrial growth the emphasis was on finding solutions to production

problems. Corporate enterprises were under tremendous pressure to increase production capacity

due to high demand created by war time shortages, followed by very limited number of players.

In such an environment of technical capacity for mass production, production led business

functions dominated the whole enterprise. Furthermore, this era reflected independent business

function, because each and every function such as procurement, inventory, production, sales etc

were independently performed.

The objective of this stage was to maximize the profit by a corresponding maximization of sales

volume by means of aggressive selling and preaching skills for the sales force. This stage was

the phenomenon till 1950s.

Limited Internally Integrated Business Function era (1960-70)

In order to overcome the prevailing competitive environment, firms started searching for new

tools and techniques for most efficient cist control systems. At the same time, they also realized

that physical distribution and logistics were activities whose costs had neither been carefully

studied nor coordinated. In fact, this era had given a real impetus to the concept of logistics.

Prior to the period of 1960‘s activities such as procurement, sales, storage and warehousing,

transportation etc were performed in a fragmented manner that caused poor performance and

high costs. But in this era material management, manufacturing management and physical

distribution management integratively perform organization functions.

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The major objective behind this era was to control the costs & gain price based competitive

capability to survive in the competitive marketplace comfortably.

Fully internally integrated Function Era (1980’s)

With the beginning of 1980s, the business situation became more critical as both external and

internal forces continued to change the business scenario mainly due to the following reasons:

(a) Transportation could no longer be considered to be a stable factor in the business

planner‘s equation, as fuel prices continuously soared.

(b) Inflation continues to rise at an unprecedented rate.

(c) There was a gradual change in the economic system of most of the countries, especially

with regard to multinational operations.

The entire situation above further increased the magnitude of competition in the marketplace.

For this purpose they realized the need for further integration of business functions in general

and distribution functions in particular. Integrated logistics refers to a set of activities

concerned with the flow of all materials, information and control systems. In an integrated

logistics system, there is an interface between traditional activities of physical distribution &

material management along with other functions of marketing, sales & manufacturing such

as production planning and scheduling, sales forecasting, inventory management & customer

service.

The major objective behind the development of an integrated logistic management system

was cost reduction, which facilitated firms in practicing maximization of profitable sales

volume by means of a high degree of coordination between various managerial functions.

The output of era contributed significantly in the overall performance of corporate enterprises

in terms of increased productivity, profitability and market share.

Externally Integrated Business Function Era (1990’s onwards)

With the beginning of the 1990s, the overall business scenario became more critical, mainly due

to the following sea change in the environmental scenario:

(a) Liberalization of almost all economies of the world for movement of goods from one

country to another resulted in the world-class competition in the market. Firms started

adopting the concept of Total Quality Management widely throughout the industry. The

idea of zero defects in products and services started pervading in logistical operations in

the form of timely & intact delivery.

(b) Rapid innovations in the field of science and technology, particularly information and

communication technologies, have completely changed the corporate mindset from

safety-stock mechanism to real-time response mechanism by the means of rapid

communication & exchange of data.

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(c) New inventory management techniques like JIT,quick response, continuous

replishment,vendor managed inventory, efficient consumer response became popular

instruments to efficiently plan and deploy inventory items throughout the complex and

multi-level distribution networks, preventing stock-out situation without excessive safety

stock, resulting into further curtailment of logistical costs in general and inventory cost in

particular.

As a result of the above stated developments, a new pattern of external integration in the

organizational structures has started emerging for various logistics activities in the 1990s.this

new dimension given impetus to the concept of Supply Chain Management. The major objective

of this era is to gain core competency by means of further streamlining the logistics system with

other supply chain members so as to achieve a higher level of specialization, and to reduce

financial risk. The output of this era is maximization of stakeholder‘s value and harmonious long

term relationships between all supply chain members.

LECTURE 5

Enterprise Resource Planning (ERP): ERP system gathers data from across multiple functions

in a firm. ERP systems monitor orders, production schedules, raw material purchases, and

finished goods inventory. They support a process oriented view of business across different

functional departments. For instance, an ERP system can view the entire order fulfillment

process and track an order from the procurement of material to fill to delivery of finished product

to the customer. ERP systems come in modules that can be installed on their own or in

combination with other modules. There are usually modules for finance, procurement,

manufacturing, order fulfillment, human resource and logistics. The focus of these modules is

primarily on carrying out and monitoring daily transactions.

ERP systems are installed in most companies today. They provide a common infrastructure

throughout the company with role based access to data.

Enterprise resource planning (ERP) system is an integrated computer-based application used to

manage internal and external resources, including tangible assets, financial resources, materials,

and human resources. Its purpose is to facilitate the flow of information between all business

functions inside the boundaries of the organization and manage the connections to outside

stakeholders. Built on a centralized database and normally utilizing a common computing

platform, ERP systems consolidate all business operations into a uniform and enterprise-wide

system environment.

An ERP system can either reside on a centralized server or be distributed across modular

hardware and software units that provide "services" and communicate on a local area network.

The distributed design allows a business to assemble modules from different vendors without the

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need for the placement of multiple copies of complex and expensive computer systems in areas

which will not use their full capacity.

MODULES

Transactional backbone

Financials

Distribution

Human resources

Product lifecycle management

Advanced applications

Customer relationship management (CRM)

Supply chain management software

Purchasing

Manufacturing

Distribution

Warehouse management system.

Management portal/dashboard

Decision support system

These modules can exist in a system or can be utilized in an ad-hoc fashion.

COMMERCIAL APPLICATIONS

Manufacturing

Engineering, bills of material, work orders, scheduling, capacity, workflow management, quality

control, cost management, manufacturing process, manufacturing projects, manufacturing flow

Supply chain management

Order to cash, inventory, order entry, purchasing, product configuration, supply chain planning,

supplier scheduling, inspection of goods, claim processing, and commission calculation

Financials

General ledger, cash management, accounts payable, accounts receivable, fixed assets

Project management

Costing, billing, time and expense, performance units, activity management

Human resources

Human resources, payroll, training, time and attendance, rostering, benefits

Customer relationship management

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Sales and marketing, commissions, service, customer contact, call-centre support

Data services

Various "self-service" interfaces for customers, suppliers and/or employees

Access control

Management of user privileges for various processes.

The term "enterprise resource planning‖ originally derived from manufacturing resource

planning (MRP II), which followed material requirements planning (MRP). MRP evolved into

ERP when "routings" became a major part of the software architecture and a company's capacity

planning activity also became a part of the standard software activity. ERP systems typically

handle, logistics, distribution, inventory, shipping, invoicing, and accounting for a company.

ERP software can aid in the control of many business activities, including sales,

marketing, delivery, billing, production, inventory management, quality management,

and human resource management

ERP systems are often incorrectly called back office systems, indicating that customers and the

general public are not directly involved. This is contrasted with front office systems like customer

relationship management (CRM) systems that deal directly with the customers, or the e-

business systems such as e-commerce, e-government, e-telecom, and e-finance, or supplier

relationship management (SRM) systems. ERP systems are cross-functional and enterprise-wide.

Advantages

ERP systems connect the necessary software in order for accurate forecasting to be done.

This allows inventory levels to be kept at maximum efficiency and the company to be

more profitable.

Integration among different functional areas to ensure proper communication,

productivity and efficiency.

Tracking the three-way match between purchase orders (what was ordered), inventory

receipts (what arrived), and costing (what the vendor invoiced).

ERP systems centralize the data in one place.

Eliminates the problem of synchronizing changes between multiple systems -

consolidation of finance, marketing and sales, human resource, and manufacturing

applications

Permits control of business processes that cross functional boundaries

Shorten production lead time and delivery time

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Disadvantages

Customization of the ERP software is limited.

Re-engineering of business processes to fit the "industry standard" prescribed by the ERP

system may lead to a loss of competitive advantage.

ERP systems can be very expensive. (This has led to a new category of "ERP light"

solutions.)

ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and

business process of some companies—this is cited as one of the main causes of their failure.

Many of the integrated links need high accuracy in other applications to work effectively. A

company can achieve minimum standards, and then over time "dirty data" will reduce the

reliability of some applications.

Once a system is established, switching costs are very high for any partner.

The blurring of company boundaries can cause problems in accountability, lines of

responsibility, and employee morale.

Resistance in sharing sensitive internal information between departments can reduce the

effectiveness of the software.

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ERP Logistics Main Features

The decision to implement ERP allows Businesses to make the daily tasks simpler through the

correct control of the logistic, production and counter sales. The possibility of tracing back in

time to forecast provides a clear and reliable sight of the origin and destiny of the lot. The

liquidations for transports could be done with rates previously defined.

The purchasing and selling of contracts is easy to handle with prearranged dates for delivery and

the collection of payment. The system is also helpful in easily calculating the costs of financing,

transport and storage, as well as carriage payments, profit margins, benefits and intermediaries.

ERP provides control panels for merchandising, whether packed or in bulk. With this system, the

necessary quantities can be processed or delivered, depending on the respective prices of the

purchase and sale. This feature is fundamental in having proper control over all the activities that

are directly or indirectly related to the logistics.

There are specific modules for the satisfaction and needs of this particular sector. Some of the

more common shared by all the enterprise resource management includes the standard module,

the production module and the transport module. The first one offer the functions of basic

maintenance with are related to the application like clients, providers, products, warehouses, and

taxes.

One of the most important objectives of the standard module is to control and display the

purchasing contracts with providers and the sale with clients. This is based on the material

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entries, and each entry for storage, merchandise origin, and specific weights are saved in a

controlled way. In regards to the production module, the user will be able to handle all the

management of the production orders, packaging, and cleaning expenses. The system also

provides the user with the ability to look up the past orders and modify them to create new ones.

Besides, there is a special control display, where all the details of stocks and product prices are

available.

Finally, the transport module offers the advantages of maintaining of transports, typing the

expenses for each transport depending the origin and destiny, and also making the liquidations

for transports based on the prearranged fees.

The conclusion of the main objectives of the implementation of ERP is to provide the

organization with a simpler method of managing and integrating the Business controls of the

logistics. The merchandise in stock and the production of products is also crucially important.

With the use of this program to collect information about the clients, providers, products,

storage, and selling of contracts, it is an easy task that could help save money and time. It is a

great advantage to consider this like an investment rather than an expense.

LECTURE 6-CASE STUDY

7 Eleven convienience Stores-Tech savy Stock ups.

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STUDY MATERIAL -3

LECTURE 7- Surprise Test

LECTURE 8- Case study-WALMART SUPLY CHAIN PRACTICES

LECTURE 9,10,11- PACKAGING-For safe product handling, Movement and Storage.

Packaging can be defined as materials used for the containment, protection, handling, delivery,

and presentation of goods. Packaging can be divided into three broad categories:

Primary packaging is the wrapping or containers handled by the consumer.

Secondary packaging is the term used to describe larger cases or boxes that are used to

group quantities of primary packaged goods for distribution and for display in shops.

Transit packaging refers to the wooden pallets, board and plastic wrapping and

containers that are used to collate the groups into larger loads for transport, which

facilitates loading and unloading of goods.

Packaging is the science, art and technology of enclosing or protecting products for distribution,

storage, sale and use. Packaging can be defined as the coordinated system of preparing goods for

transport, warehousing, sale and end use.

Package labeling is any written, electronic, or graphic communication on the packaging or on a

separate but associated label.

OBJECTIVES of Packaging and Package Labeling

Packaging and package labeling have several objectives :

Physical protection - The objects enclosed in the package may require protection from,

among other things, mechanical shock, vibration, electrostatic discharge,

compression, temperature etc.

Barrier protection - A barrier from oxygen, water vapor, dust, etc., is often

required. Permeation is a critical factor in design. Some packages

contain desiccants or Oxygen absorbers to help extend shelf life. Modified atmospheres or

controlled atmospheres are also maintained in some food packages. Keeping the contents

clean, fresh, sterile and safe for the intended shelf life is a primary function.

Containment or agglomeration - Small objects are typically grouped together in one

package for reasons of efficiency. For example, a single box of 1000 pencils requires less

physical handling than 1000 single pencils. Liquids, powders, and granular materials need

containment.

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Information transmission - Packages and labels communicate how to use,

transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical,

and chemical products, some types of information are required by governments. Some

packages and labels also are used for track and trace purposes.

Marketing - The packaging and labels can be used by marketers to encourage potential

buyers to purchase the product. Package graphic and physical design have been important

and constantly evolving phenomenon for several decades. Marketing

communications and graphic design are applied to the surface of the package and (in many

cases) the point of sale display.

Security - Packaging can play an important role in reducing the security risks of shipment.

Packages can be made with improved tamper resistance to deter tampering and also can

have tamper-evident features to help indicate tampering. Packages can be engineered to help

reduce the risks of package pilferage: Some package constructions are more resistant to

pilferage and some have pilfer indicating seals. Packages may include authentication seals

and use security printing to help indicate that the package and contents are not counterfeit.

Packages also can include anti-theft devices, such as dye-packs, RFID tags, or electronic

article surveillance[9]

tags that can be activated or detected by devices at exit points and

require specialized tools to deactivate. Using packaging in this way is a means of loss.

Convenience - Packages can have features that add convenience in distribution, handling,

stacking, display, sale, opening, reclosing, use, dispensing, and reuse.

Packaging materials

The most common types of material used for packaging are paper, board, plastic, glass, steel and

aluminium.

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GLASS

Many types of Symbols for package labeling are nationally & internationally standardized for

consumer packaging, symbols exist for product certification, trademark etc.Some symbols exist

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to communicate aspects of consumer use and safety. Example of Environmental and recycling

symbols include the recycling symbol, the green dot etc.

Symbols used for Packaging

Packaging Cost

The logistical packaging helps in reducing the transit damages, enhancing the operating

efficiency of the material handling equipment and economizing on space utility. The net result is

reduction in operating cost of the system through better asset utilization and prevention of transit

damage to the product. However, the gain is more than the loss, which would have resulted

otherwise due to improper logistical packaging. But for those gains, the manufacturer needs to

plan creation cost of the packaging, which includes:

1) Cost of Package (manufactured or Landed)

2) Storage cost of empty package

3) Handling Cost of empty Package

4) Packaging operating cost (cleaning, filling, sealing, labeling, unitizing, strapping etc.)

5) Package Damage (during packaging operation) cost.

6) Obsolescence cost

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The logistical packaging cost depends on type of product, physical dimension of product, the unit

value of product, type and quality of handling and transportation of equipment, regulations

etc.However ,broadly it varies from 0.5 to 5% of the value of consignment.

Lecture 12- Radio Frequency Identification (RFID) and Bar coding

RFID

RFID is the most recent application of information technology in the logistics and supply chain

operations. It is more promising alternative to bar codes, which communicate data via radio

waves to a reader typically connected to a host computer system. Basically , an RFID consists of

an antenna and a piece of silicon, a microcircuit of data storage. They have intelligence that

allows the data to be coded into the tag and the data is communicated through radio waves.

Radio-frequency identification (RFID) is a technology that uses communication via radio

waves to exchange data between a reader and an electronic tag attached to an object, for the

purpose of identification and tracking. Some tags can be read from several meters away and

beyond the line of sight of the reader. The application of bulk reading enables an almost parallel

reading of tags. Radio-frequency identification involves interrogators (also known as readers),

and tags (also known as labels).Most RFID tags contain at least two parts. One is an integrated

circuit for storing and processing information, modulating and demodulating a radio (RF) signal,

and other specialized functions. The other is an antenna for receiving and transmitting the signal.

In January 2005, Wal-Mart required its top 100 suppliers to apply RFID labels to all shipments. To meet

this requirement, vendors use RFID printer/encoders to label cases and pallets that require EPC

(Electronic Product Code) tags for Wal-Mart. These smart labels are produced by embedding RFID inlays

inside the label material, and then printing bar code and other visible information on the surface of the

label.

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An EPC RFID tag used by Wal-mart

RFID in practice

Future group,owner of Pantaloon,Big Bazzar and food bazzar in india,has entered into a

tie up with Cisco System to implement RFID technology in all its retail formats in India.

The project cost is INR 200 crores. Almost one million stock keeping units (SKU) out of

total three million will be tagged with RFID chips. All commodities over the INR 400 price

band will be tagged with RFID chip.

Bar- coding

The bar code systems are the identification technology that facilitates speedier flow of logistical

information such as quick tracking receipts, movements details, product identification, etc with a

lesser probability of error. It refers to the placement of computer readable codes on items,

cartons and containers. It is grouping of parallel bars of different widths separated by light spaces

(using white), again on different widths. These bars (black and white), again of different widths

used to define a particular character which can be identified by an electronic scanning machine

system.

Bar codes are seen on all types of goods today. These bars are nothing but items of information

in codified form, which can be decodified or read with help of scanner. The bar code facilitates

data accuracy, real time data availability, uniformity and easy useage, which are recognized

globally.

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Benefits

Fast-selling items can be identified quickly and automatically reordered.

Slow-selling items can be identified, preventing inventory build-up.

The effects of merchandising changes can be monitored, allowing fast-moving, more

profitable items to occupy the best space,

Historical data can be used to predict seasonal fluctuations very accurately.

Items may be re-priced on the shelf to reflect both sale prices and price increases.

This technology also enables the profiling of individual consumers, typically through a

voluntary registration of discount cards. While pitched as a benefit to the consumer, this

practice is considered to be potentially dangerous by privacy advocates.

The various bar code symbologies differ both in the way they represents data and in the type of

data they can encode. Some symbology can encode numbers, while others both numbers and

letters, and some can encode letters, numbers as well as characters, that is ASCII codes. The

latest symbologies include multiple language options. Bar code symbologies can be divided ito 3

broad categories:

Linear – It consists of a single row of bars and can be read by single line scanner.

Stacked-A stacked Symbology consists of several rows of bars and spaces and can be read by a

multiple ID scanner with moving laser beam.

Matrix-These are in a Polygonal array of data cells and are read from 2D mage scanner. Bar

codes are also one, two or three dimensional types depending on the symbology and its

application.

Some popular symbologies in use:

Symbology Type Data Capacity Usage

Code 39 Linear Alpha Numerical Distribution

Code 128 Linear 1-48 ASCII Shipping ,Labels

Pharma Code Linear Alfa-numeric Pharmaceutical ind.

Ups/EAN Linear 13 digits Grocery items

Maxi codes Matrix 1-90 Alpha numerical Parcels

PDF-417 Stacked 1-1200 Full binary Passports,IDs

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Bar-Coding and EDI

Texas instruments has linked EDI and Bar coding in the order placement and management

of office supplies the company benefited by way of reduction in the inventory- holding cost

to the extent of USD 2 million,freed up 40,000 sq ft of warehouse space and reduction in

cycle time by more than one-third.

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Study Material 4

Lecture12-Seven –Eleven Case Study

Lecture -13,14,15,16-Transportation: Backbone of Logistics

Transportation is an indicator which measures the economic, social & commercial progress of a

country. It has transformed the entire world into one organization and greatly contributed to the

evolution of civilization. Transportation is the most visible element of logistics operation. It has a

significant share in overall logistical cost of the firm and needs a great deal of planning to control

it. Transportation is the exciting and dynamic part of the supply chain & managing transportation

presents both opportunities and challenges.

Evolution of Transportation System

Transportation ensures movement of people as well as goods from one place to another. So it

helps in growth of trade and commerce of the country. A good transportation system is one of the

pillars of industrial growth and commercial structure of the country. In ancient times, various

modes of transportation, such as human beings, camels, horses, donkey, bullock-carts and ships.

An evidence of these modes found in the histories of Roman, Greek, Persian, harrappan and

Mohenjo-Daro civilizations. But capacity and speed were the main constraints for these modes.

With the advent of the industrial revolution in Europe, rapid changes occurred in the

transportation system. The new system required easy transportation of workers to and from the

factories and speedy movement of goods to the place of consumption.

The result was development of 4 modes of transport that is, road, rail, air and water. In India

before independence, the transportation system mainly comprised roads and railways, which was

Transport

Management

Rate

Negotiations

Route Planning

Claim

Administratio

n

Transport

mode and mix

decisions

Documentation

Carrier

evaluation and

selection

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developed for smooth administration by the then government for communication. However, after

independence, the focus changed to the development of railways and road infrastructure for

supporting the developmental needs of Indian economy and society. Then, slowly the seaports

and airports were developed to facilitate industrialization in the country.

Transportation Infrastructure

In the movement of raw materials or products from place of production to the place of

consumption, transportation is the most important component of logistical system. It serves two

purposes, one is product movement and the other is in-transit product storage. In India, 39% of

the total domestics cargo movement is done through road; followed by rail, which contributes to

the extent of 35%; balance shared by inland water, air and sea.

Table indicates the cargo handled through each mode.

Cargo movement (2006-2007),mode comparison

Transport Mode Cargo handled(billion

km/ton)

Cargo handled (million

tones)

Road 768 450

Rail 481 728

Sea - 464

Air - 1.55

Pipelines - 58.5

Road

Road transportation is one of the promising means for agricultural and industrial advancement of

the country. It is suitable for short and medium distances where other means are unable to reach.

It provide basic infrastructure to bring trade and commerce from remote rural areas to urban

areas or vice-versa and bring far off villages in the mainstream of national life ensuring

connectivity. Today road transportation is occupying predominant position in the transport

network in the country. Road transportation offers a number of advantages such as

Door to door service

Flexibility

Reliability

Reaching Remote Places

Speed

As regards the trucking industry in country, it is predominantly in the unorganized private

sector and bulk operators are single truck owners. The operator face many irritant, such

as levy of multi-point octroi and traffic police checks, which impede the free flow of

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goods traffic.Currently,25 million trucks are playing on Indian roads. The Indian road

conditions not being good, the average distance covered by a truck is 250-300 Km per

day as against 550-600 Km by their counterparts in developed countries. The average

operating cost of the Indian truck is INR 15 per KM.

Railways

Railways are the principal carriers of men and material and play a major role in country‘s

trade and commerce activities. It is main source of supplying essential commodities,

transporting them through length and breadth of country. Across, the world railways have

played an important role in industrialization and development of nations. It has been

primary means of for movement of raw material and finished goods.

Indian railways operating through a network of 6896 railway stations across 62,800 Km

of route length. IR‘s 96% cargo consists of bulk items such as coal, iron ore cement,

fertilizers, raw material for steel plants, finished steel products and petroleum. Bulk

Cargo is transported through railways because of cost advantage over other modes of

transportation.

Sea

The shipping fleet across the world comprises tankers, dry bulks carriers, containers,

container ships and special vessels. The tanker fleet accounts for 33% of the total fleet,

while a dry bulk carrier contributes 32% of the total in terms of million gross registered

tones (GRT).

India as approx. 55 shipping companies. Indian shipping on has very high dependence on

international trade, with 95% of overseas cargo by volume and 77% by value moving by

sea. Crude oil, oil products, iron ores, coal, food grains and steel are some major products

transported through sea. In India, 11 major ports handle 95% of international trade and

85% of domestic sea trade. The Indian shipping companies (SCI and Essar) are slowly

moving from carrying business to become a complete sea logistics solution providers,

Railway goods trafic

Cement

POL

Fertilisers

Steel

Coal

Foodgrains

Ironore

others

26

thereby maximizing shareholders wealth focus on energy (oil) transportation business and

moving upward in value chain by providing one stop integrated logistics solution and

value addition by providing their client web-based logistics solutions.

Air

Compared to all other modes of transport, air transport is less hazardous in nature. Air

Transportation is a costly affair and it is used only for highly perishable commodities and

items, whose life is short and value is high. Even though the cargo handled by air is

growing at a rate of 15-16 percent, it is significant as compared to cargo handled by other

modes of transportation. The air cargo traffic is handled by eight international airports, 87

domestic airports and 28 civilian airports (shared with defense forces).the air cargo traffic

is concentrated around the gateway airports such as Mumbai,Chennai,Delhi,Kolkatta and

Bangalore. These airports handle 87% of air cargo traffic in India.

Inland water transport (IWT)

IWT is an eco-friendly transportation mode. IWT can play a significant role in

augmenting the country‘s transportation infrastructure. India has a potential of 1, 45,000

km of IWT infrastructure comprising rivers, lakes and channel. Cargo movement through

IWT in India is meager one percent as against 10-12 % in UK, Europe and China.

With the globalization of Indian economy and implementation of WTO directives in

India, there will be greater movement of goods to and fro. This will create heavy pressure

on already Burdened transportation system of rail and road in India. There is a limit to

expansion of road capacity because of limited availability of land, high input cost and

environmental considerations. IWT is cost effective as compared to road and rail

infrastructure. A Kilometer of highway construction cost INR 6 crores, while more than

100 kms waterways can be developed at the same cost at the current rate.

There are some hazardous commodities, which should not be allowed for transportation

on road. The major advantage of IWT is doubling of load capacities or a small increase in

depth and thereby providing flexibility and cost elasticity, which does not exist in other

mode of transportation .Besides lower fuel consumption and construction cost.

Pipelines

Pipeline as a mode os transportation which was first developed in 1870 by Samuel Van

Syckel for transporting petroleum.20 yrs later, Standard oil Company changed the face of

transportation. Though petroleum was the first product transportated in this manner, the

pipeline became useful for several other commodities such as coal in slurry form, iron ore

fines in slurry form, chemicals, and natural gas etc.The basic advantage of this mode is it

reduces the operational cost, though the initial investment is high. In India, pipeline is

used for oil transportation by all public and private sector petroleum refineries.

27

It is an eco-friendly transportation mode. The cost of moving oil by rail and road

continues to rise over the years; however, pipeline heads towards downtrends. The

transportation cost of moving oil is INR 1.15 per tone per km on a new pipeline, while it

is INR 2.50 per tone per km by road.

Currently, 27% of the petroleum products are moved by pipelines of 6350 km length in

India.

Ropeways

In India more than 16% of the geographical area is hilly. Communication to such areas is

a problem because of the long circuitous routes The transportation of goods and essential

commodities to the hilly areas is sometimes important because of their strategic location

from the defense point of view.

Ropeways cause least damages to the ecology.

Inaccessible hilly areas can be reached with shortest distances.

Other modes of transportation are uneconomical.

Bulk material can be moved faster over short distance.

Currently 175 km of ropeways are in use in the above territories for transportation

of both materials and human beings.

Transportation modes: Characteristics Comparison

Characterstics Road Rail Water Air Pipeline

Speed 2 3 4 1 5

Investment 1 2 3 4 5

Freight Cost 4 3 1 5 2

Reliability 2 3 4 5 1

Frequency 2 3 4 5 1

Capability 4 3 2 5 1

Elements of transportation Cost

It has already been said that transportation cost is one of the major constituents of total logistical

costs. Hence it is essential to have a proper analysis of transportation costs, which includes

various elements. Some element behave in contradictory manner with others.

E.g.-if we opt for speedier mode of transportation, say airways, the transit time, obsolescence

and deterioration costs are less but tariff cost goes up.

Following are the elements of Transportation cost:

1) Tariff of transport mode-This element of transportation refers to freight charge of various

modes of transport to be paid for movement of goods from one location to another,

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Tariff of airways is highest, followed by roadways, railways, seaways and pipelines.

Normally, Freight charges increases with the decrease in transit time.Tarriff of transport mode

largely depends upon large no. of factors, such as:

Nature of product

Distance to be covered

Volume/quantity to be shipped

Density ( Weight and Space) of the product

Trade relationship, etc

2) Transit time cost- this cost of transportation deals with the cost of inventory in transit. From

total logistics costs point of view, this element of transport cost is very significant.

If the transit time of particular mode of transportation is longer, it means the product of the firm

remains in transit for a longer period of time.So, the involvement of warehouse cost for a longer

period of time, resulting into higher transit time cost.

3) Obsolescence & deterioration Costs- This element of cost caused due to obsolescence &

deterioration in the physical attributes of the product during transit. There are various products

which are perishable & delicate in nature, whose physical attribute deterioration over a period of

time, gradually resulting into devaluation of product.

4) Protective Packaging Cost- For specific products and modes of transportation, there is a

requirement of a specific protective packaging, such cost come under transport cost

If transportation is done through railways, more sophisticated protective packaging required to

protect goods from breakage and pilferage.

In case of roadways, less protective packaging required

As far as breakage and pilferages concern, normally road transports settle the shippers claim

instantly, whereas as it takes too long in railways. Hence shippers need to take into consideration

the protective packaging requirements along with cost incurred in it while selecting a particular

mode of transportation and its cost calculation.

5) Transit insurance cost-It is cost of insurance paid to insurance company to cover various

risks. At the advent of Containerization, this cost is minimized because there are less chances of

damages.

6) Miscellaneous cost - Apart from the above elements of transportation costs. There are other

miscellaneous costs, such as local taxes, octroi,toll taxes etc.specially when goods shipped

through roadways.

29

Containerization

A container can be defined as a transport device for moving solid and liquid material. It is a case

or tank with adequate strength to be repeatedly used for packaging and transportation of material.

It was Malcolm McLean, owner of a huge trucking Company in the USA, who conceived the

idea of containers in 1956.Initially containers were used for sea transportation.

These are normally air and water tight construction using steel and aluminium ally and are built

as per ISO instructions and verification.

During its first 20 years, many container sizes and corner fittings were used; there were dozens

of incompatible container systems in the U.S. alone. Among the biggest operators, the Matson

Navigation Company had a fleet of 24-foot (7.3 m) containers while Sea-Land Service, Inc used

35-foot (11 m) containers. The standard sizes and fitting and reinforcement norms that exist now

evolved out of a series of compromises among international shipping companies, European

railroads, U.S. railroads, and U.S. trucking companies.

Today

Today, approximately 90% of non-bulk cargo worldwide moves by containers stacked on

transport ships;[11]

26% of all containers originate from China. As of 2005, some 18 million total

containers make over 200 million trips per year. There are ships that can carry over

14,500 Twenty-foot equivalent units (TEU), for example the Emma Mærsk, 396 m long,

launched August 2006.

Biggest ISO container companies

Top container shipping companies in order of TEU capacity, 23 Jan 2011

Company TEU capacity Number of ships

A.P. Moller-Maersk Group 2,150,888 545

Mediterranean Shipping Company S.A. 1,638,962 414

CMA CGM 1,100,007 384

American President Lines 589,879 147

30

Evergreen Marine Corporation 554,725 152

Hapag-Lloyd 541,811 124

COSCO 498,437 134

CSAV 469,428 128

Hanjin Shipping 448,051 98

China Shipping Container Lines 440,236 122

NYK Line 365,034 95

31

Sea Freight Container dimensions

20 ft Dry Outside dimension: 6.045x 2.438x 2.438 m

Inside Dimension: 5.918x 2.337x2.2103 m

Volume: 31 m3

40 ft Dry Outside dimension: 12.192 x 2.438 x 2.591m

Inside Dimension: 12.040 x 2.337 x2.338 m

Volume: 67 m3

20 ft Dry High Cube Outside dimension: 6.045x 2.438x 2.591 m

Inside Dimension: 5.918x 2.337x2.413 m

Volume: 33 m3

40 ft Dry High Cube Outside dimension: 12.192 x 2.438 x 2.896 m

Inside Dimension: 12.040 x 2.337 x 2.692 m

Volume: 76 m3

20 ft Refer ( Referigerated) Outside dimension: 6.045x 2.438x 2.438 m

Inside Dimension: 5.385x 2.159x 1.956 m

Volume: 23 m3

ISSUES

Increased efficiency

A 1998 study of post-containerization employment at United States ports found that container

cargo could be moved nearly twenty times faster than pre-container break bulk. The new system

of shipping also allowed for freight consolidating jobs to move from the waterfront to points far

inland, which also decreased the number of waterfront jobs.

Additional fuel costs

Containerization increases the fuel costs of transport and reduces the capacity of the transport as

the container itself must be shipped around not just the goods. For certain bulk products this

makes containerization unattractive in some areas (mostly USA and Canada) containers are

double stacked (one above another), but this is usually not possible in other countries.

32

Hazards

Containers have been used to smuggle contraband. The vast majority of containers are never

subjected to scrutiny due to the large number of containers in use. In recent years there have been

increased concerns that containers might be used to transport terrorists or terrorist materials into

a country undetected. The U.S. government has advanced the Container Security Initiative (CSI),

intended to ensure that high-risk cargo is examined or scanned, preferably at the port of

departure.

Empty containers

Containers are intended to be used constantly, being loaded with new cargo for a new destination

soon after having emptied of previous cargo. This is not always possible, and in some cases, the

cost of transporting an empty container to a place where it can be used is considered to be higher

than the worth of the used container.

Loss at sea

Containers occasionally fall from the ships, usually during storms; 10,000 containers are lost at

sea each year. For instance, on November 30, 2006, a container washed ashore on the Outer

Banks of North Carolina USA, along with thousands of bags of its cargo of Doritos Chips.

Containers lost at sea do not necessarily sink, but seldom float very high out of the water,

making them a shipping hazard that is difficult to detect .In 2007 the International Chamber of

Shipping and the World Shipping Council began work on a code of practice for container

storage, including crew training on parametric rolling, safer stacking and marking of containers

and security for above-deck cargo in heavy swell.

Who is Shipper & Carrier?

‗Xerox‘ made Photocopier at the factory situated at Rampur, U.P., ‗Blue –Dart‘ transported these

photocopier to its Delhi based warehouse. ‗Xerox‘ refers to ‗shipper‘ and ‗Blue-Dart‘ is ‗carrier‘.

Shipper-One who sends goods from one place to another

Carrier-One who is employed, or makes it his business, to carry goods for others for hire; a porter;

33

Transportation decisions (Pricing & Rate)

There are various factors which affect transportation decisions:

Economic Factors

Shipper‘s factors

Carrier‘s Factors

Alternative Pricing strategies.

Economic Factors

There are several economic factors which influence transport rates. The specific economic

factors are distance, volume, density, stowability, and handling.

Distance-It contributes directly to variable cost, including labour.fuel, maintenance. Distance is

one of the most basic economic factors which determine the total logistic cost. It contribute

directly to variable cost, including labour, fuel, maintainnace.The transport variable cost is

directly proportionate to distance.

Volume- The second economic factor is load volume, which influences the transportation cost.

Transport cost per unit of weight decreases with the increase in the load volume. It is mainly due

to fixed administrative and other costs like delivery and picking costs. Furthermore, it increases

in the cases of under load capacity of the vehicle.

Density- The density factor incorporates weight and space aspects, which is significant because

transportation cost is normally quoted in terms of rupees per ton. Logistics managers are required

to increase the product density, allowing more unit of product to be loaded on a trailer of the

vehicle to better utilize capacity.

Stowability- The stowability factor refers to product dimensions and how they affect vehicle

space utilization. Products of odd sizes and shapes along with excessive weight or length,

typically waste space because, they can‘t be stowed well. For instance, while steel blocks and

rods have the same density, rods are more difficult to stow because of their length and shape than

blocks. Transportation costs are generally more in the case of odd-shaped products whose

stowability is more difficult.

Shippers factors

While making transportation related decisions, a shipper‘s objective emphasizes on minimization

of total logistics costs in terms of transportation, inventory, information and maximization of

customer responsiveness capability of the firm. The following aspects of costs are required to be

taken into account:

I. Cost paid to carrier for shipment

34

II. Cost of holding inventory incurred by shipper supply chain network.

III. Facility cost in the shippers supply chain.

Carriers Factors

While making Transportation related decisions, carriers are required to make investment

decisions for the development of transport infrastructure and then operating decisions to

maximize their own return against investment.

Carrier incurs the following costs:

I. Cost of procurement of vehicle

II. Fixed operational costs like salary of drivers, attendants, vehicles

insurance,registration,road tax etc

III. Trip related cost- like cost of fuel, labour, road permit, toll tax etc.

IV. Value added services such as tracking of shipment, point-to-point information,

barcoding, EDI etc.

Alternative pricing strategy

While setting rates to charge, shippers and carriers can adopt one or a combination of two of the

following alternative pricing strategies. The major objective is to bring about a trade-off between

the cost of service rendered by carrier and the value of the service to the shipper.

I. Cost of service strategy- It is the simplest pricing strategy for transportation service. In

this strategy a build up approach is adopted where the transport service provided.

Determine a rate based on the cost of providing the service plus a profit margin to get

predetermined return.

a. E.g. - Cost of transportation-5000

b. Profit mark up - 10%

c. Cost of Service - 5500

II. Value of service strategy- this strategic approach refers to fixation of transportation

charge on the basis of value of the service required by the shipper. Currently, logistics

manager of the enterprise are not expecting more movement of goods from point of

origin to destination point, but they need value added services in terms of total logistics

solution.

Hence in this approach transport charges are fixed on the basis of perceived shipper value

rather than the cost of actually providing the service. This approach is most suitable in the

case of transportation of high-value goods.

III. Combination Strategy- As the name itself depicts, this strategy is a combination of

earlier discussed two approaches. It refers to the establishment of the transportation price

35

at the same intermediate level between where the cost of service minimized and value of

service maximized.

Inter- modal Transportation

It‘s the use of more than one mode of transportation for the movement of shipment from the

origin to is destination. These are joint; point-to-point.it generally involves two or more modes of

transportation.

Piggyback- Coordination between railways and roadways. Its also call TOFC or COFC .it

involves picking up goods in a trailer or container, delivering it to rail, removing the truck trail,

reattaching it to a truck, which make final delivery.

Fishy back-This is achieved by coordination of road and water modes of transportation. Goods

containing boxes are loaded on the trailer which will be further loaded on ship.

Tranship- Intermodal transportation system is the outcome of the coordination between railways

and waterways for the bulk movement.

Air truck- Its outcome of the coordination between airways and roadways. It‘s also called

‗Birdyback‘.It refers to exchange of goods container between air and road carriers.

36

Lecture-17, 18,19,20,21

Warehousing: A role beyond storage

Modern warehousing is in the process of an evolutionary change from an emphasis on storage to

emphasis on flow through, from inventories at rest to inventories at motion. In logistical system

role of a warehouse is that of a switching facility rather than a storage facility. The effectiveness

of the supply chain can be considerably enhanced through proper decision making on

warehousing.

Warehousing – A logistical challenge

A warehouse act as a supporting function for logistics and play a key role in attaining the overall

objectives of the firm‘s logistical supply chain system. In today‘s context, a warehouse is used as

a switching facility rather than a long term storage house. The attention is paid to higher

inventory turnover, lower operating costs and shorter cycle times. The performance of a

warehouse is judged by its productivity and cost performance, to achieve two polemic goals of

customer satisfaction and lower cost of operation.

One of the most important steps in the selection of a logistics network is deciding on a

centralized or decentralized warehouse system. A warehouse can act as mother warehouse or a

distribution warehouse depending on the distribution system adopted by company. The

centralized warehouse ensures tight control on inventories and can operate on economies of scale

resulting in lower operating cost. The decentralized warehouse operations with multiple

Warehousing

Source of logistical

competence

Occupancy

Productivity

Inventory turns

Operating Costs

Order Fulfillment

Timely shipment

Damage free delivery

Documentation

37

distribution centers ensure the best services to the customers. The site selection for locating the

warehouse is the next step which depends on type of product, consumption centers,

transportation cost, customer service needs etc.

The following needs to be taken care of:

Maximum utilization of storage space. (Floor and cubic space)

Higher labour productivity

Maximum asset utilization

Reduce material handling

Reduce operating cost.

Increased inventory turnover.

Reduced order filling time.

Warehousing Functions

The primary task of a warehouse is to store any material until it has been delivered to the

customer or the end user. As the manufacturing and consumption cycle never match, the

manufactured material has to be stored somewhere till the demand for the same is generated and

delivery is confirmed. In fact, the storage facilities are designed around the following four

functions:

Material Storage function

HOLD- the holding function is the most important function of a warehouse for the finished

products ready for delivery. Depending on demand or order booking pattern and delivery

schedules promised to the customer by the marketing department, the goods are dispatched from

the warehouse. At the warehouse there is continuous inflow and outflow of material. The

allocation of area for materials at different point of time is necessary to retrieve those materials

as and when required for further delivery to particular customers or markets. Hence, the material

holding function has to be carefully planned looking at variables such as product categories,

product mix, product characterstics, shipment arrival time, expiry dates etc.

Warehouse

(Finished goods)

Manufacturing

Plant

Customer

38

CONSOLIDATION if the supplies are originated from various sources in small quantities, it

may be economical to collect these small shipments at one centre and combine them into a large

shipment for sending it to the customer. The consolidation will ensure cost saving on freight.

For import or export of goods for large buyers whose requirement does not warrant for enough

volumes for shipment from each source, there is potential cost saving on freight with

consolidated shipment.

BREAK BULK in contrast to consolidation warehouse, here the material arriving in bulk is

divided into small shipments for delivering it to the end customer. The bulk cargo of fertilizers,

oil, chemicals coming from a source is broken into small consignments for buyers as per their

requirement.

Manufacturing

Consolidation

warehouse

Vendor 1

Vendor 2

Vendor 3

Buyer 2

Buyer 1

Buyer 3

Break Bulk Warehouse Manufacturing

Plant

Customer 2

Customer 1

Customer 3

39

CROSS DOCKING this is similar to break bulk activity except that it involves multiple

suppliers. The usage of a warehouse is for very short time. The material arriving in bulk in fully

loaded trucks is broken into smaller consignments for further dispatch to the customers. The stay

of material in warehouse is not more than 48 hours. Cross docking is most commonly used in

retail chains wherein the mother warehouse receives different materials from multiple suppliers,

which is broken, assorted and consolidated for dispatch to various retail stores as per the

requirement.

MIXING a warehouse sometimes is used as a product mixing point for a company having a

number of plants manufacturing different ingredients, which are mixed at a convenient place to

make final product. The process involved is a simple mixing. The customer order can be fulfilled

without mixing, by sending the ingredients in small uneconomical volumes from individual

plants to the customer. However the transportation cost becomes prohibitive, for shipments of

individual ingredients to the customer. A common mixing point permits volume shipments of

ingredients at a single location.

Packing this is an important function that is carried out in a warehouse after the break bulk

operations. The repackaging of the material as per the ordered quantities of the individual

customer is done. The packs are labeled and marked as per the packaging regulations or as per

requirements of the customer.

Material Handling Function

This function is divided into 3 activities:

Loading and Unloading- The unloading activity is performed when the goods arrive in a

warehouse. The material is offloaded from the transportation vehicle. Loading is the last function

performed in a warehouse. the material packed in boxes is loaded on to the transportation vehicle

at the loading area. Loading includes the additional efforts of bracing the load to prevent

damages.

Material movement –These activities are carried out either manually or with the help of the

material handling equipment. The incoming material that is unloaded has to be moved to an

assigned place in a warehouse for temporary storage, while during order pick up the material is

to be moved from the storage area to the picking area and then to the loading area. For material

movement the most common equipments in use are trolley, crane, conveyor or forklift.

Order filling- This includes the selection of material from various lots at various locations in a

warehouse as per the customer order. This activity is done manually or with the help of robots.

40

The order cycle time, which is the most critical parameter in customer service, is very much

dependent on the speed of material picking.

Information Handling Function

For an effective and efficient customer service, it is essential for the marketing persons to know

the availability of stocks and the likely dispatch schedule. Also the inventory level at any point

of time is of crucial importance to the top management to know its impact on cash flow of the

firm. This is possible with a proper warehouse information system. Information is also required

on the following:

Goods inward

Inspection an auditing

Goods Outwards

Stock outs

Excess Stocks

Invoicing

Warehouse expenses Transit damage and Breakage

Consignment tracking

Warehouse Options- A Strategic Decision

The warehouse option is a strategic decision having long-term effects on the efficiency and

effectiveness of the system. The option may be exercised after thorough evaluation of the

logistics system design mix. For acquiring a warehouse space the following 3 options are

available:

Private Warehouse

Public Warehouse

Contract Warehouse

Private Warehouse- Private Ownership of a storage facility refers to the entire facility under

financial and administrative control of the firm. The firm owing the product operates these

warehouses. These facilities may include a production oriented captive warehouse or a

distribution warehouse located in the field for customer service. Private warehouses are attractive

prepositions under certain circumstances such as:

41

Product specific material handling and storing facilities are required which are not

available with other options

Volumes handled are high ensuring full capacity utilization and benefits of scale

economies

High degree of control over operations is required

The benefits of a private warehouse are flexibility, full management control and lower operating

cost. The operating cost of a private warehouse is less as private warehouses do not have a profit

mark up. The material handling and the storage facility can be changed as per the product mix,

which is not possible in case of public or contract warehouses.

Public Warehouse- A public warehouse is similar to a private carrier in transportation service.

The firms having warehousing space, storage facility and material handling equipment, for the

most general use, provide these services. These types of warehouses are extensively used in

logistical systems. Public warehouses are designed for handling the most general packaged

products or commodities, which do not require specialized storage and handling arrangement.

The products generally stored are food grains, paper rolls, furniture, chemicals, bulk material

(cement, fertilizers) etc.

A public warehouse provides financial flexibility. A newly formed firm desirous for expanding

its distribution network need not invest in developing a private warehouse. The option is to hire

some space in a public warehouse and use the money for other productive activities.

Contract Warehouse- These are the product specific warehousing facilities acquired for use for

a specific period against fixed charges. A contract warehouse can provide the benefits for both

private and public warehouse. This facility provides the benefits of scales, flexibility and

customizes a facility. The resources such as labour,material handling equipment, storage

arrangement, communication equipment, can be used on sharing basis with depositors from the

same industry to economize on operating cost. As the facilities are product specific product

damages are less.

42

Warehouse options

Basis Private Public Contract

Investment High None Very little

Flexibility in Material handling,

storage and

throughput planning

Location Location

Cost per unit stored Related to volume Low Related to volume

Level of control High Low Medium

Adequacy of goods

stored

High Low High

Ten 21st Century warehousing Trends

Practices as just-in-time, quick response, efficient customer response, direct –store delivery and

continuous flow distribution will reduce the dependence on warehouse in distribution. But in real

world, warehousing will still link suppliers with consumers. The following are some warehousing

trends for 21st century:

1. Focusing on the customer:

2. Compression of operations and time

3. Continuous flow

4. Cross- Docking

5. Electronic transactions

6. Customized warehousing

7. Third party warehousing

8. The incredible shrinking order

9. Automation

10. The human factor

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Warehouse Site Selection

The Consideration of warehouse site selection revolve around two major factors, i.e., service and

the cost. Product availability can greatly be enhanced by locating the warehouse close to a

market place. Smaller and frequent deliveries, which nowadays the customer prefers, can be

organized this will enhance the confidence in the supplier. However, transportation cost, which is

major element in logistical cost, depends on the location of the warehouse. The other factors

affecting site selection are:

Infrastructure- the availability of proper infrastructure such as approach roads, utilities (water,

electricity, communication), and labour has a great effect on the efficiency and the effectiveness

of warehouse operations. For a cold storage warehouse, availability of electric power is a major

factor influencing site selection. The unavailability of a proper road or rail siding facility will

have a serious impact on the operations of a warehouse and as a result the transportation cost

may go up considerably.

Market- The distribution warehouses are planned in close proximity to the markets or

consumption centers for offering better service to the customers. Frequent deliveries with small

quantities as required by the customers can be organized due to limited geographical area

coverage.

Access- the location of the warehouse has the greatest effect on the primary transportation cost.

The difficulty in access will have an influence on the transportation cost.

Primary transportation cost- transportation cost is the largest component in the product cost,

particularly for low unit price products. The location of the warehouse will have the greatest

influence on the primary transportation cost. The product demand pattern will influence the

transportation cost in two ways, first, on the frequency of truck trips and , second, on the loading

pattern (full or partial) of the transportation pattern.

Availability- the availability of warehousing space in an urban area, particularly in metros at

cheaper rates, is a remote possibility. In such cases the site has to be shifted beyond the

municipal city limits where storage space is available at a considerably cheaper rate. However,

this arrangement may add to the transportation cost.

Product- the type of product will have a profound effect on the number of warehouses and their

locations. For example-perishable products need to be delivered to the customer within their

expiry period and hence they should be located near consumption centers.

Regulations- For certain types of products (explosives, hazardous chemicals, and radio active

materials), which can cause damage to human life; the storage site selection is guided by

44

government regulations. In such cases very little options are left with the firms to choose the site

form.

Local Levies- depending on the sales tax and octroi charges in the region, the location of a

warehouse is planned. Due to non- uniformity of sales tax across the Indian states, marketers

invariably plan the warehouse to take benefits of the local sales tax disparities.

Warehouse Costing

The elements of warehousing cost normally accounted for are transportation; storage and

administration. The inventory carrying cost is not included in warehousing cost. The

warehousing cost includes Fixed and Variable cost elements. Fixed cost covers, rental, capital

cost, salary-wages of the employees, and utilities while the variable cost covers repair and

maintenance, material handling, transportation, and packaging which is related to the load on the

warehouse etc.Wide variations are observed in proportion of variable and fixed cost across the

different warehouse.

Warehousing strategies

Warehousing network plays a major role in the success of the physical distribution of products.

However, with the proliferation of a number of warehouses, the cost of logistics operations goes

up. Hence, it is a tight –rope walk for the logistics manager to meet the expectations for cost and

customer service. Under these circumstances, to strike a balance between the two and to remain

competitive, it is observed that the leading firms adopt and implement the following warehousing

strategies.

Hub Networking-to reduce the level of inventory and exercise better control on the distribution,

warehousing hubs are planned at a few strategic locations to serve the entire market spread over

a vast geographical area. This is practiced more in FMCG, pharmaceutical an white goods

industry, wherein the distribution networks consists of a large number of dealers, stockiest and

retailers. In the Indian context, most of the leading firms have their warehousing hubs located

near or around the four metros (Mumbai, Kolkata, Chennai, Delhi) catering to the demand of

four regions (east, west, south, north) in the country. The hubs are responsible for secondary

distribution to dealers, stockiest and wholesalers in the specified region. A regional hub will

cater to the needs of several states covered under respective regions. These hubs will eliminate

the need of having distribution centers located in each state which is the practice followed by

many firms. The advantages of hub strategy are:

Reduction in operating cost

Minimization of transportation cost

45

Better control on inventory

Improved customer service.

Capacity switching- For a given market there will be a monthly demand pattern for a product.

This demand may be greatly fluctuating in certain months due to seasonality in consumption of a

product. Under such circumstances the capacity of a warehouse may be planned on the basis of

average demand per month over the year and for additional space requirement (to take care of

seasonal requirement), a public or contract warehouse may be used for a short period during the

season. This may reduce the quantum of investment in a private warehouse if planned on the

basis of the peak demand.

Public or contract warehouse

(for 25% capacity)

Warehousing FC

Storage

Capacity Private Warehouse

Requirement (for 75% capacity)

J F M A M J J A S O N D

Months

Warehouse Capacity planning

Cobbling-This strategy works well with players who ae not competitors but cater to the needs of

similar groups of users or customers and have a similar distribution channel. For example,

FMCG products manufactured by the manufactured by the companies such as HLL, J&J &

Nestle can be cobbled together to reduce wasteful practices in the storage and transportation. The

operating cost will considerably be reduced benefiting all the cobbling partners.

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Outsourcing- most of the firms do not have expertise in warehousing operations. Moreover, it is

not a core activity in their business process. Hence, this area of operations remains neglected for

investment decisions and as a result it becomes a bottleneck in overall system productivity,

efficiency and effectiveness. For gaining logistical competitiveness, leading firms are

outsourcing entire warehousing operations to 3PL providers who bridge these gaps through their

expertise, technology and infrastructure.

Warehousing in India

In India warehousing in general is a neglected area and it is used to the extent of storage of goods

until they are delivered. However, some multinationals and professionally managed companies

are exception to this. Unlike the developed countries, in India a warehouse is not used as a

strategic area for developing a competitive advantage. Most of the warehouses in India still use

manual material handling system and are smaller in size as compared to those in the western

countries, where they operate on economies of scale and use sophisticated material handling

equipment and storage scheme and make use of the latest IT and communication technologies.

Indian business firms practice a number of different types of warehousing arrangement. The

following are the important amongst them:

Captive warehouse located in manufacturing premises of the firm.

Network of distribution warehouses at different geographical locations by hiring space

from private warehouse.

Utilizing godowns available with the stockiest, distributors or dealers at major market

centres.

Each pattern has its associated cost, benefits, merits and demerits. Different firms prefer patterns

based on their unique situation and their perception of relative cost and benefits. The

warehousing industry catering to the industry sector is highly fragmented. There is no central

government agency to look after the growth of the industry.Cenral warehousing Corporation and

State Warehousing Corporation are the main public warehousing agencies in India. They are

statutory agencies having network of warehouses all over the country and are mainly catering to

needs of government bodies such as Food Corporation of India for storing grains, spices,

fertilizers, cotton seeds etc.They perform functions such as storage, stock accounting, insurance

and outward delivery. These agencies are governed by the warehousing Corporation Act, 1962.

For the distribution of food grains in the country, the FCI has its own network of warehouses

with 13 million tones of storage capacity the total food grain storage capacity (FCI,SWC,CWC,

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ARDC and private storage capacity together) is around 19% of the total food grain production

(202 million tons) in the country which grossly inadequate.

Food grain storage capacity in country

Public warehousing agencies Storage Capacity (million tons)

Food Corporation of India (FCI) 13.07

Central Warehouse Corporation (CWC) 9.80

State Warehouse Corporation (SWC) 11.39

Agricultural Rural Dev. Corporation (ARDC) 3.50

Virtual warehouse - Virtual warehouse is a important terminology of E-Commerce technology.

The main advantage of virtual warehouse is reduction of costs and the flexibility of handling to

users. This is because the available information can be shared not only by many users of the

same company but also if required globally by many companies thus giving flexibility and ease

of handling. The cost gets reduced because there is reduction in structure costs by the concept of

virtual warehouse.

The concept of virtual warehousing surfaced due to emerging networking and communication

technologies in the 1980‘s. this helped very large organizations operating in the global markets

to evolve a framework of competitiveness with effective and efficient logistics operations to

develop an advantage over their business rivals. It is defined as a single storage system located at

a convenient place to take care of worldwide requirements of products and services thereof,

based on the information in the real time environment. However the effectiveness of a virtual

warehousing system depends on the speed and accuracy of information flow and accuracy.the

success of a virtual warehouse will depend on the availability of the following:

Alternative and efficient transportation system.

Speedy communication and computing system

Networking facility

Real-time tracking system

Inventory management software for demand management to handle product volumes and

varieties.

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Study material -5

Lecture – 22:-Some Terminologies

SIX SIGMA

Six Sigma is a business management strategy originally developed by Motorola, USA in 1986.

As of 2010, it is widely used in many sectors of industry. Six Sigma seeks to improve the quality

of process outputs by identifying and removing the causes of defects (errors) and

minimizing variability in manufacturing and business processes. It uses a set of quality

management methods, including statistical methods, and creates a special infrastructure of

people within the organization ("Black Belts", "Green Belts", etc.) who are experts in these

methods. Each Six Sigma project carried out within an organization follows a defined sequence

of steps and has quantified financial targets (cost reduction or profit increase).

The term Six Sigma originated from terminology associated with manufacturing, specifically

terms associated with statistical modeling of manufacturing processes. The maturity of a

manufacturing process can be described by a sigma rating indicating its yield, or the percentage

of defect-free products it creates. A six sigma process is one in which 99.99966% of the products

manufactured are statistically expected to be free of defects (3.4 defects per million). Motorola

set a goal of "six sigma" for all of its manufacturing operations, and this goal became a byword

for the management and engineering practices used to achieve it.

Methods

Six Sigma projects follow two project methodologies inspired by Deming's Plan-Do-Check-Act

Cycle. These methodologies, composed of five phases each, bear the acronyms DMAIC and

DMADV.

DMAIC

The DMAIC project methodology has five phases:

Define the problem, the voice of the customer, and the project goals, specifically.

Measure key aspects of the current process and collect relevant data.

Analyze the data to investigate and verify cause-and-effect relationships. Determine what the

relationships are, and attempt to ensure that all factors have been considered. Seek out root

cause of the defect under investigation.

Improve or optimize the current process based upon data analysis using techniques such

as design of experiments, poka yoke or mistake proofing, and standard work to create a new,

future state process. Set up pilot runs to establish process capability.

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Control the future state process to ensure that any deviations from target are corrected before

they result in defects. Implement control systems such as statistical process

control, production boards, and visual workplaces, and continuously monitor the process.

DMADV or DFSS

The DMADV project methodology, also known as DFSS ("Design For Six Sigma"), features

five phases:

Define design goals that are consistent with customer demands and the enterprise strategy.

Measure and identify CTQs (characteristics that are Critical To Quality), product

capabilities, production process capability, and risks.

Analyze to develop and design alternatives, create a high-level design and evaluate design

capability to select the best design.

Design details, optimize the design, and plan for design verification. This phase may require

simulations.

Verify the design, set up pilot runs, implement the production process and hand it over to the

process owner(s).

Quality management tools and methods used in Six Sigma

Within the individual phases of a DMAIC or DMADV project, Six Sigma utilizes many

established quality-management tools that are also used outside of Six Sigma. The following

table shows an overview of the main methods used.

Histograms

ANOVA

Pareto chart

Chi-square test

Correlation

Cost-benefit analysis, etc.

Implementation Roles

One key innovation of Six Sigma involves the "professionalizing" of quality management

functions. Prior to Six Sigma, quality management in practice was largely relegated to the

production floor and to statisticians in a separate quality department. Formal Six Sigma programs

adopt a ranking terminology (similar to some martial arts systems) to define a hierarchy (and

career path) that cuts across all business functions.

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Six Sigma identifies several key roles for its successful implementation.

Executive Leadership includes the CEO and other members of top management. They are

responsible for setting up a vision for Six Sigma implementation. They also empower the

other role holders with the freedom and resources to explore new ideas for breakthrough

improvements.

Champions take responsibility for Six Sigma implementation across the organization in an

integrated manner. The Executive Leadership draws them from upper management.

Champions also act as mentors to Black Belts.

Master Black Belts, identified by champions, act as in-house coaches on Six Sigma. They

devote 100% of their time to Six Sigma. They assist champions and guide Black Belts and

Green Belts. Apart from statistical tasks, they spend their time on ensuring consistent

application of Six Sigma across various functions and departments.

Black Belts operate under Master Black Belts to apply Six Sigma methodology to specific

projects. They devote 100% of their time to Six Sigma. They primarily focus on Six Sigma

project execution, whereas Champions and Master Black Belts focus on identifying

projects/functions for Six Sigma.

Green Belts are the employees who take up Six Sigma implementation along with their other

job responsibilities, operating under the guidance of Black Belts.

Some organizations use additional belt colors, such as Yellow Belts, for employees that have

basic training in Six Sigma tools.

Kaizen-Kaizen, Japanese for "improvement" or "change for the better", refers to philosophy or

practices that focus upon continuous improvement of processes in manufacturing, engineering,

supporting business processes, and management. It has been applied in healthcare,

psychotherapy, life-coaching, government, banking, and many other industries. When used in the

business sense and applied to the workplace, kaizen refers to activities that continually improve

all functions, and involves all employees from the CEO to the assembly line workers. It also

applies to processes, such as purchasing and logistics that cross organizational boundaries into

the supply chain. By improving standardized activities and processes, kaizen aims to eliminate

waste (see lean manufacturing). Kaizen was first implemented in several Japanese businesses

after the Second World War, influenced in part by American business and quality management

teachers who visited the country. It has since spread throughout the world and is now being

implemented in many other venues besides just business and productivity.

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While kaizen (at Toyota) usually delivers small improvements, the culture of continual aligned

small improvements and standardization yields large results in the form of compound

productivity improvement. This philosophy differs from the "command and control"

improvement programs of the mid-twentieth century. Kaizen methodology includes making

changes and monitoring results, then adjusting. Large-scale pre-planning and extensive project

scheduling are replaced by smaller experiments, which can be rapidly adapted as new

improvements are suggested.

The five main elements of kaizen:

Teamwork

Personal discipline

Improved morale

Quality circles

Suggestions for improvement

Just –In-Time (JIT)- JIT is an inventory strategy that strives to improve a business's return on

investment by reducing in-process inventory and associated carrying costs.

To meet JIT objectives, the process relies on signals or Kanban between different points in the

process, which tell production when to make the next part. Kanban are usually 'tickets' but can be

simple visual signals, such as the presence or absence of a part on a shelf. Implemented

correctly, JIT focuses on continuous improvement and can improve a manufacturing

organization's return on investment, quality, and efficiency. To achieve continuous improvement

key areas of focus could be flow, employee involvement and quality. This

saves warehouse space and costs. The just-in-time inventory system focus is having ―the right

material, at the right time, at the right place, and in the exact amount‖

Benefits

Main benefits of JIT include:

Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory

for "changeover" time. The tool used here is SMED (single-minute exchange of ideas).

The flow of goods from warehouse to shelves improves. Small or individual piece lot sizes

reduce lot delay inventories, which simplifies inventory flow and its management.

Employees with multiple skills are used more efficiently. Having employees trained to work

on different parts of the process allows companies to move workers where they are needed.

Production scheduling and work hour consistency synchronized with demand. If there is no

demand for a product at the time, it is not made. This saves the company money, either by

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not having to pay workers overtime or by having them focus on other work or participate in

training.

Increased emphasis on supplier relationships. A company without inventory does not want a

supply system problem that creates a part shortage. This makes supplier relationships

extremely important.

Supplies come in at regular intervals throughout the production day. Supply is synchronized

with production demand and the optimal amount of inventory is on hand at any time. When

parts move directly from the truck to the point of assembly, the need for storage facilities is

reduced.

Kanban- It’s also spelled kamban and literally meaning "signboard" or "billboard", is a concept

related to lean and just-in-time (JIT) production. According to Taiichi Ohno, the man credited

with developing Just-in-time, kanban is one means through which JIT is achieved.

Kanban is not an inventory control system. Rather, it is a scheduling system that tells you what

to produce, when to produce it, and how much to produce.

The need to maintain a high rate of improvements led Toyota to devise the kanban system.

Kanban became an effective tool to support the running of the production system as a whole. In

addition, it proved to be an excellent way for promoting improvements because reducing the

number of kanban in circulation highlighted problem areas.

Kanban, is part of an approach of receiving the "pull" from the demand. Therefore, the supply or

production is determined according to the actual demand of the customers. In contexts where

supply time is lengthy and demand is difficult to forecast, the best one can do is to respond

quickly to observed demand. This is exactly what a kanban system can help with: It is used as a

demand signal that immediately propagates through the supply chain. This can be used to ensure

that intermediate stocks held in the supply chain are better managed, usually smaller.

Kanban cards are a key component of Kanban that utilizes cards to signal the need to move

materials within a manufacturing or production facility or move materials from an outside

supplier to the production facility. Kanban cards thus, in effect, help to create a demand-driven

system. It is widely espoused by proponents of Lean production and manufacturing that demand-

driven systems lead to faster turnarounds in production and lower inventory levels, helping

companies implementing such systems to be more competitive.