Module 6

Logistics
A network involved in the actual transportation of goods and services from the place of manufacturing to the place of consumption. Ensures the delivery of right product at the right place at the right time in the right quantity.

 In normal usage logistics in concerned with entire supply chain, from raw material procurement stage to the delivery of finished goods. designing and managing a system that controls the flow of materials into, through, and out of the organization

Logistics
Process of planning, implementing and controlling the efficient, cost effective flow and storage of raw material, in-process inventory, finished goods, and related information from the point to origin to the point of consumption for the purpose of conforming to customer requirements.
Council of Logistics Management

 The process of managing and controlling the flow of goods and services from the source of production to the marketplace. It involves the integration of
transportation, inventory, warehousing, material handling, packaging.

 In business, logistics may have

internal focus (inbound logistics), external focus (outbound logistics)

An estimated 40% of the final cost that a customer pays is absorbed by logistical activities in FMCG sector.

Logistics management
Conventionally defined as the process of ensuring the delivery of the right product at the right place at the right time in the right quantities

Objectives of logistics
Logistics strategy mainly has 3 objectives
Cost Reduction Minimize level of investment Service improvement

Key Logistical Activities

Better Customer Service Facilitates Demand Forecasting Inventory Control Materials Handling Warehouse Site location Procurement Packaging Reverse Logistics

Logistics Planning
The purpose is to balance the activity levels of all the components of logistical system. So that they dont work at cross purpose in the process of achieving their respective Objective Reduce objectives.
Warehouse inventory Frequent small quantities Postpone dispatch

Objective Transportation Reduce cost

 According to Simchi Levi, basic types of outbound logistics strategies are: Direct Shipment Warehousing

Inventory Management Customer Service Goals

Transportation Decisions

Location Decision Logistical Decision Making

Warehousing Decisions
Logistical system needs some permanent facility for storing and supplying goods to the end consumer. A warehouse is a commercial building for storage of goods. Warehouse are locations where the inventory is received, stored and shipped out according to the demand.

Why Warehouse???
Support better customer service Maintain source of supply without interruptions Overcome time and space difference Efficient recording which helps in detecting out of stock products. Point of allocation (bulk breaking). Prevent damage. Helps in achieving economies of scale in transportation. (Large quantities can be shipped at same time).

Main function of Warehousing

Movement
Receiving Transferring Shipping

Information
Transfer Inventory level Order fulfillment

Storage

Warehousing Location Strategies

Market Positioned:
Located nearest to the final customer

Production Positioned
Located close to production facility

Intermediately Positioned:
Mid locations between final customer and producer.

Warehouse selection factors

Location of major markets Nature of product Potential for expansion Local tax structure Cost of availability of utilities

Major Decisions
Location of warehouse
Proper location leads to better customer service at less cost Improperly located warehouse leads to higher lead times and high transportation cost.

Number of Warehouses
Factors considered:
Cost of lost sales Stock out cost when a customers order is not fulfilled due to lack of availability of stock within permissible waiting time. Inventory cost Cost incurred on procuring and holding inventory

 Transportation Cost Warehousing Cost

Renting, Leasing or owning Maintenance

Transportation Decisions
An activity that moves products to markets that are geographically disparate. Provides time and place utility by taking the products nearer to the point of consumption.

Transportation
The major decisions involve:
Mode selection Vehicle routing and scheduling (Best path a vehicle should travel through) Shipment consolidation

Mode Selection
Different modes:
Air Rail Water Road (Major mode, nearly 65% in India) Pipeline

Major factors considered are:

Cost Dependability Possibility of loss and damage

Inventory
Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state. Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Inventory pile up may lead to damage. Not possible to reduce because: It is difficult to precisely forecast demand. May lead to poor customer service. Thus the focus remains on maintaining optimum levels of inventory. Emergence of concepts like JIT, ECR

Zero Inventory?
Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly.

Reducing the amount of works-in process by using just-in-time production.

Reducing the amount of finished goods by shipping to markets as soon as possible.

Why Inventories?
Improves customer service. (demand fluctuations) Reduces cost (discounts from suppliers, reduce transportation cost).
Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) Economies of Purchasing

Cost associated with inventory

Inventory procurement cost
Shipping Handling

Inventory carrying cost

Inventory service cost Storage space cost Inventory risk cost

Stock out cost

Cost of lost sale Back order cost( delayed purchase)

Inventory level decisions

Push or Pull Strategy Inventory Replenishment Point Reorder Quantity (EOQ) Order Timing (Reorder Point)

Push v/s Pull Inventory Control

Push Strategy: Inventory management is centralized. Forecasting done at central level E.g. FMCG companies Not capable enough of reacting to market changes.

Pull Strategy
Bottom up approach Decentralized forecasting Warehouses and other storage points calculate their inventory requirements. Helps in reducing inventory. Production coordinated with demand rather than forecast.

Order Quantity Decisions

Quantity of reordering so that inventory is replenished at most ideal rate. Ideal stock is maintained when there is neither stock out nor inventory pile up. Calculated by Economic Order Quantity (EOQ) formula Major consideration of formula is to reduce total cost of inventory.

 EOQ that minimizes TC is given by

Q=

2DS/IC

Where;
D= Demand S= Ordering Cost IC = Inventory Carrying Cost

Reorder Point
Quantity to which inventory is allowed to drop before replenishment order is made Need to order EOQ at the Reorder Point: ROP = D X LT D = Demand rate per period LT = lead time in periods