SUPPLY CHAIN MANAGEMENT PLANNING (ETTE-424)

UNIT -1

1.1 Supply Chain Management – Concepts

The term SCM was originally introduced by consultants in the early 1980s and has subsequently
gained tremendous attention. Since the early 1990s, academics have attempted to give structure
to SCM

Supply chain management (SCM) is the management of the flow of goods and services,
involves the movement and storage of raw materials, work-in-process, inventory, and of finished
goods from point of origin to point of consumption. There is need to manage Interconnected or
interlinked networks, channels and node businesses combined in the provision of products
and services required by end customers in a supply chain.

1.11 Definition of Supply Chain Management:

According to APICS Dictionary, Supply chain management is the design, planning, execution,
control, and monitoring of supply chain activities with the objective of creating net value,
building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with
demand, and measuring performance globally.

1.12 Objectives of Supply Chain Management:

• Maximize the overall value generated – is the difference between what the final product is
worth to the customer and the effort the supply chains expends in filling the request of the
customer

• Supply chain profitability is the difference between the revenue generated from the customer
and the overall cost across the supply chain

• It is the total profit to be shared across all supply chain stages

• Supply chain success is measured in terms of supply chain profitability and not in terms of the
profits at an individual stage

• Revenue is from customer – positive cash flow

• All other cash flows are simply fund exchanges that occur within the supply chain given that
different stages have different owners

• All flows of information, product or funds generates costs within the supply chain

• Supply chain management involves the management of flows between and among stages in a
supply chain to maximize total supply chain profitability
 Figure. 1 SCM: integrating and managing business processes across the supply chain

1.2 Issues in Supply Chain Management; Some of the issue related to Supply Chain
Management is given as follows

 Distribution Network Configurations related Issues

 Inventory related Issues
 Supply Contracts or Suppliers related issues
 Distribution Strategies or distribution related issues
 SCM Integration related Issues and Strategic partnership
 Outsourcing and procurement strategies and related issues
 ICT implementation and Implementation of Decision Support System (DSS)
 Assessment of Customer Value
 Ethical Issues, Transparency and Visibility
 Environmental Issues and Green Supply Chain
 Sustainability and risk management related Issues
The possible approaches to solve some of the SCM issues are given in Table 1

Table 1: SCM issues, related problems and suggested problem-solving approaches

1.3 Demand Volatility and information Distortion:

Demand volatility is the sudden or unexpectedly change in demand in the market for
certain product. The demand volatility is some time synonymous to demand variability.
Demand variability is the changes in demand from period to period. Each period can
be defined by its appropriateness. Demand variability is also the result of trend, seasonality,
events, and noise.

Information distortion is the tendency of information communicated within and between

individuals and organizations to be altered, omitted, or re-organized as it is communicated. It
includes a range of alterations from error in transmission to deliberate prevarication. The greater
the distance between the events reported and the ultimate decision maker the higher the level
of distortion tends to be.

Because customer demand is rarely perfectly stable, businesses must forecast demand to
properly position inventory and other resources. Forecasts are based on statistics, and they are
rarely perfectly accurate. Because forecast errors are given, companies often carry an inventory
buffer called "safety stock" due to the demand variability from the actual forecast.

Moving from the low stream to upstream of the supply chain or from end-consumer
to raw materials supplier, each supply chain participant has greater observed variation in demand
and thus greater need for safety stock. In periods of rising demand, down-stream participants
increase orders. In the periods of falling demand, orders fall or stop, thereby not reducing
inventory. The effect is that variations are amplified as one move upstream in the supply
chain (farther from the customer).

1.4 Managing Supply Chain Networks and relationships:

Figure 1.2. Supply chain network structure. [Source: Lambert et.al (1998).]

Figure 1.3. Integration of manufacturing and logistics services in Supply Chain

 Figure 1.4. Integration of manufacturing and logistics activities in Global Supply Chain

1.41 Horizontal Vs Vertical Globalization

 In Horizontal Globalization Foreign Direct Investment (FDI), MNCs duplicate the same
activities in multiple countries.

In vertical Globalization, the FDI firms locate different stages of production in different
countries.

The basic difference between the two is – Horizontal integration always occurs at the same stage
on the supply chain and Vertical integration always occurs at different stages of the supply chain.
 Figure 1.5. Integration of various SC Networks in a typical Supply Chain

1.42 Different Types of supply Chain Network: Three (Material, Information &
Financial) Flows results three types of network given as follows

  Logistics network provides a streamlined material flow between all partners,

reducing lead time and cost.
 Communications network provides information integration between companies
of supply chain network
 Financial network connects all institutions providing Funds, letters of credit and
Insurance etc.

1.43. Different Types of Sub Network: `There are three types of Sub network based on
demand and supply side of the supply chain, given as follows;

 Demand sub-network: consists of manufacturing, distribution, retailing,

outbound logistics and finance. Perfect delivery is important.
  Supply sub-network: B2B network consisting of suppliers, manufacturers,
inbound logistics, Financial Institutions and Freight forwarders.
 Service sub-network: connects consumer with suppliers & manufacturers after
sales service centers

1.44: Business Processes in Supply Chain network: There are three important business
processes based on the types of transactions within the supply chain, given as follows:

 Procurement: Sourcing raw materials and components from the suppliers:

Vendor & logistics provider selection, Delivery scheduling & Inventory
management.
 Manufacturing: Could be in a single location or geographically distributed.
 Distribution & Retail: consists of packaging, transportation and warehousing.
Options include direct shipping or outsourcing to third parties.

1.45 Types of Intermediaries in Supply Chain Network: There are six dominant players in the
Supply Chain Network, given as follows:

 Suppliers
 Logistics Players: B2B and B2C
 Contract manufacturers (Vendors)
 Original Equipment Manufacturers
 Distributors
 Retailers
Above players, operate as independent companies and may be globally distributed &
highly connected

1.46: Types of Logistics (Based on product life cycle): Logistics depends on the product
life cycle

 Manufacturing logistics : Movement of Semi finished items from one machine

shop to another
 Outbound logistics : Movement of Finished products from end of the production
line to the consumer
 Inbound logistics: Movement of Raw materials and components from source of
supply to the beginning of the production line.
 Spare part logistics: –  Movement of Spare parts from manufacturers to the
customers via dealers
 Reverse logistics:–  Movement of Used goods from consumer to the
manufacturers
1.47 Types of Logistics (Based on owner party of the logistics operation):

 Many manufacturers handle all logistics functions themselves including trucking

and warehousing (1PL).
 2PLs are basic transportation and storage providers such as truckers, warehouses
and container lines and have high levels of asset intensity but low barriers to
entry. –  Airports and Seaports as capacity providers are also categorized as 2PLs
 3PLs provide total value added logistic solutions –  Own some assets such as
distribution centers and rent assets available 2PLs. –  Freight management &
Contract logistics

Figure 1.6. Types of logistics Provider and SC Integration

1.48: Lead Logistics Providers (LLP): (Also called as 4 PL)

 The LLPs follow the leveraged growth model that mobilizes the needed assets and
capabilities existing within other companies to deliver value to its customers
Assumes responsibility for the logistics and the management of collaborative relations in
the network, and aligns the participants’ objectives with those of the complete chain.
Orchestrators must be competent at recruiting the right providers and developing strong
ties with them
 1.49: Best Practices to Manage Supply Chain Network:

 Supply hubs: Third Party maintains inventory for the suppliers at the
manufacturer site.
 Modularization: Design of component modules that can be used in multiple
products
 Standardization: specifying common parts for use in multiple products and
models.
 Cross docks: Transshipment facilities where goods are sorted, consolidated and
loaded onto outbound trucks
  Postponement: Final assembly done adding customer specific features such as
labeling garments, packaging with customized manuals based on the customer
order
 Merge-in-transit: Components shipped from different production units &
warehouses are assembled during transit
 Collaborative Planning, Forecasting & Replenishment combines the
collaborative intelligence of multiple trading partners in planning and fulfillment
of customer demand

1.491 Disintegration of Production: A Case of Barbie doll Supply Chain:

 The plastic and hair sourced from Taiwan & Japan.

 The molds & paints for decorating the dolls are from US.
 Assembly in low-cost locations Indonesia, Malaysia & China.   China supplies
only cotton cloth for dresses and the labor.
 The export value of the dolls at Hong Kong is $2 in which 35 cents of Chinese
labor, 65 cents of materials & rest for transport, overheads & profits.
 The doll sells for $10 in the US: 1$ for Mattel (Brand of Barbie doll) & the rest
covers transport, marketing, wholesale and retailing in U.S.

Figgggggg 1.5 The Architecture of Physical distribution Network: An approach to logistics and
distribution strategy planning is outlined in Figure 1.8. This approach describes the practical
steps that need to be taken to derive a physical distribution strategy from a corporate business
plan,. This type of approach requires the collection, collation and analysis of a great deal of data.
It is thus quantitative, although a degree of qualitative assessment may also be necessary. Each
key step is described .

Some initial points to note are: Great care should be taken to define the precise overall problem.
It is likely to be concerned with the use and location of DCs within a distribution network, but
certain elements may or may not be included. For example, are production facilities included in
the mix or must some be retained or all of them? Can products be sourced at different production
sites? Are there existing DCs that cannot be closed down? The planning horizon into the future
needs to be determined.

• All relevant cost relationships need to be identified and understood.

• The relevant product flows for different patterns of demand and supply need to be

• established. Important aspects will include the type of products, the origin of these products
(factories, etc), the destination of products (shops, hospitals, factories, etc) and the amount and
type of product going through the system (throughputs, etc).

Figure 1.8. Planning of a typical physical distribution Network

1.6 Channel Objectives & Constraints:

Channel objectives will necessarily differ from one company to another, but it is possible to
define a number of general points that are likely to be relevant. These should normally be
considered by a company in the course of its distribution planning process to ensure that the most
appropriate channel structure is developed. The main points that need to be addressed are as
follows:

To make the product readily available to the market consumers at which it is aimed.

• Perhaps the most important factor here is to ensure that the product is represented in the right
type of outlet or retail store. Having identified the correct marketplace for the goods, the
company must make certain that the appropriate physical distribution channel is selected to
achieve this objective. To enhance the prospect of sales being made

• This can be achieved in a number of ways. The most appropriate factors for each product or
type of retail store will be reflected in the choice of channel. The general aims are to get good
positions and displays in the store, and to gain the active support of the retail salesperson, if
necessary. The product should be ‘visible, accessible and attractively displayed’. Channel choice
is affected by this objective in a number of ways: Does the deliverer arrange the merchandise in
the shop? – Are special displays used? – Does the product need to be installed, demonstrated or
explained? – Is there a special promotion of the product? – To achieve co-operation with regard
to any relevant distribution factors.

• These factors may be from the supplier’s or the receiver’s point of view, and include minimum
order sizes, unit load types, product handling characteristics, materials handling aids, delivery
access (eg vehicle size) and delivery time constraints, etc.

To achieve a given level of service

• Once again, from both the supplier’s and the customer’s viewpoints, a specified level of service
should be established, measured and maintained. The customer normally sees this as crucial and
relative performance in achieving service level requirements is often used to compare suppliers
and may be the basis for subsequent buying decisions. . To minimize logistics and total costs

• Clearly, costs are very important, as they are reflected in the final price of the product. The
selected channel will reflect a certain cost, and this cost must be assessed in relation to the type
of product offered and the level of service required. To receive fast and accurate feedback of
information

• A good flow of relevant information is essential for the provision and maintenance of an
efficient distribution service. It will include sales trends, inventory levels, damage reports,
service levels, cost monitoring, etc.
1.7 Channel Selection: All of the factors described above will need to be taken into account
when designing a channel structure and selecting the appropriate channel members. A formalized
approach that might be adopted when undertaking the design of a channel structure is set out in
Figure 1.10

Figure 1.10. Channel selection: A formalized approach

1.8 Global Retailing: All the activities involved in selling products and services to final
international consumers for their personal consumption may be termed as global retailing.

A retailer is a merchant or occasionally an agent or a business enterprise, whose main business is

selling directly to ultimate consumers for non-business use. He performs many marketing
activities such as buying, selling, grading, risk-trading, and developing information about
customers’ wants. A retailer may sell infrequently to industrial users, but these are wholesale
transactions, not retail sales. If over one half of the amount of volume of business comes from
sales to ultimate consumers, i.e. sales at retail, he is classified as a retailer. Retailing occurs in all
marketing channels for consumer products.

Retailers may be classified by form of ownership and key marketing strategies. Also, types of
retailers distinguished according to product assortment, price and customer service levels.
Mature institutions such as department stores, discount houses and super markets face strong
challenges from new competitors, particularly chain stores or multiple shops in various product
categories. Five major forms of non store retailing such as direct selling, telemarketing,
automatic vending, on line retailing and direct marketing are discussed. Each type has
advantages as well as drawbacks. Franchising in particular is growing dramatically.

1.81 Reasons to focus on Retailing Services

The sector makes a huge contribution, everywhere, to both formal and informal employment For
OECD countries, studies in the 1990s suggest the retail sector accounts typically for around 13-
17% of employment, 25-30% of business activity and 8-17% of GDP. Within distribution, the
bulk of these contributions come from retail rather than wholesale. The distribution sector is the
crucial link between producers and consumers and is consequently a very dynamic high value-
add activity though jobs in retail are often mischaracterized as low value, low productivity low
wage female jobs.

1.82 Transformation of retailing

Once a sector comprised typically only of small enterprises, dependent on their suppliers, the
retailing sector has seen, since the 1990s, a rapid process of market concentration, resulting in
retailers now figuring among the largest national firms (More Mega Stores, Big Bazar, reliance
fresh, etc). This concentration, plus a progressive expansion of retailers’ own-label products, has
significantly shifted the balance of power in consumer goods distribution from the supplier to the
retail chain. Add to this the innovation associated with IT-enabled retail systems, and retailers
have emerged as the lead firms in “buyer-driven” supply chains.

Integrated logistics and supply chain management methods also enabled “just-in-time”
demand-pull supply systems- systems which linked reordering with real-time purchases This
enabled the adoption of “lean retailing” practices, allowing big reductions in inventory
holdings and in the capital tied up in those holdings These developments led to what we now
call Modern Retailing or Organized Retailing, in which order acquisition, order execution,
promotions and launches, transport and payment processes are all done very differently from the
way they are handled by the traditional mom and pop stores.

1.83 Globalization of Retailing

From the mid-1990s, the transformed retail firms of a small number of OECD (Organization for
Economic Co-operation and Development) countries began a period of sustained international
activity – as exporters of retail expertise, chiefly via mode 3 but also via mode 1 franchising.
The late 1990s saw a rapid increase in retail FDI, largely by European and US retailers and
primarily into East Asia, Latin America and Central and Eastern Europe. By the late 2000s,
multinational retailing had become substantial; 8 of the world’s top 15 retailers derived over
50% of their sales outside their home country and on average they traded in 18 different host
markets, with several of the leading firms operating in as many as 30 markets.

1.9 International Channel Innovation

In more recent years, the contexts of globalization in which market channel structures and
strategies are developing is bringing to a more complex concept of marketing channels, with
disintermediation or reinter mediation, multi channeling and new roles/specializations that are
emerging as new issues. In this context, innovation in marketing channels becomes a complex,
multi organizational, multidisciplinary activity that requires collaboration and interactions across
various entities within the supply chain network. In recent years, the innovation processes in
marketing channels have occurred with high intensity and speed, especially following the
changes spurred by technology that allowed the adoption of more efficient organizational
solutions.
 UNIT 2
2.1 LOGISTICE FRMEWORK:

Historically, many organizations have adopted a piecemeal and incomplete approach to their
strategic planning. This is particularly true in the context of logistics where, often, individual
functions within the logistics or supply chain have been sub-optimized to the detriment of the
logistics chain as a whole. One of the reasons for this incomplete approach is the pressure for
change exerted on companies from a wide variety of sources. Figure 2.1 provides an illustration
of some of these pressures. They include: a significant improvement in communications systems
and information technology,

• including such developments as enterprise resource planning (ERP) systems, electronic point-
of-sale (EPOS) systems, electronic data interchange (EDI) and of course the internet;

• one example amongst many economic unions, but also including various environmental and
green issues; increasing customer service requirements, especially where the levels of service
that

• logistics can provide are oft en seen as the competitive edge between companies and their
products; a shortening of product life cycles, particularly for high-technology and fashion
products;

• the need for improved financial performance at a time when companies and economies are
under severe pressure; the development of new players with new roles in channels of distribution
– this

• includes the growth of third-party service providers and their move to offer global and pan-
European operations and to develop supply partnerships; the never-ending pressures to reduce
inventories and their associated costs – through

• depot rationalization and the adoption of JIT concepts; the need to adopt a wider supply chain
perspective when planning and redesigning

• logistics operations.

The danger for any organization is to overreact to this need for change. Thus, a measured
response is required that enables distribution and logistics systems and structures to be developed
as a whole in the context of company strategic plans. In this way, the likelihood of the sub
optimization of some logistics activities can be avoided. The quantitative modeling of logistics
requirements as a second stage of strategic business planning is an important aspect of this.
 Figure 2.1. Pressure influencing Logistics Systems

2.2 Design of Logistics Framework:

On completion of this initial phase of the business planning process it should be possible
to identify corporate strategy and objectives, and to determine a specific competitive strategy.
The next task is to prepare appropriate functional strategic plans.

There are several important issues concerning the development of a suitable logistics
strategy. The first is the need to link the logistics or distribution plan directly with the corporate
plan. This is best achieved by ensuring that logistics is an integral part of the corporate plan and
that factors related to these functions are used as inputs in the overall planning process. The
second point concerns the extent or coverage of the logistics strategic plan. This will clearly vary
from one company to another. It may well just be a ‘distribution’ functional plan. It is most
likely that it will be necessary to incorporate elements from other functions (marketing,
production, etc) to represent the fully integrated nature of logistics or the supply chain. The third,
and in many ways most important, issue is whether or not a company has a structured logistics
plan at all. Many still don’t, so a first and major step may be to ensure that such a plan is
developed, based of course on the company’s business and competitive strategic plans. To
achieve this, a logistics planning framework, as outlined in Figure 2.2, can be used. As can be
seen from the figure, there are four key design elements that need to be considered. Traditionally,
logistics planning and design have evolved around the structure of the logistics network, such as
depot numbers and location, but it is now recognized that, as well as these physical logistics
elements, there are other factors that also need to be considered. These are the design of logistics
processes, logistics information systems and logistics organizational structure. Logistics process
design is concerned with ensuring that business methods are aligned and organized so that they
operate across the traditional company functions and become supply chain-oriented. Thus, they
should be streamlined and should not be affected or delayed because they cross functional
boundaries. A typical logistics process is order fulfillment, designed to ensure that customers’
order requirements are satisfied with the minimum of time and the maximum of accuracy. The
process should be designed as a seamless operation from.

Figure 2.2. A framework for logistics network design

A strategic planning overview to be defined to incorporate a review of the external

environment to the company;

• internal factors;

• the development of a corporate strategy;

• the development of a competitive strategy;

• the development of a logistics strategy.

• A framework for a logistics design strategy is proposed. This incorporated the four key aspects
of logistics design:

1. process design;
2. network design;

3. information system design;

4. organizational structure.

Some of the major factors that need to be considered when planning for logistics were also
considered. These included the product type, the product life cycle, packaging and unit loads.

2.21 Transportation

Transportation is an important element of a logistics system, as it provides the links among

suppliers, producers, and consumers. A reliable and efficient transportation system contributes to
efficient production and allows a firm to reach broader geographic markets. Transportation costs
are, in fact, the most important elements of logistics costs. Transportation costs can vary greatly
among industries, but across all industries they account for almost half of the total costs of
physical supply and distribution (Magee et al., 1985, p 113). Transportation activities incur a
number of costs, such as labor, fuel, maintenance, terminal and roadway administration, and
others. This cost mix can be divided into those costs which vary with services or volume
(variable costs) and those that do not (fixed costs). However, it is very important to consider as
fixed, the costs that are constant over the "normal" operating volume of the carrier. All other
costs are treated as variables. More specifically, fixed costs are roadway acquisition and
maintenance, costs of terminal facilities, transport equipment costs, and carrier administration.
Variable costs usually include line-haul costs, such as fuel and labor, equipment maintenance,
handling, pickup and delivery. This may not be a precise allocation between transportation costs,
because there is a significant difference between fixed and variable modes, and there are
different allocation depending on the dimensions being examined. The reason for this is that all
costs are partly fixed and partly variable, and that the allocation of cost elements into one class or
another is a matter of individual perspective (Ballou, 1978, p 158). According to Bowersox et al.
(1986, p 23), the cost of transport is determined by the actual payment for transportation between
two points, plus the expenses related to owning an in-transit inventory. A logistical system
should be designed to minimize the transport cost in relation to the total system cost.

2.22. Warehousing

Warehousing, and products and materials handling are essential ingredients in the logistics mix
of activities. In contrast with transportation which takes place over distance and time,
warehousing and materials handling are, for most part, bound to given locations. Therefore, the
cost of these activities is closely related to the selection of sites (Ballou, 1978, p 196). If the
demand for a firm’s products was calculated precisely and products could be supplied
continuously to meet demand, theoretically no storage space would be required. However, it is
neither practical nor economical to operate a firm in this manner, because demand usually cannot
be predicted exactly. The costs of warehousing and materials handling are justified because they
call be traded with transportation and production cost. These costs are usually labor, facilities,
equipment, energy, and financial investment costs.

2.23. Inventory

The control and maintenance of inventory is a problem common to all organizations in any
sector of the economy and in logistical management it is one of the riskiest areas of decision.
Inventory may be viewed in several ways by a company. It can be seen not only as a physical
stock of materials and products in the logistics chain, but also as an asset and as such, it may
represent an investment competing for scarce resource. For this reason, the measurement and
control of inventory investment is an important consideration for logistics management. There
are three different cost categories in managing inventories (Ballou, 1978, p 266). These are (I)
carrying costs, (2) procurement costs, and (3) out-of-stock costs. The inventory carrying cost
includes such items as capital cost, taxes, insurance, handling, storage, shrinkage, obsolescence,
and deterioration. Capital cost reflects lost earning power or opportunity cost (Tersine, 1988, p
17).

Procurement costs are associated with acquiring the needed quantities for stock
replenishment. These are, the cost of processing an order through the order-processing,
accounting, and/or purchasing departments; the cost of transmitting the order to the supplier,
usually by mail or electronic means; the cost of setting up production to produce or setting up
handling procedures to fill the order quantity; the cost of any materials handling or processing of
the order at the receiving dock, and the price of the goods (Ballou, 1978, p 263). The stock out
cost results from external and internal shortages. The external shortage occurs when a customer
does not have his order filled; an internal shortage occurs when a group or department within the
organization does not have its order filled. External shortages result in backorder costs, present
profit loss, and future profit loss. Internal shortages can result in lost production and a delay in a
completion date (Tersine, 1988, p 17).

2.24. Packaging

In discussing the product, it is important to be aware of other relevant physical

characteristics that can influence any decisions regarding the choice of logistics operation. In
terms of the physical nature of a product, it is not generally presented to the logistics function in
its primary form, but in the form of a package or unit load. These two elements are thus relevant
to any discussion concerned with the relationship of the product and logistics. The packaging of
a product is broadly determined for product promotion and product protection, the later being the
function that is particularly pertinent to logistics. There are also some other factors that need to
be considered when designing packaging for logistics purposes. In addition to product protection,
packages should be easy to handle, convenient to store, readily identifiable, secure and of a shape
that makes best use of space – usually cubic rather than cylindrical. Once again, there are trade-
offs’ that exist between these factors. This trade-offs’ will concern the product and the logistics
operation itself. It is important to appreciate that, for those involved in logistics, the package is
the product that is stored and moved and so, where possible, should be given the characteristics
that help rather than hinder the logistics process. Packaging is very much a part of the total
logistics function, and the design and use of packaging has implications for other functions such
as production, marketing and quality control, as well as for overall logistics costs and
performance.

2.25 Unit loads

The idea of a unit load for logistics was developed from the realization of the high costs involved
in the storage and movement of products – particularly in the inefficient manual handling of
many small packages. The result of this has been the unit load concept, where the use of a unit
load enables goods and packages to be grouped together and then handled and moved more
effectively using mechanical equipment. Two familiar examples are the wooden pallet and the
large shipping container, both of which, in their different ways, have revolutionized physical
distribution and logistics. From the product point of view it is possible to introduce unit load
systems to alter the characteristics of a product and thus make more effective logistics possible.
One classic example has been the development of the roll-cage pallet that is in common use in
the grocery industry. Although the cages are expensive units, the trade-off , in terms of time
saving and security, is such that overall distribution costs decrease significantly. Much of
distribution and logistics is structured around the concept of load unitization, and the choice of
unit load – type and size – is fundamental to the effectiveness and economics of a logistics
operation. Choosing the most appropriate type and size of unit load minimizes the frequency of
material movement, enables standard storage and handling equipment to be used with optimum
equipment utilization, minimizes vehicle load/unload times, and improves product protection,
security and stocktaking.

2.3: Types of Logistics (Based on product life cycle) : Logistics depends on the product
life cycle

 Manufacturing logistics : Movement of Semi finished items from one machine

shop to another
 Outbound logistics : Movement of Finished products from end of the production
line to the consumer
 Inbound logistics: Movement of Raw materials and components from source of
supply to the beginning of the production line.
 Spare part logistics: –  Movement of Spare parts from manufacturers to the
customers via dealers
 Reverse logistics:–  Movement of Used goods from consumer to the
manufacturers
2.31 Types of Logistics (Based on owner party of the logistics operation):

 Many manufacturers handle all logistics functions including trucking and

warehousing (1PL).
 2PLs are basic transportation and storage providers such as truckers, warehouses
and container lines and have high levels of asset intensity but low barriers to
entry. –  Airports and Seaports as capacity providers are also categorized as 2PLs
 3PLs provide total value added logistic solutions –  Own some assets such as
distribution centers and rent assets available 2PLs. –  Freight management &
Contract logistics/

2.4: Control and Communication in Logistics Operation:

Control systems are the key to ensuring that performance is consistent with the
management's operational plans. Logistical control activity serves several functions as Bowersox
et al., (1986, p 477) has stated. First it measures performance through reports, audits, and
observations. Secondly, it makes a comparison of the actual to planned performance. And
finally, it identifies corrective actions. The control objective is to provide a prototype system for
measuring the productivity, utilization and performance of the overall logistics system,
functional areas, and individual managers. Even the best organized systems will require some
control to ensure that the desired outputs are achieved and that its use of inputs (resources) is
within the planned levels. Products and service volumes, costs customer service requirements,
and legal requirements all may change over time. If logistics objectives for cost and service are
to be met over time, then the logistical performance must be kept in line with the planned
performance. This is the responsibility of the managerial control (Ballou, 1978, p 415).
Variations from planned levels will occur at both the input and output levels due to a variety
reasons. It is convenient to categorize these variations into internal and external environments.
'The internal environment relates to those variables within the control of company, e.g. product
mix, system configuration, procedures etc. The external environment concerns those elements
generally beyond the control of the company, e.g. customer requirements, competitors' service
policy, government legislation etc. Thus, to improve the control of the logistics system, both the
internal and external environments must be monitored, along with the measurement of resource
inputs and performance outputs. The second reason for establishing a logistics control procedure
is to assist in the search for productivity improvements. Productivity can be defined simply as the
ratio of the outputs of a system to the inputs. In the logistics context we can think of customer
service performance as the output and the logistics mix elements (e.g. inventory, warehousing,
transportation, order processing etc.) as the inputs (Christopher, 1985, p 79).
 Figure 2.3: The Planning and Control Cycle

Figure 2.4: Services in Supply Chain Network

 Figure 2.5: Key elements of Logistics Control

2.5 Role of Information Technology in Logistics:

The latest technologies being used in logistics and supply chain management are segregated into
three categories given as follows;

 Automatic Identification Technology

 Communication Technology
 Information Technology

Role of Information Technology is given as follows;

2.51 Procurement- In the initial period the procurement process in the organization
was done by a separate department on the basis of least price from the supplier. In the next
generation with the advent of IT the e-procurement is done where online auctions are conducted
and strategic relations are forged with good suppliers by long term contracts and relationships.

2.52 Planning – In the initial period before the advent of IT, production and distribution
planning was done based on historical data. There was not much linkage with business planning
and production changed with varying demand. However with the advent of IT planning approach
include collaborative planning, forecasting and replenishment (CPFR). It involves long term
commitment to information sharing for collaborative planning purposes like joint business
planning (SKUs, brands) and financial planning.(sales, inventory, safety stock, pricing, fill rate).

2.53. Web-based collaboration- The web-based collaboration application enables to share and
collaborate with supply chain partners on forecasts, replenishment and promotions plans to
deliver the highest level of customer service and profitability.

2.54. Scheduling – In the initial period the scheduling was done to improve asset utilization
and reduce manufacturing costs. However with the advent of IT strong linkage is established
between supply chain partners and customers. As such scheduling is done to serve the customer
at the right time.

2.55. Inventory management – In the initial period every department tried to minimize the
inventory by transferring it to the next level of the supply chain. Thus the total inventory cost in
the supply chain was high as there was no transparency of the inventory held in the supply chain.
However with the advent of IT, techniques such as collaborative replenishment and vendor
managed inventory were followed where manufacturer takes the responsibility to replenish the
distributor inventory, resulting in inventory control and access to demand information.

2.56. Logistics and warehouse management – In the initial period logistics was more manual
intensive and there was no visibility of the movement of goods. However due to the advent of IT
and technologies like RFID and GPS complete visibility in movement of goods is assured
resulting into efficient logistic and warehouse management.

2.57. Customer service – In the initial period customer service was only reactive. The
complaints or information was difficult to reach the concerned department and was time
consuming process. However with the advent of IT, customer service is more proactive as it
reaches the customer through internet and takes continuous feedback from them.

2.6. Logistics Service Firms and Third Party Logistics:

Third-party logistics (abbreviated 3PL, or sometimes TPL) in logistics and supply chain
management is a company's use of third-party businesses to outsource elements of the
company's distribution and fulfillment services.
Third-party logistics providers typically specialize in integrated
operation, warehousing and transportation services which can be scaled and customized to
customers' needs based on market conditions, such as the demands and delivery service
requirements for their products and materials. Often, these services go beyond logistics and
include value-added services related to the production or procurement of goods, i.e., services that
integrate parts of the supply chain. When this integration occurs, the provider is then called a
third-party supply chain management provider (3PSCM) or supply chain management service
provider (SCMSP). 3PL targets particular functions within supply management, such as
warehousing, transportation, or raw material provision.
 The global 3PL market reached $750 billion in 2014, and grew to $157 billion in the US;
demand growth for 3PL services in the US (7.4% YoY) outpaced the growth of the US economy
in 2014, as of 2014, 80 percent of all Fortune 500 companies and 96 of the Fortune 100 used
some form of 3PL services.
The global third-party logistics market is predicted to grow at around 5
percent CAGR during 2016 to 2024 (forecast period). Its companies operate for the shipping
industry to supervise logistic undertakings (forecasting, warehousing, & conveyance
management software). The market will attain a size of about USD 1, 054 billion by 2024.
2.61. Types of 3 PL:

Third-party logistics providers include freight forwarders, courier companies, as well as other
companies integrating & offering subcontracted logistics and transportation services. Hertz and
Alfredsson (2003) describe four categories of 3PL providers:

 Standard 3PL Provider: this is the most basic form of a 3PL provider. They would perform
activities such as, pick and pack, warehousing, and distribution (business) – the most basic
functions of logistics. For a majority of these firms, the 3PL function is not their main
activity.
 Service Developer: this type of 3PL provider will offer their customers advanced value-
added services such as: tracking and tracing, cross-docking, specific packaging, or providing
a unique security system. A solid IT foundation and a focus on economies of scale and scope
will enable this type of 3PL provider to perform these types of tasks.
 The Customer Adapter: this type of 3PL provider comes in at the request of the customer
and essentially takes over complete control of the company's logistics activities. The 3PL
provider improves the logistics dramatically, but does not develop a new service. The
customer base for this type of 3PL provider is typically quite small.
 The Customer Developer: this is the highest level that a 3PL provider can attain with respect
to its processes and activities. This occurs when the 3PL provider integrates itself with the
customer and takes over their entire logistics function. These providers will have few
customers, but will perform extensive and detailed tasks for them.
Outsourcing may involve a subset of an operation's logistics, leaving some products or
operating steps untouched because the in-house logistics is able to do the work better or cheaper
than an external provider. Another important point is the customer orientation of the 3PL
provider. The provider has to fit to the structures and the requirements of the company. This fit is
more important than the pure cost savings, like a survey of 3PL providers shows clearly: The
customer orientation in form of adaptability to changing customer needs, reliability and the
flexibility of third-party logistics provider were mentioned as much more important than pure
cost savings.
2.62 : Lead logistics providers ( Also Called 4 PL )
3PL providers without their own assets are called lead logistics providers. Lead logistics
providers have the advantage that they have specialized industry expertise combined with low
overhead costs, but lower negotiating power and fewer resources than a third-party provider has
based on a normally big company size, a good customer base and established network systems.
3PL providers may sacrifice efficiency by preferring their own assets in order to maximize their
own efficiency. Lead logistics providers may also be less bureaucratic with shorter decision-
making cycles due to the smaller size of the company.

Unit 3
3.1 Logistics Network Design for Domestic and Global Operations:
Logistics process design is concerned with ensuring that business methods are aligned
and organized so that they operate across the traditional company functions and become supply
chain-oriented. Thus, they should be streamlined and should not be affected or delayed because
they cross functional boundaries. A typical logistics process is order fulfillment, designed to
ensure that customers’ order requirements are satisfied with the minimum of time and the
maximum of accuracy. The process should be designed as a seamless operation from

Figure 3.1. A framework for logistics network design

Company to another. It may well just be a ‘distribution’ functional plan. It is most likely
that it will be necessary to incorporate elements from other functions (marketing, production,
etc) to represent the fully integrated nature of logistics or the supply chain. The third, and in
many ways most important, issue is whether or not a company has a structured logistics plan at
all. Many still don’t, so a first and major step may be to ensure that such a plan is developed,
based of course on the company’s business and competitive strategic plans. To achieve this, a
logistics planning framework, as outlined in Figure 3.1, can be used. As can be seen from the
figure, there are four key design elements that need to be considered. Traditionally, logistics
planning and design have evolved around the structure of the logistics network, such as depot
numbers and location, but it is now recognized that, as well as these physical logistics elements,
there are other factors that also need to be considered. These are the design of logistics processes,
 logistics information systems and logistics organizational structure. Logistics process
design is concerned with ensuring that business methods are aligned and organized so that they
operate across the traditional company functions and become supply chain-oriented. Thus, they
should be streamlined and should not be affected or delayed because they cross functional
boundaries. A typical logistics process is order fulfillment, designed to ensure that customers’
order requirements are satisfied with the minimum of time and the maximum of accuracy. The
process should be designed as a seamless operation from.

A strategic planning overview to be defined to incorporate a review of the external

environment to the company;

• internal factors;

• the development of a corporate strategy;

• the development of a competitive strategy;

• the development of a logistics strategy.

• A framework for a logistics design strategy is proposed. This incorporated the four key aspects
of logistics design:

1. process design;

2. network design;

3. information system design;

4. organizational structure.

Some of the major factors that need to be considered when planning for logistics were
also considered. These included the product type, the product life cycle, packaging and unit
loads.

3.2 Logistics Network Configuration:

The Configuration involves five steps

1.  Map the Supply Chain Ecosystem for the Industry Vertical

2.  Formulate the Supply logistics Strategy

3.  Select possible locations for the factories, DCs based on Investment climate

4.  Identify the Supply Chain Risks

5.  List the feasible logistics configurations

 3.21 Map the Supply Chain Ecosystem for the Industry Vertical: This step is crucial and
requires

–  Domain knowledge of the vertical & the companies: their products, capabilities & reputation
for quality delivery

–  Corporate and Political connections

–  Soft skills for negotiation of acquisition of assets, Partner selection, Risk assessment and
Talent recruitment

In emerging markets, disputes over the asset acquisition can turn wicked involving long drawn
negotiations or abandoning the project.

Figure 3.2: Map the Supply Chain Ecosystem for the Industry Vertical

3.22: Formulate the Supply logistics Strategy:

Decide the product you are selling: knowledge of the ecosystem (Traders), just the
product, Solutions. Innovations in product and process and other Ecosystem items to build a
blockbuster industry subject infrastructure

Identify the strategic areas for partnering or outsourcing in the value chain including the
risks of partnering –  Make or Buy decisions; Local or Low cost Country Outsourcing, FDI or
Outsourcing.
–  originally developed for emerging markets (the ECG device for rural India and the ultrasound
machine for rural China), now are being sold in US, pioneering new uses for such machines.

- Business model innovation (BMI) is a reconfiguration of activities in the existing

business model of a firm that is new to the product/service market in which the firm
competes.
- Business model innovation actually involves importing a business model from one
product/service market into another. For instance:. –  McDonald’s brought traditional
assembly line techniques into the fast food business. –  Xerox does not only sell copying
machines but installs and maintains copying machines in offices and charges per page
basis. –  Power by the Hour: aircraft engines are paid for the number of hours they are in
the flying aircraft
- Use Innovations in Regulations: The governments have deregulated the telecom industry
and made many positive policies. –  Allowed private and foreign players to set up shops
though FDI –  Created Special Economic Zones to attract equipment and other
manufacturers –  Allowed foreign players to participate as manufacturing and service
providers. Companies should use these to advantage
- Disruptions Catalyzed by Cloud The growth of cloud delivery models helped the start
up to follow pay peruse model rather than buying , installing and maintaining servers.
- The new Cloud architecture can address the needs of Orchestrators trying to manage
loosely coupled network partners Other Industries such as health care, Finance, Logistics,
Education get disrupted by Cloud. In health care patient records can be accessed from
cloud. Cyber Security, Breach of Trust are big issues.
- Innovations in Governance Do not own all assets – Orchestrate : New Mantra in
Businesses –  Li & Fung, does not own any factories but orchestrates a network of 15,000
suppliers and 29,000 employees in 40 countries, supplying goods to well known
consumer brands .
- Boeing’s 777 jet is assemblage of three million parts from more than 900 suppliers in 17
countries around the world. Boeing produces only the wings and fuselage, and assembles
the aircraft.
- Southwest, JetBlue and Ryan Air retained only the core of branding and the concept of
the airline and put all other operations out to bid: They leased engines & aircraft, and
contracted out baggage handling and maintenance
- 4PLs are integrated logistics providers who aggregate and provide transport, warehousing
and distribution services to several customers by orchestrating 3PLs, Owners of
warehouses and Trucks.

3.23: Select possible locations for the factories, DCs based on Investment:

For the industry vertical, – study the parameters that determine the investment climate of
nations and regions and rank order the regions – Identify the asset specific requirements from the
suppliers
3.231 Clusters: Clusters are geographic concentrations of interconnected companies,
specialized suppliers, service providers, and associated institutions (universities, vocational
training) present in a region. The proximity of companies and institutions in one location fosters
better coordination and trust lowering the transaction costs, minimizing the inventory, importing
costs and delays

3.232 Types of Supplier Asset Specificity:

Physical asset specificity refers to the mobile and physical features of assets such as specific
dies, molds, and tooling for the manufacture of a contracted product. Dedicated asset specificity
represents discrete and/or additional investment in generalized (as opposed to specific)
production capacity in the expectation of making a significant sale of a product to a particular
customer. Human asset specificity arises in a learning-by-doing fashion through long-standing
customer-specific operations. Site asset specificity refers to the successive stages that are
immobile and are located in close proximity to one another so as to economize on inventory and
transportation

3.233 The Global Competitiveness Indicators

Global Competitiveness Indicators based on which countries are evaluated include

– National Policies for Openness in Trade and Markets

– Best Practices for International Trade
– Effective Legal and Enforcement Systems
– Infrastructures for a Global Economy
– Financial Services for Cross-Border Commerce
– Human Capital
 .

Figure 3.3: Global Economic Competitiveness Comparison

Figure 3.4: Investment climate enablers at various levels
 Figure 3.5: Calculation of Total Transaction Cost in a Supply Chain

3.24: Identify the Supply Chain Risks:

All possible social, political & environmental risks that may affect the Supply Chain and
the goods, information and financial flows estimate the risk and identify what it takes for their
resolution.

3.241. The Supply Chain Risks

Outsourcing: the loss of Intellectual Property, quality issues, transport delays, foreign exchange
fluctuations, energy costs escalation, loss of goods due to theft or piracy, etc.

In case of mergers or acquisitions: all the risks associated with their supply chain ecosystem
must also be considered..
Large scale and a high degree of concentration e.g. Giant firms such as DHL, Flextronics etc.and
geographical concentration (e.g. low cost manufacturing in China, IT clusters in India) make the
clusters highly vulnerable for terrorist attacks and natural disasters

3.242 Environmental Supply Chain Risks

Political and Societal risk: Land acquisition or people displacement are involved: Risks
such as change in the government, State- Center relations, Corruption, Social factors need to be
assessed If resource intensive shortages such as infrastructure, oil, power, water, mining etc
should be quantified.

3.243 Cyber Security: Biggest Risk of Connectivity

Computer systems are subjected to electronic attacks originating from sources that are usually
unidentified.

The terrorist and counterfeit networks are also globally connected and indeed they follow the HR
practices of recruitment, training of people and also systematic planning processes for
implementing their objectives

3.25: Identify Feasible Supply Chain Configurations for Implementation

For the product of your company (knowledge, product, solutions, and value chains) identify the
partners (Companies & Countries) for the Goods, Information and Financial flows and also the
risks of partnering

 Use the ecosystem information of partners of your partners while assessing the risks
(Failure of a Govt., Bank or an Earth quake)
 Map the supply chain processes including methods of collaboration and also for ensuring
partner loyalty
 Map your supply chain for each customer order and have mitigation strategies for
operational possible attacks, failures, etc.
 What do we have at the end of the Supply chain formation phase?
 Ecosystem map, various network partners (including manufacturing, logistics & IT) &
their (country & regional) locations
 Risks that the ecosystem faces
 The innovations (product, process, business model) needed to make it big in the industry
 The value chain architecture with outsourced and ownership details.
Figure 3.6: Ways to mitigate Supply Chain IP (Intellectual Property) Risks

Figure 3.7: Enablers and Supply Chain Performance

3.3 Trade Offs associated with different approaches in Logistics Network:

Logistics is the way your company organizes its transportation, warehousing, inventory,
customer service and information processing systems. There are always tradeoffs in business. Do
you keep larger inventories of your products, resulting in increased warehousing costs, more
waste in outmoded or outdated product on the shelf, and higher management costs? Or do you
reduce the inventory to save money but risk insufficient product to fulfill demands? These
tradeoffs are different for different businesses, but all businesses have tradeoffs that must be
considered. Firms often re-organize their logistics in an attempt to improve their transportation,
inventory, and infrastructure. Deciding when, what and how to reorganize is a problem faced by
companies worldwide every day. The down side of tradeoffs is that nothing is guaranteed. Your
decisions to reduce inventory, increase prices, or maintain the status quo can result in potential
benefit and/or harm to your customers and to your business. Considering the pros and cons of
tradeoffs to your clients can sometimes help identify the solution during the process. Effective
Supply Chain Management results in an opportunity to discover the best tradeoffs for your
clients. Processing, planning, implementing and controlling your business ensures efficiency and
cost effectiveness. The process or steps that change your product from its raw materials into the
finished product is your supply chain. Managing that chain of products, and ensuring the
efficiency of the steps to achieving successful delivery, is called Supply Chain Management
(SCM). Here are some potential benefits to your clients that effective and efficient SCM can
provide:
 Reduced Costs: Improving your bottom line can result in bringing the costs down for
you and for your consumer.
 Better delivery: As you research and improve transportation methods, the delivery of
your product to the end user will improve.
 Enhanced Product Conformity/Reliability: Improvements to your product based on
research, design improvement and adherence to standards results in better reliability and
performance.
 Better Service: As you explore methods to better serve your customers, overall public
perception of your product will improve.
 Customer Satisfaction: Your customer will be more impressed with your product, and
therefore more apt to continue to purchase, use and enjoy it.
 Better Technology: When you add technology to the development of your product, you
improve the technology of the end product itself.
 Better Availability: As you increase your methods of delivery, shelf stocking, sales, and
product distribution, your customer benefits because your product is there when he needs
it, where he needs it.
 Cohesive and efficient SCM results in improved products for your customers. That is
the bottom line that all organizations need to remember when considering logistical
tradeoffs.
 Figure 3.8: Trade Offs associated with Logistics Network

3.4 Capacity Expansion Issue:

The broad classes of capacity planning are lead strategy, lag strategy, match strategy, and
adjustment strategy.

 Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is

an aggressive strategy with the goal of luring customers away from the company's
competitors by improving the service level and reducing lead time. It is also a strategy aimed
at reducing stock out costs. A large capacity does not necessarily imply
high inventory levels, but it can imply higher cycle stock costs. Excess capacity can also be
rented to other companies.
Advantage of lead strategy: First, it ensures that the organization has adequate capacity to meet
all demand, even during periods of high growth. This is especially important when the
availability of a product or service is crucial, as in the case of emergency care or hot new
product. For many new products, being late to market can mean the difference between success
and failure. Another advantage of a lead capacity strategy is that it can be used to preempt
competitors who might be planning to expand their own capacity. Being the first in an area to
open a large grocery or home improvement store gives a retailer a define edge. Finally many
businesses find that overbuilding in anticipation of increased usage is cheaper and less disruptive
than constantly making small increases in capacity. Of course, a lead capacity strategy can be
very risky, particularly if demand is unpredictable or technology is evolving rapidly.

 Lag strategy refers to adding capacity only after the organization is running at full capacity
or beyond due to increase in demand (North Carolina State University, 2006). This is a more
conservative strategy and opposite of a lead capacity strategy. It decreases the risk of waste,
but it may result in the loss of possible customers either by stockout or low service levels.
Three clear advantages of this strategy are a reduced risk of overbuilding, greater
productivity due to higher utilization levels, and the ability to put off large investments as
long as possible. Organization that follow this strategy often provide mature, cost-sensitive
products or services.
 Match strategy is adding capacity in small amounts in response to changing demand in the
market. This is a more moderate strategy.
 Adjustment strategy is adding or reducing capacity in small or large amounts due to
consumer's demand, or, due to major changes to product or system architecture.

3.5 Information Management for Global Logistics:

Innovative application of information management offers six opportunities for transportation and
logistics companies Globally:
1. Digitizing core back-end processes gains faster access to data. There is still a significant
number of staff assigned to manual data capture and exchange activities such as track and trace,
gathering freight bill information, managing custom forms, or securing proofs of delivery. These
essential activities are resource intensive, error-prone and stall billing, and cash collection.
2. Internet-of-Things (IoT) amplifies containerization. IoT technologies allow carriers to
transmit vital stats, such as temperature, location, and power supply via satellite. By having this
information sent to the cloud and analyzed at a central office, carriers have real-time information
as issues develop that also leads to increased safety for port staff.

3. More transparency across the supply base. More companies are demanding transparency
into the shipping process. Having better visibility into processes can improve shipment times and
minimize supply chain disruption, but in order to do this, standardization and automation is
needed.

4. Manufacturers are demanding transportation and logistics companies help them

mitigate the increased risk of longer and more variable supply chains. Information
management strategies should help address the risks associated with disrupted flight plans, a
tsunami in Thailand that affects the port activity in California, or threats of a terrorist attack in
Brussels that may halt all transportation. Having access to global information and applying it
locally is a critical asset to minimizing crises.

5. The last mile is transforming. The uberization of many services is impacting the industry,
and the last mile is becoming more fragmented. Cloud platforms and crowd-sharing startups are
also collaborating with incumbents to complement their services. These disruptions to the last
mile as we knew it requires speed in accessing accurate information.
6. Analytics to gain insight. Forward-thinking companies will use analytics to better understand
their digital initiatives and customers’ challenges. Transforming that data to anticipate future
needs expands the value to customers.

3.6: Global LIS / LITS Capabilities and Limitations: LIS (Logistics Information Systems)
and LITS (Logistics Information and Telecommunication System), LIS and LITS both may be
taken in same context.

LIS may be defined as “An interacting structure of people, equipment, and procedures
which together make relevant information available to the logistics manager for the purposes of
planing, implementing and control.”

Information flow makes a logistical system dynamic. Quality and timeliness of information are
key factors in logistical operations.

Figure 3.8: Elements of Logistics Information System

3.61: Roles & Applications of LIS / LITS:

 LIS perform three vital roles in business firms.

– Logistics processes and operations,

– Logistics decision making; and

– Strategic competitive advantage

 Major application categories of information systems include:

– Operations Support Systems; and

– Management Support Systems

3.62 LIS Benefits

– Increased product visibility and control

– Improved knowledge of key logistics network component capabilities and

capacity
 – Enhanced economic value

 Cost reductions

 Sales increases

– Creation of competitive advantage

 Direct linkages to customers

Figure 3.9: Overview of Logistics Information System

3.63 Technologies in LIS

 Bar code
 Point-of-Sale ( POS)
 EDI
 RF-RFID
 UNIT 4

4.1: Performance Measurement and Evaluation in Global Logistics Operation and

Logistics Control:

4.11 Performance measurement

The measurement system should ensure that resources are assigned and monitored to achieve
managerial objectives. Logistical performance should always be measured relative to the
operational plan. Without an operational plan, measuring performance is very difficult, if not
impossible. Logistical measurement is management by exception. The comprehensive and
detailed nature of logistics requires that management review be limited to the deviations from
anticipated results. There are several kinds of methods; productivity ratios, flexible budgets,
standards, control charts, and audits, which can be used to measure performance and control
logistics costs. Each method is discussed below.

4.1.1 Productivity ratios

Productivity ratios are the simplest form of management controls and involve the comparison of
different physical and/or financial measures. These ratios can be used to monitor the
performance of overall logistics operations, various functions or individual work activities
(Magee et al., 1985, p 236). These ratios are easily developed, readily understood and can
uncover problem areas or indicate opportunities to investigate for potential improvement.
However, productivity ratios are limited in their usefulness (Magee et a]., 1985, p 237). First,
they compare current performance against the past performance or the performance of similar
operations - not against some objective standard of performance. Second, the productivity ratios
generally do not distinguish between variable and fixed cost components, and therefore different
operating levels of activity may greatly influence the productivity ratio. Third, the operational
characteristics often differ for different facilities and companies, and therefore a simple
comparison of productivity ratios may not be an appropriate measure of relative efficiency.

4.1.2 Flexible budgets

Flexible budgets are a common and useful method of logistical management control. Flexible
budgets can vary with the level of activity. The fixed and variable cost components are
separately identified, and a placed level of expenditure is computed for an actual operating level.
Actual expenditures are compared against this budget, and the resulting difference or variance is
analyzed to determine if the difference in planned and actual performance was due to product
mix changes, activity efficiencies or inefficiencies, or cost/price differences (Magee et al., 1985,
p 238).
4.1.3 Standards

Standards, used as part of a flexible budgeting system, could provide the most effective
management controls. Standard costs are based on predetermined costs, not historical costs.
Standard costs are generally determined from industrial engineering studies, where operations
and work activities ha.ve been analyzed to determine efficient and reasonable operating rates for
a. given task.

Standards for distribution activities are at times difficult to determine because of the complex
and causal relationship of many distribution activities. However, the costs of limitations
standards may be developed for all logistics functions (transportation, warehousing, inventory,
etc.) and for any logistics level or component (logistics sub functions and individual work
activities).

4.1.4 Adaptive control

Schary (1985, pp 43-44) has suggested that the focus of logistical control should be to respond to
change by projecting possible future system states. This can be accomplished to some extent
through flexible budgeting, and projecting fixed and variable costs separately. However, in some
cases the response of flexible budgeting may be inadequate. The focus should, therefore, be on
adaptive control; management seeks comparison with a planned future, not the past. Adaptive
control should not assume a continuation of the past, but possible future conditions, in order to
plan for response and guide decisions. The control problem precedes, includes, and follows the
decision problem. The first objective in control is to detect change; second, to determine the
significance for action, leading toward decision making and then to evaluate performance.
Adaptation requires the ability first to foresee future conditions and then to respond, com- paring
performance to the standards which have been projected. In general, an ada.ptive control system
operates with both a feed-forward (projective) system and a feed-back (analytical) sys- tem.

4.1.5 Other methods

Not all performance data is best presented in a numerical form. Trends and activity performance
that is out of control can be easily detected when performance levels are graphically presented. A
popular type of control chart in industrial quality control applications is applied to the control of
customer service. The upper and lower limits for service are based on standard statistical
procedures. When either the trend becomes suspect or the service level falls outside the limits,
the manager may wish to take action at that time bringing service back within its limits. This
type of chart may be developed for logistics activity costs as well (Ballou, 1978, p 419).
Performance measurement on a regular basis is not always accurate. Reports may indicate that
activity performance is within acceptable limits when, in fact, it is not. Because there can be
reporting errors and because regular reporting does not have total coverage of the logistics
system activities, it is necessary to take stock of the situation from time to time. (Ballou, 1978, P
420) Several types of audits are popular in logistics control. Inventory audits are conducted at
least on an annual basis by firm that maintains raw materials, in-process goods, and finished
goods stocks. Stock counting is generally necessary for tax purposes, but a logistician can use the
audit to correct any discrepancies in the accounting records. Such audits are periodically
necessary, because errors occur in records due to common causes such as inadequate reporting of
stock depletions and returns, and theft of stock. The total function of an audit is becoming
increasingly popular. An audit examines the logistical activities as a whole to assess the overall
status of logistical costs and performance. The market, financial, legal, supply, and governmental
regulation environment, can change at a pace that can go undetected by management over long
periods of time. Different kinds of audits may be conducted for specific purposes. These might
focus for example, on customer service, materials handling efficiency, transport fleet utilization,
or vendor performance.

4.2. Performance measurement of logistics key elements

According to Kearney (1984, pp 46-47), there four separate stages for measuring the productivity
and performance of transportation, warehousing and inventories.

4.2.1 Service level. Customer service performance may be measured with respect to
availability, capability, and quality (Bowersox et al., 1986, pp 27 and 97).

Product availability measures the ability to provide a product when it is desired by the customer.
This may be measured in term of the percent of orders, units, or lines that can be filled from
existing stock. Other measures may be lines shipped complete or orders shipped complete. The
shipped complete measures record the percentage of instances that orders or lines can be
completely filled from existing stock.

Customer service capability measures are order cycle time, distribution system flexibility, and
malfunction handling capability. The order cycle time is the customer's perception of the elapsed
time from when the order is placed until the shipment is received. The cycle time measures
include average time and time variances associated with order communication, order processing,
order consolidation, backorder delay, and delivery time.

The flexibility measure evaluates the capability of providing special services for orders such as
processing back-orders, providing substitute products, expediting orders, and providing faster
transportation. The flexibility measure must record the relative effort involved in the changes and
the enterprise's ability to respond.

4.2.2: The malfunction correction capability measures the ability to respond to problems such
as errors or damage. The errors may involve order entry, processing, picking, or shipping errors
when an incorrect product or incorrect amount is sent to customer. Damage may be incurred in
the manufacturing process, warehouse handling, or transportation. The measures that are
appropriate to the malfunction include the number and percentage of orders that are incurred in a
malfunction, the corrective responses taken, and the cost of correcting such malfunctions.
The service measures that are quality related are information and product support. These
measures evaluate the ability to provide pre- and post-transaction support for the customer in
terms of both information and service. These information measure records an enterprise's ability
to respond to customer inquiry for order and inventory status. The second quality measure
concerns product support at all points in the transaction. An enterprise demonstrates product
support ability by providing technical advice as well as maintenance and repair services. These
measures can be reported in terms of availability, accuracy, and completeness of technical
product information.

4.2.3 Transportation. At Stage I, transportation costs are often compared to some type of
macro output such as sales in money. Thus a common Sta.ge I measure could be total
transportation costs as a percent of sales.

In Stage 11, physical measures and activity budgets are introduced for transportation activities.
Units such as weight stops, orders, kilometers, etc. are tracked within the transportation activities
over shorter time intervals such as days or weeks. At this point, these physical units can be
measured against transportation 1abor or non labor costs to track the cost per ton, per km, per
stop, or per ton .km.

Stage III requires the establishment of goals for the overall transportation operation. These goals
could be in the form of physical units or period operational costs, but in either case could lead to
the measurement of performance (actual versus standard). Transportation requirements can be
converted to standard hours of work, vehicle loads, or money of cost, for instance. Included here
would be the actual cost versus the budgeted cost analyses as well as variance analyses
highlighting the reasons for budgetary variance.

In Stage IV, physical performance data are merged with financial data to provide the
management with an overall view of the transportation operation. Armed with this type of
measurement system, the management is in a position to control ongoing operations as well also
test alternatives and seek trade-offs to present operation.

4.2.4 Warehousing. Stage I pertains the development and use of raw data in terms of money.
At this stage, these costs are often compared to some type of macro output as money sales.

At Stage 11, physical measures and activity budgets are introduced for warehouse activities.
Units such as weight, lines, orders, etc., are tracked within the warehousing activities over
shorter time intervals. At this point, these physical units can be measured against warehouse
labor hours, and warehouse labor and non-labor cost. The introduction of time phased activity
budgets is now possible with this data.

Stage III requires the establishment of goals for overall warehouse and warehouse activities.
These goals may be in the form of physical units or operating costs, but can lead to the
measurement of performance. The productivity trade-offs among warehousing activities can be
quantitatively gauged at this level.

Stage IV incorporates the use of physical performance and budget performance measures to
evaluate trade-offs across logistics activities.

4.2.5 Inventory. In Stage I, the data are generally reported in values of money (e.g. total
inventory money value). These macro measures may also be compared with some overall
measures during Stage I such as total money sales.

A refinement of the performance measurement system occurs in Stage I1 when the measures of
inventory are instituted by product category. This sta.ge also includes the development of
planning and control procedures of these functions including a. time phased procurement plan by
product group, an inventory stock status reporting system, and monitoring of shop-floor
compliance with production schedules.

Stage III introduces the use of standa.rds, budgets and goals in the form of inventory levels. This
stage includes the comparison of actual performance to goa.ls and the determination of
variances.

The formal integration of inventory with other company objectives indicates the Stage IV
measurement. Customer service goals and sales forecasting have been considered in inventory
function to this point, but more in the manner of dictating requirements. Stage IV sees the
merging of company objectives, with a. constant updating of functional objectives and needs.

4.2.6 Corrective action

The managerial control process is not complete until a comparison of performance with goals or
standards has been made and corrective action is taken if performance levels are outside of the
normal acceptable limits. There are basic ways in which the comparison is made (Ballou, 1978, p
422). First, it may be made by the manager; He simply applies his judgment and experience to
the reports received to decide whether some action should be initiated to adjust logistical
activities in order to bring them back in line with planned performance. Second, the versatility of
digital computers has encouraged the automation of the control process. Computer systems may
be designed so that the manager is not directly involved in routine control. In this sense, it is
automated control. Corrective action often depends on the degree to which the logistical
activities are out of control. In practice there will always be a variation in logistical activities due
to a constantly changing environment for these activities. The transport service cost might be
vary due to weather, fuel costs, economic conditions, and routes that must be used.

The inventory carrying cost might change due to the interest rate on capital, customer
requirements for stock availability, and variations in demand and lead time. When minor
adjustments do not bring cost and performance into line, major re planning may be necessary.
Existing facilities, locations, inventory stocking policies, transport services, and warehouse and
materials handling methods may have become obsolete over time. Practically the only option for
a logistician is to conduct a careful examination of the logistics systems or its sub activities.

4.2.7 Information systems

It has long been recognized that managerial control performance is closely linked to the quantity,
form, and accuracy of the information available on the subject (Ballou, 1978 p 330). In this
paragraph the management information system, as it aids in controlling the logistics system is
discussed. The logistics information system (LIS) is a subsystem to the management
information system (MIS). It provides the information that is needed specifically for logistical
management. According Ballou (1978, p 331) and I3owersox et al., (1986, pp 332-334) logistical
needs can separated into four levels. The lowest level refers to transaction and inquires. At this
level information flow is concerned with the execution of the operational plan. A stream of
transaction documents signals a need, and the action document identifies the appropriate steps
necessary to meet objectives. There are two important features concerning the flow of
information at this level. First, information deals with the day-to-day activities of the business on
a transaction basis and there with the execution of predetermined programs. The second feature
of the information flow at this level is the accumulation of records to formulate a data bank for
all other levels of control. The next level of the information system involves first line-line
supervision. This level is concerned with the accumulation of information regarding deviations
from the initial plan. It is important to realize that the scope of the information reviewed at this
level is reduced considerably in comparison to the direction level. Tactical planning and control
is an extension of the management at the supervisory level. The assortment of information
presented at this level will be very selective. Evaluation of inventory-control limits, supplier
evaluation, carrier selection, planning warehouse layout, and transportation needs are examples
of tactical control problems. Finally, strategic planning involves setting the goals, policies, and
objectives, deciding on the overall logistics structure, and determining the resources needed for
the supply-distribution task. The speed of information is rarely critical, and the information
system is interrogated only infrequently. As noted earlier, each level is concerned with system
monitoring as well as reporting exceptions. However, as information flows from the lowest level
to the highest level, the subject matter decreases in quantity and increases in importance to the
welfare of the enterprise.

4.3 Measure Performance in Functional Integration and Sectoral integration: Some of

the metrics to measure entire integrated supply chain performance are given as follows;

 Lead time Interval between start and end of a process. In a supply chain context it is the
Time interval between raw material order until final product reaches the retailer or
consumer –  Reducing lead time frees resources, reduces cost, and improves quality.
 Cost: Unit Cost, Costs involved in Transport and Storage, Customs, Insurance, Financial
Services Margins, Negotiations, Inspection, Damage, Theft , Obsolescence, etc. – 
Strategies for cost reduction are important
  Quality: Management of all work processes so that each is on target and the entire
process is on target with low variability.
 Flexibility: Ability to meet customer demands under uncertainties in various dimensions
such as delivery time, delivery schedules and ordered quantities, design, demand and
product mix changes. –  Measured in terms of Product variety manufactured and
delivered, changeover times between products, time interval between successive new
product introductions

4.31 Lead Time

 Map the entire process highlighting the sub processes, interfaces , decision making
points, etc
 Interval between the start and end of the process –  New product : Concept to Market
time –  Order to delivery process : Delivery time –  Supply chain process : Procurement
to Retail –  B2B process: Warehouse to warehouse (Intl) –  B2C process: warehouse to
consumer
 Lead time includes quality and cost –  Low lead time – no defects and less resources

Figure 4.1: Supply Chain Lead Time

4.32. Various Components of Lead time (Sectoral level Components of lead time)

 Procurement lead time: The time required for supplier selection based on time, cost and
priority considerations
 Supplier lead time: The time elapsed from the time the order is received till the
component is ready for delivery at the supplier.
 Inbound logistics delivery: The time required for the components or subassemblies to
reach the supply hub near the factory. It is the maximum of the delivery times from
various suppliers and includes the passage through international ports.
 Assembly time: The time required for assembly, testing and packaging for final delivery
to the distributor
 Outbound logistics delivery: Time required for various subassemblies to reach the
consumer site after customization
 Customs and Trade Facilitation: Time taken by the customs for processing the
shipment at various ports that the components and final product visits.
 Coordination time: Time required for choosing the partners for particular order and for
quality and exception management.
Location of facilities in several countries will certainly increase the complexity of
coordination, scheduling, transportation, and in-transit inventory. Uncertain lead times
will increase the inventory levels. Political uncertainties and differences in culture further
exacerbate the problems.

4.33 Sectoral level components of Total Landed Cost

 Unit cost : raw materials and component costs

 Inbound logistics cost: Cost moving materials and components to the factory site from
the suppliers located in different countries.
 Assembly cost: This includes the labor, assembly and equipment costs (such as molds or
other asset specific investments)
 Customs, duties, and taxes
 Inventory Costs: Raw materials, work in process and finished goods inventories
 Outbound logistics cost: The transportation costs include: supplier in LCC(Low Cost
Carrier) to the port, LCC port to domestic port, Domestic port to distribution centers,
Pick and pack operations at the distribution centers & plants, Distribution centers to
customers.
 Coordination Costs: Inspection cost, managing relationships with companies in different
time zones, culture and language s, IT administrative and legal functions.
 Figure 4.2: Total Transaction Cost in Global Supply Chain

4.4 Supply Chain Performance Enablers

 The nation’s economic and import and export policies such as tariffs, customs
regulations, free trade agreements and the logistics infrastructure highly influence the
growth of the firm and the industry vertical
 These Enablers are the features of the Supply Chain elements that influence the
competitiveness. Enablers are vertical dependent and include both hard infrastructure as
well as soft infrastructure which implements regulations.
 Lead time or Cost are dependent on all the four elements of SES i.e. they’re both soft
and hard enabling features
Figure 4.3: Supply Chain Enabler and Performance variables
 Figure 4.4: Competitiveness Metrics in Firms’ level and national level

4.5 Past Present and Future of Supply Chain Management:

Modern supply chain management is entering the third wave of a multi-decade

progression towards greater levels of sophistication in addressing increasing levels of product
variety, fulfillment options, and customer engagement, at the lowest possible cost. A nexus of
business process and technology forces is ushering in unprecedented change for supply chain and
retail operations within all companies across the globe. In this paragraph we try to investigates
these forces and the associated implications for the future of supply chain management. It
identifies and describes the top trends that companies need to address in order to be relevant and
successful in the next decade and beyond.

Modern supply chain management, leveraging computers, can be characterized by three

significant periods, as shown in Figure 4.5. The first two of these fall into roughly twenty-year
stretches; the next period is just as likely to be on the order of twenty years. It is important to
note that there is significant overlap between each period and that they successively build on
each other. In the 1960s, the IBM 360 and its derivatives ushered in a period of widespread use
of computers and software for a whole host of business applications, starting with the
mechanization of back-office finance and human resource functions. This spread into supply
chain management (which was known as “logistics” at the time) in the mid to late 1970s for
inventory management and, ultimately, for planning and execution functions.

The principal area driving this was materials management, both inbound material
requirements planning (MRP), and outbound distribution requirements planning (DRP). These
foundational concepts led ultimately to the development and widespread deployment of
enterprise resource planning (ERP) systems. (In 1990, Gartner Group coined the term
“Enterprise Resource Planning” to describe next-generation MRP/DRP systems).

Figure 4.5 - Three Periods of Modern Supply Chain Management

Next Generation Previous-generation supply chain management systems have been

characterized by relatively static models codified in rules defined by humans to provide the best-
possible representation of the real physical world. Sophisticated software is configured to run
against these models to produce plans, execute the plans, and to react to real-world events.
Instead of a static model, the next generation will be driven by increasingly dynamic models,
made possible by the availability of digital data points from everywhere, the ability to sense this
data, the ability to process this data, the ability to react to this data, and the ability to learn from it
over time.

Furthermore, these models will provide much more accurate representations of

the real world at any given point in time. In other words, computer representation of the supply
chain will become time-synchronized with the physical real world; as digital data from the
supply chain is processed and as intelligent adjustments are made, the digital and the physical
become one. Not only will the models be commingled with physical reality through digital data,
but the logic that runs software against these models will transition from a rules-driven paradigm
to a learning paradigm. In the digital phase of modern supply chain management, machine
learning will enter the mainstream of enterprise software. Today’s fast-response systems and
prescriptive analytics are precursors to this. In the future, fast response and analytics will be
necessary, but not sufficient, conditions for success.

The progression of this phenomenon is based on the interaction of three central characters:

• Customer

• Technology

• Structure

4.51 Customer: The customer is the individual or entity that creates demand. As Peter
Drucker said, “all businesses exist for one purpose – to create a customer.” Traditionally,
relationships between a customer and business have been thought of in terms of business- to-
business (B2B) or business-to-consumer (B2C). In today’s world, much emphasis is placed on
end consumers, who are thought to be creating a lot of the disruption that is ushering in the third
wave. However, business customers are increasingly taking on the same characteristics as end-
consumers such that lines between B2B and B2C are blurring (see convergence trends later in
this paper). Furthermore, many B2B customers who sell end-consumer products through
intermediaries must increasingly establish and manage direct relationships with the end-
consumer in order to exert stronger control over their brand identity.

4.52: Technology: encompasses the wide array of microprocessor and computer-based

innovations that are changing how people and physical things interact. This includes how
customers, smart machines and devices interact with businesses and each other on a global basis
through the internet of everything. Technology also includes the hardware and software
necessary for businesses to exist and thrive in the future.

As Moore’s Law continues its multi-decade run, its consequences are making possible the
digitization of everything. Previously intractable or difficult problems, along with clumsy
approaches to solve them, are giving way to elegant solutions. Everything from common
everyday devices such as light bulbs, thermostats, wristwatches, and motor vehicles to robots and
smart phones are digital devices with some level of increasing intelligence. There is a sense that
across a wide swath of industry and society, a technological tipping point has been reached. This
occurs when the Moore’s law doubling effect creates such compute power that previous work
that seemed to move along an incremental curve suddenly results in breakthroughs. This is
expressed in Figure 4.6, where certain fields and applications move for decades along a
continuous improvement curve and then suddenly, within a short period of time, the
improvement curve goes asymptotic1. There is a sense that this phenomenon is now occurring
across virtually every aspect of the supply chain and its interaction with customers.
 Figure 4.6 – Technology Improvement Curve

Structure refers to all aspects of the physical supply chain and the various processes for
managing it. Physical assets include factories, warehouses, retail stores, transportation, and
human capital. Management processes cover planning and execution functions, including
business and financial planning, demand management, category management, sales and
operations planning (S&OP), assortment planning, manufacturing planning, inventory
deployment planning, transportation planning and management, warehouse management, and
store operations, including labor and inventory.

4.53 Supply chain structure: in the past has been viewed as a fairly “left-to-right” linear
set of assets with relatively static inter-relationships. Today’s supply chains are more
characterized as a set of assets that “surround the customer” and dynamically assemble to
process and fulfill orders. This is shown pictorially in Figure 4.7.

The ultimate destination of this area might be a dynamic “map of the world’s supply chains.”
This will be discussed later.

Together, these three characters act as a flywheel, with technology playing the
role of the triggering mechanism. Technology emboldens the customer, who then continuously
raises expectations, which then drives further technology change; together the customer and
technology force structural changes on the supply chain. These structural changes are driven by
the need for changes in the way customers are served, and to do so at a desirable profit margin.
In this context, structure is defined as the physical supply chain and all associated management
processes (defined as supply chain management).

Figure 4.7 – Evolving Supply Chain Structure

4.54 Top trends for the next decade

A host of factors working together is creating a revolution in supply chain management.

While previous technology-led revolutions were the work of a single or a handful of foundational
technologies, the revolution that is upon us seems to be driven by a confluence of factors that are
all coming together simultaneously. The steam engine, railroads, electricity, motor vehicles, the
microprocessor, and the Internet all led to significant societal upheaval, along with significant
step functions in productivity. Today, supply chain managers have to focus on a host of
significant trends, which, taken together, will lead to broad upheaval in the way supply chains
are planned, managed, and operated.
 Supply chains and their management are now at a pivot point – the need to
pivot to myriad new technologies while leveraging past investments and transitioning them over
time.

Within this context and the context of the three central characters
previously discussed, the top trends for supply chain management are summarized in Table 1.
The trends are grouped into three color-coded categories: blue for one major trend of customer
centricity; green for structural trends; and purple for technological trends.

Top Trends for SCM in the Next Decade Each of these is discussed in the
sections that follow. Each key trend is first defined and discussed in a general sense, followed by
a specific discussion with examples of how the trend will potentially impact various aspects of
supply chains and supply chain management.

 Customer-centric , supply chains of one – customers increasingly demand “everything

aisle” access with tailored fulfillment at mass produced prices. Customers increasingly
value companies based on their supply chains.
 Convergence – the physical value chain, business processes, time and function, and
digital and physical will increasingly converge.
 Self-forming and asset virtualization – the physical value chain will increasingly be a set
of assets that “surrounds the customer” and is dynamically brought together through
software and advanced decision making.
 3D printing / additive manufacturing – digital techniques that transcend time and space
will transform the value chain for at least some set of products. Sharing economy and
crowd sourcing – asset and operations sharing across businesses will occur where it is
deemed to have no value to the customer. This will be enabled by a “hub of hubs,” or a
“network of networks.” Digitization of everything and internet of everything– physical
assets and people will be increasingly digitized and connected to the Internet of
Everything (IOE).
 Data science and “math houses” – data science will play an increasing role in supply
chain management. Internal and external “math houses” will form to solve problems
“around the edges” of existing solutions.
 Software/ strategy-driven value chains – the value chain is increasingly synchronized to
business strategies. These strategies drive policies, which are synchronized from
customer through supplier and strategy through execution.
 Adaptive learning software / machine learning – machine learning will enter the
mainstream of business application software, allowing for automatic configuration
changes and decision-making based on outcome learning.
 Digital hub, apps, and the “network of networks” – “digital hubs” will form to process
data from digitization and IOE, allowing it to be used for advanced decision making.
These hubs will start a new apps economy and a “network of networks.” Cloud and web-
 scale IT – cloud will continue to evolve, providing for continuous upgrades and much
lower TCO. Google and other companies will make available to companies services
previously only available to consumers.
 The two-speed architecture – existing software architectures and new cloud architectures
(e.g. Google Cloud Platform) will work together. This will provide new capabilities to
existing software assets, while allowing them to migrate over time.

---------------------------------------------------------------------------------------------------------------------