Logistics Notes

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Ch. 1: INTRODUCTION Definition The Council of Logistics Management defined the term Logistics as follows: "Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption, for the purpose of conforming to customer requirements." Introduction The above definition focuses on Logistics as a tool for getting the products and services where they are needed and when they are desired. It is difficult to accomplish any marketing or manufacturing without logistical support. It involves the integration of information, transportation, inventory, warehousing, material handling, and packaging. The operating responsibility of logistics is the geographical repositioning of raw materials, work in process, and finished inventories where required at the lowest cost possible. Background Logistics as a concept is considered to evolve from the military movements of this world. In ancient Greek, Roman and Byzantine empires, there were military officers with the title 'Logistikas' who were responsible for financial and supply distribution matter. Also the Oxford dictionary defines Logistics as: "The branch of military science having to do with procuring, maintaining and transporting material, personnel and facilities." The Iraq war as a dramatic example of the importance of logistics. It had become very necessary for the USA and its allies to move huge amounts of ,men, materials and equipment over great distances. Logistics was successfully used for this effective movement. The defeat of the British in the American War of Independence, the defeat of Rommel in the desert has been largely attributed to logistics failure. The logistical concept in business evolved only in the 1950s. This was mainly due to the remodeling of the concept from its military application to business in providing more value to the customers and to support marketing. Supply Chain Management SCM formerly known as logistics management now includes more aspects apart from the logistics function. SCM basically means delivering the right product to the right place at the right time and at the right price. SCM is the one area wherein much operational efficiency can be gained, thereby reducing organizations costs and enhancing customer service. It is the Supply Chain Management that is conceptualized as something even larger than logistics that links logistics more directly with the user's total communications network and with the firm's engineering staff. A supply chain is, in fact, a network of facilities and distribution options that necessarily performs the functions of procurement and acquisition of material, processing and transformation
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of the material into intermediate and finished tangible products and finally the physical distribution of the finished tangible products to the customers, whether intermediate or final ones. Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide cost while satisfying service level requirements. Earlier No two companies at the same level of competition. The main motive was to increase production. Production differentiation very early and far from customer. Reaction approach of industries. Customer did specifications. not care Today Competition at all levels. Main motive is customer service. Product differentiated nearer the customer. Action approach of industries exact
Companies
Customer
about Customers demand specifications.
Less market moving powers
More power devolved to the customers.
Importance and need of Logistics Management in todays business Logistics management deals with the coordination of resources in an organization. Logistics management focuses on the organization as a whole and not on individual units and departments while deciding about the allocation of resources The resources may be in the form of men, machines, materials, money and time. Logistics management helps in the efficient use and deployment of the scarce resources. In absence of effective logistics management, there will be a depletion of various meager resources. In developing countries like India projects do not succeed because of lack of attention to logistics management. Due to this there is a delay in the implementation of the projects. There is also uneven distribution of goods and services. In certain areas, there is excess of goods and services available, while in certain other areas, they are scarce. There is general inefficiency, uncertainty and instability in rendering services to the public. Depending on the type of business, the expenditure on logistics can be anything between 5 and 35 percent of the sales. The cost of logistics management is therefore found to be high by certain industries. Because of this high cost, they are reluctant to implement logistics management. But, if adequate attention is paid to logistics, cost reduction can be effected in various departments. This is because logistics suggests the use of efficient means of transport, locating areas where cheaper materials are available, determining the correct quantities to be dispatched to market areas so that there is no scarcity or surplus felt in those areas etc. In case a problem arises, logistics management would investigate the problem and resolve the same on the basis of costs and benefits to the organization as a whole and not to any particular department or unit. For example, to manufacture any product with zero defects would mean high cost of Production, which the customer may not be willing to pay. At the same time, if the finished product contains a lot of defectives, the customers would be unwilling to buy such
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products. Logistics management tries to find out the permitted standards of allowable defects in the finished products without any loss in the market share. This information is passed on to the production departments, which fix standards for production. Another type of interface problem is caused when for example-, the marketing department considers that it is responsible only for the sale of the finished product. On the other hand, the production department may feel that the moment the goods are loaded on to the vehicle, its responsibility ceases. Such rigid compartmentalization of responsibilities and roles is definitely not desirable. This leads to neglect of activities in the interface areas which affects the overall efficiency of the organization. Logistics management does away with the ambiguity in the definition of the responsibilities of individuals, Units and departments in an organization. It focuses on areas of possible inefficiency and ensures that all areas are effectively managed. It brings about coordination between units and departments. The Objectives of Logistics 1. Rapid response F-flexibility objective of an organization: Some companies measure this as response time to customer's order. On an average how much time do we need to fulfill one particular type of customer's order in a year? This is a measure of rapid response. Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response. Instead of stocking, the goods and supplying on demand, orders are executed on shipment to shipment basis information Technology plays an important role here as an enabler. IT helps management in producing and delivering goods when the consumer needs them. This results into reducing of inventory and exposes all operational deficiencies. Now the management resolves these deficiencies and slashes down costs. [Concept of SMED and KANBAN as practiced by JIT companies in Japan or elsewhere] 2. Minimum variance D-delivery objective of an organization, this can be measured as 'On Time Delivery' or OTD. If 100 deliveries are made in a month/quarter/year how many reached as per the commitment made to the customer? This percentage is OTD. Any event that disrupts a system is variance. Logistics operations are disrupted by events like delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches, damage in transit. Traditional approach is to keep safety stocks and transport the goods by high cost mode. The cost of this approach is huge. Logistics is expected to minimize these events, thereby minimize and improve on Time Delivery. 3. Minimum inventory This is component of cost objective of a company. Inventory is associated with a huge baggage of costs. It is termed as a necessary evil. Objective of minimum inventory is measured as Inventory Turns or Inventory Turnover Ratio. Americans call this measure as turn velocity. Logistics management reduces these turns without sacrificing customer satisfaction. Lower turns ensure effective utilization of assets devoted to stock. [Concept of single piece flow as practiced by JIT companies in Japan or elsewhere]. Logistical management should keep the overall well being of a company in view and fix a minimum inventory level without trying to minimize the inventory level as an isolated objective
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4. Movement consolidation Transportation is the biggest contributor to logistics cost. Transportation cost depends on product type, size, weight, distance to be transported etc. For transporting small shipments just in time [reduction in inventory costs] expensive transport modes are used which again tend to hike the costs. Movement consolidation is planning several such small shipments together [of different types of shipments] by integrating interests of several player s in the supply chain. Generally, large shipment size and long distances reduce transportation cost per unit. Movement consolidation shall result into reduction in transportation costs 5. Quality If the quality of product fails logistics will have to ship the product out of customers' premises and repeat the logistics operation again. This adds to costs and customer dissatisfaction. Hence logistics should contribute to TQM initiative of management. In fact, commitment to TQM has made the management world over wake up to the significance of logistics function. Logistics can play a significant role in total quality improvement by improving the quality of logistics performance continuously and continually 6. Life cycle support cradle to cradle logistical support produce, pack (cradle) and repack (cradle)]A company has to support a product not only while selling it but it has also to give a good after sales service and in some cases support the product when it is being disposed off. In some countries it is mandatory for the manufacturer to support the product when it is being disposed. Example in European countries they have to ensure proper disposal of electronic goods like laptops. Logistics function is expected to provide life cycle support to the product after sale. This includes 1. After sales service: the service support needed by the product once it is sold during its life cycle 2. Reverse logistics or Product recall as a result of:

rigid quality standards [critical in case of contaminated products which can cause environmental hazard transit damage [leaking containers containing hazardous material] product expiration dating rigid laws prohibiting unscientific disposal of in terms associated with product [packaging] Rigid laws making recycling mandatory Erroneous order processing by supplier
Reverse logistics is an important component of logistics planning. INTEGRATED LOGISTICS is defined as " the process of anticipating customer needs and wants-, acquiring the capital, materials, people , technologies and information necessary to meet those needs and wants; optimizing the goods-or-service-producing a network to fulfill customer requests; and utilizing the network to fulfill customer request in a timely way." Integrated logistics is a service-oriented process. It incorporates actions that help move the product from the raw material source to the final customer. The movement of raw materials and components to a manufacturing company must be managed. So must the movement of finished goods from the manufacturing plant to further processing, to the retail, or to the final consumer. The management of this movement is called integrated logistics management.
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Logistics Cycle (The Integrated Logistics System) In an organization, broadly speaking, there are three cycles. a. Procurement Cycle (Material Management) b. Manufacturing support (Production Management) c. Physical Distribution Cycle (Marketing Management) Traditionally, the concerned and relevant managements managed each of these cycles. This resulted in each of the concerned managements concentrating only on their objectives and neglecting areas of interface between them. The materials management's objective was to minimize the inventory cost. On the other hand, the production management was taken on minimizing the production cost. But marketing management's viewpoint was to get maximum number of orders to Increase sales revenue. 1 hey, therefore, wished to satisfy various types of customers; whatever is their type of demand. This resulted in maintaining a large stock of a wide variety of products. In other words, they were asking for smaller number of batch-size with maximum number of changeover. Thus we see that the three departments have conflicting objectives. The Integrated Logistics System (ILS) attempts to integrate and coordinate all these three cycles of the organization. Inventory Flow
Procurement Cycle
This basically is concerned with the movement of inbound materials from various suppliers to the receiving stores/warehouse in the factory. Logistics integration over here ensures that the materials/components purchased pertain to those required by the manufacturing department so that the manufacturing department does not suffer any loss of production due to want of materials. Again, by purchasing only those materials that is required, logistics helps to minimize the inventory cost.
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This cycle involves the movement of materials within the manufacturing process. The main features of this cycle are as follows: This cycle is concerned with effective movement of work-in-progress or semi-finished goods from stage to stage. It is also concerned with the task of answering questions as what type of product to manufacture when to manufacture it, in what quantity and in what quality to manufacture it, which machines to use, etc. Manufacturing cycle is not concerned with the uncertainties of random order and erratic demands This is essential for the smooth running of the manufacturing process. Logistics coordinates the movement of materials within the manufacturing cycle by ensuring that the marketing departing indicates the type of orders and requirements; to be met with proper schedule. Once this is established, logistics integrated the procurement department into buying those materials/components required by the manufacturing department so that the orders of the marketing department are met on schedule Physical Distribution Cycle
This part of the cycle is basically concerned with the movement of outbound materials, which are in the form of finished products. These goods are required to be dispatched to the customers. Customer service and satisfaction have to be achieved ultimately. At the same time, this part of the cycle is subject to the pressures of random orders and erratic demands. E.g.: In the summer season the demand for ice creams and cold drinks would be high, due to which the marketing department would plan for high sales. But if the rains arrive early, the demand for these goods would fall thus creating erratic demand. Logistics integrates and tries to coordinate the demands of the customers with the manufacturing and procurement department. This is achieved without any conflict of interest between the three cycles. Mission of Logistics Management Logistics management is basically concerned with delivering to the customer the desired level of service and quality at the lowest affordable cost. To achieve this, a company has to plan and coordinate all its logistical activities. This in a nutshell is called the Logistical Mission or the Total
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System Concept of Logistics.
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The above diagram indicates that the needs of the Customer can be achieved by the effective coordination of materials and information flow which extends from the market place (i.e. customers), through the firm and its operations and beyond that to the various suppliers. Before the advent of Logistical concept the manufacturing and marketing departments used to operate independently without iterance from each other. E.g.: the manufacturing department was always concerned about keeping the set-up times as well as any job changes to the bare minimum. The marketing department on the other hand, preferred a better product-mix so that the company can achieve a larger market share. Such conflicting objectives created hindrances in the smooth functioning of the organization. However, in today's competitive world, Logistics has played a vital role by creating a proper balance between these two departments of an organization. Logistical mission concept has helped in integrating the various plans for marketing, manufacturing, distribution, procurement departments into a one plan strategy. Thus the mission of logistics management essentially envisages all aspects from the marketplace to the procurement of materials and suppliers as an integrated process to achieve the desired corporate goals. Outsourcing Outsourcing is viewed as involving the contracting out of a business function to an external provider. When an enterprise identifies a need for a specific product or service, it must decide whether to make the product or perform the service internally (make) or to purchase the requirement from an external source (buy). The classic make-versus-buy decision centers around the economic trade-off associated with the each option. Outsourcing decisions examine not only the firm that has the lowest cost but also which one can produce or market the product or perform superior service. Both questions must be answered from a long-term perspective.
Example: For a firm to evaluate whether to own a private fleet of trucks or outsource by hiring carriers, not only the current rates and costs are important but long-term cost trends and strategic vision need also be considered. Specialization The critical issue in outsourcing decision is the idea of specialization.
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Every company has its core competency or area of specialization. This area of specialization can be exploited by the company to its advantage. There may be several companies who would like to make use of this specialization. They will, therefore outsource their jobs to this company which has the requisite specialization. Specialization can also bring about strategic benefits i.e. the company, which has the knowledge regarding the specialization can favorably exploit it by creating a monopoly reading the specialization. Example: A transport company can implement a satellite tracking service capable of quickly pinpointing the location of a truck so that it can provide customers with accurate delivery status information. This techonology will provide the transport company a unique competitive advantage for customers who value the availability of instantaneous information tracking. Thus an enterprise will stand to gairl by outsourcing transportation from the above company and thereby obtain specialized skills rather than develop the same capability internally. Economic Factors Influencing Outsourcing When a company outsources a particular activity or service, it loses on the effective internal control. Again, outsourcing creates a situation where external firms can behave opportunistically at the expense of their customer. E.g.: a service provider may withhold information regarding poor performance to ensure its operational success. Such information withholding could result in a major problem for the service provider's customers. Another factor influencing outsourcing is the availability of alternative sources. It may happen that a company, while outsourcing its activity, may require certain specific facilities from the service provider. E.g.: the company may specify certain specialized mode of transport like sophisticated refrigerated trucks, for transporting its products. The service provider may not have this facility available readily and may ask the parent company to invest in such a facility. The company has then to decide whether it will prefer to have the facility installed internally, or whether it should outsource the activity. Transaction cost analysis suggests that logistics activities be performed internally if the transaction cost is lower than the expenses associated with outsourcing. For internal sourcing we have to analyze fixed capital costs (say, for warehouses), variable costs (volume-based), equipment costs, managerial costs, direct labour costs (say, drivers), overhead costs (warehouse lighting). To analyze outsourcing costs, we must consider rates of transportation, warehouse charges. Another cost, which the company must consider before outsourcing, is the cost of obsolescence. A company may decide to develop the internal facilities to manage a particular activity. But in the process, the internal facilities developed may become obsolete due to changing technologies. Therefore the company may decide on outsourcing because the responsibility of investing in changing technologies will rest on the third-party service provider. Labour cost is also an important consideration related to outsourcing. If an activity is outsourced, the labour requirements and managerial responsibilities will be shifted to the service supplier. This shift affects early retirement benefits, union problems, layoffs, compensations, increasing morale through incentives, etc.
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Strategic factors affecting outsourcing
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Performance capability influences the make-versus-buy decisions Before outsourcing, a company must evaluate how much its core and non-core competencies will be affected. No firm would like to take the risk of diluting its core competencies. In fact a company would normally prefer to outsource only its non-core competency activities. The difficulties for the company may be as to how it must identify and isolate its core competency activities. Outsourcing a service or a product is done when the company feels that such a step improves the company's service to its customers. Or it twill reduce its overall investment or operational requirements. Thus, a make-or-buy decision decd ion is a trade off decision between various factors. Outsourcing may be justified if service to customers improves, or variable cost decrease greatly. Competency and Core Competency To effectively deal with the competition and to achieve growth, various organizations depending on their nature of business have to achieve a wide varieties of competencies. In simple terms, competency may be defined as acquiring, establishing and developing expertise within an organization so that the organization can effectively and satisfactorily deal with any sort of eventuality or situation that may come in the way of customer satisfaction. Now, as an organization grows, it keeps gaining experience over a period of time. In other words, while satisfying customer wants and requirements, the organization also learns from its mistakes and deficiencies. Sincere efforts are made by the managers to eliminate these faults so that the market share is not only maintained but also improvised. This leads to a healthy growth of the company. However, in the process of improvising its methodology of working the company starts excelling in few areas of the competencies. It starts gaining better expertise, better knowledge and better understanding in some specific areas of the competencies. It is practically impossible for an organization to excel in every area of competency. Hence those individual competencies in which the firm excels and dominates in the market are known as core competencies. E.g.: Bajaj's core competency was in manufacturing 2 wheelers. It held the market leadership in 2 wheelers for a long long time. The 3 C's and Competitive Advantage If the logistics management of an organization is effective, ii can provide a major source of competitive advantage. That is, customers may prefer products and services of your company rather than your competitors.
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Customers
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There are several reasons why a company or an organization on succeeds at the market place. But, basically it involves the three C's - the Company, the Customers and the Competitors. The three-way relationship is shown in the above diagram. First, the company must be capable of convincing its customers that it is offering something different than its competitors. It must convince the customers that its products/services have better advantage than the competitors. Secondly, the company must show greater profitability at lower costs. This is because if the operating costs are high then to work at the same profit margins, the sales value will increase. Higher the cost of from buying the products. The competitors will stand to finished products will dissuade the customers gain by this. No company would desire this. Gaining Competitive Advantage through Logistics A firm can gain competitive advantage only when it performs its strategically important activities (designing, producing, marketing delivering and supporting its product) more cheaply or better than its competitors. Value chain activity disaggregates a firm into its strategically relevant activities in order to understand behavior of costs and existing and potential sources of differentiation. They are further categorized into two types (i) (ii) Primary - inbound logistics, operation outbound logistics, marketing and sales, and service Support infrastructure, human resource management, technology development and procurement
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To gain competitive advantage over its rivals, a firm must deliver value to its customers through performing these activities more efficiently than its competitors or by performing these activities in a unique way that creates greater differentiation. Logistics management has the potential to assist the firm in the achievement of both a cost/productivity advantage and a value advantage. The under lying philosophy behind the logistics concept is that of planning and coordinating the materials flow from source to user as an integrated system rather than, as was so often the case in the past, managing the goods flow as a series of independent activities. Thus under a logistics management regime the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are service at higher levels and yet at lower cost. In today's world, success can be attributed to 2 factors basically. First a particular product may sell because of its cost advantage. There are customers who look for the cost of products & purchase those which have lower costs. On the other hand, there are other products which are preferred by the customers which have greater differentiated values in relation to the competitors. One of the ways of reducing the cost of a product is by increasing its sales. But, increase in sales cannot be taken for granted since competitors are also going to b here, The other way of reducing cost is by productivity increase. That is, we try to reduce the cost of various inputs by proper logistical management. One way of "adding value" to a product is by efficient service. Today, markets are becoming more & more "service sensitive". It is not necessary that increase, in sales will continue to depend on "brand value". For example, there are various types of fridge, ACs washing machines etc available in the market. But now, a customer prefers to buy that product which has a better after sales service, financial package, technical support, etc basically, therefore, service relates to the process of developing better relationship with the customers.
A good example of a cost leader would be Nirma, which with its cost effective logistical system is giving a good competition to giants like HUL. Similarly a service leader would be a company like NDTV which has provided a good news service. A cost and service leader would
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be a company like Maruti, who has not only a low cost but has got a good service by providing ample number of service centers. Scope Of Logistics Logistical competency is achieved by co-coordinating (a) Network design (b) Information (c) Transportation (d) Inventory (e) Warehousing, material handling and packaging The work related in these 5 areas is combined so as to create perfect logistical integration. It has to be clearly understood here that all firms besides coordinating the above 5 areas require the support and the cooperation of many other businesses to complete their overall logistical process. The above 5 activities are explained below a. Network design Integrated Logistics System involves manufacturing plants, warehouses and retail stores to market the firm's products. A good network design decides how many of each of this facility is required, their geographical locations, the work to be performed at each one of them the transport cost involved, etc.
a.
Network design is prime responsibility of logistical m4oqeibrift since a firm's facilities and structure is used to provide products and materials to the customers In certain situations, some of the facility operations may be outsourced to service specialists. Regardless of who does the actual work, all facilities must be managed as an integral part of a firm's logistical network. Network design, not only determines the number and location of all types of facilities required to perform logistical work but also determines what inventory and how much to stock at each facility and where to assign customer orders for shipments.
b.
c.
b. Information 1. The information received may be incorrect In terms of trend and events. This would give rise to inaccurate forecast which could result in inventory shortage or over commitment. E.g.: This is especially true in garment industry where if due to improper information the future trend in clothing's is predicted wrongly, it would lead to manufacture of clothes which are out of fashion and hence would not sell. 2. Information related to order processing may be inaccurate with request to a specific customer requirement. This would result in faulty delivery of goods. The customer would be unhappy. This would increase in the cost of logistics without resulting in the actual sale of goods. In fact the costs of logistics management are often increased due to inventory return. In fact each and every error in the composition of information requirements creates potential disturbance for the total supply chain.
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Some of the areas of logistics work that depends upon accurate information are: Forecasting of sales Planning of the future market share Diversification of product mix Managing the orders received
c. Transportation Transportation is the operational area of logistics that geographically positions inventory. It involves physical movement of inventory to and from various geographical points. There are three ways of transporting the goods. These are: 1. Private: vehicles and shipments privately owned by the manufacturer. 2. Contract: contracts can be made with various transport companies for shipments and transportation. 3. Common carriage : services of different transport companies may be engaged on an individual shipment basis Transportation performance mainly depends on the following three factors : Cost : Payment for movement between 2 geographical locations and expenses related to administration and maintaining in-transit inventory. Speed : The time required to complete a specific movement. However speed and cost of transportation are interrelated. E.g.: delivering goods at a higher speed usually incurs a higher cost. But, the fact remains that the inventory remain in transit for a short time thus, making goods available faster for usage. Hence a proper balance needs to be build between the speed and cost of transportation. d. Inventory The level of inventory of a company depends upon the orders from the customers the type of service required by the customers, etc. However, the objective of logistics management is to achieve the desired level of customer service, with commitment to minimize the inventory cost which should be consistent with lowest total system cost. Excessive inventories may compensate for deficiencies in basic designs of a logistics network and to some degree, inferior management. However excessive inventory will ultimately result in higher than necessary total cost of logistics. A sound inventory management policy is based on five aspects of selective deployment: 1. Customer segmentation: Some customers are highly profitable to the company while others are not so profitable. The company targets different types of customers depending upon their profitability to the company. Highly profitable customers form the core market for an enterprise. The company must keep inventories ready at hand to meet the demands of these customers. E.g.: HLL manufactures different brands of bathing soaps which are priced differently to suit different income segments.
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2. Product requirements: The profitability of different products normally varies. Generally a company would find that less than 20% of all the products manufactured account for more than 80% of the total profits (Paretto's Principle). For better profitability, a company would offer higher availability and consistent delivery on more profitable products. 3. Transport integration-. Most of the transportation rates are based basically on the volume and on the size of the shipments. Hence, it would appear as a sound strategy for a company to stock sufficient goods at a warehouse where potential customers are seated. This is apparently to reduce the transportation cost. But this decrease in the transport cost may be offset by inventory holding cost. 4. Time based Logistics : is concerned with delivering goods to the customers in the shortest possible requirements time. If products and materials can be delivered quickly, then there will not be stock of inventory at manufacturing plants. Again if it is possible to replenish retail stores at regular intervals, less safety stock will have to be maintained forward in the supply chain. 5. Competitive : Sound inventory policies are essential to give customer service advantage, or, to performance neutralize strength that a competitor currently enjoys. So higher the competition, higher would be the inventory required as the case with Pepsi V/s Coca Cola. e. Warehousing, Material handling and Packaging These functions do not have independent status and form integral part of other logistics areas. Merchandise needs to be warehoused at selected times, transport vehicles require material handling equipments efficient loading and unloading of goods and goods are most efficiently handled when package together into shipping cartons or other types of containers. Warehousing: Warehousing is basically storing of goods. The logistical activities that are carried out in warehousing are storing, sequencing, order selection, transportation consolidation and sometimes product modifications and assembly. Regarding selection of a warehouse a firm may have its own warehouse or it may hire a warehouse or it may get into a contract with a warehousing company. Material Handling: Within the warehouse, products must be received, moved, sorted, and assembled to meet customer order requirements. For these activities, material handling becomes significant. Packaging: Products packed in cans, bottles, or boxes are handled more efficiently than when combined in larger units (Master Cartons). Generally packaging serves 2 purposes: 1. It protects the product during the logistical process. 2. It facilitates ease of handling by creating one large package rather than a multitude of small, individual products. Types of Logistics: 1. Return Logistics (Reverse Logistics): In order to increase the sales as well as the market share, many companies advertise that their goods will perform well over a period of time. The customer is, therefore, led to believe that in case he buys the product of that company, he is assured of satisfactory performance of the product. But at the same time, it is very much obvious that the company cannot assure the satisfactory performance of each and every of its product which is sold in the market. Few of the products sold may not perform as advertised over
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Such products need to be brought back by the company to confirm good customer service. Multination Companies (MNCs) to protect their market image and to stall its competitors from grabbing its customers, recall immediately the defective or substandard product from the market. Product recall is a critical competency resulting from a. increasingly rigid quality standards b. product expiration dating c. responsibility for hazardous consequences The company has, therefore, to take into account the defective goods that would be returned while framing the total logistical system network and calculating the total cost of such a system of network. Incorporating the goods returned in the total logistical systems network and cost is called as Return Logistics. Return Logistics requirement' also result from the increasing number of laws prohibiting random scrapping and disposal on one hand, while encouraging recycling of waste such as beverage containers, packaging materials, etc. The most significant aspect of return logistical operation is the need for maximum control when a potential health liability exists. E.g.: a contaminated drug in the market is extremely dangerous and the company has to recall all the stock of contaminated drug. 2. Military Logistics Military logistics is the art and science of planning and carrying out the movement and maintenance of military forces. In its most comprehensive sense, it is those aspects or military operations that deal with: (a) Design, development, acquisition, storage, distribution, maintenance, evacuation, and disposition of material, (b) evacuation, and hospitalization of personnel, (c) acquisition or construction, maintenance, operation, and disposition of facilities. Origins of military logistics The word "logistics" is derived from the Greek adjective logistikos meaning "skilled in calculating." The first administrative use of the word was in Roman and Byzantine times when there was a military administrative official with the title Logista. 3. Third Party Logistics (3PL) 3PL, Third Party Logistics describes businesses that provide one or many of a variety of logistics related services. Types of services would include public warehousing, contract warehousing, transportation management, distribution management, freight consolidation. A 3PL provider may take over all receiving, storage, value added, shipping, and transportation responsibilities for a client and conduct them in the 3PL's warehouse using the 3PLs equipment and employees or may manage one or all of these functions in the clients facility using the clients equipment, or anything combination of the above. 3PL can be defined as the "Business of proposing physical distribution reforms to a client and undertaking comprehensive physical distribution services." Third party logistics (3PL), a new business model for physical distribution, originated in the U.K. & became highly popular in U.S. in the 1990s. 3PL providers offer innovative alternatives to clients in the form of comprehensive logistics services. Because 3PL requires that providers have intimate access to the corporate strategy of their clients, relationships are based long term contracts as a rule
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The growing demand for 3PL can be attributed to both demand,& supply side factors. (1) faced with deregulation & growing competition, transport companies are seeking new business opportunities, & (2) clients are seeking to outsource their logistics operations cut costs & focus management resources on core businesses. 4. Fourth Party Logistics Traditionally, suppliers and big corporations have been meeting the demands by increased inventory, speedier transportation solutions posting on-site service engineers and many times employing a third party service provider. Today they need to meet increased levels of services due to e-procurement, complete supply visibility, virtual inventory management and requisite integrating technology. Now corporations are outsourcing their entire set of supply chain process from a single design, make and run integrated comprehensive supply chain solutions. This evolution in supply chain outsourcing is called Fourth Party Logistics - the aim being to provide maximum overall benefit. Thus a fourth party logistics provider is a supply chain integrator that assembles and manages the resources, capabilities and technology of its own organization with those of complementary service provider to deliver a comprehensive supply chain solution. It leverages the competencies of third party logistics providers and business process managers to deliver a supply chain solution through a centralized point of contact. As the fourth party logistics provider caters to multiple clients, the investment is spread across clients-thus taking the advantage of economies of scale. Cost Effectiveness of Fourth Party Logistics 1. Revenue growth by enhanced product quality, product availability, and improved customer service -all facilitated by the application of leading technology. 2. Operating cost reduction can be achieved through operational efficiencies, process enhancements and procurements. Savings will be achieved by complete outsourcing of supply chain functions and not just selected components. 3. Fixed capital reductions will result from capital asset transfer and enhanced asset utilization. The fourth party logistics organization will own physical assets through freeing up the client organization to invest in core competencies. Emergence of fourth party logistics is a new concept in supply chain outsourcing . With the rapid advancements of technologies, it will be easier to reap the benefits of fourth party logistics concept. Thus fourth party logistics is the future of supply chain management. 5. Inbound Logistics Creation of value in a conversion process heavily depends on availability of inputs on time. Making available these inputs on time at point of use at minimum cost is the essence of Inbound Logistics. All the activities of a procurement performance cycle come under the scope of Inbound Logistics. Scope of Inbound Logistics covers transportation during procurement operation, storage, handling if any and overall management of inventory of inputs. Several activities or tasks are required to facilitate an orderly flow of materials, parts or finished inventory into a Manufacturing complex. They are sourcing, order placement and expediting, transportation, receiving and storage. Overall, procurement operations are called inbound logistics. Inbound logistics have potential avenues for reducing systems costs. Delivery time, size of shipment, method of transport & value of products involved are different from those of physical distribution cycles. Normally delivery is
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large as a low cost transportation mode is chosen. As the value of inventory is low, size of shipment is large & transit inventory costs are low. 6. Outbound Logistics Value added goods are to be made available in the market for customers to perceive value. Finished goods are to be distributed through the network of warehouses and supply lines to reach the consumer through retailers's shops in the market. During conversion value is added to the raw materials and as a result value of the inventory in this case is very high unlike inputs. Now the size of shipment, modes , of transport and delivery time are different as compared to inputs. Activities of shipment, distribution performance cycle come under the scope of Outbound Logistics. They are order management, transportation, warehousing, packaging, handling etc. LOGISTICAL PLANNING PROCESS - PLANNING AND DESIGN METHODOLOGY To match the changing environment in the logistics due to the changes in the markets, competitors, suppliers and technology, there is a need for systematic planning and designing a methodology to formally include the relevant consideration and effectively evaluate the alternatives for a flawless Logistical System. The logistics relational and operating environment is constantly changing. Even for the established industries, a firm's markets, demands, costs and service requirements change rapidly in response to the customer and competitive behavior. Just as no ideal logistical system is suitable for all enterprises the method for identifying and evaluating alternative logistics strategies can vary extensively. However there is a general process applicable to most logistics design and analysis situations. The process can be segmented into three phases: problem definition and planning, data collection and analysis, and recommendations and implementation. The following discussion describes each phase in detail. PHASE I Problem Definition and Planning 1. Feasibility Assessment We must understand and assess the present industrial environment, study the characteristics of present industrial environment, study the characteristics of present system, and find out if any modifications are required. In feasibility assessment, there are following three categories. a) Situational- Analysis The purpose of the situational analysis is to provide senior management with the best possible understanding of the strengths and weaknesses of the existing logistics capabilities for both current and future environment. The situational analysis is the performance of measures and characteristics that describe the current logistics environment through: Examines all major resources such as work force, equipment facilities, relationships and information These are required to understand if customers' requirements are met. Internal review is made regarding customer service, materials management, transportation, warehousing, and inventory. This is required to assess customers' desires. It should focus on external assessment like suppliers, customers and consumers.
Internal review
Market Assessment
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Technological Assessment
The new and better technologies which are available in the areas of transportation, materials handling, storage facilities, packaging, and assessed and compared with the existing facilities. Modes of better form of communications have also to be looked in to. This consists in integrating the findings of internal review, market assessment and technological assessment made above. Here, we study the following: Potential benefits change must be clearly identified.It has also to be justified if detailed research and analysis is necessary to implement the new logistical system. Areas where improvements can be made should be identified, like for example, streamlining inventory, realigning distribution centers. This includes a) knowing the current procedures and system b) Identifying the most likely alternative procedures and system. c) Constructing flow diagrams The final feasibility assessment is a preplanning estimate of the potential benefits of performing a logistic analysis and implementing the recommendation. Benefits should be categorized in terms of: This refers to increasing the loyalty of the existing customers to the firm's products, attracting new customers. This indicates whether installing the new, logistical system will reduce the financial expenses whether will reduce amount of capital deployed, decrease variable expenses. Cost prevention reduces involvement in programs and operations experiencing cost increases. Any cost prevention justification is based on an estimate of future conditions and therefore is vulnerable to some error. E.g. many material handling and information technology upgrades are at least partially justified through financial analysis of the implications of future labor availability and wage levels.
b) Supporting Logic Development
Justification
Identification
Redesign Alternatives
c) Cost Benefit Estimates
Service Improvements
Cost Reduction Benefits
Cost Prevention
2. Project Planning This comes after Feasibility Assessment. It involves the following categorizations: Statement of Objectives It documents cost and service expectations of the logistical system revisions in measurable factors. The objectives define time frame for revisions, specific performance requirements, like inventory availability, customer shipments requirements, mixed commodity orders, core customers. Statement of Constraints It can happen that senior management will place restrictions on the scope of permissible system modifications. Restrictions may be in
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terms of large financial investments. Again, the management may agree for modifications in some department only. Therefore, a statement of constraints gives a well defined staring points and overall perspective for the planning effort. Managerial Measurement Standards Managerial performance standards must be fixed. Standards must be with respect to overall systems performance. But the goals fixed must not be impractical. Once the project objectives and constraints are developed, planning must identify alternative solution and select the best approach. Analysis techniques range from simple manual methods to elaborate computerized procedures. A project work plan must be determined and the resources and the time required for completion identified. Project management is responsible for the achievement of the expected results within the time and budget constraints.
Analysis Procedures
Project work Plan
PHASE - II Data Collection And Analysis Once Feasibility Assessment and Project Planning are completed Phase II focuses on Data Collection and Analyses which includes the following: 1. Assumptions and Data Collection This activity builds on the feasibility assessment and project plan to develop detailed planning assumptions and identify data collection requirements Define Analysis The analytical approach ach uses standard numerical methods to Approach and Analysis evaluate each logistical alternative. The common techniques are Techniques simulation and optimization Simulation techniques are used when significant uncertainty Optimization involves the use of linear programming or mathematical programming to evaluate alternatives and select the best one. Define and review Assumptions For planning purposes, the assumptions define the key operating characteristics, variables and economics of current and alternative systems. Business assumptions define the characteristics of the general business environment such as trends in the market, consumer wants, product changes, and competitive actions. Management assumptions include definition of alternative distribution facilities, transport modes, logistic processes and fixed and variable costs. Analysis assumptions define the constraints and limitations such as problem size, solution methodology. Detailed data must be collected and organized to support analysis. When Data are extremely difficult to collect or when the necessary level of accuracy is unknown, sensitivity analysis can be used to identify data collection requirements. Data regarding sales and customer orders, specific customer data, costs associated with manufacturing and purchasing, modes and rates of transportation, are all relevant for analysis.
Identify Data Sources
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Collect data
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Once data sources have been identified, the process of collection of data begins. Care should be taken to collect latest data that do not contain errors. Also, the data collected should be useful for logistical analysis. Validation of data is required to verify that the results accurately reflect reality. The objective of validation is to increase management credibility regarding the analysis process. If in case the process does not yield credible results, management will hold little confidence in the alternative analysis.
Validation of Data
2. Analysis The analysis uses the technique and data from the previous activity to evaluate logistics strategy and tactical alternatives. This consists of the following: The questions asked should be specific and pertaining to alternatives, which are suggested. For Example question regarding a distribution Define analysis center should pertain to evaluation of combinations of locations. In questions case of inventory analysis, questions should be focused on alternative availabilities and uncertainty levels of Mock. Baseline analysis other current logistics environment is made. Potential errors may result from incorrect or inaccurate input data, inappropriate or Inaccurate analysis procedures, or unrepresentative validation data. These must be rectified. Once the approach has been validated, the next step is to complete an evaluation of the various alternatives available. Relevant performance characteristics of each alternative must be determined. The options may include changes in management policies and practices with regards to number of distribution centers, inventory levels, transport shipment size,etc.
Complete and validate Baseline analysis
Complete the Alternative analysis
The best performing alternatives are targeted for further sensitivity analysis. Uncontrollable factors such as demand, competitive actions are used (for analysis purposes) to assess the ability of potential Complete the sensitivity alternatives to operate under a variety of conditions. E.g.: Suppose the analysis alternative strategy suggest five distribution centres. Sensitivity analysis investigates whether the five distribution centres will still be a correct decision if the demand increases or decreases by 10%. PHASE III Recommendations and Implementations 1. Development of Recommendations After selection from among the best of the alternatives, an analysis Evaluate costs and comparing the present cost and service capabilities with projected benefits conditions must be made for the alternative. Benefits can be either in terms of one time savings or recurring operational economies or both. Develop a risk Appraisal Risk appraisal considers the probability that the planning environment will match the assumptions. It also considers the potential hazards related to system changeover. External risks include uncertainty
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associated with demand, competitive actions, etc. Internal risks include labour and productivity considerations, changes in resource accessibility. A presentation has to be made to the management which identifies rationalizes and justifies the suggested changes. The presentation and the accompanying report must justify the changes in terms of service, expenses, asset utilization, productivity 'Improvements. The presentation should incorporate extensive of graphs, maps and flow charts.
Develop presentation
2. Implementation Define Implementation plan Implementation plan has to be defined in terms of individual events, their Sequence and their dependencies. While implementing the plan, it should Be ensured that the plan must provide individual assignment responsibility and accountability. The schedule of implementation must allow time for acquiring facilities and equipment, negotiating agreements, developing procedures and training. The final task of the logistical planning is the implementation. Implementation must include adequate controls to ensure the performance occurs on schedule and that acceptance criteria are carefully monitored.
Schedule Implementation
Implement
Ch. 2: SUPPLY CHAIN MANAGEMENT

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Supply Chain management (SCM)
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A supply chain consists of all stages involved, directly or indirectly in fulfilling a customer request. The supply chain not only includes the manufacturer and the suppliers, but also transporters, warehouses, retailers and customers themselves. A supply chain is dynamic. It essentially involves the constant flow of information, product and funds between the different stages of the supply chain. There is continuous interaction between all stages of a supply chain. E.g.: a customer walks into a store to purchase detergent. The supply chain for a company begins the moment a customer requires detergent and is looking for it. The next stage in SCM involves the store where the customer is. looking for purchasing the detergent. The shelves of the store will be stacked with various detergents which it may have received from the distributor. The distributor in turn gets the goods from the company say HUL, whom he regularly keeps informing about the demand for their product, the quality, pricing, and so on. Based on all such information received from various distributors spread throughout the country, HUL plans its manufacturing process. Information is then send to the material processing department who establish contact with suppliers of raw materials, packaging materials, etc. hence, in the supply chain process formation regarding pricing, customer requirements, competitors strategies, all flow to the manufacturer of the detergent who will share it with his suppliers. As a result the supplier is incorporated in to supply chain process. Evolution OF SCM Until about mid 1950's, the field of supply chain management was in a state of stagnant. The slow and isolated fragmented set of activities was rampant. Production and manufacturing were given uppermost attention. The inventory was the responsibility of the marketing, accounting and/or production areas and order processing was an accounting or sales responsibility. This fragmented way resulted in a great deal of friction on account of the conflicting objectives between production, marketing, accounting This led to the assertion in the early 1960's that logistics was one of the real frontiers of opportunity for enterprises to improve their corporate efficiency. Initial focus and emphasis was on the internal front, limited to productivity within the four walls of the factory or manufacturing till the 1970's. During the Ethiopian famine relief efforts of the 1980's, the term logistics was applied to the food-supply activities. The 1980's stressed the need for quality, whereas the 1990's have seen the emergence of the supply chain management and the millennium trends on ebusiness or IT enabled supply chains. Distinguish between Logistics and Supply Chain management Logistics Supply Chain Management 1. It i s conc erned wi th getting goods & 1. SCM encompasses all those activi ti es services where they are required & when they associated with movement of goods from raw are desired material stage to the end user 2. Logistics is used within a single 2.Supply chain management requires organization. coordination and implementation through various organizations in the supply chain. 3. Logistics is a part of Supply Chain 3. Supply chain management is an extension of management Logistics management. 4. Logistics adds value when inventory is 4. Effective SCM excels in reducing operating
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costs, improves asset productivity and reduces order cycle time 5. The concept of Logistics management is 5. The concept of Supply chain management is relatively old relatively new 6. Logistics management is a narrower concept 6. Supply chain management is a broader concept A typical supply chain may include the following stapes/ Conventional Supply Chain management: Components / raw materials / product suppliers Manufacturers Wholesalers / distributors Retailers Customers
Supply Chain Management therefore involves the management of flow of materials and information between and among stages in a supply chain to maximize total profitability. Participants in a Supply Chain Suppliers - They organizations that provide goods and/or services to a purchasing organization (a manufacturer or a distributor). It is often used synonymously with vendors but may also refer to an internal company resource. Manufacturers - They are the companies engaged in the original production and assembly of products, equipment or services. They sometime refer to companies that purchase such products or services manufactured or assembled in accordance with company specifications. Distributors - Those are the external entities that sell for suppliers or manufacturers directly and often collects all payments from customers and maintains an inventory of the supplier's or manufacturer's products.
Relationship Management Supplier relationship management (SRM) is a discipline of working collaboratively with those suppliers that are vital to the success of your organization, to maximize the potential value of those relationships. Supplier relationship management is a comprehensive approach to managing an enterprise's interactions with the organizations that supply the goods and services it uses. The goal of supplier relationship management (SRM) is to streamline and make more effective the processes between an enterprise and its suppliers just as customer relationship management (CRM) is intended to streamline and make more effective the processes between an enterprise and its customers. SRM includes both business practices and software and is part of the information flow component of supply chain management (SCM). SRM practices create a common frame of reference to enable effective communication between an enterprise and suppliers who may use quite different business practices and terminology. As a result, SRM increases the efficiency of processes associated with acquiring goods and services, managing inventory, and processing materials. According to proponents, the use of SRM software can lead to lower production costs
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and a higher quality, but lower priced end product. SRM products are available from a number of vendors, including 12 Technologies, Manugistics, PeopleSoft, and SAP. CRM is the acronym of Customer Relationship Management. CRM is a business system that consists of enterprise goals, business strategies, business processes and enterprise information systems. CRM software systems automate many customer-related business tasks. CRM Definition - A Systems Perspective Goals of CRM Systems - Goals of CRM is to learn more about customers' needs and behaviors in order to develop stronger relationships with them and to facilitate acquiring, enhancing and retaining of customers. BULLWHIP EFFECT The problem frequently observed in unmanaged supply chains is the bullwhip effect. It can be described as a series of event that leads to supplier demand variability up the supply chain. The reasons for this variability include the frequency of orders, varying quantities ordered, or the combination both of event by downstream partners in a supply chain. As the orders make their way upstream, the perceived demand and is amplified and produces what is known as the bullwhip effect. The bullwhip effect has been perceived as an unavoidable effect of demand variation.
Ch. 3: ORGANISATION STRUCTURE

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LOGISTICAL ORGANIZATION DEVELOPMENT Logistical functions were not receiving any importance prior to 1950. They were treated as support functions and dispersed in the organization. Post war business woke up to the fact that logistics played very important role in war. As so many concepts came from warfare to business, logistics also began to receive importance gradually. Organization underwent series of changes as new concepts took hold in business. As these dispersed functions reported to separate functional heads no cross-functional links existed between them. At that time it was thought that commercial, manufacturing and marketing were the only functions important to business. Later on, it was thought that logistics could be used to bring about functional integration. The idea was that functional proximity would facilitate improved understanding of how decisions and procedures in one area affect performance in other areas. Today, the emphasis is to examine the role of logistical competency in the overall process of creating customer value. The thinking now is how best to achieve integrated logistical performance. Today, the question with the logistical managers is not how to organize individual functions, but to manage the overall logistical process. The present day logistical organization came into being in three evolutionary stages. It is a fact that improvements in the logistical system are taking place everyday. However, while elaborating the evolutionary stages what is described is how the present-day logistical set up was evolved and what deficiencies were overcome. STAGE 1 ORGANIZATION
The initial attempt at grouping logistical activities emerged during the late 1950s and early 1960s. The typical evolutionary pattern was for two or more logistics functions to be operationally grouped without significant change in the overall organization hierarchy. Such initial aggregation Occurred at both the staff and line levels of organization. The physical distribution and material management units were completely separate. Figure illustrates a typical stage 1 organization. One or two clusters of unified operations
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emerged. In the marketing area, the cluster typically centered on customer service. In the manufacturing area, concentration was usually on inbound materials or parts procurement. Most traditional departments were not changed. The organizational hierarchy was not altered significantly. Basically the organizational change involved grouping functions within the traditional domains of marketing and manufacturing. For example, initial physical distribution organizations typically controlled warehousing, transportation and order processing. Few stage 1 organizations had direct responsibility to manage trade-offs between transportation and finished inventory deployment. STAGE 2 ORGANIZATION
As the overall enterprise gained operational experience with unified logistics and cost benefits, a second stage of organization began to evolve. Figure illustrates stage 2, which began to emerge in the late 1960s and early 1970s. The significant feature of stage 2 was that logistics was singled out and elevated to a position of higher organizational authority and responsibility. The motivation was simple: Positioning logistics at a higher organization level increased the likelihood of strategic impact. Independent status allowed logistics to be managed as a core competency. A likely candidate for elevated status was physical distribution in firms where customer service performance was critical to overall success. The grocery manufacturing business was an example where materials management often increased in operational authority and responsibility because inbound materials and production were major portions of product costs. Thus the focal group that was elevated to higher organizational prominence in the stage 2 organizations typically depended on the nature of the enterprise's primary business. The example in the figure illustrates a situation wherein physical distribution was restructured and elevated. In the stage 2 organization, the concept of a fully integrated logistics unit was not achieved. Rather, integration was focused on either physical distribution or materials management. A significant point about the stage 2 organization is that integrated physical distribution and/or materials management began to gain acceptance among financial, manufacturing, and marketing counterparts. The other corporate officers viewed these integrated organization as something more than purely reactive efforts aimed at cost reduction or containment. In the stage 2 organizations, it was common for the integrated unit to become a primary contributor to business strategy. The stage 2 organization is readily observable in industry today and may well remain the most adopted approach to logistical facilitation.
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STAGE 3 ORGANISATION
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Stage 3 organizations emerged in the 1980s, the logistical renaissance began. This organizational structure sought to unify all logistical functions and operations under a single senior manager. Stage 3 organizations, having the comprehensive nature, were and continue to be rare. However, the trend at the stage 3 level of organization structuring is clearly to group as many logistical planning and operational functions as practical under single authority and responsibility. The goal is the strategic management of all materials and finished product movement and storage to the maximum benefit the enterprise. The rapid development of logistical information systems provided an impetus for stage 3 organizations. Information Technology became available to plan and operate systems that fully integrated logistical operations. Several aspects of the stage 3 organizations justify further discussion. Each area of logistics - purchasing, manufacturing support and physical distribution is structured as a separate line organization. The lines of authority and responsibility directly enabled each bundle of supportive services to be performed within the overall integrated logistical effort. Areas of operational authority and responsibility are well defined. Each of the areas of operation such as purchasing, manufacturing, physical distribution become selfsufficient. Hence, flexibility is possible. There is better coordination and integration between departments, which helps in providing great benefit to the company. In stage-3, the overall planning and controllership exists at the higher level. This facilitates integration. There is long range strategic planning, measurement of cost and customer service performance, availability of required information for managerial decision making. Thus, there is efficient operation of financial and human resources from material sourcing to customer delivery.
Stage 4: A Shift in Emphasis from Function to process

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The concept of the twenty-first-century organization is envisioned a the result Of 3 factors: first. the development of a highly involved work environment with selfdirected work teams (SDWT) as a vehicle to empower employees to generate maximum performance, second, improved productivity that results from managing processes rather than functions (this notion has always rested at the core of integrated logistics) and third, the rapid sharing of accurate information that allows all facets of the organization to be integrated Information technology is viewed as the load-bearing structure of the new enterprise, replacing organizational hierarchy. The challenges of managing logistics as a process are threefold' First, all effort must be focused on value added to the customer. An activity exists and is justified only to the extent that it contributes to customer value. Therefore, a logistical commitment must be motivated by a belief that customers desire a specific activity to be performed logistical managers must develop the capacity to think externally. Second, organizing logistics as part of a process requires that all skills necessary to complete the work be available regardless of their functional organization. When horizontal structures are put in place critical skills need to be positioned to ensure that required work is accomplished. Finally, work performed in a process context should stimulate synergism. with systems integration, the design of work as a process means that overall organizational trade-offs are structured to achieve maximum output for minimum input investment. The concept of matrix organization has emerged as the most acceptable structure to facilitate horizontal management. The availability of superior information to operationalize a matrix approach relaxes dependence on a rigid formal organization structure. Stage 5: Beyond Structure: Virtuality And Organizational Transparency: It is highly unlikely that the attention being given to process will end management's quest for the ideal logistical organization. While several different scenarios concerning the organization of the future are technologically feasible, one of the most intriguing is speculation that formal hierarchical command and control organization structure will be replaced with an informal electronic network often referred to as a virtual organization. The word virtual implies an underlying existence without formal recognition. In other words, a virtual organization, whether it is a total enterprise or a specific core competency, would exist as a provider of integrated performance but not as an identifiable unit of formal organization structure. In the case of logistics, key work teams may be electronically linked to perform critical activities in an integrated fashion. These work teams could be transparent in terms of the formal organization structure of their membership. In other words, formal organization charts may not be related to actual work flow. In fact, logistics organizations of the future could be characterized by functional disaggregation throughout the organization in an attempt to focus on work flow rather than structure. To customer requirements for speed and response, authority will be pushed down the organization. Strategic direction can be expected to originate at headquarters. Operational adaptations will increasingly be made on the front lines. Frontline managers will be expected to define strategy and apply it directly to operations. Centralization and decentralization will increasingly become meaningless terms. Organizations of the future will seek to capture the best of centralization and decentralization without commitment to either concept. The idea behind disaggregation is that the power of information, theology will allow integrated management and performance of logistics work without grouping or aggregating functions into a formal organization unit. The responsibility for performing logistics work will be organizationally positioned by users. The user, in this sense, is the organization that requires transportation, warehousing, inventory, or any other logistics service to complete its mission. All logistics work, regardless of when and where it is performed, can be captured as part of the informal logistics network. Sharing, common information regarding requirements and
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performance metrics while retaining local control offers potential to facilitate a logistical core competency that far exceeds today's best practice model The transparent logistical network organization is properly viewed as a composite affiliated business functions that are motivated and directed by common interest and goals. The informal network is facilitated by information sharing. The information tech nAgy4exists today to make electronic imaging for organization structure and coordinated behavior a reality. Research on best practice indicates that some firms are at the initial stages of linking disparate work electronically lather than physically or organizationally. The idea of a virtual organization is broader than simply creating structural transparency. The notion that entities can join forces to achieve common goals and then disband has significance for the challenges of managing alliance. The aspect of vitality that deal with a fluid and flexible group of firms working together to combine their individual core competencies will have a major or impact on the future of logistical service suppliers. It gives substance to the idea of a disposable logistics competency that users can acquire when needed and then abandon when no longer required. The idea of disposable logistics has application in such areas as special promotion, seasonality, & new product development and introduction. The fact that firms today constantly form and then dismantle alliances gives credibility to the notions of both transparency and virtuality.
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Ch. 4: CUSTOMER SERVICE
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Customer service is often the key link between logistics and marketing. If the logistics system, particularly outbound logistics, is not functioning properly and a customer does not receive a delivery as promised, the company could lose future sales. Even though manufacturing can produce a good product at the right cost and marketing can sell it-, if logistics does not deliver it when and where promised, the customer will be dissatisfied. The role of customer service is to provide time and place utility in the transfer of goods and services between buyer and seller. Put another way, there is no value in the product or service until it is in the hands of the customer or consumer. The 7 R's of Customer Service: The seven R's rule offers a simple description of how integrated logistics creates customer service. The seven R's mean having The Right Product, In The Right Quantity, In The Right Condition, At The Right Place, At The Right Time, For The Right Consumer And At The Right Cost. Elements of Customer Service Customer service has multifunctional interest for a company but, from the point of view of the logistics function, we can view customer service as having four traditional dimensions: Time, Dependability, Communication and Convenience. 1. Time: The time factor is usually order cycle time particularly from the perspective of the seller looking at customer service. On the other hand the buyer usually refers to the time dimension as the lead time, or the replenishment, time Regardless of the perspective or the terminology, several basic components or variables affect the time factor. 2. Dependability: To some customers dependability can be more important than lead time. The customer can minimize its inventory levels if lead time is fixed. i.e., a customer that knows with 100% assurance that lead time is 10 days could adjust his inventory levels to correspond to the average demand (usage) during the ten days and would have no need for safety stock to guard against stock outs resulting fluctuations in lead time. - Cycle time: Lead time dependability then directly affects the customers' inventory and stock out cost. Providing a dependable, lead time reduces some of the uncertainty a customer faces. A seller, who can assure the customer of a given level of lead time, plus some tolerance, distinctly differentiates its product from that of its competitors. The seller that provides a dependable lead time permits the buyer to minimize the total cost of inventory, stock outs, order processing and Production scheduling. - Safe delivery: An order's safe delivery is the ultimate goal of any logistics system. The logistics function is the culmination of the selling function. If goods arrived damaged or are lost, the customer cannot use the goods as intended. A shipment containing damaged goods aggravates several customer cost centres, inventory, production and marketing. - Correct orders: Finally, dependability embraces the correct filling of orders. A customer who has been anxiously awaiting the arrival of a urgently needed shipment may discover upon receiving the shipment that the seller made an error in filling the order. The customer who has not received what was requested may face potential lost sales or production.
3. Communication: the two logistics activities vital to order fulfillment are the
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communication of customer order information to the order filling area and the actual process of picking out of inventory the items ordered. In the order information stage the use of EDI or internet enabled communications can reduce errors in transferring order information from the order to the warehouse receipt. The seller should simplify product identification such as product codes in order to reduce order picking errors. 4. Convenience: This is another way of saying that the logistics service levels must be flexible. From the logistics operations stand point, having one of a few standard service levels that apply to all customers would be ideal; but this assumes that all customers' logistics requirements are homogeneous. In reality, this is not the situation. E.g.: one customer may require the seller to palletize and ship all shipments by rail another may register a truck delivery only, with no palletization, still others may request special delivery times. Basically logistics requirements differ with regards to packaging, the mode and the carrier the customer requires, routing and delivery times. Convenience recognizes customers' different requirements. Performance measures for customer service: There are four traditional dimensions of customers Service from a logistics perspective. They are:

Time Dependability Convenience Communication
There are essential considerations in developing a sound and effective customer service program. They also provide basis for setting standards of performance of customer service in the logistics area. Now, however, the standards have been changed as per the needs of the customer. They have become customer oriented as compared the previous (traditional) seller oriented standards. The NEW BASIS of customer service performance measures are: Order received on time Order received complete Order received damage free Orders filled accurately Orders build accurately
There was a problem with traditional form of customer service performance measures because they looked after the performance of only pre-shipment. So any problems that took place during the delivery of the goods that could cause problems and dissatisfaction to the customer were not catered to and thus the seller using the traditional methods of measurement would not have any basis upon which to evaluate the magnitude and extent of the problem. The Current method (New Method) focusing on he measurement at the delivery level not only provides a data base to make an evaluation but also more importantly provide early warnings of problems as they are developing. E.g.: If the standard delivery for on time delivery is 98% and it slips during a given month to
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95% an investigation may show that a carrier is not following instructions or even that the buyer is at fault by not being ready to accept the shipments. Customer Service Audit Customer service audit is collection and examination of records and customer data. Verification of accounts and financial data is done to check any errors and corrections. Customer service audit comprise of many methodologies which helps in for improved employee performance and overall development of the organization. Customer service audit is beneficial for the management of value service of a customer. Such constant checks are necessary in order to keep close eye on customer satisfaction and responses. Customer service audit encompasses variety of methodologies like customer feedback, customer questionnaires, customer information records, communication with customers and their records, mystery shopper's records, and the customer service measurement. These all methods when applied simultaneously with proper scrutinizing tools, gives you the optimum customer service audit. Such a productive service audit is very crucial for future strategy and current trends and quality service. Service level The service level is the target specified by the management it defines the performance objectives, which the inventory function must be capable of achieving. The service level can be defined in terms of an order cycle time, case fill rate fill rate order fill rate, or any combination of these. The order cycle time (performance cycle) is the elapsed time between the release of a purchase order by a customer and the receipt of the corresponding shipment. A case fill rate defines the percentage of cases or units ordered that can be shipped as requested. For example a 95 percent case fill rate indicates that, on an average 95 cases out of 100 could be filled from available stock. The remaining 5 cases would be backordered or deleted. A line fill rate is the percentage of order lines that could be filled completely. Each line on an order is a request for an individual product, so an order may have multiple lines. For example, when a customer order is received for 80 units of product A and 20 units of product B, the order contains 100 cases and 2 lines. If there are only 75 units of product A available and all 20 units of product B, the case fill would be 95 percent [(75 + 20) / (80 + 20)] and the line fill would be 50 percent (1/2). Order fill rate is the percentage of customer orders that could be filled completely. In the above example, the order could not be completely filled. So the resulting order fill would be zero.
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Ch. 5: FORECASTING
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Forecasting The following are different types of forecasts: Demand Forecast Supply Forecast Price Forecast Demand Forecast involves determining the firm's demand for an item. This includes current and projected demand, inventory status and lead time. Supply Forecast involves collection of data about current suppliers and producers, aggregate projected supply situation and technological and political trends which might affect supply. Price Forecast is based on information gathered and analyzed about demand and supply. It provides a prediction of short term and long term prices and the underlying reasonsJor those trends. Further, forecast can be classified as: Short Term Forecast Intermediate Term Forecast Long Term Forecast Long Term Forecast usually covers more than three years are used for strategic or long term planning. Intermediate Term Forecast usually range from one to three years and address budgeting issues and sales plans. Short Term Forecast is more important for the operational logistics planning process. They project demand into next several mo4h 4pf one year or slightly more than one year. Demand Forecasting Forecasting product demand is crucial to any supplier, manufacturer, or retailer. Forecasts of future demand will determine the quantities that should be purchased, produced, and shipped. Demand forecasts are necessary since the basic operations process, moving from the suppliers' raw materials to finished goods in the customers' hands, takes time. Most firms cannot simply wait for demand to emerge and then react to it. Instead, they must anticipate and plan for future demand so that they can react immediately to customer orders as they occur. Firms that offer rapid delivery to their customers will tend to force all competitors in the market to keep finished good inventories in order to provide fast order cycle times. As a result, virtually every organization involved needs to manufacture or at least order parts based on a forecast of future demand. The ability to accurately forecast demand also affords the firm opportunities to control costs through leveling its production quantities, rationalizing its transportation, and generally planning for efficient logistics operations. In general practice, accurate demand forecasts lead to efficient operations and high levels of customer service, while inaccurate forecasts will inevitably lead to inefficient, high cost operations and/or poor levels of customer service. In many supply chains, the most important action we can take to improve the efficiency and effectiveness of the logistics process is to improve the quality of the demand forecasts. Forecasting is a problem that arises in many economic and managerial contexts, and hundreds of forecasting procedures have been developed over the years, for many different purposes, both in and outside of business enterprises. General Approaches to Forecasting
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All firms forecast demand, but it would be difficult to find any two firms that forecast demand in exactly the same way. Over the last few decades, many different forecasting techniques have been developed. Many such procedures have been applied to the practical problem of forecasting demand in a logistics system, with varying degrees of success. Almost any forecasting procedure can be broadly classified into one of the following four basic categories based on the fundamental approach towards the forecasting problem that is employed by the technique. 1. Judgmental Approaches. The essence of the judgmental approaches to address the forecasting issue by assuming that someone else knows and can tell you the right answer. That is, in a judgment-based technique we gather the knowledge and opinions people who are in a position to know what demand will be. For example, we might conduct a survey of the customer base to estimate what our sales will be next month. 2. Experimental Approaches. Another approach to demand forecasting, which is appealing when an item is "new" and when there is no other information upon which to base a forecast, is to, conduct a demand experiment on a small group of customers and to extrapolate the results to a larger population. For example, firms will often test a new consumer product in a geographically isolated "test market" to establish its probable market share. This experience is then extrapolated to the-national market to plan product launch. Experimental approaches are very useful and necessary for new products but for existing products that have an accumulated historical demand record it seems intuitive that demand forecasts should somehow be based on this demand experience. 3. Relational/Causal Approaches. The assumption behind a causal or relational forecast is that, simply put, there is a reason why people buy our product. If we can understand what that reason (or set of reasons) is, we can use that understanding to develop a demand forecast. For example, if we sell umbrellas at a sidewalk stand, we would probably notice that daily demand is strongly correlated to the weather we sell more umbrellas when it rains. Once we have established this relationship, a good weather forecast will help us order enough umbrellas to meet the expected demand. 4. "Time Series" Approaches. A time series procedure is fundamentally different than the first three approaches we have discussed. In a pure time series technique, no judgment or expertise or opinion is sought. We do not look for "causes" or relationships or factors which somehow "drive" demand. We do not test items or experiment with customers. By their nature, time series procedures are applied to demand data that are longitudinal rather than cross-sectional. That is, the demand data represent experience that is repeated over time rather than across items or locations. The essence of the approach is to recognize (or assume) that demand occurs over time in patterns that repeat themselves, at least approximately. If we can describe these general patterns or tendencies, without regard to their "causes", we can use this description to form the basis of a forecast. Methods of Forecasting Time Series: Time series analysis comprises methods that attempt to understand such time series, often either to understand the underlying theory of the data points (where did they come from? what generated them?), or to make forecasts (predictions). Moving Average: This simplest forecasting method is the moving average forecast. The method simply averages of the last m observations. It is useful for time series with a slowly changing mean. Exponential Smoothing This method considers the entire past in its' forecast, but weighs recent experience more heavily than less recent. The computations are simple because only the estimate
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of the previous period and the current data determine the new estimate. The method is useful for time series with a slowly changing mean. Regression The moving average method does not respond well to a time series that increases or decreases with time. Here we include a linear trend term in the model. The regression method approximates the model by constructing a linear equation that provides the least squares fit to the last m observations. Seasonality We model seasonality with a multiplicative seasonal index. The data is adjusted by dividing by the index and the adjusted data is used to obtain forecasts using one of the methods above.
Ch. 6: TRANSPORTATION
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Transportation functionality: the functions of transportation in Logistics Transportation Functionality provides two major functions which are described below:
Product Movement To move various types of products whether it is raw materials, components, semifinished goods, packaging material, scrap, and so on, transportation is very essential. While moving semi-finished goods or W.I.P., transportation moves them to the next stage in manufacturing, whereas while moving finished goods, it plays a role of physically bringing the goods closer to the ultimate consumers. Transportation of a product involves the use of temporal (time) resources. A particular product is inaccessible while it is in-transit. Such types of products, are called in-transit inventories. These products are significantly important because they influence a variety of supply chain decisions. Transportation of a product involves the use of financial resources. Transportation of a product involves various costs such as cost of driver, cleaner, fuel, taxes, repairs/ maintenance, etc. Transportation of a product also uses environmental resources either directly or indirectly. In direct terms, transportation uses a, very large amount of energy in terms of fuel and oil. In indirect terms transportation creates environmental expenses in terms of congestion, air-pollution and noise pollution. Product storage One of the functions of transportation is temporary storage of goods. This function may be called as the secondary function of transportation as transportation is not meant for storage of goods. E.g.: In case the goods have to be moved once again within just a few days. It is advisable to keep them stored in the transport vehicle themselves. This will avoid the cost of unloading and loading as well as the possible damage to goods during such operations. Principles of Transportation There are two fundamental principles guiding transportation management and operations. They are economy of scale and economy of distance. Economy of scale It refers to the characteristic that transportation cost per unit of weight decreases when the size of the shipment increases. It is common knowledge that larger the capacity of the transport vehicle more goods can be transported at a time which will decrease the cost per unit of transport. If
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smaller is the capacity of the transport vehicle then to transport a large amount of goods, more trips will have to be made which will increase the cost per unit of transport. E.g.: Rail or water transport is less expensive in case of bulk transport than smaller capacity vehicles like motor or air. A transportation economy of scale exists because fixed expenses such as administrative costs, invoicing costs, equipment costs associated with moving goods and materials get spread over the entire weight of the load. This will help to decrease cost per unit of the goods transported. E.g.: Suppose the cost to administer a shipment is Rs. 10.00. Then for a 10 Kgs shipment the cost of transporting per unit of the product becomes Re.1.00, while for a 1,000 Kgs shipment the cost of transporting per unit of the product Re.0.01. Thus, it can be said that an economy of scale exists for the 1000 Kgs shipment. Economy of distance It refers to the characteristic that transportation cost per unit of distance decreases as distance increases. Transportation economy of distance is also referred to as a tapering principle since rates or charges taper (decrease) with distance. The rationale of economies of distance is similar to that for economies of scale. Longer distances allow the fixed expenses to be spread over more miles, resulting in lower overall per mile charge. These principles are important considerations when evaluating alternative transportation strategies or operating practices. The objective is to maximize the size of the load and the distance that is shipped while still meeting customer service expectations. Modes of Transportation / Modal Characteristic The basic modes of transportation are rail, highway, water, pipeline and air. Rail India has amongst the largest railway network in the world. Every city, town, village has a rail connection. Through railways very large volumes of goods can be transported economically over long distances to remote places in the country. But railways in general incur high fixed costs because of expensive equipment (i.e. railways must maintain their own rail track meant exclusively for them) switching yards and terminals. However the railways experience relatively low variable operating costs. Railways help to transport raw materials from extractive industries which are located at considerable distances. Besides this railways also transport massive amount of steel, automobiles, war equipment, across the country. Railroads basically concentrate on the container traffic and are becoming more responsive of the customer needs, emphasizing bulk industries and heavy manufacturing. They have expanded their intermodal operations through alliances and motor carrier ownership. Railroads are even concentrating on development of special equipment. There are unit trains which are entire train carrying the same commodity, which are bulk products such as coal or grain. Unit trains are faster, less expensive to operate and quick as it can bypass rail yards and go direct to the product's destination. There are also various different types, such as articulated cars for extended Rail chassis, doublestack railcars, have 2 levels of containers, thereby doubling the capacity of each car. It also reduces chances of damage because of their design. These technologies have are being applied by
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railroads to reduce weight, increase carrying capacity, and facilitate interchange. The above examples show the attempts being made by the railways to retain and improve their share of overall transportation market. Road Transport Road transport forms an essential part of any transport activity, whether rail, sea or air. It is essential as a supplementary and complementary mode of transport to complete movement by other modes of transport. Eg. From one terminal i.e. the railway station the goods have to be carried to the destination by road. Highway transportation has increased rapidly since the end of World War II. This is because Motor carrier industry results from door-to-door operating flexibility and speed of intercity movement. They are even flexible because they can operate on each and every kind of roadways. In comparison to railroads, motor carriers have relatively small fixed investments in terminal facilities and operate on publicly maintained highways. The variable cost per mile for motor carriers is high because a separate power unit and driver are required for each trailer or combination of tandem trailers. Labor requirements are also high because of driver safety restrictions and the need for substantial dock lobor. Motor carriers are best suited to handle small shipments moving short distances. The characteristics of motor carriers favor manufacturing and distributive trades, short distances, high-value products. Motor carriers have made significant inroads into rail traffic for medium and light manufacturing. This is also because of delivery flexibility that they have captured a major chunk of the market. This industry even has a few problems, and one of the primary difficulties relate to increasing cost to replace equipment, maintenance driver wages, and platform and dock wages. Although accelerating, labor rates influence all modes of transport motor carriers are more laborintensive, which causes higher wages to be a major concern. Since 1980, the industry segments have become more definitive since deregulation, and include truckload (TL), less than truckload (LTL), and specialty carriers. TL segment includes loads over 15,000 pounds that generally do not require intermediate stops for consolidation. LTL segment of the industry loads less than 15,000 pounds that generally requires stops at intermediate terminals for consolidation. Because of terminal costs and relatively higher marketing expenses, LTL experiences a higher percentage of fixed costs then TL. Specialty carriers include package haulers such as Federal Express and United Parcel Service. These firms focus on specific requirements of the market or product. It is quite apparent that highway transportation will continue to function as the backbone of logistical operations for the foreseeable future. In short Road transport offers certain advantages like i. Door to door service to customers which neither rail nor neither sea nor air transport can offer. ii. On per unit basis, the cost of making a road is 1/6`h that of laying a railway line. iii. Capital investment in case of railways is much less then railways designed to carry equivalent quantum of traffic. iv. Road transport provides employment to many people. Road transport faces a number of problems. This is evident from the following facts: 1) There is an occasional storage of diesel fuel in the country.
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2) Vehicle availability in the country has been problematic. With the recent entry of a number of manufacturers, the situation has improved to some extent. 3) The cost of components and accessories, such as tyres and batteries, has escalated tremendously. 4) The Octroi and police check posts are to many, resulting in heavy detention to road vehicles, 5) The present Motor Vehicle Act regulating the issue of licenses and permits and movement of vehicles is very restrictive. 6) Conditions on Indian road are very bad and hazardous. They tend to reduce speed of vehicles, which leads to wastage of natural transport capacity. 7) Roadside maintenance and service facilities have not developed through fund necessary. 8) The system of national, zonal and state permits restricts free, growth of road transport but the system has to be followed.
Water transport
One of the oldest modes of transportation is water. In terms of time factor, they may be slow. But, they Water transport could be of inland can carry more shipment, at reduced cost over longer distance. Water transport could be of inland type or oceanic transport. Inland water transport Inland water transport is used mainly for transport within a country. In our country Inland water transport through rivers and canals is quite popular because of the low cost and bulk transport. But here, the inland water transport system heavily depends upon the rain and in many places on the tides. So, in our country we cannot guarantee the functioning of inland water throughout the year at the same efficiency. Oceanic Transport Oceans act as huge waterways for transport of goods form one country to another. Oceanic transportation includes import and export of crude and bulky commodities like materials which are removed from mines, cement, chemical, crude oil, iron ore, coal, chemicals like sulphur, crude petroleum, and selected agricultural products, etc. The capability of water to carry large tonnage at low variable costs makes it in demand. When a company desire low freight rates and the speed and the time of transport are secondary, it has the option of selecting water as a mode of transport. The main disadvantage of water transport is the limited range of operation and speed. Unless the origin and destination are adjacent, supplement haul by rail or truck is required. Water transport isn't all that flexible. Labour restrictions on loading and unloading at docks create operational problems and tend to reduce the potential range of available traffic. Also, a highly competitive situation has developed between railroads and inland water carriers in areas where parallel routes exist. Pipelines Primarily, pipeline is used for the transport of crude petroleum, refined petroleum and natural gas. Pipelines are also used for the transportation of certain types of chemicals, Pulverized dry bulk materials such as cement and flour via hydraulic suspension system, and sewage and water in cities. A significant fixed cost is incurred while setting up the pipeline and related infrastructures. Thus, given the nature of costs, pipelines are the best suited when relatively large and stable flows of materials are required. E.g.: pipeline may be best suited to transport crude petroleum from the port to the refinery. But, to transport refined petrol to a gas station does not justify the use of a pipeline and this is better done by a truck. There is a talk going on between
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India, Iran and Pakistan regarding the transportation of crude oil from Iran to India with the help of a pipeline which will pass through Pakistan. This will reduce the cost of transporting crude oil from Iran to India. In comparison with the other modes of transport, pipelines operate on a 24 hour basis, seven days a week. They stop functioning due to change in the commodity to be transported, or due to maintenance. Unlike other modes of transport, pipeline does not have any 'empty containers' or vehicles' which are to be returned to the origins. A high fixed cost for pipelines normally results from the right of way construction and requirements at the control stations and pumping capacity. Another disadvantage of 'pipeline is that they are not flexible. Once the route of a pipeline is fixed, it is not changeable. Again pipelines are restricted with respect to the types of commodities which can be transported through them. Only products in the form of gas, liquid slurry can be handled by the pipelines:' One advantage of pipelines is that, once they.01aye been constructed, they are not labour intensive for operational purposes as other modes of transport so their variable operating cost is low. Air Transport Air transport though new as compared to other modes of transportation, has gained large popularity in transporting various commodities. The basic advantage of Air transport is its high speed. By air, the time required may be just a few hours, which may be days by other modes of transport. However this being a major advantage, air transport also has various disadvantages. These are: Air transport is a costly affair. Air transport is limited by 'lift capacity' i.e. goods upto certain load (weight) can be transported by aircrafts. Air freight variable cost is very high due to fuel, maintenance and labour intensity of both in flight and ground crew. The fixed cost of air transport is low as compared to rails, water and pipeline. In fact, air transport ranks second only to highway with respect to low fixed cost. Airways and airports are maintained by public funds and terminals are by local communities. The fixed costs of airfreight are associated with aircraft purchase and the requirement for specialized handling systems and cargo containers. But the air freight variable cost is extremely high as a result of fuel, maintenance, and labour intensity of both in-flight and ground crews. Even though it has all these disadvantages, High speed of air transport often helps in compensating its other disadvantages. No particular commodity dominates the freight carried by air transport. E.g. big courier companies such as DHL, Fed Ex have their own air crafts to transport couriers between different countries within a short time. Rope ways A ropeway is a form of naval lifting device used to transport light stores and equipment across rivers or ravines. It comprises a jackstay, slung between two sheers or gyps, one at either end, from which is suspended a block and tackle, that is free to travel along the rope and hauled back and forth by inhauls (ropes attached to the pulley from which the block and tackle are suspended).
Intermodal Transportation Intermodal transportation is the use of more than one mode of transport to move a shipment to its destination. A variety of intermodal combinations are possible depending upon the
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type and amount of goods, the time of delivery, the pricing factor, etc. the most common combination is that of the motor carrier and railway. Intermodal combination of transport has also helped to increase the revenue of each of the modes of transport. On land it has been found that a combination of truck and rail mode of transport offer a better deal in terms of cost and time rather than transport by truck alone. In general, therefore intermodal means of transport helps to bring together different modes of transport to create a price and /or service offering that may not be matched by any single mode transport. Various Intermodal combinations Piggyback / railroad It is a specialized form of containerization in which rail and and road transport co-ordinate. In piggyback, the carrier places the motor carrier trailer on a rail flatcar, which moves the trailer by rail for a long distance. A motor carrier then moves to trailer for short-distance pickups and deliveries. Containership / Fishy back / trainship : Containership, Fishy back, trainship and example of the oldest form of intermodal transport. They utilize waterways, whiche of the least expensive modes for product movement. The Fishyback, trainship and containership concept loads a truck trailer, railcar, or container onto a barge or ship for the shipment.
Classification Of Modes
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The next table summarizes the fixed-variable cost structure of each mode. Rail Highway Water Pipeline High fixed cost in equipment, terminals, tracks, etc. Low variable cost. Low fixed cost (highways in place and provided by public support). Medium variable cost (fuel, maintenance, etc.) Medium fixed cost (ships and equipment). Low variable cost (capability to transport large amount of tonnage). Highest fixed cost (rights-of-way, construction, requirements for control stations, and pumping capacity). Lowest variable cost (no labor cost of any significance). Low fixed cost (aircraft and handling and cargo systems). High variable cost (fuel, labor, maintenance, etc.).
Air
Transportation cost/Freight Rate Structure Freight rates of any mode of transport are based on the following principles: 1. Freight should the actual cost of transport operation. The actual cost of operation depends on the following factors: a) Fixed costs -Freight should cover interest on capital, depreciation, registration and insurance expenses of a vehicle, if applicable, general upkeep of the vehicle. administration overheads, and expenditure on other fixed facilities, etc. b) Semi-fixed costs - Freight should cover the salary of the driver, cleaner, conductor and miscellaneous maintenance expenses, which vary partially the running of the vehicle. c) Vehicle Utilization - A transporter is interested In getting maximum mileage out of his vehicle by moving it at top speed to cover the distance in as short a time as possible. i. If the consignments loaded or the route Covered is not conducive, the transporter would quote a higher freight rates. ii. Higher freight rates are also quoted when vehicles are detained at terminals either for certain formalities, terminal congestion in busy ports or at factory gates, or while waiting for loading or unloading operations. Terminal detentions are invariably accounted for in the freight rates , normally not noticed at all. iii. Freight rates are quoted higher if there is no expectation of obtaining a return trip with a load or if considerable empty movement of vehicles is involved after unloading. iv. Vehicle Utilization is affected by the nature of goods. Hazardous goods that are likely to cause damage to the other consignments or the vehicle itself attract higher freight rates. v. Consignments, which can be loaded less by weight in a vehicle, attract higher unit freight rate since they yield poor utilization of the vehicle. 2. Traffic Bearing Capacity: An age-old consideration for the freight rates is the doctrine of "what traffic can bear." This basically means how much the customer can pay for the transportation. Transportation adds place utility to goods, for it makes them marketable at another place. However, after the addition of the cost of transport, the price of goods should be still attractive to the buyer. 3. Public Use: Freight rates all over the world are governed on human grounds that items of public use should be made available to the common man at the cheapest rate. For example, foodgrains and salt are
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carried at rock-bottom prices, sometimes even at those, which do not cover the actual cost of operation. 4. Government Policies: Freight rates are often framed on the basis of government objectives, which aim at serving certain points such as promotion of certain type of trade, development of certain industries, etc. In such cases, freight rates are either depressed to promote the particular traffic or hiked to discourage particular traffic. 5. Reasonable Profit: The transporter must provide for a reasonable profit after covering the cost of operations and capital investment. This margin must give not only return of investment but also compensate him for the entrepreneurial time and effort he puts in, but also provide sufficient fAg f6r future development of his enterprises. Transportation Hidden Costs The physical distribution component of a major project, including transportation of raw materials, project materials, machinery and equipment and such as infrastructure facilities as roads, vehicles etc., usually accounts for 20 to 30% of the total capital cost. The general scarcity of various goods, unpredictable nature of the economy and economic behavior , on the part of the business community and the bureaucracy in India make it all the more necessary for one to plan well ahead. In fact, planning of transportation and infrastructure must be done well ahead of general planning, so that resources spent on other parts of the project do not result in useless expenditure. E.g.: Trucks get stuck in muddy roads, work sites remain unapproachable, and serious vehicular accidents are caused near the project areas. Due to delays caused by transportation of goods and materials, the capital cost of the project increases. The interest amounts on loans taken build up. Such increase in the cost of the project if attributed or apportioned to inadequate transportation, would constitute one of the hidden costs for which transportation is responsible. In India, Project authorities generally do not hold themselves responsible for the transportation bottlenecks and resulting delays. These delays are due to non-receipt of equipment, machinery, raw materials etc. and these delays generally run into months. Due to such delays, the project suffers heavy losses, which occur because of congestion in the ports, traffic jams, railway restrictions etc. Hence proper and realistic planning with regard transportation is very necessary in our country, not just for controlling the hidden costs but also for the smooth completion of the project. . Transportation cost elements / Factors Influencing Transportation costs: The following are some of the important elements that are included in the cost of transportation: a) Mode of transport For an organization, the decision regarding selecting the particular mode or modes of transport for distributing its finished products is very critical. In the case of distribution of its products, the company has to think of 1. The transit time, or the time lapse between the production of goods and its ultimate sale. 2. The amount of transportation costs involved.
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Normally speaking there is an inverse relationship between the transit and transportation cost i.e. lower the transit time, higher is the transportation cost. This is because to cut down on transit time. The company would like to transport its goods faster by possibly a combination of various modes of transport. This would definitely increase its cost of transportation. But as stated this need not be a generalization. E.g.: If a company decides on slower transit time to reduce transportation costs then unsold inventory would pile. Thus there would be higher inventory cost for the organization. b) Transit Capital When goods are in transit, the capital of the company (i.e. money) is locked up. The company would like to convert goods into cash as quickly as possible so that the cash (i.e. capital) so generated can be put to profitable use. Hence the company must ensure that the transit time of goods is kept to minimum level. Here an effective and planned transportation should be evolved within the company's logistical system so that the overall transit time is kept at the minimum level. c) Obsolescence When a company is tied down to a slow or say an erratic mode of transport (E.g.: Roadways in monsoons) it is necessary for the company to maintain a higher level of inventory at depots/ware houses/distributors. This required so that the customer can be assured of continuous and uninterrupted supply of companys products. However in case the designs of the products change rapidly or the wants/desires of the customers change, the goods of the company will remain unsold which may become time barred and obsolete (E.g.. medicines and drugs). Again, rapid changes and innovations in technology (E.g.: electronic items and computers) will be the technical obsolescence of the goods. Any goods in the process of manufacture or, which are in transit to the depots/warehouses, will realize a lower sales value when new models arrive. Hence, with proper coordination and planning involving logistics the company has to decide on swifter more efficient modes of transport to avoid possible obsolescence of goods/products. d) Packaging Packaging can be considered as an inevitable factors which needs due consideration before goods are transported from one place to another. The mode of transport (apart from the type of the product) very often influences the type of packaging required. E.g.: Long distance transport by road will require different sort of packaging for a product, as compared to the same product being transported by air. Hence, the mode of transport determines the type of packaging required. This can increase the cost of the product since packaging costs have to be incorporated in profitability calculations. Also, more the packaging means more weight and volume, which will increase the cost of transportation. Hence, design of packaging has become very important in logistical planning. e) Insurance Insurance risks are based on the modes of transport, transit time as well as on the possibility of damage to the goods on route. In case the transit time for the goods is smaller and the handling of the goods by the transport companies is skilful there will possibly be no damage to the goods. Proper management of the goods in transit by efficient staff is also essential. Insurance premiums paid would be lower since less or no damage to the goods is expected.
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The cost of the breakages of the products during transport has to be considered by any company while calculating cost incurred on goods transported. Insurance companies do cover damages, cost to the goods due to breakages during transport. The company cannot overlook this cost. Apart from the high premiums paid during transport (called transit insurance), the delay in, establishing and receiving claims, the cost involved in making replacements, and consequent loss of established customers and market will prove very expensive to the company. Hence, the logistic manager must select that mode of transport which will reduce or eliminate the loss due to breakages in transit. The firm must ensure that handling systems are sophisticated during transit, also if possible special containers should be used to safeguard products from breaking. If direct door to door delivery is possible by the transport company, it would ensure less multiple handling thereby safeguarding the goods from breakage: g) Pilferage The Problem of pilferage of goods during transport-whether it be rail, truck or water, is very common in our country. The cost involved due to loss suffered because of pilferage is enormous, especially when the products are expensive. Practically speaking, the problem of pilferage is difficult to be eliminated from our country. But is can be attempted to be reduced by proper storage containers that are pilter proof, adequate security arrangements during transit, etc. But the loss due to pilferage during transit is real and has to be taken into account during cost benefit calculations. h) Deterioration Many goods that are transported over long distance by rail, water and truck get deteriorated due to various reasons. First, the goods may not have been protected against adverse weather conditions like heavy rains or scorching sun. Second, the roads may be extremely bad making it difficult for the truck to move smoothly, the rough seas may make water transport dangerous, long waiting times at railway yards can be a cause of concern about the conditions of the goods. Deterioration during transport can prove to be expensive. Again, to avoid losses due to deterioration in terms of special packages, conditioning, etc. may add to the cost of the goods, making them expensive.
Transportation infrastructure Transportation infrastructures consist of:

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The rights-of-way Roads, Rail Network, Airports, etc. are called as rights of way. Without this infrastructure transportation cannot take place. This infrastructure is usally provided by the government. Vehicles Carrier organizations
That offer transportation services on hire basis or internal basis. The nature infrastructure required determines the mode of transportation that would be adopted by the company. Roll-on/roll-off (RORO or ro-ro) ships are vessels designed to carry wheeled cargo such as automobiles, trucks, semi-trailer trucks, trailers or railroad cars that are driven on and off the ship on their own wheels. This is in contrast to lo-lo (lift on lift off) vessels which use a crane to load and unload cargo. RORO vessels have built-in ramps which allow the cargo to be efficiently "rolled on" and "rolled off' the vessel when in port. While smaller ferries that operate across rivers and other short distances still often have built-in ramps, the term RORO is generally reserved for larger oceangoing vessels. The ramps and doors may be stern-only or bow and stern for quick loading. The lighter aboard ship (BASH) system refers to the practice of loading barges (lighters) aboard a larger vessel for transport. It was developed in response to a need to transport lighters, a type of unpowered barge, between inland waterways separated by open seas. Lighters are typically towed or pushed around harbors, canals or rivers and cannot be relocated under their own power. The carrier ships are known variously as LASH carriers, barge carriers, kangaroo ships or lighter transport ships.
Ch. 7: WAREHOUSING Distribution centers

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A distribution center for a set of products is a warehouse or other specialized building, often with refrigeration or air conditioning, which is stocked with products (goods) to be redistributed to retailers, to wholesalers or directly to consumers. A distribution center is a principal part, the "order processing" element, of the entire "order fulfillment" process. Distribution centers are the foundation of a "supply network" as they allow a single location to stock a vast number of products. Some organizations operate both retail distribution and direct-to-consumer out of a single facility, sharing space, equipment, labor resources and inventory as applicable. The way a typical retail distribution network operates is to have centers set up throughout a commercial market. Each center will then serve a number of stores. Large distribution centers for companies such as Wal-Mart serve 50-125 stores. Suppliers will ship truckloads of products to the distribution center. The distribution center will then store the product until needed by the retail location and ship the proper quantity. Basic Functions of a Warehouse Basic function of a warehouse are movement of goods storage of goods, and information management. 1. Storage of Goods: One of the traditional requirements of a warehouse has been for storing goods. The warehouse provides the space required for such storage and it is one of the important functions of a warehouse. Warehouse performs two types of storage: planned and extended. Planned Storage: Storage required as planned to meet the regular customer demand is called panned storage, Every inventory in received in the warehouse requires storage for a certain period of time. The duration of storage many vary. Extended Storage: Extended storage is an inventory in excess of normal warehouse operation. Some of the reasons for extended storage requirements are seasonality in demand, erratic demand, product conditioning, speculative purchases, discounts, etc. To meet the erratic or seasonality in demand an additional storage of goods in terms of safety stocks could be required. Some products such as food items may be stored for conditioning purposes. E.g. ripening of fruits. Sometimes a firm may buy bulk quantities to avail of the discounts that are available or to purchase when the price is low. This is speculative purchases as the goods are bought at a higher quantity due to lower price or due to expectation of higher price in the future. Sometimes due to promotional campaigns such as sales promotion, additional stock may be required to be kept to meet the expected higher demand for the product.
2. Movement of Goods: Movement of goods consist of inbound activity (unloading of goods brought to warehouse), transfer to storage (transferring the goods from the inbound area to the storage area), order selecting (selecting the good in the storage as per order to be shipped and transferring it to shipment area) and outbound activity (checking and loading the gods for shipment). 3. Information Management: Keeping a track of information regarding goods that have come
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into the warehouse, stored and that are shipped out of the warehouse. Also any other information pertaining to the warehouse is stored. The data captured by the information system in the warehouse is then passed on to the higher management in order to take better decisions. Secondary Functions of a Warehouse 4. Protection of goods- A warehouse provides protection to goods from loss or damage due to heat, dust, wind and moisture, etc. It makes special arrangements for different products according to their nature. It cuts down losses due to spoilage and wastage during storage. 5. Risk bearing - Warehouses take over the risks incidental to storage of goods. Once goods are handed over to the warehouse-keeper for storage, the responsibility of, these goods passes on to the warehouse-keeper. Thus, the risk of loss or damage to goods in storage is borne by the warehouse keeper. Since it is bound to return the goods in good condition, the warehouse becomes responsible for any loss, theft or damage etc., thus, it takes all precautions to prevent any mishap. 6. Financing- When goods are deposited in any Warehouse, the depositor gets a receipt, which acts as a proof about the deposit of goods. The Warehouses can also issue a document in favour of the owner of the goods, which is called warehouse-keeper's warrant. This warrant is a document of title and can be transferred by simple endorsement and delivery. So while the goods are in custody of the warehouse-keeper, the businessmen can obtain loans from banks and other financial institutions keeping this warrant as security. In some cases, warehouses also give advances of money to the depositors for a short period keeping their goods as security. 7. Processing Certain Commodities are not consumed in the form they are produced. Processing is required to make them consumable. For example, paddy is polished, timber is seasoned, and fruits are ripened, etc. Sometimes warehouses also undertake these activities on behalf of the owners. 8. Grading and branding- On request warehouses also perform the functions of grading and branding of goods on behalf of the manufacturer, wholesaler or the importer of goods. It also provides facilities for mixing, blending and packaging of goods for the convenience of handling and sale. EXAMPLE HARYANA WAREHOUSING CORPORATION: PANIPAT Haryana Warehousing Corporation was set up on November 1, 1967 under the Warehousing Corporation Act, 1962. It carries out the following functions at large: a) Acquire and build godowns and warehouses at such places within the State as it may, with the previous approval of the Central Warehousing Corporation. b) Run Warehouse's in the State for storage of agricultural products, seeds, manures, fertilizer, agriculture implements and other notified commodities. c) Arrange facilities for the transport of agricultural produce, seeds, manures, fertilizers agricultural implements and notified commodities to and from warehouses. d) Act as an agent of the Central Warehousing or of the Govt. for the purpose of purchase, sale, storage and distribution of agricultural produce, seeds, manures, fertilizers, agricultural implements and notified commodities. Benefits from warehousing / warehousing functionality / operations Benefits from warehousing are classified on the basis of economics (cost) and service.
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Economic Benefits Warehousing helps to reduce the overall logistical cost. This can be done in four ways 1. Consolidation of materials: The warehouse can be used to receive material from many plants. This material received can then be consolidated to supply to a single customer or a single destination. This helps to supply many small shipments to a single, destination as a single large shipment. This helps in reducing the overall cost of transportation, Example, if a courier company wants to send a lot of packages from different sources in Mumbai to London, it brings all the packages to a single warehouse where all the packages, (in a given time period) are consolidated and sent as a single large package.
2. Breaking of bulk materials : The warehouse receives materials from the manufacturing plant to supply to a number of customers. The warehouse thus breaks the bulk material into smaller packages and supplies it to individual customers. Thus instead of the manufacturer sending the material to individual customers, it sends to a central warehouse close to the market area which then forwards the materials to the customers. This helps in saving on the transportation cost. McDonalds in Mumbai gets its raw materials from various parts of India to a central warehouse. Here it breaks the bulk material and supplies it to individual outlets in Mumbai.
3. Processing: Warehouse could help in final processing such as labeling, finishing touches, etc. This helps to postpone shipment of final products. Example, if the manufacturer has many customers demanding for the same product, but the finishing for each customer is different, then the manufacturer can produce the goods and keep it in the warehouse and
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do the final finishing touches in the warehouse as and when the customer demands for the product. In this way the manufacturer does not have to keep a separate inventory for each and every customer. This helps to reduce inventory and thus saves on cost. 4. Storing: Storing is essential for all the goods, especially seasonal goods. If the demand is in a particular time of the year, the goods can still be produced throughout the year and stored. This helps in uniform production throughout the year thus saving on production cost. Example, in the paints industry in India, the demand is very high during Diwali time. But the companies produce throughout the year and store the goods in the warehouse. Service Benefits These benefits are mainly intended to improve the service of the logistics and may or may not reduce cost. The service benefits are as follows: 1. Reducing delivery time: Warehouses, can be located near the key market areas when the demand is high in order to reduce the time required to deliver to the market. Thus the goods that are manufactured can be warehoused at a location close to the market where the demand is identified in advance. This is specially true for seasonal industries as it helps them to cater to the market when the season arrives. 2. Assortment: Here the warehouse stores Various goods in anticipation of customer demands. It supplies to the customer the mixture of goods required by him. This allows larger shipment quantities to the customer thus reducing transportation cost. It also reduces the number of suppliers the customer has to deal with. This is true with distributors, who store goods from different suppliers which are supplied to the retailer when required. Thus the retailer does not have to interact with each and every supplier and can deal with the distributor for a number of goods. 3. In transit mixing: The various bulk materials are broken down and then mixed so that goods can be taken to the customer as per his requirement. For example there are lots of retail outlets in the city who may require different quantities of coca cola, fanta, thumsup, etc. Coca Cola as a company has a central warehouse where truckloads of various products (coke, fanta, thums-up, etc.) arrive. Here the goods are broken down to crates and are supplied to different retail outlet as per the requirement. This saves on the transportation cost and also caters to the exact requirements of the customer.
4. Manufacturing support: In order to get economies of scale in production, a continuous flow of raw materials is required. If there is a disruption in the supply of raw materials for any reason, it may cause the production to stop. In order to maintain continuous
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production and have economies of scale, the raw materials are stored in a warehouse. 5. Market Presence: By having a warehouse close to the market, the company can cater to the market well and thus avoid any stock outs. The company can thus be more responsive towards customer needs. Warehouse options (Types of Warehouses) The decision on which type of warehouse to select will depend on various financial and nonfinancial factors. Financial factors include Operational Cost (cost: of, running the warehouse) and Capital cost (cost of setting up the warehouse). Non-financial factors include control, customer service, expertise and perceived risks. 1. Private Warehouse: A private warehouse is operated by the firm owning the product. The facility (land and building) could be either owned or leased. It is recommended to go in for a private warehouse when the utilization of the warehouse is expected to be high so that the unit cost of warehousing would be low. The advantages of having a private warehouse are that the company can design the warehouse to suit its specific requirements. Also the company has a great deal of control and flexibility on the warehouse operations. The company can claim depreciation on the flexibility asset and if there is excess space the company can look at renting the space out to get some extra revenue. But the capital cost of a private warehouse is very high. Due to which the funds of the company could get blocked (which could be used for other profitable use). Also the operating cost per unit of goods would be high if not utilized properly. EXAMPLE Cadbury India Ltd takes utmost care of the storage of the raw materials. They have different provisions for storing different kinds of materials. Cadbury follows a systematic way of storing and distributing its finished goods. In all, Cadbury has 27 warehouses in India in which 17 are the major warehouses and 10 are minors. Thus it has one warehouse in every state called as the carry and forwarding agents. The Thane plant is an important plant for Cadbury, producing some of the important Cadbury products. As a result it has been provided with a large warehousing facility of around 37,500 sq. Ft. This facility is a two-storyed warehouse wherein the heavy materials are stored at the ground floor and lightweight materials are stored at the first floor. 2. Public Warehouse: If an enterprise does not want to own a warehouse, it can go for public warehouse. These are warehouses whose facility can be hired by anyone. It gives marketing flexibility as the company can change the location and size depending on the market demand. As a public warehouse caters to many clients, economies of scale could be achieved which could reduce cost. Public warehouse are into the business of providing warehouse operations and hence provide expertise in the field. The different types of public warehouses are general merchandise, refrigerated, special commodity (special handling), bonded and household goods. Bonded warehouses are used to store goods before the tax are paid and is uses extensively in international business during exports and imports. EXAMPLE Central Warehousing Corporation (CWC) was established as a model for scientific warehousing in the country to undertake storage and distribution of the agricultural produces. It
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has a chain of Public warehouses with over 458 warehouses of 69.75 lakh metric tonnes capacity being managed by 15 regional offices. The warehouses of CWC provide storage and ancillary services for more than 250 groups of commodities and products and many of which call for specialized arrangements and a high degree of professional care and skill. 3. Contract Warehouse: There is a long-term contract signed between the company and a party providing warehousing services. The long-term contract could help in lowering the cost. Apart from providing lower cost (cost divided over number of clients), it provides for expertise in warehousing and flexibility. Normally contract warehouse also provide for additional services such as transportation, order processing, customer service, etc. 4. Co-operative Warehouses: These warehouses are owned, managed and controlled by cooperative societies. They provide warehousing facilities at the most economical rates to the members of their society. Factors determining type and number of warehouses The factors that determine the type and number of warehouse are. 1. Presence Synergy: Marketing benefits of locating the warehouse in the market 2. Industry Synergies: Reducing cost by sharing resources such as warehouse, transportation with other firms. 3. Operating flexibility: Ability to adjust internal policies and procedures to meet product and customer need 4. Location flexibility: Ability to adjust location and number of warehouse depending on the customer demand 5. Scale economies: Ability to reduce material handling and storage cost through application of advanced technologies. The factors influencing the number of Warehouses are Warehouses are erected for two reasons to reduce cost and to give better service to the customers. As the number of warehouses increase there is initially a decrease in the inventory carrying cost, transportation cost and obsolescence cost. But after a particular limit there is an increase in these costs. Also the warehouse overhead cost increases with the number of warehouses. The benefits of more warehouses are that it improves the customer service by reducing stock out and by reducing market delivery time. The number of warehouse is predominantly decided by the tradeoff between cost and customer service. The other factors that affect number of warehouses are customer locations and buying habits of people. Designing a Warehouse (Warehouse Design) 1. Location: The primary considerations while locating a warehouse are cost and customer service. Warehouse can be located near the market or near the production plant or at some intermediate place. Warehouses are located near the market in order to service the customer well. Warehouses are located near the manufacturing plant to store raw material and work in progress to support manufacturing or to store final goods for shipment to the customers. Warehouses are stored in the in between the manufacturing and market area so the goods from various plants can be brought to a central location and consolidated to send full load
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2. Site Selection: Once the location is finalized, the site at which the warehouse has to be located is to be finalized. There are three sites that can be looked at commercial zones, outlying areas served by motor trucks only and central Areas. The considerations that would decide the site would depend upon capital cost of setting up a warehouse and operating cost. These parameters are apart from other consideration such as services available, scope of expansion. Capital cost involves the initial cost of setting up a warehouse. Taking services of a public warehouse or a leased warehouse could reduce the capital cost. Operation expenses involve cost of running the warehouse, taxes to be paid, transportation cost to and from the warehouse, etc. Services such as availability of water and electricity, good road leading to the warehouse to transport goods, availability of manpower should be looked into. If the demand for the product picks up, there could be need for expansion. So the warehouse should have a scope of expansion. 3. Product Mix considerations: The design of the warehouse depends on the various products to be stored in the warehouse and their mix. Some of the factors related to the product that has to be considered are characteristics of the product, its weight, its size and shape, volume of sales, variation in demand of various products. This information will help to determine the size of the warehouse, its layout, design of the storage space, material handling equipments and the operating procedures. 4. Material Handling System: Depending on the product mix, sales volume of the products and the size of the warehouse, material handling equipments need to be selected. The material handling equipments should facilitate maximum product flow, as one of the main functions of the warehouse is movement of goods. 5. Warehouse Layout: Layout of a warehouse depends on the material handling system and requires development of a floor plan to facilitate product flow. Following are some of the steps while designing the layout: Determining the pallet size (if pallet has to be used) or the size of the goods to be stored. The size of the pallet should be selected in such a way that as far as possible it is able to fit the various products to be stored in the warehouse. As far as possible it should be ensured that the pallets are of standardized size and of uniform size for the entire operation. The positioning of the pallets has to be determined. One of the basic methods of placing the pallets is positioning it perpendicular to the aisle. It should be ensured that the material handling equipment is integrated into the final layout.
6. Determination of warehouse space: Determining the warehouse, space begins with the sales forecast. Once the sale is forecasted, the base stock and the safety stocks are determined depending on the variation in demand throughout the year. A good rule of the thumb is to allow 20 percent additional space to account for increased volume new products and so on. 7. Warehouse design: The size, layout and the path of movement of materials is a prerequisite for designing the warehouse. While designing the warehouse care should be
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taken that the product flow should not be hindered. Some of the other considerations while designing the warehouse are as follows: Overhead obstructions such as lights, sprinkler system, etc should be higher than the material storage and should not hinder storage of materials. Supporting columns should not restrict storage areas and should not come in the path of material movement. Floor area should be hardened so that it does not get damaged when the material is being moved. As far as possible maximize the use of the cubic space available.
The Square Root Law (Inventory at various locations) Modern logistical management strives to reduce inventory levels in the logistical network without sacrificing customer satisfaction. As the number of locations reduces, inventory in the net work also reduces, but reducing inventory beyond a certain level would certainly affect customer satisfaction. The square root law shows the amount of inventory one should hold at the new number of locations to maintain the same level of customer satisfaction. If a company decides to change the number of inventory locations as a part of their strategy, they can find out the inventory volume needed to be stored in new facilities. The square root law states that the total safety stock inventories in a future number of facilities can be approximated by multiplying the total amount of inventory at existing facilities by the square root of the number of future facilities divided by the number of existing facilities. If a company distributes 40,000 units using 8 existing facilities and plans to reduce the number of facilities to 2, then what should be the inventory in two of their future facilities? If we use the square root formula, the answer is 20,000(= 40000 x (2/8)) X2 =[x l] [n2/n1] X1 = total inventory in existing facilities X2 = total inventory in future facilities n1 = number of existing facilities [warehouses] n2 = number of future facilities [warehouses] Warehouse Design Principles While designing a warehouse the following principles should be taken care of. 1. Design Criteria: There are basically three criteria for designing a warehouse a. Number of floors: Ideally there should be a single floor as more than one floor would result in movement of goods upward and downward from one floor to another. This would result in wastage of time and energy. But if land is a scarce and costly then more then one floor as storage would be justified in terms of cost. b. Height utilization: As far as possible ail space should be utilized even the vertical space as each space costs money. Height should be utilized as much as it is safe to lift and store the material. c. Product flows: Product flow should be straight. This means that goods should enter from one door and exit from another door ensuring that the path of entrance and exit don't cross each other. 2. Handling of material: Two principles govern material handling technology a. Movement continuity: This principle' states that it is better for the material handler to make small number of larger movements than large number of smaller movements. For too much of exchange of material from one hander to another handler could lead to delay
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as well as spoilage of goods. b. Movement scale economics : The material handler should move or handle the largest quantity possible. This reduces per unit cost of handling of material. 3. Storage Plan: While designing the warehouse, product characteristics should be taken into consideration. Some of the product considerations are as follows a. Sales: Fast moving goods or the goods whose sales are high should travel the minimum distance and should be easily accessible. This will reduce travel distance and save time. b. Weight: Relatively heavier items should be stored near the ground level, whereas lighter items could be stored at a higher level. c. Volume: Bulky material may require a open space for storage, whereas smaller goods may require drawers or shelves.
Ch. 8: MATERIAL HANDLING Material handling is an important element, which determines the productivity of a
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warehouse. Material handling is highly labor intensive as compared to any other operations in a warehouse. Therefore the personnel cost in material handling is usually high. Most of the activities in material handling require significant manual handling and hence has little benefits from computerization and improved information technology. Objectives / Roles 1. Handling The primary handling objective in a warehouse is to sort inbound shipment according to precise customer requirements. The three handling activities are receiving, in-storage handling and shipping. 2. Receiving: When material reaches the warehouse it has to be received by the warehouse. One of the important activities here is to unload the goods from the transportation vehicle. Most of the time unloading is done manually. Containerized or unit-load shipments considerably reduce the unloading time. 3. In-storage Handling: In-storage handling consists of all movement within a warehouse facility. The two types of in-storage handling are transfer and section. Various transfers of goods happen within the warehouse. The goods as soon as they are received in the warehouse are transferred to the storage area. The second transfer may be required during order selection where goods are transferred from storage area to order selection area. The final transfer of goods takes place when the goods are finally shipped from the warehouse. Here the goods are transferred from the or election to the shipping or outbound area. Selection activity basically involves selecting different materials and is grouped to meet the , customer demand. The idea of using warehouse as a selection area is to reduce the overall transportation cost. 4. Shipping: Shipping consists of checking and loading orders onto transportation vehicles. As in receiving, shipping is manually performed in most systems. Material handling principles The principles of materials handling which ensures effective and efficient handling of material are as follows: 1. Planning Principle: All material handling should be the result of a deliberate plan. Non-plan movement of materials should be avoided as far as possible. 2. Standardization Principle: Material handling equipment, controls, and software should be standardized. While standardizing it should be ensured that performance objectives and flexibility in operations are not sacrificed. 3. Work Principle: Material handling work should be minimized without sacrificing productivity. 4. Ergonomic Principle: human capabilities and limitations must be taken into consideration while designing material handling tasks and equipments. 5. Unit Load: Unit load should be properly determined so that it accommodates all materials and material handling becomes easier. 6. Space Utilization Principle: Effective and efficient use must be made of all available space. 7. System Principle: Material handling and storage should be fully integrated so that there is a smooth flow of materials in the warehouse. 8. Automation Principle: Material handling operations should be mechanized and/or automated where feasible in order to improve operational efficiency. This will reduce potentially unsafe manual labor operations.
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9. Environmental Principle: Environmental impact and energy consumption such as petrol, diesel, should be considered as criteria when designing or selecting material handling systems. 10. Life Cycle Cost Principle: Cost of equipment throughout its entire lifecycle and not only its initial cost should be considered before selecting it. Designing Handling Systems The following guidelines should be considered while designing the mate handling systems. 1. Equipment for handling and storage should be standardized as possible. 2. When in motion, the system should be designed to provide maximum continuous product flow. 3. Investment should be in handling rather than stationary equipment 4. Handling equipment should be utilized to the maximum extent possible. 5. Wherever practical, gravity flow should be incorporated in system design. Factors Affecting the selection of Material Handling Equipment The selection of materials handling equipment requires the attaining of proper balance between the production problem, the capabilities of the equipment available, and the human element involved. The ultimate aim is to arrive at the lowest cost per unit of material handled. Equipment factors to be taken into consideration may well include the following: Adaptability: the load carrying and movement characteristics of the equipment should fit the materials handling problem. Flexibilitt: Where possible the equipment should have flexibility to handle more than one material, referring either to class or size. Load capacity: Equipment selected should have great enough load-carrying characteristics to do the job effectively, yet should not be too large and result in excessive operating costs. Power: Enough power should be available to do the job. Speed: Rapidity of movement of material, within the limits of the production process or plant safety, should be considered Space requirements: The space required to install or operate materials handling equipment is an important factor in its selection. Supervision required: As applied to equipment selection, this refers to the degree of automaticity designed into the equipment. Ease of maintenance: Equipment selected should be easily maintained at reasonable cost. Environment: Equipment selected must conform to any environment regulations. Cost: The consideration of the cost of the equipment is an obvious factor in its selection. TYPES of MATERIAL HANDLING EQUIPMENT A wide variety of materials handling equipment are available in the market, suitable to almost every industrial requirement. This material handling equipment differs from each other in following aspects: (i) Suitability for the type of material Some material handling equipment are suitable for bulk load while Other are suitable for packaged load or individual pieces. (ii) Direction of movement. Some material handling equipment can move materials only in horizontal direction, other can move only in vertical direction, while there are some which can move material in horizontal as well as vertical direction'
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(iii) Speed of movement' Some material handling equipment have fixed speed while in others speed can be varied' (iv) Path followed' Some material handling equipment follow a fixed path while in others path tan be varied' (v) Power required for the operation of the equipment Material handling equipment can be power driven (Battery or IC engine) or manual-driven (hand driven) or gravity feed driven' (vi) Supervision required
Shelf-type truck superstructures customize a nontilt platform truck to carry loose items and packages, and make the truck useful order picking.
Walkie pallet trucks are highly versatile low-lift pallet and/or skid handlers with load capacities from 3.000 to 8AW) lb. These trucks are very popular in grocery warehouses.
Orderpicker trucks place the operator on an elevating platform along with the forks. The operator picks items or cases from racks onto a pallet or shelf-type Structure.
Reach trucks operate in narrow aisles, storing and retrieving pallets in racks. Some are. equipped with a Pantograph mechanism and can shelve pallets two-deep.
Balance-till floor trucks are highly maneuverable. even with lone or bulky loads, because the. balances on the center Wheels and on one or two smaller swivel caters.
Outrigger rising-cab turret trucks lift the operator to the carne height as the pallet. These trucks are for Stacking pallets on both sides of very narrow aisles to 40-ft heights.
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Pallet trucks or "pallet jacks" remain one of the basic unitload handlers. Load capacities now reach 10,000 lb. Trucks can be customized with options-such as skid adapters.
Burden carriers have large heavy-duty cargo platforms and driver compartment. They are excellent for long hauls. and most can be used indoors or outdoors.
Counterbalanced lift trucks can be battery-powered or powered by LP. gas, or diesel engines. Three- or four-wheel models are available. with pneumatic or cushion tires.
Two-wheeled hand trucks come in three constructions: hardwood /steel. all steel, or aluminum / magnesium. Load capacities range up to 2000 Special designs tire available
Tow tractors are straightforward, operator-aboard. selfpowered tractors for towing wagons or cans over long, distances. Some can operate outdoors.
Material handling selection criteria Equipment Racking: Conventional pallet rack Drive-in rack Type of materials Pallet loads Benefits Manual Good storage density, good product security Fork trucks can access loads. good storage density Same as above Other considerations Storage density increases; further by storing loads two deep Fork truck access is from one direction only Fork truck access is from two directions Often used in ASKS and may offer tax advantages when used in rack-supported building
Pallet loads
Drive-through racks
Pallet loads
High-rise racks
Pallet loads
Very high storage density
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Pallet stacking frames
Odd-shaped or crushable parts
Slacking racks
Odd-shaped or crushable parts Unit loads
Each different SKU can be stored on a separate shelf Allow otherwise Can be disassembled unshakable loads to be when not in use stacked, saving floor space Same as above Can be stacked flat when not in use High density storage, gravity moves loads Inexpensive FIFO or LIFO flow of loads Can be combined with drawers for flexibility Can be compartmentalized for many SKUs Come equipped with safety devices May offer tax advantage when racksupported Best used where there are large quantities of only a few SKUs For flexibility. can be installed in several different configurations Can be stacked on top of each other Can serve dual role as storage and delivery system in multi-floor facilities Can be used with high-rise shelving or modular drawers
Gravity-flow racks
Shelving
Small. loose loads and cases Small parts and tools
Drawers
All parts are easily accessed. good security
Mobile racking or shelving Unit-load ASKS
Pallet loads, loose Can reduce required materials. and cases floor space by half Automated Pallet loads, and a Very high storage wide variety of sizes density. computerarid shapes controlled Pallet loads, other unit loads High storage density
Car-in-lane
Miniload ASRS
Small parts
High storage density, computer-controlled
Horizontal carousels
Small parts
Easy access to parts. relatively inexpensive High storage density Very flexible
vertical carousels
Small pails and tools
Man-ride machines
Small parts
Very flexible
Classification of Handling Systems Handling systems are classified as mechanized, semi automated, automated, and information directed.
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Mechanized systems use a combination of labor and machines for receiving, processing and shipping. In this case the labor constitute major portion of overall cost of material handling. Example, forklift trucks, pallet trucks, hand trucks.
Example: A CONTINUOUS Checkweigher system developed and built in Australia, is a Mechanized material handling equipment used by manufacturing industries for checking pallet weight precisely. Clients such as Nestle, Cadbury, Uncle Bens and Mars have been using the machine for as long as three years. An automated system minimizes the use of labor as much as possible. Automated equipments do most of the handling work.
Example: LGVs (Laser Guided Vehicles) is a fully automated system used specially in warehousing facilities. LGVs are fully controlled by Laser mechanism and require very little manual help for functions like picking of the finished products and packaging of the same and finally palletizing and wrapping of shipper cartons. Following palletization and wrapping of cartons, completed pallets are then automatically stacked by LGVs, ready to be fed into trucks via conveyer. A system where part of the work involves manual labor and part is done by automated equipments is called semi automated system. Information directed system uses computers to maximize control over mechanized handling equipment. Here the machines are directed and given information with the help of computes.
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Ch. 9: PACKAGING
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Packaging though an integral part of logistics also affects marketing and production function. Packaging helps in promoting the goods and informing the customer. As production employees often package the goods, the size, shape and the material of the package greatly affects production's labor efficiency. Packaging greatly influences the entire logistics system. The size, shape and type of packaging material influence the type and amount of material handling equipment as well as how goods are to be stored in the warehouse. Likewise, package size and shape affect transportation in loading, unloading, and transporting a product. Material handling efficiency is strongly influenced by packaging. Functions of Packaging The functions of Packaging are as follows: 1. Protection: It helps in the protection of materials and goods in the logistics process. This protection is from damage, theft, contamination and environment. It is generally not economical to provide absolute protection to the product from all possibilities. Hence a balance should be maintained between cost of packaging and providing adequate. protection. High cost and delicate goods require a high amount of packaging to avoid spoilage of goods. Therefore we normally see that the packaging in consumer durables such as television, computers are much higher as compared to packaging in soaps. 2. Utility: It facilitates other logistics functions such as transportation', storage and handling. Because of packaging and the concept of unit load. master cartons, pallets, containers, other functions of logistics such as transportation storage and handling becomes much easier and usually reduces the overall cost of logistics. 3. Communication: Packaging, enables product identification and tracking, and displays product care information. With newer technologies coming in such as bar code scanners has helped in improving capabilities in product identification and tracking. Product identification and tracking helps in receiving, order picking and to improve the overall efficiency of the logistics process. 4. Sale: Packaging also helps in improving the appeal of the product to the customer thus resulting in higher sales. Packaging Design While designing the packaging, the following considerations need to be looked into: 1. The type of product that is to be packaged. If the product is delicate, it may require more packaging in order to protect the product from damage. 2. The cost of the product. If the product is costly then it makes economical sense to protect the product with a higher amount of packaging so that the goods are not damaged. 3. The amount of handling the product has to go through. If there is a lot of handling is to be done then the product should be packaged properly for protection. 4. Packaging should be such that it should facilitate handling. 5. Its ability to be reused. Sometimes packaging could be costly. In order to reduce cost per unit the package designed such that it can be reused. Example, soft drinks served in bottles, where bottle are reused many times over so that the cost of packaging (bottle) per unit of soft drink is low. Another example is that of containers which are reused. 6. Its ability to be disposed. Once the use of packaging is over it should be disposed. There should be no problems while disposing the package. Therefore a lot of consumer durables are packaged in cardboard containers, which could be easily be disposed after its use. 7. Its effect on environment. Care should be taken that packaging material should riot harm
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the environment. The environmental impact of using plastics and wood as packaging material should be looked into. Palletization / Unitization In palletization / unitization, the master cartons are accumulated and stacked to form a single larger unit. Palletization helps in handling, transportation, storing, loading, unloading, loss and damage. This helps to save money and improve productivity. Although the advantages of pallets are many, there are three major disadvantages: Lack of standard pallet size: Pallets come in variety of shapes and sizes. This may cause problems in loading, unloading and packing. Once the pallet is empty, it needs to be stored, which takes up some space that could be used for storing other products. Costs of pallets are high. As it is used to store master cartons, it should be of sturdy material, which increases cost. Pallets could be made of rigid containers where the product is completely enclosed or it could be non rigid, where the products are not completely enclosed. Types of Packaging Packaging is classified into two types : Consumer oriented packaging in which packaging is designed for consumer convenience and appeal, marketing consideration and display. Logistic oriented industrial packaging focuses on the handling convenience and protection during transportation, material handling and storage. Industrial packaging is performed in four stages. 1. First stage is packaging the product itself. For example, soft drinks are packaged in cans. 2. Second stage is called Master cartons. In this case the packaged products are packed in larger cartons so that it can help in quantity handling. 3. The third stage is that of formation of unit load. Here the master cartons are consolidated into a single, large unit to facilitate handling, transportation, protection and storage. This process may involve palletization, where the master cartons are mounted onto a standard size rigid platform. 4. The fourth stage is called containerization. Here the unit loads are placed in rigid containers for protection and handling facilitation. Containerization helps in improving the efficiency in transportation, transfer across vehicles, and safeguarding from theft. Examples of Packaging in industries Cadbury, India, after the big problem of infested chocolates few months back has now imported machinery for auto-wrapping and put in place a new packaging system designed to keep infestation at bay. Armed with a new, air-tight packaging that is now exclusive to only Cadbury products in India and a system that trains its retailers and sales people on proper storage and handling of the product. The company has spent over Rs.8 crore in importing auto-wrappers for the new packaging, introduced new foil and poly-laminated packaging. Packaging at HP Usinq Molded Cushions packaging for computers HP's system of packaging PCs uses molded foam cushions with built-in accessory trays to protect products during shipment and to conserve natural resources. This development reduced
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the number of packaging components from four to three; reduced the weight of packaging material by 15%, and the cost of packaging material by approximately 28%; and increased the ' number of PCs shipped per pallet by '133%, ultimately conserving fuel energy and reducing vehicle emissions. Reducing unused space in product packaging Using a new packaging system that utilizes high-density polyethylene for some of the digital camera models worldwide, HP reduced unused space inside the camera package by 25%, thereby increasing the quantity shipped per pallet by 50% while decreasing packaging materials use by half. As a result, in 2004 HP saved an estimated $1 million in packaging cost while reducing transportation impacts. Bulk pack system reduces material use Bulk pack system reduces material use In 2004, HP developed new bulk packaging systems for their scanner sub-assembly units, reducing packaging and providing significant cost savings. They redesigned their corrugated cardboard packaging globally to allow the layer at the top of each unit to secure and protect the unit stacked above it. In 2004, this improvement reduced the amount of packaging material used to ship HP scanners by 40 tonnes.
Ch. 10: Inventory

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An inventory is any stock of economic resources that is stored for future use. It is commonly used to indicate materials, raw materials in progress, finished goods, packing materials, spares, etc. stocked in order to meet an expected demand or distribution in future. Even though inventory of materials is an idle resource, in the sense it is not meant for immediate use, it is almost a necessity to maintain some inventories for the smooth functioning of an organization. From the logistics operations point of view, the decision regarding inventory are extremely crucial. They have a high impact on logistics operations. Inventory decisions are high-risk because without proper inventory assortment, marketing may find that the sales are lost and customer satisfaction will decline. Likewise, inventory planning is very crucial for manufacturing activities as well. Raw material shortages can either shut down a manufacturing line or it may force modification of production schedules. Again, overstocking of inventories can also create problems. Overstocks increase cost and reduce the profitability due to i. increased warehousing requirements ii. increased working capital requirements iii. deterioration in quality of goods iv. fear of obsolescence v. Increased interest amounts, insurance premiums, taxes etc. Types of Inventories Several types of inventories are maintained by organizations. Some of the major inventories are: Raw materials: Raw materials, required for production of finished products are one of the basic components of inventory for a manufacture. Shortage of raw materials can cause production stoppage or change in production Schedule which in turn may result in a shortage of finished goods. Thus sufficient quantities of raw materials need to be stored to cope with uncertain situations. However, where shortage of raw materials can disrupt normal manufacturing operations, excessive inventories can increase inventory carrying costs and reduce profitability. Finished Goods: Finished goods are another important part of inventories, especially for the wholesalers and manufacturers. While holding finished goods inventory, it is important to have a adequate and not excess stock of inventories as they may incur cost as well as loss if the excess inventory is not sold out in time. W.I.P.: Work In Progress (W.I.P.) inventory is often maintained between manufacturing operations within a plant to avoid production hold ups in case a critical machine or equipment were to breakdown and also to equalize production flow, since not all manufacturing units produce at the same rate. Spare parts: Spare part inventories are mainly held for purpose of coping up with untimely breakdowns in machinery and facilities. This may form a minor part of the inventory, however are as necessary as holding raw materials inventory. Inventory functionality A major portion of the investment of the company is in inventory. Hence, the company must assure itself of at least a minimum amount of return on this investment. As the same time, experts in the field of accounts have found it difficult to exactly quantify the trade-off between the amounts invested in the inventory and the service levels, and operating efficiencies. In other words, it cannot be exactly quantified as to the amount of 'loss' suffered with regard to service offered to client, or how much other operating efficiencies have gone down, because of the
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money invested in inventory. Due to this, many enterprises carry an average amount of inventory that can exceed their basic requirement. This can be understood better by studying four prime functions underlying inventory commitments. 1. Geographical Specialization Because of the requirements of factors of production such as power, materials, water and labor, the economical location for manufacturing is often at a considerable distance from the major market. For example: for an automobile industry, components such as tyres, batteries, transmission, and springs are essential components but a tyre industry prefers to be located at a place when materials for tyre manufacturing are easily available because this minimizes transportation cost for that industry. Same is the case regarding the manufacturer of other components. This geographical separation of the components manufacturing units will reduce the cost of the components produced. But, for the final assembly, these components have to be transported to the main' assembly plant of the automobile company. Geographical separation also requires manufactured goods from various locations to be collected at a stage warehouse. These are then combined as a mixed product shipment and sent to the required destination. For example: Procter and Gamble uses its distribution centers to combine products from its laundry, food, and health care divisions to offer the customer a single integrated shipment. For an enterprise geographical separation, permits economic specialization between the manufacturing and distribution unit. Let us once again consider the case of automobile factory. Because of the proximity of the availability of power, water, materials and labor the tyre plant, the spring manufacturing plant will be located at different geographical points. Each geographical location of course will require its basic inventory. The economies gained through geographical specialization are expected to more than offset increased inventory and transportation cost, in case the company had decided to manufacture all the required components at it main assembly plant. 2. Decoupling A second inventory function, decoupling provides maximum operating efficiency within a single manufacturing facility by stockpiling work-in-progress between production operations. Decoupling processes permit each product to be manufactured and distributed in economic lot sizes that are greater than market demands. For example, let us consider a tyre-manufacturing unit. This unit once the production operation begins will continue to produce a certain type of tyre till an economic lot size is produced. There may not be a market demand for the entire lot of production. But the production of the lot was carried out keeping in mind the future demand as well as the economies of production. Customer can be sent large shipments with full-load capacity of trucks at minimum freight cost. In a way, therefore, decoupling tends to "buffer" or "cushion" the operations of an enterprise from uncertainty. Decoupling, therefore, enables increased operating efficiency at a single location. In contrast, geographical specialization looks at the operating efficiency at multiple locations because from these multiple locations, goods have to be dispatched to the main manufacturing unit. 3. Balancing supply and demand A third inventory function, balancing, is concerned with the elapsed time between consumption and manufacturing. Balancing inventory means the availability of supply is attempted to reconcile or match with the demand for the product. The most notable example is seasonal production and year-round consumption. In the West, Orange juice is consumed to a great extent throughout the year. But the production (i.e., reaping or harvesting) of oranges is
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basically seasonal. So the seasonal availability of oranges has to be reconciled to the year-round demand for orange juice. Balancing of inventories, therefore, attempts to link the economies of manufacturing with the variations of consumption. When the demand for a product is concentrated in a very short selling season, manufacturers, wholesalers, and retailers are forced to plan about stocking of goods in advance of the point of selling period. In our country we can take the example of a particular festival season, say Diwali. Every retailer, wholesaler and manufacturer expects a boom for gift articles, sweet and new clothes. But these enterprises have to plan out the amount of goods and products that are required to be manufactured ,and stockpiled. There should be a proper balance between the expected demand and the availability of supply. This is to minimize the risk of carryover into the next selling season. If such situation arises then the quality of goods and its marketability will be the problems for its sale. 4. Buffer uncertainties
The safety stock or buffer stock function concerns short range variation in either demand or replenishment. The safety stock requirement results from uncertainly concerning future sales. Safety stocks protects against two types of uncertainties : 1. Demand can be in excess of the forecast, during the performance cycle 2. Dealys in the length of the performance cycle itself. In the first type of uncertainly the customer may demand more than what he had actually planned. It can also happen that the demands from the customer may also fall, which can also upset inventory. In the second type of uncertainly, there can be delay in order-receipt from the customer, or delay in processing of the order, or delay in transportation of required material. This brings about an uncertainly in the length of the performance cycle. To tide over these uncertainties, there are statistical and mathematical techniques which help managers to plan the levels of safety or buffer stock. With these available techniques, the probability and the magnitude of each type of uncertainly can be reasonably estimated, The function of buffer or safety stock 9nventory is to provide a specified degree of protection against this type of uncertainty.
5. Service level The service level is the target specified by the management. It defines the performance objectives, which the inventory function must be capable of achieving. The service level can be defined in terms of an order cycle time, case fill rate, line fill rate, order fill rate, or any combination of these. The order cycle time (performance cycle) is the elapsed time between the release of a purchase order by a customer and the receipt of the corresponding shipment. A case fill rate defines the percentage of cases or units ordered that can be shipped as requested. For example, a 95 percent case fill rate indicates that, on an average 95 cases out of 100 could be filled from available stock. The remaining 5 cases would be backordered or deleted. A line fill rate is the percentage of order lines that could be filled completely. Each line on an order is a request for an individual product, so an order may have multiple lines. For example, when a customer order is received for 80 units of product A and 20 units of product B, the order contains 100 cases and 2 lines. If there are only 75 units of product A available and all 20 units of product B, the case fill would be 95 percent [(75 + 20) / (80 + 20)] and the line fill would be 50 percent (1/2). Order fill rate is the percentage of customer orders that could be filled completely. In the above example, the order could not be completely filled. So the resulting order fill would be zero.
Purpose of holding inventory / Importance
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1. MEET DEMAND:- In order for a retailer to stay in business, it must have the products that the customer wants on hand when the customer wants them. If not, the retailer will have to backorder the product. If the customer can get the good from some other source, he or she may choose to do so rather than electing to allow the original retailer to meet demand later (through back-order). Hence, in many instances, if a good is not in inventory, a sale is lost forever. 2. KEEP OPERATIONS RUNNING:- A manufacturer must have certain purchased items (raw materials,- components, or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods. 3. Inventory between successive dependent operations also serves to decouple the dependency the operations. A machine or work centre is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a workcenter, then all subsequent centers will shut down for lack of work. If a supply of work-inprocess inventory is kept between each workcenter, then each. Machine can maintain its operations for a limited time, hopefully until operations resume at the original centre. 4. LEAD TIME:- Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered. 5. If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory. 6. A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day. However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, on-hand inventory of three months' steel requirements would be necessary. 7. HEDGE:- Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs. 8. QUANTITY DISCOUNT:- Often firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified. 9. SMOOTHING REQUIREMENTS:- Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat, erratic. Notice how the use of inventory has allowed the firm to maintain a steady rate of output (thus avoiding the cost of hiring and training new -personnel), while building up inventory in anticipation of an increase in demand. In fact, this is often called anticipation inventory. In essence, the use of inventory has allowed the firm to move demand requirements to earlier periods, thus smoothing the demand.
Inventory & profitability
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Inventory turns, or turnover, has a significant impact on profits. The faster inventory passes through your business, the higher the annual rate of return on the investment. Grocery stores, for example, earn only about 2% gross margin on sales but they turn their inventory out nine times a year. Nine turns times 2% yields an annualized rate of return of 18% gross margin. Smaller inventories turning faster cost far less than the alternative thus contributing to bottom line profits. Average inventory includes the following: Cycle inventory: Cycle inventory, or base stock is the portion of average inventory that result from the replenishment process. At the beginning of a performance cycle, the stock is normally at a maximum level. Daily customer demands draw off inventory until the stock level is reduced to zero. But, prior to this occurring, a replenishment order is initiated so that stock will arrive before the stock out occurs. The amount ordered for replenishment Is called order quantity. The average inventory held as a result of the order process is referred to as base stock. Considering only the order quantity average cycle inventory or base stock equals one-half of the order quantity. Safety stock inventory: The second part of average inventory is the stock held to protect the facility against the impact of uncertainty. This portion of inventory is called safety stock. Safety stock inventory is used only at the end of replenishment cycles when uncertainty has caused higher than expected demand or longer than expected performance-cycle timed. Transit inventory: Transit inventory represent stock that is either moving or awaiting movement in transportation vehicles. This portion of total inventory is also referred to as pipeline inventory. Transit inventory is necessary to achieve order replenishment. Increased focus on smaller order amounts, more frequent order cycles, and just in time strategies have resulted in transit inventory becoming a larger percentage of total inventory assets. Because of this a greater attention is being directed towards reducing the amount of transit inventory and its associated uncertainty. Safety Stock Factors affecting the level of Safety Stock: 1. Category of item: in case of A category items where a better control is exercised it may not be required to keep a high level of safety stock. In addition to this a high level of safety stock and high value consumption item will also increase the inventory carrying costs. 2. Lead time: Normally longer the lead time, more is the chances of fluctuation and hence more is the requirement of safety stock. 3. Number of suppliers: In case there are a number of suppliers available for an item, it is not necessary to keep a high level of safety stock as any stock out situation can be handled easily from alternate sources of supply. 4. Criticality of an item: safety stock for critical items needs to be high. E.g.: In case of packing materials the safety stock need to be high as stock cut in packing materials will affect the delivery of finished goods to the customer, but incase of lubricants where lubrication can be delayed safely by a few days a lower safety stock can be maintained. 5. Availability of substitutes : Lesser safety stock can be kept for items where substitutes are easily available. 6. Possibility to make the item in house : If it is possible to make an item in house at a short notice in case of emergency. A lower safety stock will suffice. 7. Risk of obsolescence or deterioration : It is better to have lower safety stock for items where the cost of deterioration is higher than the cost of no stock situation.
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8. Space restrictions : Restrictions in the storage space is another factor influencing the safety stock levels. 9. Stock out cost/ management policy : The cost of stock out and the management decision to allow stoppage of production due to no stock situation (depending upon the market and companys financial conditions) also influence the decision on the safety stock levels. Inventory Management The objectives of inventory management are: i. To increase corporate profitability through improved inventory management, ii. To predict the impact of corporate policies on inventory levels and iii. To minimize the total cost of logistics activities while making customer service requirements. Symptoms of poor inventory Management The symptoms of poor inventory management include: i. An increase in the number of back orders, indicating too many stock outs ii. Rising inventory investment iii. Higher than normal customer turnover. iv. Increased number of cancelled orders from customers or intermediaries. v. Insufficient storage space due to excessive inventory vi. An increase in the number and rupee value of obsolete products. Measurement of Effectiveness of inventory Management The key measure of effective inventory management is the impact that inventory has on corporate profitability. Profitability can be improved by lowering costs of supporting increased sales. Measures to decrease inventory - related costs include: (i) Reducing the number of back orders or expedited shipments. (ii) Purging obsolete o, dead stock from the system and (iii) Improving the accuracy of forecasts. Better inventory planning helps to reduce or eliminate transhipment of inventory between field warehouses and small lot transfers. Better inventory management can increase the ability to control and predict how inventory investment will change in response to management policy" EOQ (Economic Order Quantity) There are different EGQ Models. The most classical model was first proposed by Wilson in 1928. It is popularly known as EOQ (Economic Order Quantity) Model or "Wilson's Lot Size Formula". Basic (or Wilson) EOQ Model Assumptions underlying the EOQ model: i. The demand of the item occurs uniformly over the period at a know rate. ii. The replenishment of the stock is instantaneous. iii. The time that elapses between placing a replenishment order and receiving the item into stock, called lead time is zero. iv. The price per unit is fixed and is independent order size. v. The cost of placing an order and processing of the delivery is fixed and does not vary with the lot size.
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The inventory carrying charges vary, directly and linearly with the size of the inventory and are expressed as a percentage of average inventory investment. The item can be produce in the quantities desired, there being no restriction of any kind. The item has fairly long shelf life, there being no fear of deterioration or spoilage.
Nowadays EOO technique is not much in use because an open order with delivery schedule can be placed on a supplier for all future periods. This keeps down the purchasing cost. With the availability of computer links (Networking techniques / E mail / E - commerce, M commerce, C - commerce, etc.) between the buyer and the supplier, there is no need to physically raise a purchase order. This helps in avoiding major purchasing cost. At the same time computer helps in ensuring Just in Time inventory. Limitations of EOQ: 1. The assumptions listed above may not come true in real life situations, thus limiting the use of this model. 2. Price off materials may not remain same throughout the year. 3. Availability of materials is another constraint. Material can only be purchased at the time when it is available. 4. There can be delays in real situation in placing orders since many times the calculated EOQ is an inconvenient number and some time is wasted in taking decision for rounding off this number. In real situations, suppliers receive an irregular stream of orders since the use of EOQ usually leads to orders at random points. 5. If suppliers are allowing discounts after purchasing quantities above a particular level, the discount will also have to be taken into consideration for fixing the ordering quantity. Also purchasing costs are nowadays reduced to a great extent because of computer links between buyer and seller. So in practice purchasing cost and inventory carrying cost are not exactly opposite to each other. Often the inventory carrying cost and purchasing cost cannot be identified accurately and sometimes cannot be even identified properly. Concept of Economic order Quantity (EOQ): One of the major inventory control problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it has to be purchased on each replenishment. These problems are called order e1quantity problems, and the task of the firm is to determine the optimum or Economic Order Quantity. Determining an optimum inventory level involves 2 types of costs: (a) Ordering Cost and, (b) Carrying Cost. The Economic Order Quantity is that inventory level which minimizes the total of ordering and carrying cost. a) Ordering Cost: The term ordering cost is used in case of raw material and includes the entire cost of acquiring raw materials. They include cost incurred in the following activities: Requisitions, Purchase Ordering, Transporting, Receiving, inspecting and Storing. Ordering cost includes the number of orders; thus the more frequently inventory is required, the higher the firms ordering cost. On the other hand, if the firm maintains large inventory levels, there will be few orders placed and ordering cost will relatively small. Thus ordering cost decrease with increasing size of the inventory. b) Carrying Cost: Cost incurred on maintaining a given level of inventory are called carrying costs. They include storage, insurance, taxes, deterioration and obsolescence, etc. Carrying cost vary with inventory size. The economic size of inventory would thus depend on trade off between carrying cost and ordering cost.
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The Economic Order Quantity which is determined by the interaction of the above costs can be found out graphically as given below.
In the figure, costs - carrying cost and ordering cost are plotted on vertical axis and horizontal axis is used to represent the order size. Total carrying cost increase as the: girder size increases, because on an average a larger inventory level will be maintained, and ordering cost decline with increase in order size because larger order size means less number of orders. The Economic Order Quantity is determined at the point where there is an intersection of the carrying cost and the ordering cost. Thus the firm's operating profit is maximum at point Q. Derivation of EOQ Let 'D' be the annual demand for an item in units. If Q is the order size (i.e., EOQ) to be determined then, the number of orders/year = D/Q Let Co be the cost per order or ordering cost. Then, annual ordering cost = (Number of orders per year) X (Cost per order) D/Q x Co The holding cost or carrying cost can be calculated using the average inventory level. Then we can calculate the holding cost for an item per year by multiplying the average inventory level by the cost of carrying one unit in inventory for a stated period (the period could be one week, one month or one year). However, since the holding or carrying cost is expressed as an annual percentage of the value of average inventory for an item, inventory models are developed on an annual cost basis. Let I = annual carrying cost rate (as percentage) P = unit price of the inventory item
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Cc = annual cost of holding or carrying one unit in inventory Then Cc = pl Annual holding or carrying cost = (Average inventory level) X (annual holding cost per unit) Average inventory = Initial inventory + Final inventory 2 = Q+0 = Q 2 2 Annual holding or carrying cost = (Q/2) x Cc Total annual inventory cost = Annual ordering cost + Annual holding cost TC = (D/Q) Co + (Q/2) x Cc The optimal order quantity occurs at the point where the total cost curve is at the minimum, which also coincides exactly with the point where the ordering cost curve intersects with the carrying cost curve. This enables us to determine the optimal values of order quantities or EOQ by equating the two cost functions and solving for Q as follows:
Alternately, the optimal value of Q can be determined by differentiating the total cost equation with respect to Q and equating the resulting function to Zero and then solving for Q as follows:
Computation of EOQ can be best understood with the help of the following illustration: ABC Company is engaged in the manufacturing of various types of gears and shafts in their well established gear shop. One of the sets of gears which are mass produced at this company requires a special cutting tool. Two hobs per month on the average are required to manufacture the required of these gears. The average lead time required to place an order and obtain the supply of these hobs is around three months.
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Each hob costs the company Rs.2,400/-. The company's personnel estimate that it costs Rs.34/- to place an order and process the delivery. The inventory carrying charges are estimated at 17% of the average inventory investment What quantity should be actually ordered and received at a time to ensure availability of the tool all the time if, the supplier agrees to supply the tools in staggered lots of any size provided a firm order indicating definite schedule is placed. Solution:
Annual consumption (units) i.e. 2 x 12 Cost of placing an order (Rs.) inventory carrying cost Cost per unit (Rs.)
= = = =
24 34/17% i.e. 0.17 2400
Substituting the values of the above parameters in the EOQ formula, we get:
Since the supplier agrees to effect supplies in staggered lots, the buyer should place an order for annual requirement (i.e. 24 hobs) to receive 2 orders every month (i.e. EOQ). Such an arrangement takes care of the constraint as well as gives the benefit of cost optimization through EOQ. Re-order Point The problem, how much to order, is solved by determining the EOQ. However, the answer to the when to order in determining the Re-order Point. The Re-order Point is that inventory level at which an order should be placed to replenish the inventory. To determine the Re-order Point we should know: (a) Lead time, (b) Average usage and (c) EOQ Lead time is a time normally taken in replenishing inventory after the order has been placed. In simple words, Re-order Point is simply that inventory level which will be maintained for consumption during lead time.
Re-order Point = Lead time X Average usage.

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To illustrate, let us assume that the EOQ is 500 units, lead time is 3 weeks and the average usage is 50 units per week. If there is no lead time, i.e. delivery of inventory is instantaneous, the new order will be placed at the end of 10th week, as soon as EOQ reaches zero level. But, as the lead time is 3 weeks, the new order should be placed at the end of 7th week, when there are 150 units left to consume during the lead time. As soon as the lead time ends as inventory level reaches zero, the new stock of 500 units will arrive. Thus, the Re-order Point is 150 units (50 units x 3 weeks). The above diagram shows that the order will be placed at the end of the 7th week, where 150 units are left for consumption during lead time. At the end of 10th week, the firm will get a supply of 500 units. If the lead time is nil, the Re-order Point will be the zero level of inventory. Safety stock When the wage rate and/or lead-time vary, then the reorder level should naturally be at a level high enough to cater to the production needs during then procurement period and also to provide some measure of safety for at least partially neutralizing the degree of uncertainty. It depends on the degree of uncertainty surrounding the usage rate and lead-time. It is possible to a certain extent of to quantify the values that usage rate and lead-time can take along with the corresponding 'chances of occurrences' known as 'probabilities'. These probabilities can be ascertained based on the previous experiences and the judgmental ability of executives. Based on the above values and estimated stock out costs and carrying costs of inventory it is possible to work out the total cost associated with different levels of safety stock. Higher, the quantity of safety stock, the lower will be the stock-out cost and the higher will be the incidence, of carrying costs. Thus the reorder level will call for a trade-off between stock out costs and carrying cost. The reorder level will be such that the total stock out cost and the carrying cost will be at its minimum. If safety stock is present then reorder point becomes Reorder point = Normal consumption during lead time +safety- stock during lead-time
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Economic batch quantity (EBQ), also called optimal batch quantity" or economic production of units that can be produced at minimum quantity, is a measure used to determine the quality average costs in a given batch or production run. A refinement of the economic order quantity to take into account circumstances in which the goods are produced in batches. An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of , them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenue's, cannot be properly matched and a company could make poor business decisions. Inventory control Each item of inventory used by an organization has its own criteria of importance. A check or control has to be kept on each of these items. It is obvious that depending upon the type of the item, there will be variations in the type of controls employed. That is the controls applied are on a selective basis. This is selective control. Selective control car, be divided into the following categories: ABC Analysis: Criterion Employed usage value. Statistically speaking, in any industry in general, there are a few items only that form the major or expenditure on materials. Hence, in ABC analysis, depending upon the annual usage of the materials, items are broadly classified as A, B or C. Such a categorization helps the company to give only the necessary importance that is required for an item. A) Items: On a general basis, it is found that 5 to 10% of the total items with an organization account for about 70 to 75% of the total amount of money spent on materials. Quite naturally, a strict control has to be kept on their usage. Because of their high cost, these items have to be preferably stocked in smaller quantities. This will automatically mean that they have to be procured or re-ordered more frequently in smaller batch quantities. B) Items: Broadly, they form 10 to 15 % of the total items and represent about 10 to 15 % of the total expenditure on the materials. These items are intermediate in nature regarding their importance. Hence, the controls applied on these items need not be as rigid and detailed as in the case of A-items. C) Items: These items are numerous. They may form as much as 70 to 80 % no of the total number of items. Again, relatively speaking they are inexpensive contributing about say 5 to 10 % of the total annual expenditure on materials. They are, therefore, insignificant in the sense that they do not require any rigid control over them as compared to the A and B items. In terms of their procurement, the policy adopted is generally reverse of that applied for the A items. That is, C items are procured in sufficiently large quantities and not very frequently. ABC analysis can be applied to every aspect of materials management it can be applied in the case of( a) purchasing, (b) receiving, (c) inspeotion, (d) store-keeping (e) issuing of stores, (f), verification of bills, (g) inventory control, (h) value analysis. The purpose of A-B-C analysis can be enumerated as follows :
To separate out the items, normally in terms of their annual consumption.
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To avoid wasteful expenditure. To have a selective control on the various items of usage. To have a more rationale purchasing policy. That is, priority is given to A- items regarding their purchase etc. To have a better analysis of cost and item before any purchase is made. There is better follow-up regarding the purchase and the usage of the items. An effective value analysis about the items used by the company is created.
HML Analysis: Criterion Employed - only unit price of the item. Items are classified into three groups labeled as High - Medium - Low. The HML analysis is very similar to the ABC Analysis, the difference being instead of usage value, the price criterion is used. In their classification, the items used by the company are arranged in descending orders of their unit price. After this, the management of the company uses its discretion and judgment to decide the cut off lines for deciding the three categories. For example, the management may decide that all items of unit price value above Rs 500 should be categorized as H items, items whose, unit price falls between Rs 50 and Rs 500 should be categorized as M items and items whose unit price falls below Rs 50 should be categorized as L items. The categorization therefore is decided by the management. HML analysis helps an organization to take decisions on the following: a) It helps to assess the security requirements and the type of storage for high priced items. For example, expensive ball bearings can be kept under lock and key in a cupboard. b) The frequency of stock checking is decided on the basis of the cost item. In other words, more expensive the item, more frequent will be its stock-checking. c) A control on purchases and buying policies can be exercised by the company. This means H and M items will not be ordered in excess of the required minimum quantity. However, in the case of L items, they may be purchased in bulk in order to avail the benefits of bulk purchase. VED Analysis: Criterion Employed criticality of the item. VED Analysis attempts to classify the items used into three broad categories, namely Vital, Essential, and Desirable. The analysis classifies items on the basis of their criticality for the industry or company. Vital: Vital category items are those items without which the production activities or any other activity of the company, would come to a halt, or at least be drastically affected. Essential: Essential items are those items whose stock - out cost is very high for the company. Desirable: Desirable items are those items whose stock-out or shortage causes only a minor disruption for a short duration in the production schedule. The cost incurred is very nominal. VED Analysis is very useful to categorize items of spare parts and components. In fact, in the inventory control of spare parts and components it is advisable, for the organization to use a combination of ABC and VED Analysis. Such control system would be found to be more effective and meaningful. SDE Analysis: Criterion Employed Procurement diff100711160`14e. how easy or difficult it is to procure each of these, items. S-D-E stands for Scarce, Difficult and Easy. It attempts to classify items on the basis of its availability or procurement such as a) Its non-availability.
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b) How scarce it is. c) Does it have a longer lead time ? d) Where is the geographical location of the suppliers of the item, i.e. close by, or very far away. e) How reliable (or unreliable) ,after the suppliers of the item, etc. Scarce: These are generally short in supply, or are channelized through government agencies. If the company feels that a lot of time as well as expenditure is involved in procuring these items, it would be advisable for the company to procure these items, say once a year. Difficult: These items are available indigenously, but are difficult to procure. "Difficult" categorization also includes those items which are procured from far off places and whose suppliers cannot be relied upon. Sometimes it may happen that certain items are difficult to manufacture and further, there may be only one or two companies who manufacture this item. In order to procure such items in time for production, the manufacturers may have to be given an order well in advance. Such items are also classified under "difficult" Category. Easy: As the name suggests, these items are easily and readily available. They include all those items that are produced according to commercial standards, items which are able to be procured locally without any difficulty, etc. G-NG-LF Analysis/ GOLF Analysis: Criterion employed Source of procurement, that is, foreign, local, government, etc. G-NG-LF Analysis, or also called GOLF Analysis, categorizes items based on the nature of suppliers. The nature is fixed or determined on the basis of quality of suppliers, lead time of supply, terms of payment, continuity and regularity of supply, extent of administrative work involved in the procurement, etc. The analysis classifies items into four broad groups G, NG (O), L and F. it is similar to the grouping made under the SIDE analysis. G group covers all those items which are procured from government suppliers, namely State trading Corporation. Minerals and Metal Trading Corporation (MMTC) and various public sector undertakings. The procurement transactions with these category of suppliers normally involves a long lead time. Many times these suppliers demand payment for goods in advance. NG (which is represented by the letter 0 in the word GOLF) comprises of all those items which are procured from various Non-Government, or, Ordinary suppliers. Transactions pertaining to purchase of items under this category involve purchase from those suppliers who deliver goods in a moderately reasonable time. Further, the suppliers also offer credit which may range from to 45 days. L group consists of those items which are purchased from local suppliers. These items generally consist of cash purchases. F group consists of items purchased from foreign suppliers the transactions with such suppliers involve the following: a) There is a lot of administrative and paper work involved before the actual delivery of goods takes place. b) The company may have to search for reliable foreign suppliers. c) Opening of letters of credit, procuring necessary bank guarantees etc. will have to be obtained. d) The company may have to make necessary arrangements for shipping, port clearance and transport.
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S-OS Analysis: Criterion. time Dyed seasonality of goods and their procurement during those periods. The letter S stands for seasonal, and the letters OS stand for off seasonal. SOS analysis deals with the availability or purchase of items during season, or during Off-season. Items which are required to be purchased are normally identified as follows: a) Specific seasonal items which are available only for a limited period of time. For example agricultural products like raw mangoes, certain raw materials for cigarette and paper industries etc. Since such items are available only for a limited period of time, they are procured and stored to last till the next season. b) Many items are seasonal but they are normally available throughout the year. However, the purchase price of these items is generally lower during the harvest time. Because of this, the company has to predetermine the quantity of these items to be purchased. In other words, the company has to compare the cost savings accrued due to purchase of the items when the price is lower against the inventory carrying costs for the remaining part of the year. c) Non-seasonal items pertain to those items, which a company requires to procure when they are not in season. The reason for this may be that the company found it very expensive and non-profitable to purchase and stock these items in bulk when they were available during the season. F-S-N Analysis: Criterion employed: Rate of consumption of items in terms of rate of their issue from stores. In F-S-N analysis, items are classified according to their rate of consumption. The items are classified broadly into three groups: F means Fast moving, S means Slow moving, N means Non-moving. The FSN analysis is conducted generally on the following basis: The last date of receipt of the items or the last date of the issue of items, whichever is later, is taken into account. The time period is usually calculated in terms of months or number of days and it pertains to the time elapsed seems the last movement was recorded. FSN analysis helps a company in identification of the following a) The items to be considered to be "active" may be reviewed regularly on more frequent basis. b) Items whose stocks at hand are higher as compared to their rates of consumption. c) Non-moving items whose consumption is "nil" or almost in significant. X-Y-Z Analysis: Criterion employed: Amount invested in the inventory of each of the items XYZ analysis is based upon the value of the stocks, which are held. In other words, the investment made in the inventory of each of the items is detailed, Those items, whose inventory investments values are high, are called as X items. Y items consist of those items whose investment inventory values are moderate. While Z items are those items whose investment inventory values are low. Normally XYZ analysis is used along with either the ABC analysis or with HML analysis. When combined with ABC analysts it is as detailed below:
Class of
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Efforts to be made to reduce stock to Z category Efforts to be made to convert stock to Z category *
Efforts to be made to Steps to be taken to convert stock to Y dispose off surplus category stocks. * Control on stocks may be further tightened. Stock levels may be reviewed, say twice a year. *
Note: *Represents those items which are within control. Therefore no further action about them is found necessary. Selective Control Techniques: Traditional Techniques Inventory Replenishment Systems: One of the jobs of the materials department is to ensure uninterrupted supply of materials to the production department. To accomplish this task, the materials department has to monitor the stock levels and place orders regularly. Two questions that arise are - when to place an order? And what quantities to order? Two main systems are followed for the same: 1) Fixed order quantity system (Q - System of Inventory) 2) Fixed order interval system (P - System of Inventory) Fixed order quantity system (Q - System of Inventory) Here the quantity to be ordered is worked out as the economic order quantity (EOQ) and the minimum stock level is also worked out. When the stock in hand reaches this level, an order is placed for a quantity equals to the EOQ. Features of Fixed order quantity system: a) Reorder quantity is always the same, which is equal to the EOQ. b) The time interval between the orders varies. c) Reordering is done when the stock in hand is equal to safety stock plus the lead time consumption (this is known as the reorder level). d) Maximum inventory is equal to safety stock + Q e) Minimum inventory will be equal to safety stock f) This system is normally used for items of lower Value where orders are placed infrequently, and the lead time, average consumption etc. are fairly constant. To simplify this system, many firms use a TWO - BIN system. One is the main BIN and the other is a reserve BIN. The stock in reserve bin equals the reorder level. When the main bin is empty it indicates an order has to be placed for the said item. Important formulae: Reorder level Reorder quantity Maximum inventory Minimum inventory Average inventory Total cost of ordering
= = = = = =
Safety stock + lead time consumption Q Q + safety stock safety stock Q/2 + safety stock Number of orders X cost per order
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Avg. inventory X cost per unit X inventory carrying cost cost of ordering + cost of carrying
Fixed order interval system (P - System of Inventory) This is also referred to as the 'periodic-ordering-system', or 'periodic review' system or 'order cycling' system. The important features of the system are: 1. Under this system the stock in hand is reviewed at periodic intervals and an order is placed which varies with the level of stock in hand. 2. The review period is decided to minimize the sum of annual procurement cost and annual inventory carrying cost along with the consumptions and lead time consumption during the period. 3. The quantity ordered is decided depending on the stock in hand, so that the ordered quantity and the stock in hand will take care of the requirements till the next review period plus the lead time consumption plus the safety stock. 4. The interval between two orders is fixed. 5. This system is used for high consumption value items (A category) needing a strict control. Retail establishments where large number of items are produced and a continuous sales is made also follow such a system. Fair share Allocation It is a simplified inventory management planning method that provides each, distribution facility with an equitable or Fair share' of available inventory from a common source such as a plant warehouse. Example of a fair share allocation
The above figure illustrates the network structure, current inventory levels and daily requirements of three distribution centers served by a common plant warehouse. Using fair share allocation rules, the inventory planner determines the amount of inventory that can be allocated to each district center from the available inventory at the plant warehouse. For this example assumes that it is desirable to retain 100 units at the plant warehouse, hence 500 units are available for allocation. Formula
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Where, DS = common days supply for distribution center inventory. Aj = inventory units to be allocated from plant warehouse. Ij = inventory in units for distribution center 'j' Dj = daily demand for distribution center j. n = number of distribution centers. In this example, DS = 500 + (50+100+75) 10+50+15 = 500 + 225/75 = 9.67 days Hence the fair share allocation indicates that each distribution center should be brought up to 9.67 days of stock. The amount to be allocated to each distribution center is determined by: Aj = (DS Ij/ Dj) x Dj Aj amount allocated to distribution center T. Ds days' supply that each distribution center is brought up to Ij and Dj are as above. The amount allocated to distribution center 1 in this case: Al = (9.67 50/10) x 10 = (4.67) x 10 = 46.7 ~ 47 units. However fair share allocation does not consider site-specific factors such as differences in performance cycle time, EOQ, safety stock requirements. MRP I Materials Requirements Planning For a manufacturing company to produce end items, the availability of sufficient production capacity must be coordinated with the availability of all raw materials and purchased items from which the end items are to be produced. In other words, there is a the availability of dependent demand items from which the products are made one approach to manage the availability of dependent-demand items is to keep a high stock of all the items that might be needed to produce the end item. However, this approach is costly due to the excessive inventory of components, fabricated parts and sub assemblies to ensure high service, level. An alternative approach to managing dependent demand items is to plan for procurement of specific components that will be required, to produce the required quantities of the end products as per the production schedule indicated by the master production schedule. Such a technique is known as Materials Requirements Planning technique. MRP I is a computer based in which the given Master Production Schedule is divided into the required amounts of raw materials, parts and sub assemblies, needed to produce the end items in such time period (weeks / months) mentioned in the schedule. The gross requirement of these materials is reduced to net requirements by taking into account those materials that are in inventory or on order. Henceforth, a schedule of orders is developed for purchased materials based on the knowledge of the lead times for procurement of those materials.
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Objectives of MRP I 1. To improve customer service by meeting delivery schedules promised and shortening delivery lead times. 2. To reduce inventory costs by reducing inventory levels. 3. To improve plant operating efficiency by better use of productive resources. 4. To act as a planning as well as a controlling system over the production operations and procurement of materials. Since MRP is a computer based system, it was possible to expand the system into a manufacturing planning and control system, by providing information for planning and controlling both the material and capacity required to manufacture the products. Hence, MRP serves as a key component in an information system for planning and controlling production operations and procurement of materials. MRP I, when extended to include feedback from and control of vendor orders and production operations, it is called "Closed-loop MRP" which helps managers achieve effective manufacturing control. MRP II Manufacturing Resource Planning The following diagram shows a general overview of MRP as a means of coordinating purchasing activities to support manufacturing as well as material requirements in a plant.
When the capabilities of closed-loop MRP are extended to integrate financial, accounting, personnel, engineering and marketing information along with the production planning and control activities of basic MRP system, the resulting broad-based resource-coordination system is known
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as Manufacturing Resource Planning or MRP II. MRP II is basically needed by today's organization as it helps in providing vital information regarding inventory investment levels, plant expansion needs, and work-force requirements that is useful for coordinating marketing, financial, engineering and manufacturing efforts of the company.
Modern Techniques: Vendor-managed inventory (VMI)- An inventory planning and fulfillment technique in which a supplier is responsible for monitoring and restocking customer inventory at the appropriate time to maintain predefined levels. The vendor is given access to current customer inventory, forecast and sales order information and initiates replenishment as required.
JIT II, a customer-supplier partnership concept pioneered at Bose Corporation and now practiced by major companies and their suppliers, can aid in cutting both design and response lead time. This is done through system integration, a basic process strategy of time-based competition. In a JIT II relationship, a supplier's sales representative works full-time in a customer firm while being paid by the supplier. The customer serves as the host organization, and the supplier representative-referred to as an in-plant representative, or "in-plant"--functions as an employee of the customer's purchasing department, attending planning meetings and determining material needs. The in-plant is then authorized to purchase materials from the supplier for the customer.
In conventional JIT purchasing, customers and suppliers conduct themselves as partners rather than as adversaries. These partnerships provide long-term contracts to single-source suppliers. In return for the cumulative volume of business, the customer receives frequent deliveries in small quantities of high-quality goods. Benefits reported by JIT purchasing customers include improved communication between customer and supplier and the reduction of lead times, on-hand inventories, space needed for storage, and paperwork.
JIT approach became a modern production system seeking to implant concept of stockless production. JIT embraced a variety of manufacturing concepts like reduced lot sizes, quick switch over [SMED], load leveling [response to tact time], group technology, statistical process control [control charts] preventive maintenance and quality circles.
KANBAN
Kanban is a signaling system to trigger action: As its, name suggests, kanban historically uses cards to signal the need for an item. "Kanban" uses the rate of demand to control the rate of production, passing demand from the end customer up through the chain of customer-store processes. In 1953, Toyota applied this logic in their main Machine shop.
The time-based approach to inventory-Management came into focus when Toyota Motors Company came out with the concept of kanban in 1950. This lead to the dramatic reduction in WIP quantities tying the inventory closely to the demand from subsequent process or internal
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customer. Kanban is conceptually a two-bin system, a signal being raised to warrant replenishment.
American disappointment with the attempts to incorporate Japanese methods lead to other concepts like DRP.
Quick response [QR] :- When a retailer places an order for replenishment, the supplier with the help of EDI [Electronic data interchange] finalizes the delivery details and communicates them to the customer in advance. This facilitates scheduling labor and other facilities. This reduces inventories as uncertainties are reduced and total cost resulting into better performance.
Continuous replenishment strategy [CR] :- Also known as vendor managed inventory. This approach eliminates the need for placing an order. A supply chain relationship is established that ensures continuous replenishment of stock at customers place by the vendor. There are two basic needs in CR Effective communication system to provide key information between customer and supplier Sufficiently large volumes to make transportation viable Finally customer should honor the shipment from the supplier for payment Automatic or profile Replenishment or[AR] :- AR enables the supplier to anticipate the customers' requirement in advance to make replenishment. The responsibility for inventory management is placed squarely on the supplier. There should be information flow between customer & supplier that makes, inventory visibility possible. While this takes away the inventory management from the customer and gives it to the supplier, supplier gets the benefit of inventory visibility and more effective management to reduce total costs. DRP Distribution Requirement Planning DRP is a recent concept and has logically evolved from MRP (Manufacturing Resource Planning). Thus DRP comprises in itself both the distribution planning and the manufacturing resource plans. The following diagram helps to better understand the broader concept of DRP.
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DRP Distribution Requirement Planning, coordinates inventory levels, plans inventory movement and (if necessary) reschedules inventory between levels. The fundamental DRP planning tool is the schedule, which coordinates requirements across the planning horizon. There is a schedule for each stock keeping unit (SKU) and each distribution facility. A SKU is a specific item purchased by the customer including color and size uniqueness. Schedules for the same SKU are integrated to determine the overall requirement for replenishment facilities such as a plant, warehouse. Following are some benefits of using DRP: 1. Improved service levels that increase on time deliveries and decrease customer complaints. 2. Reduced distribution centre freight costs resulting from coordinated shipments. 3. Reduced inventory levels, since DRP can accurately determine what product is needed and when. 4. Improved inventory coordination with other enterprise functions, since DRP facilitates a common set of planning numbers. 5. Decreased warehouse space requirements because of inventory reduction. 6. Enhanced budgeting capability, since DRP can effectively simulate inventory and transportation requirements under multiple planning scenarios.
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Enterprise resource planningdescribes software systems designed to manage most or all aspects of a manufacturing or distribution enterprise (an expanded version of MRP systems). ERP systems are usually broken down into modules such as Financials, Sales, Purchasing, Inventory Management, Manufacturing, MRP, DRP. The modules are designed to work seamlessly with the rest of the system and should provide a consistent user interface between, them. These system usually have extensive , set-up options that allow you to customize their function your specific business needs. Unfortunately, in the real world, ERP systems rarely sufficient to meet all business needs and a myriad of other software packages such as Customer Relationship Management (CRM), Manufacturing Execution Systems (MES), Advances and Scheduling (APS), Warehouse Management Systems (WMS) and Transportation .Management Systems (TMS) are being sold to make up for these deficiencies.
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Ch. 11: INFORMATIONS SYSTEMS Definition of Logistics Information System: Logistics Information System can be defined as "The involvement of people, equipment and procedures required to gather, sort, analyze, evaluate and then distribute needed information to the appropriate decision maker in a timely and accurate manner so they can make quality logistics decisions. Importance/Need for Logistics information flow: Timely information flow is extremely important in an efficient logistical system. This is because of the following three important reasons. 1. Today customers themselves evaluate the type and extent of customer service offered by the firm. The customers are very conscious, whether the firm is responding correctly to the information regarding order status, availability of required product, delivery schedule, correct invoicing, etc. 2. Logistics managers have realized that correct and in time information flow can actually help to reduce both, the inventory levels as well as manual operations. 3. If correct information is available, it can be used for many strategic advantages. E.g. : The firm can effectively counter the strategies of its competitors, or the firm can evolve strategies for future growth on a realistic basis. LIS Logistics Information System: LIS gathers information from all possible sources to assist the logistics manager in making decisions. It also interfaces with marketing, financial and manufacturing information systems. Ail of this information is then provided to top management to help formulate strategic decisions.
There are four primary components of LIS, viz., the order processing system, research and intelligence system, decision support system and reports and outputs system. These 4 subsystems together should provide the logistics manger with timely and accurate information on which to base decisions. These subsystems are interfaced with logistics managerial functions and the integrated logistics management environment. The 4 primary elements/ components are discussed below:
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1. The order processing system is the most important subsystem of LIS because of its direct impact on the customers. 2. Research and intelligence system does scanning and monitoring of the internal as well as external environment of the firm on a continuous basis. 3. Decision support system is a computer based system which provides solutions to complex integrated logistics problems. The decision support system consists of a comprehensive database containing useful information for logistics manager to take decisions. Such a database may consist of: a) A basic file of internal and external data for analytical modeling. b) A critical factor data file which defines the scope of decision making. c) Policy and parameter data files which define integrated logistics operating policies for each functional area. d) A Solution file of past analysis results which are continuously compared against future analysis. 4. Report and output system: normal reports are used for planning operating and controlling integrated logistics. Planning outputs include sales trends, economic forecasts and other information pertaining to market place. Operating reports are useful for inventory control, transportation scheduling and routing, purchasing and production scheduling. Control reports are used to analyze expenses, budgets and performance. Principles of Logistics Information System Availability Logistics information must be readily and consistently available. Information may be regarding order status, inventory status, etc Rapid availability is very important to respond to decisions. Information availability can reduce customer requirements and improve management uncertainties in operations and planning Accuracy Logistics information must reflect the current status of all the activities like inventory levels, customer orders etc. E.g.: The actual level of inventories should match with the LIS reported inventory levels. However if there is a large difference between the actual inventories and those indicated by the information system inventory levels, buffer stock or safety stock would be required to cover up the uncertainty. Timeliness The logistics information must be timely to provide quick management feedback. Timeliness is measured in terms of delay that takes place between the commencement and occurrence of an activity and when the activity is actually visible in the logistical information system. E.g.: a company may receive a certain order which a customer desires to be executed urgently. However, the database information system of the company is not fed with the details regarding the urgency of the order for whatever reasons. This will cause delay in the actual execution of the order. This delay indicates ineffectiveness in the planning process. Similar delays can occur when the goods are moved from VVIP to finished goods. All this calls for timely management controls so that corrective actions can be taken to minimize loss. Hence timely information is very necessary to reduce uncertainty. Exception based LIS Logistics operations have to deal with a large number of customers, products, suppliers, etc. E.g.: the status regarding inventory level for each product regarding the amount of stock available, where the stock is located, etc. must be known. Another activity whose status requires to be reviewed several times is the outstanding replenishment orders. Such activities whose status requires a continuous review are considered as exceptions in the logistical
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information system. Other examples of exception situations that LIS should highlight are a) very large orders b) products having little or no inventory c) delayed shipments d) decrease in operating productivity Flexibility LIS must contain the capability to be flexible in order to meet the needs of both, the system users and the customers. E.g.: A particular retailer may want invoices for each of his retail stores. Another retailer may require only one invoice for all his retail stores. The LIS must be flexible to accommodate both the retailers. Appropriate format Logistics reports must be appropriately formatted so that they contain the right information in the right structure and the right sequence. E.g.: If a company has five distribution centers, then on one computer screen, the details of inventory at all the five distribution centers should be available. The combined data on one screen helps to make the better decisions. Internal and External information system: A sound External Logistics Information system is based on enlisting the cooperation of customers and providing adequate and relevant information for advance planning, operation and control - of logistics activities. Co-ordination is required, both within and outside the organization for the planning and control of logistics and the other functions of management. The sources of data for the external information system for customer service are no doubt the customers themselves, and information can be collected from them through the sales staff. The following information is desirable from various internal departments for the external information system. 1. 2. 3. 4. 5. Purchasing Production Marketing Finance And Control Physical Distribution
These departments may be expected to provide guidance, whenever requested or whenever found necessary. For eg, the production department may have to explain why a customer complains of a particular product quality. The marketing department may have to set up objectives and norms of customer service based on sales statistics and sales promotion efforts. The physical distribution manger will have to study and modify, if necessary, the other processing system, delivery time, the material handling system, etc., and update his policy on dispatches. The Internal Information System is made up of the elements of the information flow within an organization. This flow of information is between the departments of purchasing, production, marketing, finance, etc., on several important issues. The internal information system covers data processing, data analysis and compilation of control reports. Control reports are of various typesstatus reports, exception reports and summary reports, on the basis of which decisions may be made by respective manager-, the organization. There is also an exchange of information between the physical distribution managers and such departments as finance, marketing, production, purchasing. The departments and type of information received and supplied by the physical distribution department given below: -
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Purchasing - Supplier preferences in meeting specified delivery periods. - Names, addresses, etc., and other details about the purchasers - Delivery request deadlines. - Supplier prices and price discounts. - Alternative sources of supply and process Production - Production quantities and planning - Warehouse material handling systems. - Logistical innovations - Production capacity - Production innovations Marketing - Competitor logistics costs - Customer complaints - Sales costs - Customer service norm - Prices arid price adjustments - Special customer service requirement Finance - Budget for physical distribution costs. - Various estimates of costs - Customer credit rating - Credit procedure - Capital availability - Status of capital request RFID: Radio frequency identification, systems that use transponders to transmit significant amounts of data to a receiver; often used as part of a real-time locator system. This is used in transportation where we can exactly find the location of the goods when in transit. A lot of courier companies like DHL, etc use this to help customers track their consignment. An advanced automatic identification technology such as the Auto-ID Labs system based on the Radio Frequency Identification (RFID) technology has significant value for inventory systems. Notably, the technology provides an accurate knowledge of the current inventory. In an academic study performed at Wal-Mart, RFID reduced Out-of-Stocks by 30 percent for products selling between 0.1 and 15 units a day. Other benefits of using RFID include the reduction of labor costs, the simplification of business processes, and the reduction of inventory inaccuracies. EDI (Electronic data Interchange) Electronic data Interchange (EDI) is the electronic, computer to computer transfer of standard business documents between organizations. EDI is used extensively in LIS (Logistics Information System) to enhance the breadths, timeliness, and quality of data. EDi applies to almost every aspect of integrated Logistics ranging from paperless documentation flows to warehouse management with barcode scanner. EDI transmission allows a development to be directly processed and acted upon by the organization which receives the information. EDI replaces traditional transmission of documents such as mail, telephone and even fax.
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Advantages of EDI: 1. Cost reduction 2. Productivity gains 3. Faster order cycle times 4. Better focus on the customer 5. Reduced clerical work, paper and postage 6. Means to achieve a competitive edge, better working relationships with trading partners.
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Ch. 12: PERFORMANCE MEASUREMENT Performance Measurement (Performance Auditing) Logistical Measurement Increased competition and many times, slow economic growth has compelled many enterprises to develop an efficient and effective logistical system within their organization. The task of the logistics manager, or logistics controller, is to continuously keep measuring the performance of the firm. In order to carry out this measurement process, the logistics manager or controller focuses his attention on the development of the various resources of the firm and the attainment of goals and targets. Dimension of Performance Measurement The logistics manager will be able to compare and measure logistical performance only if they are provided with quality information. In case there are old and outdated reporting formats in a company, they have to be replaced by more advanced computer-based control systems. Objectives of Performance Measurement Monitoring measures and keeps a track on the service level and the logistical cost components so that the same can be periodically reported to the management. Sometimes, the results of monitoring may be sent to the customers as well to have their feedback about-the performance of the company's service level.
Controlling keeps a track on the on-going performance i.e. a track is kept on whether the process is within the specified standards or whether it has deviated from the prescribed standards. E.g.: during transportation, a company expects or predicts a certain amount of damage to its goods due to various reasons. By having a regular data regarding the extent of damage, the company can exercise control on the damage caused to the goods due to transportation. Directing Measures are designed to motivate personnel. Basically, they are incentives schemes, which will help to increase productivity. The principle is "Better the performance more is the pay". Here the company must guard against errors and damages caused by employees in their over-enthusiasm to earn more. Activity based performance measurement (ABPM) can assess business performance at the activity level and then, aggregate these fine-grained metrics upward to the business unit and firm level. ABPM is more flexible and leverages insights gained during the measurement effort more effectively than traditional, project-based return-on-investment approaches. It also offers greater visibility into where in the supply chain benefits will be achieved, thus providing guidance for managing the implementation and negotiating with supply chain partners. ABPM is based on two insights. The first is that costs come mainly from an activity's parts, while benefits usually result from how an activity affects other activities. As a result, measuring costs is relatively easy, but measuring benefits is hard. The second insight is that there are common patterns in the types of benefits associated with activities that have similar underlying characteristics. Process based performance measurement (Perspective Management) In this, a purview or overall view of the logistical system is evaluated. Activity-based measures and process-based measures are compared. Let us consider the following example. There are clerical staffs in an organization that are deputed to take orders from customers. Their activity is measured in terms of the number of orders they take. in case the number of order taken is high, it is deduced that the efficiency is high. But it could happen that the performance may be
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poor in terms of overall satisfaction of the customers. For this reason it very necessary that some performance measures have to be taken to evaluate overall process performance. Therefore process measures consider the customer satisfaction, which is delivered by the entire supply chain. They examine and analyze the total performance-cycle time or the total service quality. Both of which measures the collective effectiveness of all activities required to satisfy the customers. Today, process measures are given more importance by firms in relation to activitybased measures. Internal Performance Measurement internal performance measurement basically focuses on the comparing of activities and processes to previous operations and/or goals. For example a firm may compare the customer service with last year's performance as well as this year's goals or target. Logistics performance measures are classified into the following categories. Cost The most direct reflection of logistics performance is the actual cost incurred to accomplish specific operating objectives. Logistics cost performance is normally measured in terms of total amount of rupees spent, or terms of percentage of sales, or in terms of cost per unit volume etc. Customer Service The measures of internal performance are designed evaluate ability of a firm to evaluate ability of a firm to satisfy its customers. Common customer service measures are done with the help of customer surveys, obtaining cusf8mpr feedback, obtaining feedback from the company's sales force, evaluating the extent of stock outs, etc. Productivity Measures Productivity is a relationship (usually a ratio or an index) between output (goods and/or services) produced and quantities of inputs (resources) utilized by the system to produced that output. If a company has a logistical system, which clearly identifies and measures output as well as inputs, the calculation of productivity is quite routine for the company. At the same time, however, the calculation of productivity can be difficult in following cases: (1) When both the outputs and inputs are difficult to measure for a given period of time (2) The input as well as the output "mix" keeps on changing (3) Data regarding inputs and outputs are difficult to obtain. Conceptually there are three basic productivity measures. If all the inputs and all the outputs are over a given period of time are included in the calculation of the value of productivity, we get what is called as total factor static productivity ratio. The ratio is considered static because it is based on only one measurement, i.e., figures pertaining to one period of time only. If outputs and inputs in a system compare static productivity ratios from one period to another period. We get what called a dynamic productivity index. For example (Outputs for 1994) - (inputs for 1994) (Outputs for 1990) - (inputs for 1990)
The third measure of productivity is the surrogate productivity measure. This includes factors that are not directly included in the formula for the calculation of the productivity ratio, but are highly correlated with productivity. Some of these factors that definitely influence productivity are customer satisfaction, quality of the product, efficiency of the personnel, profits of the firm, etc. Many logistics manager take the help of these factors to make the understanding and interpretation of productivity more realistic and practical.
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Asset Management It focuses on the utilization of capital investments in various facilities and equipments. It also includes working capital utilized for purchasing inventory. The investments are basically done to achieve the logistics goals fixed by the company. Asset measurement is important because logistics,, equipments and inventory can represent a substantial segment of the firths assets. Measure adopted for asset management focus on the return on the investment generated by liquid assets (such as inventory turnover) and fixed assets. The performance measures adopted for asset management are inventory carrying cost, inventory levels (in terms of number of days of supply), obsolete inventory return on net assets, etc. Quality Measures relating to quality are specially process oriented evaluation. They are designed to determine the effectiveness of series of activities rather than an individual activity. Quality, however is difficult to measure. The logistics performance measure includes the following frequency of damage, damage quantified in terms of rupees, number of returns from customers,, cost of goods returned, etc. Delivery of, perfect order is the ultimate measure of quality in logistic operations. Perfect order measures whether an order proceeds smoothly through every step with regard to order entry, credit clearance, inventory availability, accurate picking, on time delivery, correct invoicing and payment without deductions. Perfect order represents ideal performance. A perfect order should meet the following standers 1. Complete delivery of all items requested. 2. Delivery to customers request date, say with maximum one days tolerance. 3. Complete and accurate documentation supporting the order, including the packing slip, bill of lading. 4. Perfect condition of the product that is faultlessly installed, correct configuration, customer ready with no damage. Today some companies have reported achieving about 55% of the perfect order but many companies have reported achieving only 20% of the perfect order. This shows that achieving the target of a perfect order is extremely difficult. External performance measurement: External performance measures are very necessary to monitor, understand, and maintain a focused customer perspective and to gain innovative insight from other industries. Customer perception measurement Regular measurement of customer's perceptions is necessary to have a leading edge in logistical performance. Such measures can be obtained through surveys or by systematic order follow-up. Such survey asks questions regarding the firms and competitors performance, in general or for specific order. A typical survey incorporates the measurement of customer's perception regarding availability of products/goods, performance cycle time, information availability regarding the product, solution to problems faced by the customer's etc. the type of survey required may be developed by the company itself or by professional consultant in the field. Reengineering Reengineering implies changes of various types and depth to a system, from a slight renovation to a total overhaul. Business process reengineering (BPR) began as a private, sector technique to help organizations fundamentally rethink how they do their work in order to dramatically improve customer service, cut operational costs, and become world-class competitors. A key stimulus for reengineering has been the continuing development and deployment of sophisticated
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There are six standard steps, which are useful to guide a firm in its reengineering procedure, Step 1: Target Identification. This is the most important aspect of the overall reengineering procedure. It is very essential to identify which work or operation is required to be changed or improved. It is also important to identify the known range of potential improvement i.e. we should know and be aware of limitations or extent of scopes of improvements that can be made. Step 2: Understand the work sequence Understanding the work sequence which is being evaluated is the second step in the reengineering procedure. The traditional gay of doing this is to make a detailed flow chart or process map of the various steps that are required for performing a particular activity. However in reengineering process only those steps that are capable of potential improvement are studied and alternative suggested. In situations where the alternatives suggested require capital commitment like installing of new machinery the return on investment is also taken in account. Step 3 and 4: The creative aspect. A model of the activity which is being studied for improvement is created. This is done to identify best possible alternative design. Simultaneously the firm should also initiate steps to study and analyze external benchmarking in order to find out improved alternative approaches to the design. A final combination of the suggested alternative design of the activity would be a combination of both the internal as well as external perspectives. Step 5: Evaluation the modifications to the activity The fifth step involves evaluation the modifications to the activity which is being reviewed on the cost benefit basis. During the benchmarking exercise, various ideas would be generated. Care should be taken only to adopt those ideas, which are practical and meaningful. The focus of the evaluation should be on the accurate assessment of the expected benefits that will be accrued from the implementation of the modified activity. Step 6: Implementation. Depending upon the extent of the proposed change, it may become necessary for the firm to resort to suitable training for its employees. How effective will be the implementation will depend upon the risk involved in adopting and managing the proposed change in the activity. Benchmarking A very important step in process reengineering (i.e. improving upon both quality of the product and the quality of operation) is benchmarking. This technique helps managers to find out how well their organization performs a special task of specialization. Benchmarking may be defined as systematic procedure for identifying the best practice and also modifying and updating the current actual knowledge to achieve superior performance. Benchmarking is based on two basic ideas. 1. Firms who are interested in processing ahead must strive to continuously improve all aspects of their present operations. This means that the firm must be ready to improve a procedure or an operation without waiting for it to fail or break operation. 2. The firm must find out and learn from outside its own, enterprises the best practice and procedure that are being adopted in other companies so that the firm fruitfully implement
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Hence benchmarking is essentially a process of proving operations by innovative methods. A critical step that has be undertaken to improve the existing process is to develop meaningful and practical standards to measure the existing practices in the operations and then to evaluate, suggest meaningful alternatives that should be attractive for implementation. Activity based costing (ABC) is one of the methods of evaluating present practices. In successful logistic reengineering processes, it is very essential to know the actual cost associated with various activities so that areas where costs have to be reduced can be identified. E.g.: by introducing and implementing improved techniques. Best Practice Benchmarking When a company attempts to introduce and review best practice benchmarking, it essentially focuses on the measures, practices and process of the comparable organization. For example: a company that wishes to introduce benchmarking may identify that the key factor in the customer satisfaction is establishing a certain level of customer service and installing a perfect order system for the customer. Firms normally employ Combinations of three benchmarking methods: 1. They use published logistics data, which is available from consultants, periodicals and university researchers. However though the published data are easily available, they do not provide much competitive advantage since the data will be available to the competitors as well. 2. To benchmark privately against non-competitive firms in one's own or related industry. Here each organization reviews the other's measures, practices and processes to develop insights that will improve performance. 3. Consists of an alliance of organizations that systematically share benchmark data on regular basis. These alliances require more effort to maintain but usually provide substantially better information than the preceding two methods. Characteristics of ideal performance evaluation system The ideal performance measurement system incorporates 3 characteristics that provide accurate & timely direction for management: 1. Cost/ service reconciliation: The difficulty that arise in collecting certain data & in in coordinating cause & effect relationships, a majority of reports show logistics expenditures only during a specific period of time. For example, freight bills may not be received until sometime after a shipment is made. This practice often causes a problem matching the freight bill with the invoice. Similarly, it is not easy to assign the extra costs related to customer service to those orders that require additional customer service effort. Typical reports fail to reflect cost/service trade-offs critical to generating revenue. It is important to identify and coordinate relevant costs and revenues in order for managers to make meaningful logistics deqisions. For example, in the toy industry, products are typically manufactured in the spring and sold with early order discounts to encourage purchase commitment by retailers for the holiday season unless costs are appropriately sequenced with revenues' management may obtain a distorted view of the performance effectiveness of its logistics system, An important benefit provided by an operational plan
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is that activity levels are matched to projected cost levels. When planned activities generate costs that are related to futures sales, it is possible to reconcile the cost with the corresponding revenues. 2. Dynamic Knowledge-Based Reporting The biggest challenge in logistical reporting is to present, a dynamic, rather than static, picture of operational performance over an extended time period. In general, most logistical operation reports provide the status of important activities such as current inventory position, transportation cost, warehouse cost & other measures of expenditures or activity level a single reporting period. Such reports provide vital statistics that can be compared operational periods to determine if performance is tracking as planned. The deficiency of static status reports is a failure to provide a picture over extended past periods & an inability to project critical trends in the future. Logistics managers require a reporting system that can project adverse trends before they surge out of control. Ideally, the reporting system can also query available logistics data and extract relevant information that will guide corrective management action. Thus, reporting systems should ideally possess diagnostic capacity to project where operational trends are heading and to suggest appropriate' corrective actions. 3. Exception-Based Reporting: Logistical measurement should be exception-based. The comprehensive and detailed nature of logistics requires that managerial attention be directed to exceptions from anticipated results. The existence of an exception to planned results is proof that unanticipated activity is occurring. Therefore, an ideal reporting system will assist managers in isolating activities-and processes requiring attention. Such attention may identify areas-requiring problem-solving efforts or facilitate taking a more in-depth assessment of a specific process or function.
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Ch. 13: LOGISTICAL COSTING Introduction The two types of accounting systems used by companies are: 1. The Financial Accounting System 2. The Managerial Accounting System Organizations following the Financial Accounting System provide reports such as balance sheet, income statements and cash flow statements to outside parties like investors and stock holders. But this system may fail to meet the needs of managers of the organization. The second system called the Managerial Accounting System serves the internal company needs. The Logistics Accounting System is a type of Managerial Accounting System. It can help managers to plan, implement and control logistics system. Logistics accounting information is useful for budgeting which is an important part of the logistics planning process. It also helps in allocation of resources for implementing the plans. Logistics accounting statements are not standardized like financial accounting statements because the integrated information needs of one manager often differ from those of another. Logistics accounting system generally allows the user to analyze decisions, based on Logistical Costing. Total Cost Approach in Logistics Today the marketing view point of any organization is that the Customer is the King of the market. Hence at whatever cost, the customer must be satisfied. Thus the importance of customer service has grown day in and day out. Today a customer, well become the reason for a manufacturer's downfall. E.g.: if a customer has received goods which have been damaged in transit and which he is unable to return or if the goods are of very poor and which, too he is unable to return, or which he finds great difficulty in returning, he is likely to remain a one time customer. He may further even publicize his adverse opinion to his colleagues, friends and others and caution them to be careful while purchasing goods from this particular manufacturer. On the other hand, a satisfied customer would recommend a particular product and a manufacturer and even give unsolicited testimonial to prospective customers. Thus it has become important to keep the customer satisfied through good customer service, which requires an up-to-date logistics system. The logistics system may require huge investments and at times may become a large portion of the total cost incurred by the company. The various costs involved in developing and maintaining a successful logistics system are: Inventory cost Inventory costs are directly affected by such factors as the mode of transport, the number of warehouses planned, the levels of inventory maintained to ensure a certain level of service, etc. The inventory costs are the cost of the money locked-up in the cost of goods, insurance, occupation of space, pilferages, losses, damages, etc., as well as the maintenance of inventory. These costs are increased by the cost of the obsolescence of a product over a period of time,
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especially when the company makes rapid changes in product models or when products are perishable. In this connection, the costs of a low inventory must also be taken into account. When the manufacturer is unable to produce goods because of lack of raw materials or is unable to supply goods because of inadequate finished products stock, he loses particular sales. Warehousing costs Goods have to be stored for sometime after production, however small that time interval may be. This is done either at the production center, or in the marketing area, or somewhere in between or at all the three locations. The warehousing of raw materials either steps up the cost of their supply or of the cost of distribution of finished product. As a manufacturer wishes to approach the objective of zero stock-out of the finished products or zero loss of production, adequate warehousing capacity becomes essential; and this pushes the firm in higher fixed and operating costs of warehousing. Also, to improve customer service to certain levels, it becomes necessary to increase the number of warehouses. Accordingly, the company management has to arrive at the optimum number of warehouses which is consistent with the minimum total cost of distribution, taking into account the effect on the other elements of cost in the total logistical system. Production or Supply costs Production costs tend to decrease with an increase in the volume of production. Also, these costs vary between various production points. If a manufacturer has several plants producing the same product, he has to make a decision to vary the supplies or production from certain plants a move which inevitably affects the cost of production itself as well as the cost of transportation, transit times, warehouse and inventory costs. Channels of distribution costs Various alternatives for distribution are available to a manufacturer. This distribution may be through a sole selling agent at the nation level, Or through regional distributors or through wholesale dealers, or by direct supplies to dealers and retailers and even to customer. Mail order sales or catalogue sales at different retail outlets of a manufacturer are direct sales to the customer, which automatically involve decisions on the establishment of stockiest and storage points or warehouses. In the traditional marketing concept, the manufacturer is interested in scaling down the discount to the distributor to reduce the total cost. But if the distributor's discount is low, he may not, perhaps because of his low profit margin, distribute the goods either in sufficient volume or he may not render satisfactory customer service. This may bring about a loss of present and future sales to the manufacturer. Similarly, changes in the distribution system may take place by alternative use of space, say, for inventory, or for marketing or for production centre. This may also affect customer service in one way or the other. Therefore, a company has to carefully select channels of distribution since it affects decisions relating, ultimately, to customer service and satisfaction. Communication and Data Processing Costs An effective distribution system requires continual of order pricing, inventory control, accounts
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receivable, dispatches, etc. An increased number of distribution points would certainly improve customer service, but would make processing of information more cumbersome and expensive. the same time, if the time taken to process the information is decreased, it is likely to lead better customer service. A manufacturer has, to decide about the speed and convenience with which information may be processed. One of the ways is use of computers having advanced software. Transportation Costs The cost of transport varies generally with the speed with which goods are transported. Water transport is the cheapest, while air transport is the most expensive. Rail transport is cheaper than road transport, beyond a certain distance. Both rail and road transport stand somewhere in between water and air in terms of the cost of transport. Material Handling Costs A suitable material handling system should be designed to reduce the cost of material handling to the minimum. This would require the consideration of several possible combinations of manual and mechanized handling of the goods and materials. But material handling operations have an impact on other distribution aspects, such as the cost of packaging as well as damages and losses that results form material handling. The design of the material handling system and the consideration of its cost also affect the selection of the mode of transport to be used and hence the cost of transport gets affected. Packaging Costs Decisions on packaging are affected by decisions on such factors as type of product, the mode of transport and type of material handling equipment used. A total cost approach would make it necessary for us to select packaging version, which takes into account other distribution factors as well. Thus it would not be sufficient merely to reduce the cost of packaging to the minimum. Customer Service Costs If the manufacturer or supplier guarantees the satisfaction with goods and agrees to give a refund on returned goods or exchange the returned goods, he must arrange for the movement of defective or returned goods from the customer (or retailer) back to the supply warehouse or manufacturing centre. Complaints of defects or of the deficiencies pointed out by the customer in the goods that are returned may therefore be utilized as a management feedback to improve the quality of service. Incidentally, with such a guaranteed service the manufacturer on a permanent basis, would win the customer's loyalty. Guaranteed customer service, therefore, involves certain costs to the organization but it also leads to certain benefits in the long run. It increases the value of the company in the market.
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Total Cost Analysis The basic work of a logistical network is the analysis of the total cost. By careful integration of various logistical activities, the total cost of the system can be reduced. This is achieved by proper coordination and planning of various activities. In the traditional accounting system, we merely get the figures of the various expenses. But we are not aware to which of the expenses are critical which is required in the logistic analysis. The two main financial statements that a company has are its Profit & Loss statements (P&L) and the Balance Sheet. The traditional accounting statements are used to prepare a list of assets & liabilities, revenue & costs of the company. These statements are then audited for the purpose of taxation and shareholder's dividends. Hence, these statements are deficient from the point o view of logistical costing analysis. As mentioned earlier, the traditional accounting statements do not segregate which are critical activities or critical expenses. The grouping of salaries, rent depreciation, etc. does not identify or
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assign operational responsibility. If costs are high normally they are attempted to be reduced. For example, if the P&L account statement shows a high inventory cost, the management attempts to reduce the cost by reducing the amount of inventory. Therefore, in case we have to evaluate the performance of logistical operations, we must identify the costs associated with the performance of specific tasks. This means that we must identify the individual logistical activities and then associate the costs to these activities for analysis purposes. Take for example the transportation cost. In many of the purchases, the transport cost is not shown separately. It is normally included with the cost of the goods purchased. Therefore, it must be ensured that the cost of transportation has to be separated from the purchases for logistical costing analysis. Again in traditional accounting the details of inventory carrying costs are not given properly. For example, it is not specifically mentioned about the total insurance paid on the inventory, the total financial burden associated with inventory (not just in terms of the purchase cost of the inventory). Logistics Activity Based Costing The fundamental concept of activity based costing is that expenses need to be assigned to the activity that consumes a resource rather than to a budget unit. Activity based costing is based on the concept that business activities are made up of a series of process that cause or consume costs. Managers can determine the costs of possible alternative action by tracing the costs to their origin. Example: Two products, produced in the same manufacturing facility, may require different assembly and handling procedures. Out of the two products, one may need additional equipment or labour for assembly or packaging operations. If total labour and equipment costs are allocated to the products on the basis of sales or the number of units produced then both the items will be charged for additional assembly and packaging operations require by only one of them. This will reduce the profitability of that product which did not require additional equipment or labour because this product will be paying for the operations it did not need. In the case of logistics, the key event is ultimately the customer. In other words, in logistical activity based costing, we determine if specific customer, order, product or service is ultimately profitable to the company. This earns that the revenue has to be matched with the specific costs. That is the logistics managers have to identify whether it is worth incurring the costs in relation to the amount of revenue earned with regard to specific products. The logistics manager can use the results of activity based costing system to weigh possible alternatives, improve decision making and also to improve efficiency and competitiveness of the firm. Assumptions made in ABC (Activity Based Costing) system: Two primary assumptions that accompany an ABC system are: (i) Individual costs in each part of the activities must be fairly homogeneous activities (ii) Costs are proportional to the activities being measured.
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Both these assumptions must be kept in mind when the system is designed. Further, the success of entire system depends on the accurate tracing of costs to activities. If the firm can accurately trace the costs to specific causes such as products, customers, supply channels and logistics activities, the results of the ABC system can be more insightful and effective in implementation. Features of Activity Based Costing 1. It out performs more traditional approaches by providing better operational performance. 2. It develops information about cost drivers and the causal relationship these drivers have with overhead resource consumption. 3. It gives a more accurate picture of expenses and helps management to make strategic decisions about cost centers such as general marketing or integrated logistics. 4. It identifies potential areas for process improvement within cost areas such as labour, equipment and supervision. 5. It can significantly enhance the effectiveness and efficiency of internal audit operations. 6. It helps managers to assess the performance of a business unit by examining productivity, flexibility, quality, order cycle time and customer satisfaction. Mission Based Costing "Mission" is a set of customer service goals to be achieved by the system within the specific market/product context. A successful achievement of defined mission involves a large input from various activity centres of the firm. Hence the logistics costing should be able to identify the total costs of meeting a desired mission. This is referred as Mission Based Costing. Essentially Mission Based Costing seeks to identity unique costs that are generated as a result of specific logistics activities aimed to achieve certain objectives in a specific customer/market. There is no point in incurring additional costs if the additional benefits do not justify the same.
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Functional Inputs to Logistical Management
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There are four stages in implementing an effective Mission Based Costing. Define the customer service segment This is required as all customers do not have the same service requirements Identify factors that produce variations in the cost of service: for example reducing the frequency of delivery .will reduce the costs. Identify the specifies specific resources used to support customer segments. Attribute activity cost by customer type or segment. Total Cost Presentation In logistical cost analysis, inventory and transportation are the two most important factors. These activities can be easily formatted in terms of their costs. E.g.: warehousing and material handling costs can be apportioned to inventory. Costs relating to inventory also include taxes, insurance, obsolescence, related to inventory. Cost of transportation would include hiring charges, legal and administrative expenses pertaining to transportation, etc. Inventory and transportation as said earlier, are very important for logistical cost analysis. Transportation deals with geographical (spatial) dimensions of logistical operations by transporting the product to the place where the customer desires it. On the other hand, inventory involves the rate at which capital assets are used (temporal usage) to meet customer requirements. Again, transportation and inventory together account for more than 70 to 80% of the logistical cost. This is another reason why inventory and transportation are very important from logistics point of view. In case of ordering cost, we can apportion it to either a specific order or to a particular customer. This basically depends upon the type of analysis adopted by the company. Cost Identification All costs associated with the performance of logistics function should be in the activity based classification. The total costs associated with forecasting order management, transportation, inventory warehousing, packaging must be isolated and preferably segregated with regard to each of the products. Typical logistics costs can be categorized under the following headings. Direct Costs: Direct or operational costs are those expenses specifically caused by the performance of logistic work. For example direct cost of transportation, warehousing, material handling, order processing etc. can be identified. Again, for example, the transportation cost can also be identified with regard to specific order. Same is the case with the apportionment of other direct costs. Indirect costs: Indirect costs are a little more difficult to isolate. For example, cost of capital., in transportation equipment, in material handling equipment for inventory, in real estate will be a little difficult to isolate as was done in the case f direct cost. Here the manner of attributing the indirect costs is left to managerial judgment. E.g.: how should the indirect cost, such as equipments associated with a warehouse be allocated to the customer order shipped from that warehouse? Overhead costs: The other allocation to be considered is the overhead. Considerable expenses in terms of lighting,
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etc., are utilized for various facilities. Managerial judgment is required to determine how and to what extent various types of overhead costs should be allocated to specific logistical activity. In conclusion, therefore it should be logistical activity based costs depend more on the managerial judgment. Cost Time Frame The basic concern in the Logistical activity based costing is to identify the period of time over which costs are accumulated for measurement. To overcome this, costs are generally divided into two broad categories one category assigns costs to a specific product and other category assigns costs associated with the passage of time. From a logistical perspective, a great many of the expenses associated with procurement and manufacturing support can be assigned and absorbed into direct product cost. In situations where considerable period of time elapses between production and sales, such as in seasonal business, it becomes difficult to associate costs incurred with revenue generated. That is, since the time lapse is considerable, the apportioning of costs requires expert managerial judgment. Cost Formatting In logistical analysis we try to analyze costs with regard to either customer orders or value added services. Logistical expenses can be presented in different ways. Functional grouping In functional grouping, all expenditures for direct and indirect logistical services performed for a specified operating time is formatted. Thus a total cost management can be constructed for comparison of one or more operating periods. But these functional grouping vary from industry to industry. There is no standardized functional grouping that is common to all industries. However every. industry must identify as many cost accounting categories so that a better analysis can be made. But such identification of functional groups can be achieved only over a period of lime. Allocated cost grouping In allocated cost grouping, the total logistical cost is divided on the basis of per ton, per kilogram, per product, per order or per product-line basis, etc., or in some other physical measure, which may be easy for the industry to compare. This sort of grouping helps the company to measure and compare the physical performance. Fixed Variance grouping Fixed Variance grouping is the most useful for any industry. Basically it involves separating out the fixed cost from the variable cost for comparison purposes. E.g.: when a company purchases a truck, the expenses incurred on its purchases is fixed, i.e. whether the company has business or not, the expenses on the purchase of the truck is not going to chance. But the expenses on petrol and for running the truck are variable as these expenses depend on the volume of business transacted.
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Ch. 14: LOGISTICAL NETWORK ANALYSIS All businesses operate in a very dynamic environment in which change is inevitable. Characteristics of consumer and industrial buyer demand, technology, competition, markets and suppliers are constantly changing. As a result, businesses must redeploy their resources in response to and in anticipation of the ever changing environment. Because of the rate at which change is occurring, no existing logistics network can be truly upto date. Hence, any logistics network that has been existing for a number of years needs to be revaluated and redesigned. There are many types of changes that may suggest a need to reevaluate and/or redesign a firm's logistics network. They are: (i) Changing customer service requirements (ii) Shifting locations of customer and/or supply markets (iii) Change in corporate ownership (iv) Cost pressures (v) Competitive capabilities and (vi) Corporate organizational change.
These changing elements of the business environment are briefly discussed in the following section/ Scope (i) Changing customer service requirements: The logistics requirements of customers are changing in many ways. As a result, the need to reevaluate and redesign logistics networks is of great contemporary interest. Shifting locations of customer and/or supply markets: The manufacturing and logistics facilities are positioned in the supply chain between customer and supply markets and any changes in these markets force the firm to reevaluate its logistics network. When the location of customer markets shift geographically, new warehouses and distribution facilities are established following the changing geolocation trends. On the-1suppi side, the service and cost requirements of firms practicing JIT based manufacturing have forced the suppliers, firms to examine the locations of logistics facilities. Many suppliers have selected nearby points for manufacturing and/or parts distribution facilities. Change in corporate leadership : Ownership-related change associated with a merger, acquisition or divestiture is a common occurrence for a firm now a days. In such instances, many firms choose to be proactive and to conduct a formal evaluation of new logistics networks versus previous logistics networks before implementing such a change. This approach will facilitate to ensure that the newly merged or newly independent firm will have fully anticipated the logistics impact of the change in corporate ownership. Cost pressures: Many firms consider today their major priority is to figure-out new and innovative ways to remove cost out of their key business processes including those related to logistics. A reevaluation of the logistics network and of the functioning of the overall supply chain can help to find new sources of cost savings. Such sources could be transportation, inventory or warehousing. Companies
(ii)
(iii)
(iv)
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considering modernization needs of plant also benefit from a comprehensive cost analysis along with a revaluation of the logistics network. (v) Competitive capabilities: Competitive pressures may force a firm to examine its logistics service levels and the costs generated by its network of logistics facilities. To remain competitive in the market place or to develop a competitive advantage, a firm should frequently examine the relative locations of its facilities toward the goal of improving service and/or lowering costs. Corporate organizational change: Even when a firm considers any major corporate organizational change such as downsizing, the strategic functioning of the firms logistics network is viewed as something that must be protected and even enhanced through the process of organizational change.
(vi)
Network Designs 1) Direct Shipment Network Suppose that a Retail store chain opts for the direct shipment network. Then the network structure of the retail store chain is designed in a manner such that all the shipment good and material come directly from the supplier to the retail store. In the direct shipment network the path or the route, which each shipment has to the take, is specified. The duty of the Apply chain manager in this case is only to decide on the quality of the goods that has to be sent to the retail store and then depending on the type and quality of goods, he has to decide on the mode transport. Here the supply chain manager has to strike a balance between the cost of transport in the inventory levels at the stores.
E.g.: If the manager decides to reduce the number of trips of transportation to minimize transportation cost then he has to decide on larger inventories at the retail store. But maintaining large inventories have their disadvantages as well. Again to keep the inventory level minimum at
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the retail store. There will be more number of trips by truck to the retail store. This will increase the cost of transportation. The major advantages of a direct shipment transportation network are the elimination of intermediate warehouses and its simplicity of operation and coordination. The shipment decision is completely local i.e. the decision made for one shipment doesn't influence the other shipment. Again since each shipment will be direct the transportation time from the supplier to the retail store will be short. A direct shipment network is justified if the retail stores are large enough and have sufficient store capacity. This is because where the retail store requires replenishment of stocks, the trucks dispatched from the supplier to the retail store should preferably be near-to full or to full capacity. If however the retail store is small the direct shipment network tends to have high costs. The reason is that if truck with full capacity is sent to the small retail store. The retail store may not be able to unload all the goods in the store. Even if it does it may not able to sell all the goods resulting in high inventory holding costs. Again to send trucks which are half empty is also not advisable from sound logistical cost management. 2) Direct shipment with milk run One Supplier Many Retail Stores Many Suppliers One Retail Stores
A Milk run is a route in which a truck either delivers product from a single supplier to multiple retailers or goes from multiple supplier to a single retailer. Hence in direct shipment will milk runs a supplier delivers directly to multiple retail stores on a truck or a truck picks up deliveries from many supplier destined for the same retailer. When using this option a supply chain manager has to decide on the routing of each milk run. This is because if a supplier has to deliver to multiple retail store. The supply chain manager has to decide on the routing of each milk run. This is because if a supplier has to deliver to multiple retail stores, the supply chain management has to decide which retail stores are to be given priority and accordingly the routes have to be decided. Similar decision about the route has to taken by the supply chain manager when many supplier have to be contacted by the truck to take delivery of goods meant for the same retail store.
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Direct shipment of goods to the destinations provides the benefit of eliminating the need of having intermediate warehouses. Further the milk run helps to lower the transportation cost by consolidating shipment to multiple stores on a single truck. E.g.: if the replenishment to each retail store is considers on a direct shipment basis, it may happen that the lot size dispatched to that retail store may be small and the truck cannot be loaded to its full capacity. However if.milk runs are used in such a case the deliveries to multiple store can be profitably consolidated onto a single truck. This will result in the better utilization of the truck and also help to reduce costs. E.g.: Toyota uses milk run from suppliers to support its just-in time (JIT) manufacturing system in both Japan and the United States. However in Japan Toyota has many of its assembly plants located close together and thus uses milk runs with a network of a single supplier to many plants. Whereas in the united State Toyota uses milk runs from many suppliers to it's only assembly plant in Kentucky 3) All shipment via central distribution centre In this transportation network the suppliers do not send the shipment of goods directly to the retail stores. The retail chain divides the stores as per geographical regions. One central distribution centre is set up for a few retail stores within one geographical region. The suppliers send goods to this central distribution centre. From there the goods go to different retail stores as per their requirements.
The central distribution centre is an extra layer between the suppliers and the retail stores. Such a network is more beneficial when the retail stores do not have enough storing capacity and need replenishments at irregular short intervals. In this case the suppliers can have cost benefit by sending larger shipments to the central distribution centre and also avoid the risk of overstocking of goods in retail stores.
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4) Cross Docking In Cross Docking goods from many suppliers reach a central distribution centre via trucks. However, after reaching the central distribution center, instead of storing the goods, the goods from different suppliers are consolidated into one truck and are directly send to the various retail outlets for replenishment. Hence Cross Docking helps to save the inventory carrying cost as well as time required for delivery of goods to the retailers. E.g.: A company imports 4 types of products. When these products arrive at the docks, they are loaded on to 4 trucks and are sent to the central distribution center. Thereafter, central distribution center can cross dock products arriving from the four overseas suppliers on inbound truck, by breaking each inbound shipment into smaller shipments that are then loaded onto the trucks which are outbound and going to each of the retail stores.
Traditionally warehousing was used as storage in order to support manufacturing and marketing activities. With forecasting and production scheduling this need has been reduced. Now warehousing is used to reduce material, storage and handling cost while optimizing production.
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Ch. 15: MODERN LOGISTICAL INFRASTRUCTURE Containerization A container essentially can be called as equipment utilized to carry goods or store goods. Based upon this concept of a container, we can say that containerization is technique or a method of distributing goods in unitized form thereby making it convenient to evoive or establish an intermodal transport system which can be a combination of railways, roadways, waterways or airways. Containers are usually standard sized and are referred to 20 ft. containers, 40 ft. containers etc. The international organization has defined freight container as and article of transport equipment of a permanent character and accordingly strong enough for repeated use specially designed to facilitate the carriage of goods by one or more modes of transport without intermediate reloading fitted with devices permitting its ready handling so designed as to be easy to fill and empty Having an internal volume of 1 m3 or more. Benefits of containerization 1. It eliminates the need for intermediate handling. 2. The absence of intermediate handling as well as the goods being transported quickly indicates that there are few chances for a cargo to get damaged or pilfered. 3. Since there is less risk of damage and pilferage due to containerization, transporting companies can charge profitable cargo carrying premiums. Such premiums cannot be changed in the conventional mode of cargo shipment. 4. Since the need for intermediate handling at terminal points such as ports, is avoided, savings on labour can be realized. 5. Since goods are transport in standardized containers, saving on packaging materials, labour required for packing, etc can be realized. 6. There is improvement in total quality service. Various types of Containers: General Cargo Container: This container is packed with all general type of cargo that does not require any specific temperature control. Today most of the containers that are in use are overwhelmingly the general cargo type. Thermal Container: These containers are specifically designed to carry cargo that requires refrigeration or thermal insulation. It is covered with a special material that has low heat transfer such as polystyrene foam. Thermal containers are further classified in to three types 1. Refrigerated containers meant for food items that require cold storage facility. E.g. meat, fish etc. 2. Insulated containers for fruit, vegetables etc. Here dry ice is used as cooling medium. 3. Ventilated containers which allow the passage and circulation of air through openings made either on the sides of the containers or at the ends of the containers. E.g. coffee seeds, tea leaves etc. are carried in these containers.
Dry Cargo Containers: These containers are in maximum use. Such containers are very useful
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when cargo has to be stuffed in to the container after the container has been mounted on to a wagon or a trailer. Flat Container: These containers have only a strong base and no side walls. They are useful when the cargo is of odd size or when the cargo is very heavy. Trucks which carry heavy machinery, large sized pipes or railway wagons which carry army tanks make use of such containers. These containers are also called flat rack. Bulk Containers: Are basically large sized containers, which have man holes in them. Man holes are openings or holes at the top of the container similar to what we see in petrol or water tankers. Such man holes facilitate the loading of bulk cargo using gravity. Garment Containers: These containers have hangers built in them. Clothes can be hung from the hangers instead of folding and packing them in boxes. Such containers are thus used for transport of garments only. Liquid Containers: These containers are usually made of stainless steeI,They have manholes built in them. These manholes are very useful to load or unload liquid cargo. Wd Dan see such containers in the transportation of milk. Gas Containers: These are specialized containers that have fixture fittings which help to fill or empty liquefied gas. E.g. Liquid oxygen. They have thick walls and are made of high quality stainless steel. This is required for safe transport of liquid gas. A deep-water port is any port that can accommodate a fully laden Panamax ship. Panamax and New Panamax are terms for the size limit for ships travelling through the Panama Canal. The size is limited by the dimensions of the available lock chambers and the depth of the water in the canal. This limit has influenced those constructing cargo ships, giving clear parameters for ships destined to traverse the Panama Canal Inland Container Depots [CDs] An inland container depot is an organization offering a total package of activities to handle container and general cargo flows between road, rail, and waterways, resulting in maximum service for inland transportation at minimum costs. ICDs provide the following services: a) Handling of containers from road, rail, and barges (light freight-boa, a seagoing vessel) to a temporary storage area or container yards. b) Intermediate storage between various transportation modes. Special containers and/or cargo may require additional provisions such as refrigeration, special areas for dangerous cargo, etc. c) Receipt and delivery of containers and general cargo. This may include activities such as weighing, inspection of scales, inspection of possible damages, inspection of safety stickers, verifying container information, verifying codes, etc. d) Sometimes the cargo cannot be directly delivered to the customer's door. In this case there can be cargo consolidation, i.e. redistribution of cargo in the containers depending upon the direction of the dispatch of the cargo. e) Facilities may include container cleaning service, pre-trip trials of new containers, checking the proper functioning of refrigeration equipment, regular maintenance and repair service of containers, material handling equipment for containers, etc. In other words, ICDs should be self-sufficient units. f) Customer clearance activities at inland terminal can help to decrease the dwell-time of
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the containers in the deep-sea ports. These activities include whether the containers are filled to their maximum capacity or not (LCL), checking of the container seals, proper assessment and the valuation of the cargo and so on. Such a function has proved to be time and cost saving. g) A company may decide to provide certain physical distribution services which are situated close to the ICDs. For example, garments can be ironed and packed, price tags/labels can be affixed to consumer goods, liquids which are to be packed in bulk can be bottled and sealed properly, etc. This means a variety of activities related to finished goods can be carried out close to ICDs wherever such services are capable of being provided. On their port, ICDs may help companies by providing sophisticated refrigeration plants and warehousing facilities for export of vegetables, and fish. Cold chain is a logistic system that provides a series of facilities for maintaining ideal storage conditions for perishables from the point of origin to the point of consumption in the food supply chain. The chain needs to start at the farm level (e.g. harvest methods, Pre-cooling) and cover up to the consumer level or at least to the retail level. A well organized cold chain reduces spoilage, retains the quality of the harvested products and guarantees a cost efficient delivery to the consumer given adequate attention for customer service. The main feature of the chain is that if. any of the links is missing or is weak, the whole system fails. The Cold chain logistics infrastructure generally consists of:

Pre-cooling facilities Cold Storages Refrigerated Carriers Packaging Warehousing Information Management systems (Traceability and Tracking etc.)
Objective The temperature controlled supply chains or cold chains are a significant proportion of the retail food market. The market shares of fast foods, ready meals and frozen products have increased in recent years. There are several food temperature levels to suit different types of products. Frozen, cold chilled, medium chilled, and exotic chilled are some of the frequently used nomenclatures with specified temperature ranges, depending on the products, whether it is meat or ice cream or potatoes or bananas. With the growing demands to keep and distribute temperature sensitive products in potent condition, organizations are seeking better solutions to maintain and monitor cold chain. The success of implementing cold chain management involves continual monitoring of product temperature throughout distribution and having appropriate corrective action plans in place. A streamlined, well maintained cold chain helps to:

Reduce costs Improve product integrity Increase customer satisfaction Reduce wastage and returns of expired stock
The Golden Quadrilateral is a highway network in India connecting Delhi, Mumbai, Kolkata
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and Chennai, thus forming a quadrilateral of sorts. it is the first phase of the National Highways Development Project (NHDP), and consists of building 5,846 kilometres of four/six lane express highways at a cost of Rs. 60,000 crores (US$ 12.317 billion at 1999 prices) As of 2008, while the Golden Quadrilateral makes up under 2 percent of India's road network, it carries about 40% of the country's traffic. As of February 2010, 5766 km of the entire work has been completed and work on remaining 80 km is under progress. The GQ project is managed by the National Highways Authority of India (NHAI) under the Ministry of Road, Transport and Highways. The Mumbai-Pune Expressway, the first controlledaccess toll road to be built in India is a part of the GQ Project though not funded by NHAI, and separate from the main highway. Infrastructure Leasing & Financial Services (IL&FS) has been one of the major contributors to the infrastructural development activity in the GQ protect. Benefits The GQ project establishes better and faster transport networks between many major cities and ports. It provides an impetus to smoother movement of products and people within India. It enables industrial and job development in smaller towns through access to markets. it provides opportunities for farmers through better transportation of Produce from the agricultural hinterland to major cities and ports for export, through lesser wastage and spoils. Finally, it drives economic growth directly through construction as well as through indirect demand for cement, steel and other construction materials Network of highways Only National Highway are used in the Golden Quadrilateral. The four legs use the following National Highways: Delhi Kolkata: NH 2 Delhi Mumbai: NH 8 (Delhi Kishangarh), NH 79A (Ajmer bypass), NH 79 (Nasirabad Chittaurgarh), NH 76 (Chittaurgarh Udaipur), NH 8 (Udaipur Mumbai) Mumbai Chennai: NH 4 (Mumbai Bangalore), NH 7 (Bangalore Krishnagiri), NH 46 (Krishnagiri Ranipet), NH 4 (Ranipet Chennai) Kolkata Chennai: NH 6 (Kolkata Kharagpur), NH 60 (Kharagpur Balasore), NH 5 (Balasore Chennai) The double-stack rail cars design significantly reduces damage in transit and provides greater cargo security by cradling the lower containers so their doors cannot be opened. A succession of large, new domestic container sizes was introduced to increase shipping productivity. A well car, also known as a double-stack car or stack car, is a type of railroad car specially designed to carry intermodal containers (shipping containers) used in intermodal freight transport. The "well" is a depressed section which sits close to the rails between the wheel trucks of the car, allowing a container to be carried lower than on a traditional flatcar. This makes it possible to carry a stack of two containers per unit on railway lines where the loading gauge assures sufficient clearance. The top container is held in place either by a bulkhead built into the car, or through the use of inter-box connectors. UNIT TRAINS : freight train composed of cars carrying a single type of commodity that are all bound for the same destination. By hauling only one kind of freight for one destination, a unit train does not Head to switch cars at various intermediate junctions and so can make nonstop runs between two terminals. This reduces not only the shipping time but also the cost. The unit train was introduced by American railroad companies in the 1950s so that they could offer lower
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shipping rates and thereby make their freight service more marketable. Logistics Park is a logistics organization and management nodes relative concentration of construction and development, with economic development nature of urban logistics functional areas;, it is also relying on related logistics services and facilities to reduce logistics costs and improve logistics efficiency and improve the flow of business services processing, raw material procurement, to facilitate direct contact and consumption the production and other activities, with the economic function of the nature of industrial development zones. its outreach areas: logistics function as an urban zone, logistics park, including logistics center, distribution center, transportation hub facilities, transport organization Management Center and logistics information center, as well as to adapt to the operational needs of urban logistics management and logistics infrastructure; as an economic functional areas, whose main is to carry out to meet the urban consumer, the nearest production, regional production required by the organization of production and business activities of enterprises . According to the above definition, the modern logistics park has two main functions, of logistics services Logistics Park is concentrated in the areas of logistics operations, in the convergence of several modes of transport, the will be a variety of different types of logistics facilities and logistics enterprise in space focused on the layout of places, but also a certain scale and have a variety of services function of logistics enterprises in the assembly points. It includes eight features an integrated function, intensive functions, information transaction capabilities, centralized storage and functions, distribution processing function, multimodal function, support service functions, parking feature. Among them, the contents of the comprehensive functions as follows: with the integration of logistics and logistics form the role of methods can be a comprehensive approach to storage, packing, handling, distribution processing, distribution and other practices and different practices between the conversion.
Container Corporation of India Ltd. (CONCOR), was incorporated in March 1988 under the Companies Act, and commenced operation from November 1989 taking over the existing network of 7 ICDs from the Indian Railways. From its humble beginning, it is now an undisputed market leader having the largest network of 59 ICDs/CFSs in India. In addition to providing inland transport by rail for containers, it has also expanded to cover management of Ports, air cargo complexes and establishing cold-chain. It has and will continue to play the role of promoting containerization of India by virtue of its modern rail wagon fleet, customer friendly commercial practices and extensively used Information Technology. The company developed multimodal logistics support for India's International and Domestic containerization and trade. Though rail is the main stay of our transportation plan, road services and also provided to cater to the need of door-to-door services, whether in the International or Domestic business. CONCOR's mission is to provide efficient and reliable multi-modal logistics support for the country's exim and domestic trade and commerce. To ensure enhanced customer satisfaction, growing shareholder value, high growth and consolidation of status as market leader.
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LOGISTICS & SUPPLY CHAIN MANAGEMENT

INDEX
NO. 1. Introduction 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Supply Chain Management Organization Structure Customer Service Forecasting Transportation Warehousing Material Handling Packaging Inventory Information System Performance Measurement Logistical Costing Logistical Network Modern Logistical Infrastructure CHAPTER 1 22 25 30 33 36 47 56 62 65 88 93 99 107 112 PAGE NO.

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about Customers demand specifications.

Less market moving powers

More power devolved to the customers.

b) Supporting Logic Development

c) Cost Benefit Estimates

Cost Reduction Benefits

Project work Plan

Identify Data Sources

Complete and validate Baseline analysis

Complete the Alternative analysis

Ch. 2: SUPPLY CHAIN MANAGEMENT

Ch. 3: ORGANISATION STRUCTURE

Stage 4: A Shift in Emphasis from Function to process

Time Dependability Convenience Communication

Transportation infrastructure Transportation infrastructures consist of:

Ch. 7: WAREHOUSING Distribution centers

Very high storage density

Pallet stacking frames

Odd-shaped or crushable parts

Odd-shaped or crushable parts Unit loads

Small. loose loads and cases Small parts and tools

All parts are easily accessed. good security

Mobile racking or shelving Unit-load ASKS

High storage density, computer-controlled

Small pails and tools

Ch. 10: Inventory

Purpose of holding inventory / Importance

Inventory & profitability

24 34/17% i.e. 0.17 2400

Re-order Point = Lead time X Average usage.

To separate out the items, normally in terms of their annual consumption.

LOGISTICS & SUPPLY CHAIN MANAGEMENT

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