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Operations Operational Challenge, Inbound Logistics-Key to seamless Supply chain, a micro perspective Rameshwar Dubey,Dr.Tripti Singh & J. V.

B Sastry

Abstract: It was way back in the year 1985 when Michael Porter has proposed value chain model in the theory of competitive advantage which was published in the Harvard Business Review pointed out that both Inbound and Outbound Logistics constitute primary activities that add value to the firm value chain which is finally accrued to the end user but still even after 22 years in India Inbound Logistics need fair treatment because due to irrational & Unprofessional approach resulting in huge loss of revenue. Time has come when serious attention should be paid towards redefining Inbound Logistics practice, building rail logistics capability, which is heart of domestic logistics in India. Design/methodology/approach: Research paper based on observation and study conducted at cement&steel plants.

Keywords: Demmurages, Shipping Cycle Time, Rake. Paper type: Research based on interview with plant Logistics manager, Production manager & Vice President of Logistics.

Introduction: According to Council of Supply Chain Management Logistics is defined as that part of supply chain which deals with efficient and effective flow and storage of goods, services and related information from point of origin to the point of consumption. However Logistics has different meanings to different people but the objective is to deliver goods or services from one point to another point by means of any existing mode in Right condition at Right Place at Right time in Right quantity at Right cost. If all these conditions are satisfied then Logistics function is very important from strategic perspective and even a greater challenge for any firm. Here Logistics owing to its vastness and complexity it has been further categorized into two major categories:(1) Inbound Logistics and (2) Outbound Logistics.Here the scope of research paper is limited to Inbound Logistics.Inbound Logistics is defined

as flow of raw materials/semi finished goods from source to plant (where materials is converted into finished goods). However it involves several key dimensions and each dimension need serious treatment because each dimension has major influence on Logistics cost and service to the customer, which further measures customer satisfaction. The objective of this research paper is to identify inbound Logistics components and impact of these components on total Logistics cost.

Executive Summary:

With the Indian economy growing at more than 8% and manufacturing growing in double digits, the Logistics sector is at an inflexion point. Strong growth enablers exist today in the form of INR 14 tn of infrastructure development and thus there is huge growing demand for steel and cement in near future and to meet this challenge Inbound Logistics needed to be seamless. To produce 1 mt of saleable steel there is requirement for 4 mt of raw materials (iron ore, coking coke, Limestone etc.) or to produce 1 mt of clinker (raw material used for making Ordinary Portland Cement it requires limestone, gypsum and coal. The situation becomes more challenging when blended cement is produced then it further requires slag or flyash. In order to produce saleable steel or saleable cement the raw materials are procured from identified source by means of road/rail. However in case of road the following Inbound Logistics dimension are very important are:

(1) Shipping Cycle Time (due to waiting time at the plant due to improper loading practice at plant leads to increased delivery time) (2) Detention Time (waiting time due improper unloading /unloading practice at plant) (3) Break down maintenance In case of rail the following Inbound Logistics dimension are very important are: (1) Demmurages (if loading and unloading time in case of rail exceeds free time then penalty is imposed which accounts nearly 1% to 2% of freight in case of cement and steel plant) (2) Handling cost

To understand these dimensions critically and there effect on Total Logistics Cost a open ended questionnaire has been prepared to know how these dimension effect total inbound logistics cost and what are the factors that effects it. On the basis of response from 5 Plant Logistics Head from cement plants of a leading cement producer and from 5 Plant Logistics Head from Integerated Steel Plant producer this research has been implemented on pilot run basis in one the plant and the result was overwhelming. This research is the only beginning and it can further sreamline the Inbound Logistics if further innovation can be done.

What is shipping cycle time and how does it affect Supply Chain:

Shipping cycle time not only utilizes available trucks but also helps to reduce cost of transportation by improving economy of scale. There must be proper loading and unloading facility at plant so that manual handling should me minimized in order to reduce shipping cycle time and thus increasing turnover of trucks thus a truck which can carry x mt of material can carry 20% more in given time thus increasing the revenue of transporters which further can be negotiated to reduce cost of transportation by ensuring maximum load in a specified period. The factors that are identified at all these plants, which effect shipping cycle time, are:

(1) Traditional Loading/Unloading facility at Plants. (2) Frequent Power Failure. (3) Clubbing of two/more party orders. (4) Lack of Backhauling Option. (5) Lack of sufficient orders during Lean period.

The factors can be monitored by improving material handling facility, introducing green channel system (preference for loading and unloading of trucks should be given to dedicated transporters then preference goes to flying truck operators) and assigning trucks to different loading/unloading points scientifically based on assignment model which not only minimizes idle time but also provides scope for improvement. Proper synchronization has to be built to avoid lack of sufficient orders (it is commonly observed that during first 15 days of the month there is lack of sufficient orders and in the last 15

days there are orders more than FTL (Full Truck Load) capacity. This refers to Bullwhip effect in Supply Chain terminology.Here Bullwhip effect refers to distortion in information in Supply Chain that leads to stockout,increased lead time,overstocking.There is always an agreement between firm and transporters that same truck which carry slags /gypsum/clinker will be used for shipping finished goods .This will not only help to reduce the cost of transportation but also helps to gain more control over vendors which will be reflected during peak season when there is huge crisis of trucks due to huge demand in steel sectors/cement sectors.

What is demmurage and how does it affect Supply Chain Management?

Demmurage is defined as detention of wagons beyond specified time (in case of 40 BCN wagons loading / unloading time is 8 hrs+free time and in case of 20 wagons loading/unloading time is 5 hrs+free time) attracts penalty on the basis of rate for each wagon/hr wagons detention hours. This penalty accumulates upto 1% to 2% of total freight and when frequency of rake lies in between those of 15 to 20 rakes in a month then impact of demmurage is over several lakhs, which accrue upto to crores in INR in a year. The factors that effect demmurages are:

(1) Lack of modern loading or unloading facilities. (2) Power failure. (3) Lack of proper infrastructure (length of rail siding).

The strategic investment (CAPEX) in building infrastructure (length of rail siding) or captive power plant or in modernized loading/unloading system will not only define the competitiveness of the firm.

Investment-Demmurages (cost paid as penalty to railway) matrix:

Investment (One Time)

Dimension

Savings

PB Period

1 Crore (INR)

(Per month)

Developing rail line

10 Lack (INR)

10 months

Improving handling facility

Installing conveyor belt

Installing counter

Result is based on one of the Integrated Cement Plant in eastern region this could be very in case of integrated steel plant.

The above matrix gives fair idea about how much investment should be made

in developing material handling capability, building rail infrastructure so that demmurages cost can be decreased because it has huge impact on Inbound Logistics Cost. Demmurage has also major impact on undercharges/overcharges (penalty levied on consignor by Ministry of Railway on each wagon). Well it sounds very interesting and very uncommon effect but recently almost every company including leading cement producers, steel producers, FMCG companies all suffered over crores of rupees in INR due to lack of proper understanding about implications of underloading/overloading of any wagons. It occurred inorder to avoid demmurages at the point of loading which resulted in exceeding the prescribed capacity of loading a particular wagon which attracted huge penalty which is calculated as given formula as given by circular issued by Ministry of Railway in the month of August 2006 which varies from period to period as per order.

The formula given for calculation of undercharges as:

Penalty imposed= {(Total weight of Tare+Consignment)-Total Tare weightPrescribed carrying capacity on each Tare (max.weight can be carried by wagon)} Highest Class Freight3.

This minute error while loading at loading point can affect Outbound Logistics Cost and thus the entire Supply Chain becomes distorted.

Conclusion:

The above findings clearly indicate that Inbound Logistics is still one of the most neglected areas has greatly influenced entire Logistics. Logistics is one the important function and backbone of Supply Chain was till date focused on distribution of finished goods but Inbound Logistics was never given its due treatment as a result Indian firms are loosing million dollars every year. In order to gain competitive advantage Inbound Logistics need fair treatment.

1. Inbound Logistics is defined as planning, implementing &controlling the efficient effective movement of raw materials or semi finished goods and storage from source to plant where it will be stored and converted into

finished goods. In case of Cement & Steel plants the raw materials are coal, gypsum, iron ore, slag, clinker, flying ash etc.

2. Outbound Logistics is defined as planning, implementing &controlling the efficient effective movement of finished goods and storage from plant to warehouse where it will be stored and delivered to respective dealer/or whole seller point.

3. Tare refers to empty wagon steel case.

References: The value chain framework of Michael Porter. Bowersox, D. J., B. J. La Londe, et al. (1969). Readings in physical distribution management. The logistics of marketing. Edited by Donald J. Bowersox. Bernard J. La Londe. Edward W. Smykay, [New York] Macmillan Co.; London: Collier-Macmillan.

Rameshwar Dubey Faculty-NSHM Business School & SupplyChain Consultant (Formerly SU-Logistics Manager & Project Coordinator, ACC Limited) Phd Scholar at MNNIT & Dr.Tripti Singh Faculty-School of Management Studies, MNNIT-Allahabad & J. V. B Sastry Sr. Vice President (Regional Logistics Head), ACC Limited