Logistics & Supply

Chain Management
BBA/BBA-BI/BBA-TT/BCIS/BCA/BHM

A precise note on Logistic & Supply Chain

Management

Dharma Raj Upreti, OCEM

1. What is logistic Management? How supply chain management is a wider
concept than logistics management?
Answer: Logistics is the process of strategically managing the procurement, movement
and storage of materials, parts and finished inventory (and the related information
flows) through the organization and its marketing channels in such a way that current
and future profitability are maximized through the cost-effective fulfillment of orders.

Logistics is essentially a planning orientation and framework that seeks to create a

single plan for the flow of products and information through a business. Supply chain
management builds upon this framework and seeks to achieve linkage and co-
ordination between the processes of other entities in the pipeline, i.e. suppliers and
customers, and the organization itself. Thus, for example, one goal of supply chain
management might be to reduce or eliminate the buffers of inventory that exist between
organizations in a chain through the sharing of information on demand and current
stock levels.

It will be apparent that supply chain management involves a significant change from the
traditional arms-length, even adversarial, relationships that so often typified
buyer/supplier relationships in the past. The focus of supply chain management is on
co-operation and trust and the recognition that, properly managed, the whole can be
greater than the sum of its parts. Thus the definition of supply chain management
adopted is:

"Supply Chain Management is the management of upstream and downstream

relationships with suppliers and customers in order to deliver superior customer
value at less cost to the supply chain as a whole."

Thus the focus of supply chain management is upon the management of relationships in
order to achieve a more profitable outcome for all parties in the chain. This brings with
it some significant challenges since there may be occasions when the narrow self-
interest of one party has to be subsumed for the benefit of the chain as a whole.

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2. Explain three C's of competitive advantages.
Answer: Effective logistics and supply chain management can provide a major source of
competitive advantage in other words a position of enduring superiority over
competitors in terms of customer preference may be achieved through better
management of logistics and the supply chain. The foundations for success in the
marketplace are numerous, but a simple model is based around the triangular linkage of
the company, its customers and its competitors the Three Cs'.

The source of competitive advantage is found firstly in the ability of the organization to
differentiate itself, in the eyes of the customer, from its competition, and secondly by
operating at a lower cost and hence at greater profit. Seeking a sustainable and
defensible competitive advantage has become the concern of every manager who is
alert to the realities of the marketplace. It is no longer acceptable to assume that good
products will sell themselves, neither is it advisable to imagine that success today will
carry forward into tomorrow. Let us consider the bases of success in any competitive
context. At its most elemental, commercial success derives from either a cost advantage
or a value advantage or, ideally, both. It is as simple as that the most profitable
competitor in any industry sector tends to be the lowest-cost producer or the supplier
providing a product with the greatest perceived differentiated values.

Put very simply, successful companies either have a cost advantage or they have a value
advantage, or even better a combination of the two. Cost advantage gives a lower

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cost profile and the value advantage gives the product or offering a differential plus
over competitive offerings.

3. Explain in detail the mission of Logistic Management.

Answer: The mission of logistics management is to plan and co-ordinate all those
activities necessary to achieve desired levels of delivered service and quality at lowest
possible cost. Logistics must therefore be seen as the link between the marketplace and
the supply base. The scope of logistics spans the organization, from the management of
raw materials through to the delivery of the final product.

Logistics management, from systems viewpoint, is the means whereby the needs of
customers are satisfied through the co-ordination of the materials and information
flows that extend from the marketplace, through the firm and its operations and beyond
that to suppliers. To achieve this company-wide integration clearly requires a quite
different orientation than that typically encountered in the conventional organization.
For example, for many years marketing and manufacturing have been seen as largely
separate activities within the organization. At best they have coexisted, at worst there
has been open warfare. Manufacturing priorities and objectives have typically been
focused on operating efficiency, achieved through long production runs, minimized set-
ups and change-over and product standardization. On the other hand, marketing has
sought to achieve competitive advantage through variety, high service levels and
frequent product changes.

In todays more turbulent environment there is no longer any possibility of

manufacturing and marketing acting independently of each other. The internecine
disputes between the barons of production and marketing are clearly

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counterproductive to the achievement of overall corporate goals. It is no coincidence
that in recent years both marketing and manufacturing have become the focus of
renewed attention. Marketing as a concept and a philosophy of customer orientation
now enjoys a wider acceptance than ever. It is now generally accepted that the need to
understand and meet customer requirements is a prerequisite for survival. At the same
time, in the search for improved cost competitiveness, manufacturing management has
been the subject of a massive revolution. The last few decades have seen the
introduction of flexible manufacturing systems (FMS), of new approaches to inventory
based on materials requirements planning (MRP) and just-in-time (JIT) methods and,
perhaps most important of all, a sustained emphasis on total quality management
(TQM).

Equally there has been a growing recognition of the critical role that procurement plays
in creating and sustaining competitive advantage as part of an integrated logistics
process. Leading-edge organizations now routinely include supply-side issues in the
development of their strategic plans. not only is the cost of purchased materials and
supplies a significant part of total costs in most organizations, but there is a major
opportunity for leveraging the capabilities and competencies of suppliers through
closer integration of the buyers and suppliers logistics processes. In this scheme of
things, logistics is therefore essentially an integrative concept that seeks to develop a
system-wide view of the firm. It is fundamentally a planning concept that seeks to create
a framework through which the needs of the marketplace can be translated into a
manufacturing strategy and plan, which in turn links into a strategy and plan for
procurement. Ideally there should be a one-plan mentality within the business which
seeks to replace the conventional stand-alone and separate plans of marketing,
distribution, production and procurement. This, quite simply, is the mission of logistics
management.

4. Describe different customer service phases.

Answer: Customer service is the measure of how logistics creates time and place utility
for a product. The meaning of customer service will vary with the organization, the
product it is marketing and the transaction phase it is undergone. The buyer will look

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for value for money he/she is spending, while the seller, when delivering superior
customer service, will look for a tradeoff between cost and customer satisfaction. Hence,
customer service depends on the phases of the transaction it is passing through. The
diagram below depicts the various services attached with the various transaction
phases.

A: Pre- transaction Phase: This Phase is more related to policy delivery for defining
the service level and related activities in quantitative and qualitative terms. It is non-
routine activity and gives guidelines to operating people, regarding the dimensions and
limitations on the customer service activities of the firm. Following are the important
elements of the pre-transaction phase.
a. Customer Service Policy: This indicates the service standard of the firm. The
firm has to evolve the policy framework for performance measures. For example,
the caterpillar, a leading manufacturer of Construction Company, makes a policy
commitment to deliver spare parts to customers within 24 hours of placements
of order. Further it promises free supply, if the parts reached after the stipulated
time.
b. Service Organization: For implementing policy directives on customer service
the form should formalize the reporting structure, delegate authority and
allocate responsibility. The contact persons contact number, name need to be
informed to the customers for getting information on order status, dispatch
details, warranty claims etc.

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 c. Structuring Services: The basic structure of service depends on customer
expectations, industry standards and service standard the firm would like to
maintain. Firm marketing capital goods may evolve a service structure to extend
lifetime product service commitments for supply of spares, irrespective of
continuous product & technology up gradation at its end. The supplier may
extend free periodic checkup services to get the competitive advantage. The level
of customer service also depends on the stages of product life cycle. E.g. The
Exide Industry Ltd. a leading automotive battery manufacturer in India
introduced Bat- Mobile service to gain competitive advantage.
d. Customer Education: This is required for minimizing customer complaints on
product deliveries, product operation and maintenance, spare parts inventory
requirements and maintenance, freight charges, transit charges etc. Customers
education is done through manuals, training, seminars, or workshops.
e. System Design: System configuration should take care to answer all possible
queries the customer would ask before placing order. The system can be manual
or fully automotive, like e-commerce.
B: Transaction Phase: During transaction phase customer service is associated with
the routine tasks performed in the logistics supply chain. These task need coordination
for the entire system to be efficient and effective in delivering the services to customer
as the desired standards. Various elements customer services in transaction phase are
as follows.
a. Order Fulfillment Reliability: In transaction phase the most important factor is
reliability in fulfilling order within agreed time frame and also with respect to
the quantity and quality of material ordered. This depends on the close
coordination and management of various components of order cycle such as
order processing, material handling, processing, allocation, picking, packaging
and transportation.
b. Delivery Consistency: To maximize the customer service level the delivery of
the order must have consistency. E.g. out of 100 deliveries , say 60 are on time
while 40 are with deviations in delivery, which may cause production
interruption in production and affects the stock availability and firm cant make
products available at the right time, which leads to customer dissatisfaction.

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 c. Order Convenience: This is the ease with which customer can place an order.
The barriers to the convenience are the paper work required by supplier,
compliance to various procedures, complex payment terms, poor
communications network etc.
d. Order Postponement: The customer sometimes requires stopping entire or
some parts of order due to certain reason. The order can be postpone on phase
basic too. This may be due to rescheduling of the production requirements at the
customer end.
e. Product Substitute: A situation may arise in which the product ordered cannot
be shipped due to certain manufacturing or quality problems. In such cases the
seller may honor its commitment by offering a substitute product of similar or
better quality in differ sizes from the available brands in the market with
customers consent. For obtaining consent for product substitute, seller needs to
maintain close interaction and clear communication with the customers.
C: Post-Transaction Phase: This phase is related to customer satisfaction and building
up of long term relationship with the customer. For service based products this is an
important phase, which depends on the firms service quality and may make image of
company in the minds of customers. The various customer service elements in post-
transaction phase are as follows.
a. Order Status Information: after payment for the goods customer needs
continuous feedback on information regarding the order status. Customers
production activities actually start after arrival of the materials at the production
site. Many firms have maintained a consignment tracking and tracing system
installed on their website for their clients to have online access to information.
E.g. DHL (a leading courier service provider), Merojobs (Human resource
consultancy in Nepal) has maintained such system.
b. Attending Customers Complaints, Claims & Returns: The sellers
responsibility is not over after the product is dispatched to clients. The customer
may get products damaged during transit, or the product may not perform as per
functional requirements or may get wrong consignments. For resolving the
issues the manufacturer normally evolves a product return policy and
implements this policy through the reverse logistics system.

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 c. Product Installation: Technically complex products need installation,
stabilization services from the supplier. To handle those issues firms normally
set up after sales service units.
d. Customer Education& Training: This is the important service element in the
post transaction phase. In the case of technically complex products, it is
necessary for the seller to train or educate the user regarding its operation. This
may be done through the manuals, training, workshops, demonstration etc.

5. What are the customer service elements for which standards should be set?
Answer: To maintain the customer to service it is necessary to set the various service
standards. There must be complete match between what the customer expects and
what the firm willing and able to provide. This may require negotiation of service
standards between the supplier and the buyer.

What are the customer service elements for which standards should be set?

There are internal service standards. In many respects theses mirror the standards that
external customers place upon the firm. As far as theses external standards are
concerned they must be defined by the customers themselves. The areas where the
standards are essentials are as follows:
a. Order Cycle time: This is the time elapsed from order to delivery. Standards
should be defined against customers requirements.
b. Stock Availability: This relates to percentage of demand for given line items
that can be met from the available inventory. The supplier should maintain the
stocks standards to make the product available to customers at right time.
c. Order- size constraints: Most customer wants Just- in- time deliveries in small
lot size in frequent manner as this firm or buyer cam]n eliminates its inventory
holding cost. The firms must fix standard of order to minimize the future
complexities.
d. Ordering Convenience: The ordering convenience may differ on the nature of
products. The question may arise to set the standard how are we seen from the
customers view point? Do the firms systems talk to buyers system?

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 e. Delivery Reliability: What proportion of total orders is delivered on time? It is a
reflection not just of delivery performance but also of stock availability and order
processing performance.
f. Documentation Quality: It includes- what is the error rate on invoices, delivery
notes and other customer communications? Is the documentation user friendly?
A larger number of service failures are from this source.
g. Claims Procedure: It is one of the post transaction customer service elements. It
is the claims process that the firms adopted for its sales. It includes- what is the
trend in claims? What are their causes? How quickly the firms deal with
complaints and claims? Do firm have procedure for service recovery?
h. Order completeness: An order is complete after the buyer receives the goods
and the supplier gets the payment. To make the order perfect the buyer and
supplier should establish standards regarding ordering time, payment system,
transportation vehicle etc.
i. Technical Support: To provide the technical support, the buyer and supplier
should make policy papers to make uniformity in servicing. What support does
supplier provide customers with after sale? If appropriate does the supplier have
standards for call-out time and first-time fix rate on repairs?
j. Order Status Information: For the continuous information on orders the firm
should maintain the order status information system to provide the information.
It includes the questions like- can the supplier inform customers at any time on
the status of their delivery? Do suppliers have hot lines or their equivalent? Do
suppliers have procedures for informing customers of potential problems on
stock availability and delivery?

6. Elaborate the principle of logistic costing.

Answer: The primarily focus of the logistics management is to develop an appropriate
logistics oriented costing system. The basic principles of the logistics costing system are
as follow:
Logistics costing should be capable of identifying the costs that result from
providing customer service in the marketplace.

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 A second principle is that it should be capable of enabling separate cost and
revenue analyses to be made by customer type and by market segment or
distribution channel. This requirement emerges because of the dangers inherent
in dealing solely with averages, e.g. the average cost per delivery, since they can
often conceal substantial variations either side of the mean.

To ensure the operation these principles requires an output orientation to costing. In

other words, we must first define the desired outputs of the logistics system and then
seek to identify the costs associated with providing those outputs. A useful concept here
is the idea of mission. In the context of logistics, a mission is a set of customer service
goals to be achieved by the system within a specific product/market context. Missions
can be defined in terms of the type of market served, by which products and within
what constraints of service and cost. A mission by its very nature cuts across traditional
company lines.

The successful achievement of defined mission goals involves inputs from a large
number of functional areas and activity centers within the firm. Thus an effective
logistics costing system must seek to determine the total systems cost of meeting
desired logistic objectives (the output of the system) and the costs of the various
inputs involved in meeting these outputs. Interest has been growing in an approach to
this problem, known as mission costing.

In determining the costs of an activity centre, e.g. transport, attributable to a specific

mission, the question should be asked: What costs would we avoid if this
customer/segment/channel were no longer serviced? These avoidable costs are the
true incremental costs of servicing the customer/segment/channel. Often they will be
substantially lower than the average cost because so many distribution costs are fixed
and/or shared.

7. Explain the relationship between logistic and shareholders value.

Answer: One of the key measures of corporate performance today is shareholder value.
In other words, what is the company worth to its owners? Increasingly senior

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management within the business is being driven by the goal of enhancing shareholder
value. There are a number of complex issues involved in actually calculating
shareholder value but at its simplest it is determined by the net present value of future
cash flows. These cash flows may themselves be defined as:

Net Operating Income

Less:
Taxes
Less:
Working Capital Investment
Less:
Fixed Capital Investment
=
After Tax Free Cash Flow

More recently there has been a further development in that the concept of economic
value added (EVA) has become widely used and linked to the creation of shareholder
value. Essentially EVA is the difference between operating income after taxes less the
true cost of capital employed to generate those profits. Thus,

Economic value added (EVA) = (Profit after tax True cost of capital employed)

Note: If Cost of capital is greater than profit after tax results negative EVA, which erode
the shareholders value in long run. And positive EVA enhances the shareholders value.
If the net present value of expected future EVAs were to be calculated this would
generate a measure of wealth known as market value added (MVA), which is a true
measure of what the business is worth to its shareholders. A simple definition of MVA is:

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 Stock price Issued shares
Less:
Book value of total capital invested
=
Market Value Added

And, as we have already noted,

MVA = Net present value of expected future EVA

The impact of logistics service can have upon net operating income (profit) and also
have impact on capital efficiency (asset turn). Many companies have come to realize the
effect that lengthy pipelines and highly capital-intensive logistics facilities can have on
EVA and hence shareholder value. As a result they have focused on finding ways in
which pipelines can be shortened and, consequently, working capital requirements
reduced.

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8. What is Activity Based Costing System?
Answer: There is growing dissatisfaction with conventional cost accounting,
particularly as it relates to logistics management. Essentially these problems can be
summarized as follows:
There is a general ignorance of the true costs of servicing different customer
types/channels/market segments.
Costs are captured at too high a level of aggregation.
Full cost allocation still reigns supreme.
Conventional accounting systems are functional in their orientation rather than
output oriented.
Companies understand product costs but not customer costs.

The common theme that links these points is that we seem to suffer in business from a
lack of visibility of costs as they are incurred through the logistics pipeline. Ideally what
logistics management requires is a means of capturing costs as products and orders
flow towards the customer.

To overcome this problem it is necessary to change radically the basis of cost

accounting away from the notion that all expenses must be allocated (often on an
arbitrary basis) to individual units (such as products) and, instead, to separate the
expenses and match them to the activities that consume the resources. One approach
that can help overcome this problem is activity-based costing. The key to activity-
based costing (ABC) is to seek out the cost drivers along the logistics pipeline that
cause costs because they consume resources. Thus, for example, if we are concerned to
assign the costs of order picking to orders then in the past this may have been achieved
by calculating an average cost per order. In fact an activity-based approach might
suggest that it is the number of lines on an order that consume the order picking
resource and hence should instead be seen as the cost driver.

The advantage of using activity-based costing is that it enables each customers unique
characteristics in terms of ordering behavior and distribution requirements to be
separately accounted for. Once the cost attached to each level of activity is

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identified (e.g. cost per line item picked, cost per delivery, etc.) then a clearer picture of
the true cost-to-serve will emerge. Whilst ABC is still strictly a cost allocation method it
uses a more logical basis for that allocation than traditional methods.

There are certain parallels between activity-based costing and the idea of mission
costing introduced earlier in this chapter. Essentially mission costing seeks to identify
the unique costs that are generated as a result of specific logistics/customer service
strategies aimed at targeted market segments. The aim is to establish a better matching
of the service needs of the various markets that the company addresses with the
inevitably limited resources of the company. There is little point in committing
incremental costs where the incremental benefits do not justify the expenditure.
There are four stages in the implementation of an effective mission costing process:
a. Define the customer service segment: The basic principle is that because not
all customers share the same service requirements and characteristics they
should be treated differently.
b. Identify the factors that produce variations in the cost of service: This step
involves the determination of the service elements that will directly or indirectly
impact upon the costs of service, e.g. the product mix, the delivery characteristics
such as drop size and frequency or incidence of direct deliveries, merchandising
support, special packs and so on.
c. Identify the specific resources used to support customer segments: This is
the point at which the principles of activity-based costing and mission costing
coincide. The basic tenet of ABC is that the activities that generate cost should be
defined and the specific cost drivers involved identified. These may be the
number of lines on an order, the people involved, the inventory support or the
delivery frequency.
d. Attribute activity costs by customer type or segment: Using the principle of
avoid ability the incremental costs incurred through the application of a specific
resource to meeting service needs are attributed to customers. It must be
emphasized that this is not cost allocation but cost attribution. In other words it
is because customers use resources that the appropriate share of cost is
attributed to them.

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Clearly to make this work there is a prerequisite that the cost coding system in the
business be restructured. In other words, the coding system must be capable of
gathering costs as they are incurred by customers from the point of order generation
through to final delivery, invoicing and collection.

The basic purpose of logistics cost analysis is to provide managers with reliable
information that will enable a better allocation of resources to be achieved. Given that
the purpose of logistics and supply chain management, as we have observed, ultimately
is concerned to meet customer service requirements in the most cost effective way, then
it is essential that those responsible have the most accurate and meaningful data
possible.

9. What is benchmarking? Also explain the different types of benchmarking.

Answer:
The intense level of competitive activity encountered in most markets has led to a new
emphasis on measuring performance not just in absolute terms, but rather in terms
relative to the competition, and beyond that to best practice. In the past it was usually
deemed to be sufficient simply to measure internal performance such as productivity,
utilization, and cost per activity and so on. It is important that such things continue to be
measured and controlled and it also has to be recognized that such measures only have
meaning when they are compared against a relevant metric or benchmark.
Definition:
It is defined as the continuous measurement of the companys products, services,
processes and practices against the standards of the best competitors and other
companies who are recognizes as leaders. Example- the earlier firm to adopt
benchmarking was the Xerox Cooperation, who used benchmarking as the major tool in
gaining competitive advantage.
Types of Benchmarking
a. Strategic Benchmarking involves examining long-term strategies (e.g.
regarding core competencies, new product and service development, improving

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 capabilities) used by successful high performers in order to improve a businesss
overall performance.
b. Performance or Competitive Benchmarking looks at performance
characteristics in relation to key products and services in the same sector. In
order to protect confidentiality this type of analysis is often undertaken through
trade associations or third parties.
c. Process Benchmarking focuses on improving critical processes and operations
through comparison with best practice organizations performing similar work.
This often results in short term benefits.
d. Functional Benchmarking compares a business with partners drawn from
different sectors to find innovative ways of improving work processes. This can
lead to dramatic improvements.
e. Internal Benchmarking involves benchmarking businesses or operations from
within the same organization (e.g. business units in different countries). Access
to sensitive and/or standardized data is easier, usually less time and resources
are needed and ultimately practices may be relatively easier to implement.
However, real innovation may be lacking: best in class performance is more
likely to be found through external benchmarking.
f. External Benchmarking analyses best in class outside organizations, providing
the opportunity to learn from those at the leading edge. This can take up
significant time and resource to ensure the credibility of the findings.
g. International Benchmarking identifies and analyses best practitioners
elsewhere in the world, perhaps because there are too few benchmarking
partners within the same country to produce valid results. Globalization and
advances in information technology are increasing opportunities for
international projects. However, these can take more time and resources to set
up and implement and the results may need careful analysis due to national
differences.

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10. What are the issues that need to be assessed in supplier and distributer
benchmarking?
Answer: The Supply chain management is so obviously bound up in the quality
relationship that extended upstream to supplier and downstream to distributors. In
both the cases the focus area is to enhance the efficiency and effectiveness of supply
chain relationship with the overall aim in the mind of improving performance of supply
chain as whole. In reviewing supplier and distributors performance the emphasis
should be on assessing their contribution to reducing the total delivered cost and
increasing user /customers service.

The types of issues that need to be assessed in supplier and distributor benchmarking
are such questions as
Willingness to work as a partner/ co- maker
Commitment to continuous improvement
Acceptance of innovation and change
Focus on throughput time reduction
Utilization of quality management procedure
Flexibility in logistical system
Does employee actively seek to improve communication with the firm?

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The above figure shows the key areas for benchmarking the supply chain. It is most
important to benchmark the supplier and distributors performance in order to gain the
competitive advantage. It is very much important to evaluate the various available
suppliers and distributors comparatively for the superior performance.

11. Explain the process of setting benchmarking priorities.

Answer: Many things can be measured and compared to performance achieved by
other companies. where should be priority be placed? Walleck recommended that the
priorities should be determined by identifying which process and entities in the supply
chain is of strategic importance? Which process and entities in the supply chain have a
high relative impact on business? Where there is a choice between make or buy? Where
there is internal readiness to change?

Figure: Setting Benchmarking Priorities

The ultimate guide to the selection of benchmark priorities has to be the impact that an
activity of function has upon competitive advantage (relative cost and relative value).
The firm only can get competitive advantage in the market place if the firm able to
differentiate its products from its competitors or market leaders. The figure below
highlights the competitive goal.

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In the above matrix the vertical axis represents relative differentiation whereas horizontal
axis represents the efficiency. Thus it is assumed that benchmarking priority must be
determined by the contribution of an activity, process or function to achievement of those
twin goals.

12. Explain different service attributes or characteristics.

Answer: The most important and critical factor of the customer service is the physical
distribution of the product, i.e. making the right product available at the right place and
at the right time., followed by motivating services success facilitators like channel
members to compete the physical distribution. The channel members need to be
motivated and serviced by the manufactures. The service extended to the trading
community is different from those required for satisfying end customers.

a. Order Processing Time: This is the most important measure of customer

service in physical distribution. It is the time between the placement of an order
by the buyer and the supply of the material by the seller. This involves the supply
of all the materials against the order placed within the agreed time frame
without any error in either in documentation or in physical distribution. The

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 order processing time consists of time required for the registration of an order in
suppliers system, material allocation and pick up from the work progress
inventory, warehouse, or distribution centers, packing of materials and dispatch
of materials.
b. Delivery Consistency: This refers to consistency in marinating the same
delivery period over a period of time for delivering materials to buyer. E.g.
against 100 repeat orders placed during a year, if the supplier dispatches the
material within the agreed delivery time for 97 orders, then the delivery
consistency is 97%. Delivery consistency speaks about the degree of
coordination in the various logistical arms of sellers firm. The delivery
consistency has direct effect on the inventory level in buyers side.
c. Delivery Frequency: Delivery frequency is the key element in customer service.
Customer does not want to carry excess inventory but wants operations to run
without interruptions. As the result customer requires frequent deliveries in
small lots. This may increase the transportation cost but reduces the inventory
related cost drastically. In other case a firm may not have ordered items available
in its stock, in such a situation the supplier with the consent of buyer may supply
critical items first followed by consignment of the left out items. The supplier
may bear the additional transportation cost to compensate the buyer.
d. Stock Availability: Stock availability is an important measure of customer
service. With excess stocks, the supplier may extend excellent service to
customer but inventory related cost reduces the profit margin of business
operation. Hence, the firm needs to maintain the balance between stock level and
desired customer service level through integrated logistical operations. The
reduction in the stock holdings may be exercised through centralized inventory
control from the single mother warehouse, by reducing field distribution
warehouse at multiple locations, which will result in rise in transportation costs
but net saving are more than the increase in cost.
e. Credit Facility: As a value added services the supplier offers credit facility to
buyer for payment against material dispatched. This is done in order to build
long term relations with the customer and to get back repeat orders from the
buyer. In case credit facility is an industry trend and customers extend payment

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 beyond the agreed time frame, the supplier may need to consider recovering the
cost of blocked funds from customer.
f. Stock Financing: against bulk orders, in case of seasonal products, suppliers
sometimes hold the inventory for buyer for a longer period of time. Depending
upon the competition in the industry and the assurance or repeat orders from
the buyer, the supplier may hold his/her inventory for a longer time, bearing the
carrying cost as a value added services.
g. This ultimately means indirectly financing the operations of buyer, by shifting
the cost element from buyer to seller. In the competitive logistics industry, the
warehouse service supplier finances to customers by way of a loan to extend of
30-50 percent of stocks deposited. The loans are available at the interest rate
lower than bank rate.
h. Service Supports: This may be in terms technical support for product
installation, commissioning, process establishing, spare parts supply, or routine
equipment check up as a part of annual service contact. Service support is
required to keep the down time of the equipment very low as it ultimately has
significant effect on productivity at the customers end.
i. Handling Convenience: The supplier, for convenience of material handling and
storage at the customers end may develop novel methods for product unitizing,
such as pallets, boxes, cartons etc. These methods are customized to suit the
existing product handling arrangements at the customers end. This may reduce
material handling hassles and product damages at the buyers end.

13. Write short notes on.

a. Order to delivery cycle
Answer: From a marketing point of view the time taken from receipt of a customers
order through to delivery (sometimes referred to as order cycle time (OCT) is critical. In
just-in-time environment short lead times and lead time reliability and consistency are
a major source of competitive advantage. It can actually be argued that reliability of
delivery is more important than the length of the order cycle at least up to a point
because the impact of a failure to deliver on time is more severe than the need to order
further in advance. However, because, as we have seen, long lead times require longer-

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term forecasts, then the pressure from the customer will continue to be for deliveries to
be made in ever-shorter time-frames.

Each of these steps/components in the chain will consume time. Because of bottlenecks,
inefficient processes and fluctuations in the volume of orders handled there will often
be considerable variation in the time taken for these various activities to be completed.
The overall effect can lead to a substantial reduction in the reliability of delivery.

b. Lead time gap

Answer: The fundamental problem in the logistics management is that the time it takes to
procure, make and deliver the finished product to a customer is longer than the time the
customer is prepared to wait for it. The difference between logistics leads time and the
customers order cycle time is called lead time gap.

Lead Time Gap= (Logistical Lead time- Customers Order Cycle time)

Where,
Logistics Lead Time: It is the total time it takes to complete the manufacturing and
supply of a product. In other words, it takes time to source raw materials, convert them
into products and move them into the market.

Customer Order Cycle Time: It is the time that customer is prepared to wait, from
when the order is placed through to when the goods are received. This is the maximum
period available for order fulfillment. In some cases this may be measured in months
but in others it is measured in hours. Market as well as the nature of the product will
influence the customers willingness to wait. Thus a customer may be willing to wait a
few weeks for delivery of a car with particular options but only a day for a new set of
tyres.

c. Kanban

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Answer: The name Kanban comes from the Japanese for a type of card that was used in
early systems to signal to the upstream supply point that a certain quantity of material
could be released.

Figure below is an abstract model of a Kanban system. Illustrated in it are two

processes, an upstream and a downstream process, where the upstream process
supplies parts (items) to the downstream. In order to supply products to the final
customer, the process needs to produce parts and make them flow to the downstream,
but not too much, as overproduction is considered the worst waste. So to prevent
overproduction, the upstream doesn't "push" finished parts to the downstream, but
instead it is the downstream that actively pulls (fetches) the parts from the upstream.
The space where parts are placed is called the "store" . The store is in the upstream
location and works as a "buffer" or a "queue" of WIP. When a worker from the
downstream process, called "material handler", comes to the store and picks up newly
finished parts, it also returns a signal of production - i.e. the downstream pulls things
from the upstream and at the same time pushes information to the upstream via
Kanban cards. This is needed, because the upstream process never produces parts
without instruction from the downstream process. So here are two types of Kanban
working together.
Withdraw Kanban - is one item on a shopping list which the material handler
takes to the store.
Production Kanban - instructs upstream processes to produce parts for its
downstream processes.

As shown in Figure , withdraw Kanbans circulate between the processes, while

production Kanban circulate within the process, and they are exchanged at the store.
Let's get a little bit more into the mechanics of this.

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 Figure: Kanban Exchange in the Store

d. Vendor Managed inventory

Answer: Traditionally, customers place orders on their suppliers. Whilst the logic of
this might seem obvious, the inherent inefficiencies are significant. Firstly, the supplier
has no advance warning of requirements-they are forced to make forecasts and, as a
result, carry unnecessary safety stocks. Secondly, the supplier is often faced with
unexpected short-term demands for products, which leads to frequent changes to their
production and distribution schedules and thus additional cost. The paradoxical end
result is that customer service suffers because of the inevitably higher level of stock-
outs.

There is now emerging an alternative way of managing demand. In this revised model
the customer no longer places orders but instead shares information with the vendor.
This information relates to the actual usage or sales of their product, their current on-
hand inventory and details of any additional marketing activity such as promotions. On
the basis of this information, the supplier takes responsibility for replenishment of the
customers inventory. No orders are received, but instead an indication is given by the
customer of the upper and lower limits of stock that they wish to keep on hand. It is the
responsibility of the supplier to maintain the customers inventory within the specified
stock bands. The benefit to the customer is that inventory levels can be significantly
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reduced whilst the risk of stock-outs diminishes. Furthermore it is often the case that
the customer does not pay for the inventory until after it has been sold or used so
there is a considerable cash flow benefit. The advantage to the supplier is that because
they have direct access to information on real demand, usually transmitted through
Electronic Data Interchange (EDI) or web-based systems, they can much better plan and
schedule production and distribution-thus improving capacity utilization and at the
same time the requirement for safety stock is considerably reduced.

14. What do you mean by creation of logistic vision? Explain.

Answer: Making service happen is the ultimate challenge. Whilst it is by no means easy
to develop strategies for service that will lead to improved competitive performance,
the hardest task is to put that strategy into action. How do we develop an organization
that is capable of delivering high-quality service on a consistent, ongoing basis?

These days most companies are familiar with the idea of mission statements as an
articulation of the vision of the business. The mission statement seeks to define the
purpose of the business, its boundaries and its aspirations. It is now by no means
uncommon for organizations to have such statements for the business as a whole and
for key constituent components. What some companies have found is that there can be
significant benefits to defining the logistics vision of the firm.

The purpose of the logistics vision statement is to give a clear indication of the basis on
which the business intends to build a position of advantage through closer customer
relationships. Such statements are never easy to construct. There is always the danger
that they will descend into vague motherhood statements that give everyone a warm
feeling but provide no guidelines for action.

Ideally the logistics vision should be built around the simple issue of How do we intend
to use logistics and supply chain management to create value for our customers? To
operationalise this idea will necessitate a detailed understanding of how customer value
is (or could be) created and delivered in the markets in which the business competes.
Value chain analysis will be a fundamental element in this investigation, as will the

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definition of the core competencies and capabilities of the organization. Asking the
questions What activities do we excel in? and What is it that differentiates us from our
competitors? is the starting point for creating the logistics vision statement.

The four elements of logistics-derived customer value are Better, Faster, Cheaper,
Closer and the criterion for a good logistics vision statement is that it should provide
the roadmap for how these four goals are to be achieved.

15. Explain the problems with conventional organization in terms of logistic &
supply chain management.
Answer: Amongst experienced observers and commentators of the logistics
management process there is general agreement that the major barrier to the
implementation of the logistics concept is organizational. In other words, a major
impediment to change in this crucial managerial area is the entrenched and rigid
organizational structure that most established companies are burdened with.

There is a great danger that those companies that do not recognize the need for
organizational change, or that lack the will to make it happen, will never achieve the
improvements in competitive advantage that integrated logistics management can
bring. The argument advanced here is that the demands of the marketplace for
enhanced service provision combined with dramatically heightened competition call for
a paradigm shift in the way in which we think about our organizations.

The concept of integrated supply chain management, whereby flows of information and
material between source and user are co-ordinated and managed as a system, is now
widely understood, if not widely implemented. The logic of linking each step of the
process as materials and products move towards the customer is based upon the
principles of optimization. In other words, the goal is to maximize customer service
whilst simultaneously minimizing costs and reducing assets locked up in the logistics
pipeline.

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However, in the conventional organization this poses an immediate problem. Most
companies are organized on a functional basis. In other words, they have created a
division of responsibility by function, so we might find a purchasing function, a
production function, a sales function and so on.

Each of the vertical functions in the conventional organization is normally headed by

senior managers who come to regard their functional area as their territory. Indeed in
many companies these functional heads are barons who wield considerable power and
who jealously guard those territories from what they perceive as unwarranted
incursions from other functional barons.

Further reinforcing the functional or vertical orientation in the conventional

organization is the budgeting system. Typically, each function will be driven by a budget
that seeks to control the resources consumed by those functions. It is almost as if the
company is working on the assumption that the prime purpose of any enterprise is to
control the consumption of resources. In fact, the leading-edge companies have long
since realized that the sole purpose of the business is to create profitable outputs and
that outputs, not inputs, should form the basis both for the way we organize and for the
way we plan and control.

16. Write few paragraphs on production strategies for quick response.

Answer: As the demand by all partners in the supply chain for a quick response
increases, the greater will be the pressure placed upon manufacturing to meet the
customers needs for variety in shorter and shorter time-frames. The answer has to lie
in flexibility. As we have already observed, if it were possible to reduce manufacturing
and logistics lead times to zero then total flexibility could be achieved. In other words
the organization could respond to any request that was technologically feasible in any
quantity. Whilst zero lead times are obviously not achievable, the new focus on flexible
manufacturing systems (FMS) has highlighted the possibility of substantial progress in
this direction.

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The key to flexibility in manufacturing is not just new technology, e.g. robotics, although
this can contribute dramatically to its achievement. The main barrier to flexibility is the
time taken to change; to change from one level of volume to another and to change from
making one variant to another. Typically we call this set-up time. It will be apparent
that if set-up times can be driven as close as possible to zero then flexible response to
customer requirements presents no problem.

The Japanese, not surprisingly, have led the way in developing techniques for set-up
time reduction. Single minute exchange of die, or SMED, is the goal in many Japanese
plants. In other words continuous attention by management and the workforce is
focused upon the ways in which set-up times can be reduced.

Sometimes it will involve new technology, but more often than not it is achieved
through taking a totally different look at the process itself. In many cases set-up times
have been reduced from hours down to minutes, simply by questioning the
conventional wisdom. What in effect we are seeing is a fundamental shift away from the
economies of scale model, which is volume based and hence implies long production
runs with few change-overs, to the economies of scope model, which is based upon
producing small quantities of a wider range, hence requiring more change-overs.

It has been suggested that under the economies of scope model:

a single plant can produce a variety of output at the same cost as (if not lower
than) a separate plant, dedicated to producing only one type of product at a given
level. In other words an economic order quantity (EOQ) of one unit, and specific
production designs, engender no additional costs. Economies of scope change the
materials-driven, batch-system technology into a multi-functional, flow system
configuration.

The marketing advantages that such flexibility brings are considerable. It means that in
effect the company can cater for the precise needs of multiple customers, and they can
offer even higher levels of customization. In todays marketplace where customers seek
individuality and where segments or niches are getting ever smaller, a major source of

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competitive advantage can be gained by linking production flexibility to customers
needs for variety. A classic example is provided by Benetton, the Italian fashion goods
manufacturer and distributor, which has created a worldwide business based upon
responsiveness to fashion changes with a particular emphasis upon color. By
developing an innovative process whereby entire knitted garments can be dyed in small
batches, they reduced the need to carry inventory of multiple colors, and because of the
small batch sizes for dying they greatly enhanced their flexibility. Benettons speed of
response is also assisted by the investment that they have made in high-speed
distribution systems, which are themselves aided by rapid feedback of sales information
from the marketplace. Many companies are now seeking to construct supply chains to
enable them to support a marketing strategy of mass customization. The idea behind
this is that todays customers in many markets are increasingly demanding tailored
solutions for their specific requirements. The challenge is to find ways of achieving this
marketing goal without increasing finished goods inventory and without incurring the
higher costs of production normally associated with make-to-order. Often this can be
achieved by postponing the final configuration or assembly of the product until the
actual customer requirement is known a strategy pursued by Dell and Hewlett
Packard, for example. In other cases high technology in the form of computer-aided
design/computer- aided manufacturing (CAD/CAM) can provide the means for this
mass customization.

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