CHAPTER 5: LOGISTICS
Supply Chain Management is an essential aspect of business today. The idea is to apply a
total system approach to managing the entire flow of information, materials and services from
raw material suppliers through factories and warehouses to the end customers. An increasingly
popular perspective today is to view the flow of material from suppliers all the way to
customers as a system to be managed.
A supply chain is essentially a sequence of suppliers, transporters, manufacturing plants,
warehouses, wholesalers, retail outlets and finally the customers. Each participant in the supply
chain has a supply chain of his own that seamlessly integrates into the entire network. Till
recently these departments functioned independently. There were internal computerization of
these departments, but still they were island. Data sharing was not practiced. As demand
showed variations, the procurement of raw materials which was based upon customers’
demand was erratic. As distribution data was not available readily, it resulted in huge
inventories and equally huge instances of wastages. Some times when demand was
overestimated, huge quantities of consumables with short shelf life had to be destroyed.
These days we have the benefits of networking. SCTM (Supply Chain Transaction Management)
system is now internet based or intranet based. Data are accessible in real time. It cuts down
times and costs. If there is scarcity of raw materials, manufacturing gets immediate alert,
which in turn alerts packaging and distribution. Due to retailer-manufacturer linkage,
production and inventory planning have improved greatly. Points of sale information is captured
on-line. The number of days’ inventory to be maintained is then benchmarked. Production
schedules are designed accordingly and production then matches the distributors’ demand also.
Customer Analysis
Order
Fulfillment Purchasing/Suppliers
Partnering
Different companies may have different supply chains due the nature of their operations. The
Integrated
Supplyfor manufacturing and service organizations
exhibits below illustrate typical supply chains
Chain
separately. A company can identify its supply Inventory
chain by first selecting a particular product group
Storage & Manageme
or product family. Then it should trace the flow of materials and information Management & final
from the
Transport nt Control
customer (end user) backwards through the distribution system, to the manufacturer and then
to the suppliers and the source of raw materials. This entire chain of activities and processes
constitute the supply chain for that product group or product family.
Manufacturing
Assembly
Demand & Lead Time
Supply Chain for a Manufacturing Organization
Management
Material Management
Retailer
Supplier
C
Customer
Supplier
A large company willAnecessarily have several supply chains. In a multi-divisional company with
many product groups, there could be many different supply chains. For example, Procter and
Gamble may use any thing between 50-100 different supply chains to bring their products to
Custom
the customers inSupplier
the market. Importance
Storage of supply chain management can be gauged from
Service
er
following reasons of B
its adaptation: -
(a) Total time for materials to travel through the entire supply chain can be quite long
(may be from 6 months to a year). Since the materials spend so much time waiting
Supplier
in inventory, there is great opportunity to reduce the total supply chain cycle leading
C
to corresponding reduction inventory, increased flexibility, reduced costs and better
deliveries.
(b) Many companies have drastically improved their internal operations and now find it
necessary to consider relations with external customers and suppliers in the supply
chain to gain further improvement in their operations.
(c) Supply chain thinking is an application of systems thinking and provides a basis
for understanding processes that cut across a company’s internal departments and
processes that extend out the company as well.
It must be appreciated that a forecast becomes input to aggregate planning, which affects
inventory planning, which ultimately leads to scheduled of workforce and equipment. Any
decision taken at one stage affects the other stages also.
INVENTORY
OVERVIEW OF SUPPLY CHAIN MANAGEMENT
MANAGEMENT
MATERIAL MANAGEMENT
On area of operations and logistics playing a major role in supply chain management (SCM) is
that of materials management, which is concerned with decisions about purchasing materials
and services, inventories, production levels, staffing pattern, schedules and distribution, either
directly or indirectly.
Traditionally, organizations have divided the responsibility for materials management among
here different departments; purchasing, production control and distribution. This approach
requires a tremendous amount of coordination to achieve a competitive supply system, since
each department has their own administrative compulsions. Many firms in such cases resort to
centralized one department called materials management department although the name
logistics management is also used some times. This approach brings together all tasks
related to the flow of materials, from the purchase of raw materials to the distribution of
finished products or services.
Purchasing is usually responsible for working with suppliers to ensure the desired inward flow of
materials, including raw materials and components, and services. Production control is
responsible for determining production volumes and scheduling the machines and labour
directly responsible for conversion process. Distribution is normally responsible for the outflow
of materials from the firm to its customers. It may also be responsible for finished goods
inventories and selection of transport suppliers.
SUPPLY CHAIN
A supply chain consists of all the three stages involved, directly or indirectly, in fulfilling a
customer’s demand. It not only includes the manufacturer and supplier but transporters,
warehouses, retailers and customers themselves. With in the organization, the supply chain
includes functions such as new products development, marketing, operations, distribution,
finance and customer service.
A supply chain is dynamic and involves the constant flow of information, products and funds
between different stages. Each stage of the supply chain performs different processes and
interacts with other stages of the supply chain. Supply chain activities start with customer order
and end when a satisfied customer has paid for the purchase. It is not necessary that only one
player is involved at each stage of the supply chain. A manufacturer may receive supplies from
many suppliers and then supply finished goods to many distributors; therefore, most supply
chains are the supply networks or supply webs.
A typical supply chain may involve the following stages: -
(a) Customers
(b) Retailers
(c) Wholesalers/Distributors
(d) Manufacturers
(e) Component/raw materials suppliers.
Four important activities involved in supply chain management are purchasing, logistics,
warehousing & distribution. These activities form the frame work for studying the nature
and scope of SCM.
PURCHASING
Purchasing is responsible for obtaining the materials parts and supplies needed for production
or to provide a service. In manufacturing more than 60% of the cost of finished goods account
for purchased parts and raw materials. The importance of purchasing is not only just the cost of
goods purchased, but also the quality of good purchased and services provided and the timing
of deliveries of goods and services, both of which can have significant impact on operations.
Purchasing Interfaces – Purchasing is the link between the organization and the suppliers. It
exchanges information with the suppliers and functional areas. Diagram below shows the
interface of purchasing with other functional areas of the organization.
Operating Units constitute the main source of request for purchased materials and close
cooperation between these units and the purchasing
Legalis vital if quality, quantity and delivery
goals are to be met.
Accounting
Legal department may provide assistance to the purchasing department in contact
negotiations, in drawing up bid specifications
Operatio for non-routine purchases and to help interpret
n
legislation on pricing, product liability and contract with the suppliers.
PURCHASIN
Accounting is responsible for handling payments to suppliers.
G
Data
Data processing may be handled by the accounts department which keeps inventory records,
Processin
SUPPLIER g
checks invoices and monitors vendor performances.
Design and Engineering usually prepare material specifications which must be communicated
Receiving
to purchasing. Also design and purchasing people may work closely to determine whether
changes in specifications, design or materials can reduce theDesign
cost of purchased items.
Receiving checks incoming shipment of purchased items to determine whether the quality, the
quantity and the timings have been met and moves the goods to temporary storage.
Purchasing must be notified when shipments are delayed, accounting must be notified when
shipments are received so that timely payments can be made.
Suppliers and Vendors work closely with purchasing to learn what materials will be
purchased and what kind of specifications will be required in terms of quality, quantity and
deliveries. Purchasing must rate vendors on cost, reliability and so on. Good supplier relations
can pay dividends on rush orders and changes and vendors provide a good source of
information on product and material improvements.
The Purchasing Cycle – It starts with a request from within the organization to purchase
materials, equipment, supplies or other items from outside the organization and the cycle ends
when the purchasing is notified that a shipment has been received in satisfactory condition. The
main steps in purchasing cycle are:
(a) Purchasing receiving the requisition
(b) Purchasing selects the supplier
(c) Purchasing places the order with the vendor
(d) Monitoring orders
(e) Receiving orders
LOGISTICS
Logistics refers to the movement of materials with in a production facility, the shipment of
incoming materials from the suppliers and the shipment of outgoing finished products to
distributors/customers. Materials include all the physical items used in the production process
such as raw materials, parts, components, consumable supplies, fuel, equipment, tools, office
supplies and so on.
Movement with in the facility – The activities involved in the movement of materials with in
a production facility are: -
(a) Removing materials from incoming vehicles and placing them on receiving
docks.
(b) Moving materials from the receiving docks to inspections.
(c) Moving materials from inspections to the stores for safe keeping.
(d) Receiving materials from stores and delivering them to the production
operations when needed.
(e) Moving materials between different stages of production operations.
(f) Moving finished products from final assembly and storing them in finished
goods warehouse.
(g) Moving finished goods from finished goods warehouse to packaging and
shipment departments.
(h) Moving packaged finished goods to the shipment docks.
(i) Loading finished goods into outgoing vehicles at the shipping dock.
All above movements must be coordinated in such a manner that there is no queuing and
clogging at any place and timing what ever have been decided are maintained. Workers and
supervisors must take care that items are not lost, stolen or damaged during movement within
the facility or during transportation.
Evaluating Shipment Options – A situation that arises frequently in some businesses is
making a choice between quicker, but more expensive shipping alternative or cheaper but
slower alternative. In some instances, there is an overriding factor present that justifies
sending a shipment by the quickest means possible, so there is little or no choice involved.
However, in most of the cases where urgency is not involved, there can be many choices.
Decision in such cases often focuses on the cost savings of slower alternative versus the
increased holding cost that would result from it.
Innovations in Logistics – New developments are continually affecting logistics. Light weight
shipping containers, unitized loads, consolidated shipments, truck trailers on ships and many
other unique methods, fluctuating fuel costs are impacting the costs savings on logistics.
Computer networking facilities make updated information available at the tip of the finger.
Computer networking can be optimally utilized for movements within the facility as well for
outgoing shipments. It is very important for logistics department to keep track of latest
developments in the area of shipment and logistics management so that maximum savings can
accrue to the organization.
WAREHOUSING
Warehousing is the management of materials while they are in storage. It includes storing,
dispersing, ordering and accounting for all materials and finished goods from the beginning to
the end of the production process. Warehousing operations deal with materials that directly
support operations and are the outcome of production process.
For keeping track of multiple varieties of items following techniques are used: -
(a) Bar Coding – Bar coding system facilitate in identifying and tracking the
items, boxes, consignments, shipments etc. It is also being used in their pricing,
quantities as also printing sales receipts and updating inventories. Bar coding is also
utilized in manufacturing and distribution. In distribution, companies can keep track
of items in warehouses and enroute to customers. Managers can instantaneously
determine the location of any item in the system and its status. In manufacturing,
bar codes track the progress of job just before each operation and specific
processing instructions for each job can be provided to operators.
(b) Electronic Data Exchange – It is the direct transmission of inter-
organization transactions, notices, debit or credit memos and the like. Benefits are: -
(i) Increased productivity
(ii) Elimination of paper work
(iii) Lead time and inventory reduction
(iv) Facilitation of JIT systems
(v) Electronic transfer of funds
(vi) Improved control of operations
(vii) Reduction in clerical work
(viii) Increased accuracy.
(c) Distribution Requirement Planning – It is a system for inventory
management and distribution planning. It extends the concept of MRP to multi-
echelon warehouse inventories, starting with demand at the end of the channel and
working that back through the warehouse system to obtain time-phased
replenishment schedule for moving inventories through warehouses network. DRP is
used to plan and coordinate transportation, warehousing, workers, equipment and
financial flows.
OUTSOURCING
MAKE-OR-BUY
Components that go into the production of many items are either made by the factory internally
or are purchased from outside suppliers. No automobile, watch, refrigerator, washing machine,
TV etc. is cent per cent work of one production unit, but has many parts which are purchased
from outside, made to order by some out production unit or simply bought off the shelf. The
considerations for taking a crucial make-or-buy decision are quite engaging.
Organization may decide to process the manufacturing of the material within its own factories
or have part or whole work done from some outside agencies. Make-or-buy decisions are policy
decisions and are arrived at after lot of deliberations at the top management level. The
purchase department having good knowledge of various issues involved takes an active part in
the deliberations by communicating information and data to the top management.
SUB-CONTRACTING
(a) Sub-contracting involves hiring another firm to perform some of the
manufacturing processes or to give sub-assemblies that will be incorporated into the
end product. Sub-contracting, in other words, is one method of buying instead of
making and hence many of the factors discussed earlier influence the sub-
contracting decisions as well.
(b) Subcontracting has several advantages. It is the fastest method of increasing
output. The buyer uses manpower where it is located instead of shifting that
manpower into his own plant. It enables him to use technical and management skills,
already existing as a functioning unit instead of developing new units. It may avoid
the need for new plants and equipment on the part of the buyer, since he in effect,
borrows existing facilities.
(c) Subcontracting checks over-expansion of production facilities. Such over-
expansion can create serious over capacity if the demand is temporary.
(d) Subcontracting will generally save the buyer from incurring investment costs
in specialized machinery and tooling which may not be usable for his regular
production requirements. However, since subcontractor does not incur such costs,
his operating costs still reflect them and to some extent his savings may be more
nominal than real. It is called comparative cost factor to be considered prior to
making the subcontracting decision.
(e) There is a factor of relative cost between doing one job in the plant and
subcontracting for it. It is important to raise certain questions and to answer them in
the light of particular situation and sound business principles. To what extent the
subcontractor permits his facilities to be committed to the buyer? To what extent
should a buyer assist a subcontractor in procuring materials, supplies and tools? To
what extent should technical assistance be extended? To what extent a
subcontractor is financed?
OUTSOURCING
(a) In the 1990s, outsourcing emerged as a major make-or-buy option. When
organizations buy from outside what they were formerly making in house, is called
outsourcing. Outsourcing is reversal of a previous make decision.
(b) Some activities have been traditionally outsourced, e.g. janitorial, food,
security etc. More and more activities are being outsourced to downsize or right size,
to emphasize on value added activities and to focus on core competencies. Such
outsourcing leads to savings, survival and prosperity.
(c) Now-a-days transport companies have added logistics aspect to their
function. They just do not move goods from one point to another. They manage all
dispatches over a period of time. They have tracking technologies to reduce risks. In
JIT system, such logistics support is crucial.