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Chapter 15

Market Logistics & Supply Chain Management

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Logistics Defined

• Logistics means having the right thing, at the right place, at the right time

• The science of planning, organizing and managing activities that provide goods or services – Logistics World, 1997

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Logistics

• Functions: planning, procurement, transportation, supply and maintenance

• : science of planning, design and support of business operations of procurement, purchasing, inventory, warehousing, distribution, transportation, customer support, financial and human resources

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Scope of Logistics

• Choice of markets• Procurement• Plant location and layout• Inventory management• Location and management of warehouses• Choices of carriers, mode of transport• Packaging decisions• Relevant to all enterprises: manufacturing,

Government, Institutions, service organisations

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•Natural Resources

(land, facilitiesEquipment)

•HR•Finance

•Information

•Marketing Orientation

(competitive Advantage)•Time and Place utility

•Efficient moveto customer

Customer serviceDemand forecasting

DistributionCommunicationsInventory control

Materials handlingOrder processing

Parts and service supportPlants and warehouse selection

ProcurementPackaging

Return goods handlingSalvage and scrap disposalTraffic and transportationWarehouse and storage

Input OutputLogistics Activities

Logistics and SCM• Logistics tends to focus on transportation and

distribution, SCM focuses on purchasing and procurement, production planning, demand management, from popint of origin to point of consumption

• Supply chain management also logistics functions plus purchasing,sourcing, procurement, manufacturing operations, location planning,

• All activities and flows from point of origin to point of comsumption of a materials

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Links and Flows

Customer’scustomer

Supplier’ssupplier

SupplierLead FirmCustomer

General cash flow

Information flow

Information flow

General material flow/ service flow

Inbound / Upstream logisticsOutbound / Downstream logistics

Source: ICFAI

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The Value ChainCompany Infrastructure

Organisation, people, methods

Systems & technology

Procurement

Inboundlogistics Operations

Outboundlogistics

Marketing& sales

Service

Primary activities

SUPPPORT

margin

margin

Source: Michael Porter

Inbound and outbound logistics

• Inbound logistics

• Receiving storing issuing inputs and taking care of materials handling, inventory control, scheduling for production,

• Interface with company’s suppliers, vendors and other service providers

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• Outbound logistics

• Distributing finished goods to dealers/ stockists/customers

• Interface with copmay’s customers

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Logistics Focus Areas

Customer service related Operations related

Packaging

Order processing

Spare parts and service support

After sales Customer service support

Demand forecasting

Distribution communications

Return goods handling

Plant and warehouse site location

Procurement

Inventory control

Materials handling

Salvage and scrap disposal

Traffic and transportation

Warehousing and storage

Logistics may be confined to the company whereas SCM extends beyond

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Supply Chain Management• Business context:

– Globalization of the market place– Advances in technology– Increasingly demanding, informed customer base– Purchase decisions on dimensions of quality, price and

time

• Innovative supply chain:– To meet customer driven challenges– To reduce costs– Improve service levels– Enhance speed to market

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Integrated

Supply Chain

Management

Manufacturing/Re-manufacturing/

Assembly

Demand & Lead Time Management

Storage &

Transportation

Materials Management

Inventory Management and control

Customer Analysis

Purchasing/Supplier Partnering

Order Fulfillment

Supply Chain Integration

Inventory management…

• Inventory Management

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Why Carry Inventory?

• Support production requirements• Support operational requirements• Maximize customer service – ensure

availability when needed – protect against uncertainty

• Hedge against marketplace uncertainty• Take advantage of order quantity

discounts

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Factors Which Drive Inventory

• Target service level parameters

• Lot sizing practices

• Safety stock and safety time conventions

• Volume discounts and purchase arrangements

• Seasonal build up needs

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Categories of Inventory

• Anticipation – built in anticipation of future demand – peak season, strike, promotion

• Fluctuation (safety) – to cover random, unpredictable fluctuations in supply and demand and lead time – to prevent disruption in operations, deliveries etc

• Lot-size – to take advantage of quantity discounts, reduce shipping, set up and clerical costs – also called cycle stock

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Categories of Inventory

• Transportation – pipeline or movement inventories – to cover the time needed to move from one point to another – factory to distribution point for example

• Hedge – for materials where prices are volatile

• Maintenance, repair and operating supplies (MRO) – to support M and O – spare parts, lubricants, consumables etc

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Performance Measures

• Inventory turns = Annual cost of goods sold /average inventory in value

• Days of sales = inventory on hand / average daily sales

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Types of Classification

• ABC category – most common for all• HML - high, medium, low - similar• FSND – fast moving, slow moving, non-

moving, dead – spare parts / FG

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ABC Inventory Analysis

• Based on Pareto’s law:– A – 20% items worth 80% of value– B – 30% items worth 15% of value– C – about 50% items account for 5% of the usage

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

importance of the group

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Inventory Related Costs• Unit costs – basic value of the item carried• Ordering costs – generating and sending a

material release, transport, any other acquisition costs

• Carrying costs – capital, storage, obsolescence• Stock-out costs• Quality costs – non-conforming goods• Other costs – duties, tooling, exchange rate

differences etc

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Approaches for Controlling Inventory

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

• Part simplification and re-design• On-site supplier managed inventory• Use of supply chain inventory management

systems, Materials Requirement Planning, Distribution Requirement Planning etc

• Automated inventory tracking systems• Supplier – buyer cycle-time reduction

Warehouse management…

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FunctionsWarehouses

Material handling

Storage function

Customer service

Information transfer

Temporary Permanent Receive goodsIdentify goods

Sort goodsDespatch to storage

Hold inventoryRecall, select goods

Marshal the shipmentDespatch the shipmentPrepare records and

advices

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Purpose of Warehousing

• To provide desired level of customer service at the lowest possible total cost

• It is that part of the firm’s logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored

• Distribution warehousing relates mainly to FG

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Warehouses

• Support manufacturing

• Mix products from multiple facilities for shipment to a single customer

• Break-bulk

• Aggregate

• Used more as a ‘flow-thru’ point than as a ‘hoarding’ point

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Distribution Warehousing

• The objective is to set up a network of warehouses closest to the customer locations to service markets better and minimise cost

• Could be C&FA s, depots or distribution centers

• Macro location strategies:– Market positioned– Production positioned– Intermediately positioned

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Transportation • Very important in the Logistics function:

– Movement across space or distance adds value to products

– Transportation provides time and place utility

• Role of transportation includes:– Provides opportunity for growth under competitive

conditions– Deeper penetration into markets– Wider distribution means greater demand– Can influence product prices favourably

Principles….

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Transportation Principles• Continuous flow• Optimise unit of cargo - stackability• Maximum vehicle unit – capacity utilization• Adaptation of vehicle unit to volume and nature of

traffic• Standardisation• Compatibility of unit load equipment• Minimum of dead weight to total weight• Maximum utilization of capital, equipment and

personnel

Process….

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Reverse Logistics

• Movement of goods from the market or customer back to the company

• The need:– Increased awareness of the environment– Stringent legislation – For some it is part of the business– Profitability of dealing with scrap, surplus

• Surplus, obsolescence can result due to:– Over optimistic sales forecasts, change in product

specs, errors in estimating material usage, losses in processing or overbuying based on incentives

Comparison of modes……

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Advantages of Rail

• Economy – more so for goods over long distances

• Efficiency of energy

• Reliability – not affected by weather conditions

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Disadvantages

• Uneconomical for small shipments and short distances

• Not suitable for remote stations

• Costly terminal handling facilities

• Inflexible time schedules

Road transport…..

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Road Freight Advantages

• Through movement – direct from consignor to consignee, no transshipment

• Flexibility – routes and loading routines can be easily altered, operate day and night

• Less capital costs – for own fleet + immunity from industrial action

• Fast turn-around – if articulated units like tractors and trailers are used

• Minimum delays

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Disadvantages

• Susceptibility to weather and road conditions – in spite of the best protection

• Unsuitability for heavy loads – rail transport more economical for bulk loads

• Unsuitability for long distances – again the rail telescopic rates are more favourable

Air transport….

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Air Transport Advantages

• Faster mode• Reduction in cost particularly inventory• Broad service range• Increasing capabilities• Disadvantages:

– High cost– Weather affects flight conditions– Limitations on heavy consignments

Water transport……

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Water Transport

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

• Disadvantages:– Not for quick transit– Suitable for certain types on commodities only

Pipeline….