Chapter 15 Market Logistics & Supply Chain Management

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Learning Objectives
Principles of materials management, logistics and supply chain management Logistics interface with other functions Inventory management principles and systems Warehousing management fundamentals Transportation management practices How IT enables the logistics function Understand about the performance measurement of the logistics function
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Materials Management
Materials forms the largest single cost item in most manufacturing companies needs to be carefully managed Materials management function includes planning and control, purchasing and stores and inventory control Materials management is the precursor to logistics and supply chain management
Logistics
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Logistics Defined
Logistics means having the right thing, at the right place, at the right time The procurement, maintenance, distribution and replacement of personnel and materials Websters Dictionary The science of planning, organizing and managing activities that provide goods or services Logistics World, 1997
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Logistics
Functions: planning, procurement, transportation, supply and maintenance Processes: requirements determination, acquisition, distribution and conservation Business: science of planning, design and support of business operations of procurement, purchasing, inventory, warehousing, distribution, transportation, customer support, financial and human resources
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Scope of Logistics
Choice of markets Procurement Plant location and layout Inventory management Location and management of warehouses Choices of carriers, mode of transport Packaging decisions Relevant to all enterprises: manufacturing, Government, Institutions, service organisations
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Components of LOG Management

Input
Natural Resources (land, facilities Equipment) HR Finance Information

Logistics Activities
Customer service Demand forecasting Distribution Communications Inventory control Materials handling Order processing Parts and service support Plants and warehouse selection Procurement Packaging Return goods handling Salvage and scrap disposal Traffic and transportation Warehouse and storage

Output
Marketing Orientation (competitive Advantage) Time and Place utility Efficient move to customer

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Links and Flows

General material flow/ service flow Information flow Information flow
Customers customer

Customer

Lead Firm

Supplier

Suppliers supplier

General cash flow Outbound / Downstream logistics Inbound / Upstream logistics

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Source: ICFAI

Logistics and Marketing

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

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

The Value Chain

S U P P P O R T
Company Infrastructure

Organisation, people, methods

Systems & technology Procurement

margin

Inbound Operations logistics

Outbound Marketing logistics & sales

Service

margin

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Logistics Plan Outline

Internal analysis (current position)
Organisation Human resources Transportation Relations with internal customers Quality of product Quality of Service

External / situation analysis

Competitor logistics performance Trends External environment / economy Public, private and contract warehouse Public, private and contract carriage Tata McGraw Hill Publishing SDM Ch 15

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Principles of Logistics Excellence

Strategic Link logistics to corporate strategy Organise comprehensively Use the power of information Emphasise human resources Form strategic alliances

Operational Focus on financial performance Target optimum service levels Manage the details Leveraging logistics volumes Measure and react to performance

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Logistics Focus Areas

Customer service related Packaging Order processing Spare parts and service support After sales Customer service support Demand forecasting Distribution communications Return goods handling Operations related Plant and warehouse site location Procurement Inventory control Materials handling Salvage and scrap disposal Traffic and transportation Warehousing and storage

Logistics may be confined to the company whereas SCM extends beyond

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Supply Chain Management

Business context:
Globalization of the market place Advances in technology Increasingly demanding, informed customer base Purchase decisions on dimensions of quality, price and time
To meet customer driven challenges To reduce costs Improve service levels Enhance speed to market
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Innovative supply chain:

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Supply Chain Integration

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

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Supply Chain Integration

Customer Analysis Order Fulfillment Purchasing/Supplier Partnering

Storage & Transportation

Integrated Supply Chain Management

Inventory Management and control

Manufacturing/ Re-manufacturing/ Assembly

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Demand & Lead Time Management

Materials Tata McGraw Hill Publishing Management

Inventory management
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Why Carry Inventory?

Support production requirements Support operational requirements Maximize customer service ensure availability when needed protect against uncertainty Hedge against marketplace uncertainty Take advantage of order quantity discounts
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Functions of Inventory
Inventory serves as a buffer between:
Supply and demand Customer demand and finished goods Requirements for an operation and the output from the previous operation Parts and materials to begin an operation and the suppliers of the materials
The shock absorber of business !
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Factors Which Drive Inventory

Target service level parameters Lot sizing practices Safety stock and safety time conventions Volume discounts and purchase arrangements Seasonal build up needs
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Categories of Inventory
Anticipation built in anticipation of future demand peak season, strike, promotion Fluctuation (safety) to cover random, unpredictable fluctuations in supply and demand and lead time to prevent disruption in operations, deliveries etc Lot-size to take advantage of quantity discounts, reduce shipping, set up and clerical costs also called cycle stock
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Categories of Inventory
Transportation pipeline or movement inventories to cover the time needed to move from one point to another factory to distribution point for example Hedge for materials where prices are volatile Maintenance, repair and operating supplies (MRO) to support M and O spare parts, lubricants, consumables etc
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Types of Inventory
Obvious.
Raw materials Work-in-process Finished goods of primary concern to marketing Maintenance, repair and operating (MRO) supplies In-transit, pipeline
Performance measures
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Performance Measures
Inventory turns = Annual cost of goods sold /average inventory in value Days of sales = inventory on hand / average daily sales

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Types of Inventory Systems

Pure Inventory when and how much to order. RM procurement. Simple manufacturing operations Production Inventory finite production rates. Demand fluctuation. Products compete for manufacturing capacity Production distribution Inventory compete for production capacity. Geographic placement of inventory for best service of demand
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Types of Classification
ABC category most common for all HML - high, medium, low - similar FSND fast moving, slow moving, nonmoving, dead spare parts / FG SDE scarce, difficult, easy to obtain procurement / Spares GOLF govt, ordinary, local, foreign source procurement / Spares VED vital, essential, desirable spare parts / FG SOS seasonal, off-seasonal - commodity
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ABC Inventory Analysis

Based on Paretos law:
A 20% items worth 80% of value B 30% items worth 15% of value C about 50% items account for 5% of the usage

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

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Inventory Related Costs

Unit costs basic value of the item carried Ordering costs generating and sending a material release, transport, any other acquisition costs Carrying costs capital, storage, obsolescence Stock-out costs Quality costs non-conforming goods Other costs duties, tooling, exchange rate differences etc
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Approaches for Controlling Inventory

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

Part simplification and re-design On-site supplier managed inventory Use of supply chain inventory management systems, Materials Requirement Planning, Distribution Requirement Planning etc Automated inventory tracking systems Supplier buyer cycle-time reduction
Warehouse management
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Stores Management Objectives

Providing efficient service to users Reduce cost of carrying goods Providing correct, updated stock figures Controlling inventory Preventing damage to or obsolescence of materials Achieve all of the above with good housekeeping
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Functions
Warehouses

Material handling

Customer service

Information transfer

Storage function

Receive goods Identify goods Sort goods Despatch to storage Hold inventory Recall, select goods Marshal the shipment Despatch the shipment Prepare records and advices
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Temporary

Permanent

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Purpose of Warehousing
To provide desired level of customer service at the lowest possible total cost It is that part of the firms logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored Distribution warehousing relates mainly to FG
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Reasons for Warehousing

Service related
Maintain source of supply Support customer service policies Meet changing market conditions Overcome time and space differentials Support JIT programs of suppliers and customers Provide customers with the right mix of products at all times Temporary storage of materials to be disposed or re-cycled
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Cost related
Achieve production economies Achieve transportation economies Take advantage of Quantity Purchase discounts and forward buys Least Logistics cost for a desired level of customer service

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Warehouses
Support manufacturing Mix products from multiple facilities for shipment to a single customer Break-bulk Aggregate Used more as a flow-thru point than as a hoarding point
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Distribution Warehousing
The objective is to set up a network of warehouses closest to the customer locations to service markets better and minimise cost Could be C&FA s, depots or distribution centers Macro location strategies:
Market positioned Production positioned Intermediately positioned
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Distribution Center
Warehouse designed to speed the flow of goods and avoid unnecessary costs Speeds bulk-breaking to avoid inventory carrying costs Helps to centralise control and coordination of logistics activities Products can also be cross-docked (one vehicle to another)
Market positioned..
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Market Positioned
Warehouses located nearest to the final customer Factors influencing are:
Order cycle time Transportation costs Sensitivity of the product Order size Levels of customer service offered
Production positioned.
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In between

Production Positioned
Warehouses located close to the production facilities or supply sources Not the same level of customer service as the earlier one Serve as points of aggregation / collection for products made in a number of plants Factors influencing are:
Perishability of raw materials Number of products in the product mix Assortments ordered by customers Transport consolidation rates ex; FTL
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Intermediate Positioned
Mid point locations between the final customer and the producer High customer service levels possible even if products made in number of units
Other macro approaches look at cost minimisation or cost and demand elements to maximise profitability
Transportation management.
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Transportation
Very important in the Logistics function:
Movement across space or distance adds value to products Transportation provides time and place utility

Role of transportation includes:

Provides opportunity for growth under competitive conditions Deeper penetration into markets Wider distribution means greater demand Can influence product prices favourably
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Principles.
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Transportation Principles
Continuous flow Optimise unit of cargo - stackability Maximum vehicle unit capacity utilization Adaptation of vehicle unit to volume and nature of traffic Standardisation Compatibility of unit load equipment Minimum of dead weight to total weight Maximum utilization of capital, equipment and personnel
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Process.

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The Selection Criteria

Environmental analysis: shipper, carrier, government regulations, public influence Deciding objectives Selecting mode Select transport type within the mode Define functions of transport Evaluation and control customer perception / satisfaction, best practice benchmarking
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Cost Factors
Can be product related or market related. Product related: density, stowability, ease or difficulty of handling and liability Market related: competition, location of markets, Government regulations, traffic in and out of the market, seasonality of movements and impact on customer service Five prominent modes:
Road, rail, air, water and pipeline. Sixth one is use of Ropeways
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Customer Service Factors

Consistency, dependability Transit time Coverage door-to-door for example Flexibility in handling a range of products Loss and damage performance Additional services provided
Reverse logistics
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Comparison of modes

Reverse Logistics
Movement of goods from the market or customer back to the company The need:
Increased awareness of the environment Stringent legislation For some it is part of the business Profitability of dealing with scrap, surplus

Surplus, obsolescence can result due to:

Over optimistic sales forecasts, change in product specs, errors in estimating material usage, losses in processing or overbuying based on incentives
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Advantages of Rail
Economy more so for goods over long distances Efficiency of energy Reliability not affected by weather conditions

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Disadvantages
Uneconomical for small shipments and short distances Not suitable for remote stations Costly terminal handling facilities Inflexible time schedules
Road transport..
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Road Freight Advantages

Through movement direct from consignor to consignee, no transshipment Flexibility routes and loading routines can be easily altered, operate day and night Less capital costs for own fleet + immunity from industrial action Fast turn-around if articulated units like tractors and trailers are used Minimum delays
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Disadvantages
Susceptibility to weather and road conditions in spite of the best protection Unsuitability for heavy loads rail transport more economical for bulk loads Unsuitability for long distances again the rail telescopic rates are more favourable
Air transport.
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Air Transport Advantages

Faster mode Reduction in cost particularly inventory Broad service range Increasing capabilities Disadvantages:
High cost Weather affects flight conditions Limitations on heavy consignments
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Water transport 49

Water Transport
Advantages:
Mass movement of bulk Lowest freight cost Preferred for long haul of low value commodities

Disadvantages:
Not for quick transit Suitable for certain types on commodities only
Pipeline.
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Pipeline Movement
Advantages:
Reliable, continuous, all weather transport Low energy consumption hence low cost Low maintenance and operating costs Underground, no space problem Can traverse difficult terrain Minimal transit losses Operation round the clock, safe Economies of scale double the throughput for only 30% additional cost
Ropeways.
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Disadvantage is in the investment cost

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Ropeways
Advantages:
In hilly or inaccessible areas Long and circuitous routes with streams / deep valleys For commodities capable of movement in ropeway buckets Short haulages of less than 50 kms Areas where other carriers are uneconomical

Disadvantages:
Heavy investments Limitations on size and quantity of haul
How to decide on the right carrier?
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Carrier Selection
Traffic Related
Length of haul Consignment weight Dimensions Value Urgency Regularity of shipment Fragility Toxicity Perishability Type of packing Special handling required
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Shipper related
Size of firm Investment priorities Marketing strategy Network of production and distribution Availability of rail sidings Stockholding policy Management structure System of carrier evaluation
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Service related
Speed (transit time) Reliability Cost Customer relationship Geographical coverage Accessibility Availability of special vehicles / equipment Monitoring of goods Unitisation Ancillary services bulk breaking, storage
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Chart of Relative Merits

Parameter Weight age Rail Road Air Water Pipe line Rope way

Speed
Versatility Reliability Availability Continuity of service Distribution cost Total score Overall ranking
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10 20 10 10 20 10 10

5
6 6 7 6 4 5.4 2

6
8 8 8 7 5 6.7 1

8
5 5 5 5 6 5.1 4

4
6 5 6 5 6 5.1 5

3
3 7 3 8 7 5.1 5

3
2 4 2 3 8 4.0 6
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Key Learnings
Support to customer service has evolved from materials management to logistics and to supply chain management Production and marketing are the two internal customers of Logistics Logistics also has a direct impact on the financials of a company Three important functions of logistics are inventory management, warehousing and transportation
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Key Learnings
Inventory directly supports customer service but also adds to the cost and has to be managed carefully Warehousing provides the place utility and works as a balance between production and meeting customer needs Transportation supports the place and time utility and uses different modes to reach the products to the consumer Modern day supply chains integrate the operations of a firm, its suppliers and customers
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