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26619608 Notes Logistics Supply Chain Management

26619608 Notes Logistics Supply Chain Management

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Sections

  • 1.1INTRODUCTION
  • 1.2LOGISTICS AND SCM
  • 1.3DEVELOPMENT OF LOGISTICS
  • 1.4THE ROLE OF LOGISTICS IN THE ECONOMY
  • 1.5LOGISTICS AND COMPETITIVE PERFORMANCE
  • 1.6.1Components of PDM
  • 1.6.2 The Systems or ‘Total’ Approach to PDM
  • 1.7SUMMARY
  • 1.8SELF ASSESSMENT QUESTIONS
  • 1.9REFERENCES AND SUGGESTED FURTHER READINGS
  • 2.1INTRODUCTION
  • 2.2HOW DOES SCM WORK?
  • 2.3LOGISTICS-MARKETING INTERFACE
  • 2.4THE LOGISTICS-MANUFACTURING INTERFACE
  • 2.5SUMMARY
  • 2.6SELF-ASSESSMENT QUESTIONS
  • 2.7REFERENCES AND SUGGESTED FURTHER READINGS
  • 3.1INTRODUCTION
  • 3.3FUNCTIONAL VS. INNOVATIVE PRODUCTS: SCM ISSUES
  • 3.4EFFICIENT CONSUMER RESPONSE
  • 3.5QUICK RESPONSE AND ACCURATE RESPONSE
  • 3.6CHAIN RELATIONSHIP – WITHIN AND BEYOND THE ORGANIZATION
  • 3.7SCM AS A CORE STRATEGIC COMPETENCY
  • 3.8SUMMARY
  • 3.9SELF-ASSESSMENT QUESTIONS
  • 3.10REFERENCES AND SUGGESTED FURTHER READINGS
  • 4.1INTRODUCTION
  • 4.2LOGISTICS: DEFINITION
  • 4.3 WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)?
  • 4.4 DESIGN AND MANAGEMENT OF SCM
  • 4.5.1 Suppliers to Manufacturers
  • 4.5.2 Manufacturers to Consumers
  • 4.6LOGISTICS MANAGEMENT
  • 4.7 INTEGRATING LOGISTICS
  • 4.8 PERSPECTIVES IN LOGISTICS
  • 4.9 SUMMARY
  • 4.10 SELF ASSESSMENT QUESTIONS
  • 4.11REFERENCES AND SUGGESTED FURTHER READINGS
  • 5.1 INTRODUCTION
  • 5.2 INTEGRATED SUPPLY CHAIN/VALUE CHAIN
  • 5.3.2 Pull Based Supply Chain
  • 5.3.3 Push-pull Strategy
  • 5.4 DEMAND MANAGEMENT
  • 5.5 INTERNET AND SCM
  • 5.7 BULLWHIP EFFECT
  • 5.8A NEW PERSPECTIVE TO COUNTER BULLWHIP EFFECT
  • 5.9 DRIVERS OF SCM
  • 5.10 SUMMARY
  • 5.11 SELF ASSESSMENT QUESTIONS
  • 5.12REFERENCES AND SUGGESTED FURTHER READINGS
  • 6.1 INTRODUCTION
  • 6.2.1 Trends in SCM
  • 6.2.2 Strategic Decisions
  • 6.2.3 Strategic Supply Management Activities
  • 6.3 SUPPLY ALLIANCES
  • 6.4.1 Problems of Quality
  • 6.4.2 How to Find the Qualified Supplier?
  • 6.4.3 Quality Survey of Suppliers
  • 6.6 SUMMARY
  • 6.7 SELF ASSESSMENT QUESTIONS
  • 6.8REFERENCES AND SUGGESTED FURTHER READINGS
  • 7.1 INTRODUCTION
  • 7.2.1 What is WCSCM?
  • 7.2.2 Features of World –Class Companies
  • 7.3.1 Organizing for Global Markets
  • 7.3.2 Stages to Global SCM
  • 7.3.3 Supply Channels
  • 7.4.1 Integrating Logistics
  • 7.4.2 World Class Logistics Management (WCLM)
  • 7.5 SUMMARY
  • 7.6 SELF ASSESSMENT QUESTIONS
  • 7.7REFERENCES AND SUGGESTED FURTHER READINGS
  • 8.1 INTRODUCTION
  • 8.2INFORMATION AND TECHNOLOGY IN THE INTEGRATED SUPPLY CHAIN
  • 8.3IMPORTANCE OF INFORMATION IN INTEGRATED BUSINESS
  • 8.4INTER ORGANIZATIONAL INFORMATION SYSTEM
  • 8.5INFORMATION REQUIREMENTS DETERMINATION FOR A SUPPLY CHAIN
  • 8.6INFORMATION AND TECHNOLOGY APPLICATIONS FOR SCM
  • 8.7SUMMARY
  • 8.8 SELF-ASSESSMENT QUESTIONS
  • 8.9REFERENCES AND SUGGESTED FURTHER READINGS
  • 9.1INTRODUCTION
  • 9.2CHANGING PARADIGM OF MANUFACTURING
  • 9.3 MATERIALS REQUIREMENT PLANNING (MRP)
  • 9.4MANUFACTURING RESOURCE PLANNING (MRP-II)
  • 9.5 ENTERPRISE RESOURCE PLANNING (ERP)
  • 9.6 DISTRIBUTION REQUIREMENT PLANNING (DRP)
  • 9.7DISTRIBUTION RESOURCE PLANNING (DRP-II)
  • 9.8ERP VS. SCP (SUPPLY CHAIN PLANNING)
  • 9.9SUMMARY
  • 9.10 SELF-ASSESSMENT QUESTIONS
  • 9.11REFERENCES AND SUGGESTED FURTHER READINGS
  • 10.1INTRODUCTION
  • 10.2ROLE, ADVANTAGES AND LIMITATIONS OF SOFTWARE PACKAGES
  • 10.3ARCHITECTURE OF ‘SAP R/3 ERP’ SOLUTION
  • 10.4.1 BaaN IV
  • 10.4.2 BaaN ERP
  • 10.5SELECTING THE RIGHT ERP PACKAGE
  • 10.6i2 TECHNOLOGY
  • 10.7CONTRIBUTION OF THE SOFTWARE PACKAGES TO THE SCM
  • 10.8SUMMARY
  • 10.9 SELF ASSESSMENT QUESTIONS
  • 10.10REFERENCES AND SUGGESTED FURTHER READINGS
  • 11.1INTRODUCTION
  • 11.2COST DRIVERS
  • 11.3ACTIVITY BASED COSTING
  • 11.4LOGISTICS COST
  • 11.5CUSTOMER PROFITABILITY ANALYSIS
  • 11.6SUMMARY
  • 11.7SELF ASSESSMENT QUESTIONS
  • 11.8REFERENCES AND SUGGESTED FURTHER READINGS
  • 12.0Objectives
  • 12.1INTRODUCTION
  • 12.2IMPORTANCE AND ROLE OF BENCHMARKING
  • 12.3METHODOLOGY FOR BENCHMARKING
  • 12.4CHANGE MANAGEMENT AND BENCHMARKING
  • 12.5CHALLENGES FACED IN IMPLEMENTATION OF BENCHMARKING
  • 12.6CASE-STUDIES – BENCHMARKING IN ACTION
  • 12.7SUMMARY
  • 12.8SELF ASSESSMENT QUESTIONS
  • 12.9REFERENCES AND SUGGESTED FURTHER READINGS
  • 13.1INTRODUCTION
  • 13.2NEED FOR SUPPLY CHAIN PERFORMANCE MEASURES
  • 13.3MEASUREMENT SYSTEMS
  • 13.4.1Supply Chain Balanced Scorecard
  • 13.4.3 Function Based Measurement System
  • 13.4.4 Perspectives Based Measurement System
  • 13.4.5Supply Chain Operations Reference Model
  • 13.4.7 Interface Based Measurement System
  • 13.5A COMPARISON OF MEASUREMENT SYSTEMS
  • 13.6SELECTING MEASURES
  • 13.7METHODS FOR SETTING PERFORMANCE TARGETS
  • 13.8TOTAL COST OF OWNERSHIP
  • 13.9SUMMARY
  • 13.10SELF-ASSESSMENT QUESTIONS
  • 13.11 REFERENCES AND SUGGESTED FURTHER READINGS
  • 14.1Introduction
  • 14.2An Illustration
  • 14.3 TRANSPORTATION BRIEFLY
  • 14.4WAREHOUSING
  • 14.5TOOLS & TECHNIQUES OF REDUCING COSTS
  • 14.6TRANSPORTATION COSTS
  • 14.7METHOD OF SELECTION
  • 14.8A TRANSPORTATION DECISION
  • 14.9NUMBER & SIZE OF DEPOTS
  • 14.10 FLEET SIZING & CONFIGURATION
  • 14.11 ROUTING AND SCHEDULING
  • 14.12 FUTURISTIC DIRECTION IN TRANSPORTATION
  • 14.13 SUMMARY
  • 14.14 SELF ASSESSMENT QUESTIONS
  • 14.15REFERENCES AND SUGGESTED FURTHER READINGS
  • 15.1INTRODUCTION
  • 15.2.1Steps in Location Planning
  • 15.2.2 Evaluation of Location Alternatives
  • 15.3 DISTRIBUTION PROBLEM
  • 15.4.1Measures of Distance
  • 15.4.2 Single Facility Location Problem
  • 15.4.3Multi-facility Location Problem
  • 15.5SELF ASSESSMENT QUESTIONS
  • 15.8REFERENCES AND SUGGESTED FURTHER READINGS
  • 16.1 INTRODUCTION
  • 16.2AN ILLUSTRATION
  • 16.3PREVENTING LITIGATION
  • 16.4SALES LAW: AN OVERVIEW
  • 16.5.1 Extent of Involvement
  • 16.5.2 Trends
  • 16.5.3 Future Developments
  • 16.6.1 Warehouse Fundamentals
  • 16.6.2 Functions in Warehouses
  • 16.8WAGES, EARNINGS AND HOURS OF WORK
  • 16.9DOCUMENTATION: INSURANCE & SALES TAX
  • 16.10 INTRODUCTION TO SALES TAX
  • 16.11 A CASE STUDY
  • 16.12 SUMMARY
  • 16.13 SELF ASSESSMENT QUESTIONS
  • 16.14REFERENCES AND SUGGESTED FURTHER READINGS
  • 17.1INTRODUCTION
  • 17.2COLLABORATIVE STRATEGIES
  • 17.3VENDOR MANAGED INVENTORY (VMI)
  • 17.4THIRD PARTY LOGISTICS
  • 17.5FOURTH PARTY LOGISTICS
  • 17.6ENTERPRISE RESOURCE PLANNING
  • 17.7INTERNET AND E-COMMERCE
  • 17.8SUPPLY CHAIN AGENTS
  • 17.9GREEN SUPPLY CHAIN
  • 17.10 REVERSE LOGISTICS
  • 17.11WORLD CLASS SUPPLY CHAIN
  • 17.12 SUMMARY
  • 17.13 SELF ASSESSMENT EXERCISES
  • 17.14REFERENCES AND SUGGESTED FURTHER READINGS
  • 18.1 INTRODUCTION
  • 18.2FACTORS INFLUENCING SUPPLY CHAIN DESIGN DECISIONS
  • 18.3 SUSTAINING COMPETITIVE ADVANTAGE
  • 18.4GOOD BUSINESS MODEL / STRATEGY
  • 18.5DEMAND DRIVEN SUPPLY NETWORKS (DDSN)
  • 18.6THE SECRET TO SUPPLY CHAIN EXCELLENCE IS BALANCE
  • 18.7 SUPPLY CHAIN DESIGN
  • 18.8 SUPPLY CHAIN STRATEGIES
  • 18.9 HAU LEE’S UNCERTAINTY FRAMEWORK
  • 18.10ALLIGNING STRATEGIES, EFFICIENCY AND COST SAVINGS IN SUPPLY CHAIN
  • 18.11 PRODUCT AND PROCESS DESIGN FOR SUPPLY CHAIN MANAGEMENT
  • 18.12 DESIGN FOR MANUFACTURING
  • 18.13 DESIGN FOR LOGISTICS
  • 18.14SUPPLY CHAIN MANAGEMENT: TRADE OFF CURVES
  • 18.15 GREENING THE SUPPLY CHAIN
  • 18.16 SUMMARY
  • 18.17 SELF-ASSESSMENT QUESTIONS
  • 18.18REFERENCES AND SUGGESTED FURTHER READINGS
  • 19.1Introduction
  • 19.2Supply Chain Management of Products vs. Services
  • 19.3Financial Services Sector
  • 19.4Hospitality
  • 19.5Transportation
  • 19.6Software
  • 19.7Communication
  • 19.8Healthcare
  • 19.9Consultancy
  • 19.10Education
  • 19.11Government
  • 19.12Retailing
  • 19.13Summary
  • 19.14Self Assessment Questions
  • 19.15References and Suggested Further Reading

Indira Gandhi National Open University School of Management Studies

MS-55 LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Logistics and SCM : An Overview

1

Indira Gandhi National Open University School of Management Studies

MS-55 LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Design and Management of SCM

2

Indira Gandhi National Open University School of Management Studies

MS-55 LOGISTICS AND SUPPLY CHAIN MANAGEMENT

IT Enabled SCM

3

Indira Gandhi National Open University School of Management Studies

MS-55 LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Cost and Performance Measurement in SCM

4

Indira Gandhi National Open University School of Management Studies

MS-55 LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Distribution Network Planning

5

Indira Gandhi National Open University School of Management Studies

MS-55 LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Emerging Trends

6

MS-55: LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Course Components
BLOCK 1 LOGISTICS AND SCM : AN OVERVIEW

Unit 1 : Logistics and SCM : An Introduction Unit 2 : Principles of Supply Chain Management Unit 3 : Customer Focus in Supply Chain Management BLOCK 2 Unit 4 Unit 5 Unit 6 Unit 7 : : : : DESIGN AND MANAGEMENT OF SCM

Logistics : Inbound and Outbound Models for SCM Integration Strategic Supply Chain Management Organizing for Global Markets IT ENABLED SCM

BLOCK 3

Unit 8 : Information Technology : A Key Enabler of SCM Unit 9 : Intelligence Information System Unit 10 : IT Packages in SCM BLOCK 4 COST AND PERFORMANCE MEASUREMENT IN SCM

Unit 11 : Cost Analyses and Measurement Unit 12 : Best Prictices and Benchmarkin for SCM Unit 13 : Performance Measurement and Evaluation of SCM BLOCK 5 DISTRIBUTION NETWORK PLANNING

Unit 14 : Transportation Mix Unit 15 : Locational Strategy Unit 16 : Logistics and SCM Environment BLOCK 6 EMERGING TRENDS

Unit 17 : Future Trends and Issues Unit 18 : Design for SCM and Greening the Supply Chain Unit 19 : SCM in Service Organization/Non-Manufacturing Sector

MS-92 : MANAGEMENT OF PUBLIC ENTERPRISES Course Components BLOCK 1 Unit 1 Unit 2 Unit 3 Unit 4 : : : : PUBLIC ENTERPRISE: AN OVERVIEW Public Enterprise: Concept and Policy Public Enterprise Scenario National and International Nature and Scope of Public Enterprise Forms of Public Enterprises PUBLIC ENTERPRISE: ACCOUNTABILITY AND GOVERNANCE BLOCK 2 Unit 5 : Concept and Policy of Accountability and Autonomy Unit 6 : Government .Public Enterprise : Interface Unit 7 : Accountability to Legislature Unit 8 : Relationship with other Agencies Unit 9 : Corporate Governance and Corporate Social Responsibility BLOCK 3 Unit 10 : Unit 11 : Unit 12 : Unit 13 : PUBLIC ENTERPRISE: PERFORMANCE AND EVALUATION Appraisal of Public Enterprise Performance-I Appraisal of Public Enterprise Performance-II Sickness and Public Enterprise and Turnaround Strategies Dimensions and Methods of Evaluating Enterprise Performance ORGANISATION AND MANAGEMENT BLOCK 4 Unit 14 : Unit 15 : Unit 16 : Unit 17 : Board of Directors: Constitution and Functioning Personnel Management Issues in Public Enterprises Project Management Management of Finance. 1989—93 Case 3 : Gloom to Glory: The Successful Turnaround of the Singareni Colleries Company Limited Case 4 : HR Initiatives for Turnaround of Visakhapatnam Steel Plant . 19981 Case 2 : Corporate Planning at SAIL. Policy and Dimensions Privatisation: International Experience Disinvestment : Experience and Strategies Implications of Disinvestment CASE STUDIES BLOCK 6 Case 1 : State Bank of India. Marketing and Production. Issues PRIVATISATION AND DISINVESTMENT BLOCK 5 Unit 18 : Unit 19 : Unit 20 : Unit 21 : Concept.

Indira Gandhi National Open University School of Management Studies MS-55 Logistics and Supply Chain Management Block 1 LOGISTICS AND SCM : AN OVERVIEW Unit 1 Logistics and SCM : An Introduction Unit 2 Principles of Supply Chain Management Unit 3 Customer Focus in Supply Chain Management 5 18 27 .

United Phosphorus Limited. Sandeep Biswas Institute for Integrated Learning in Management (IILM). Indian Institute of Technology Bombay. S. Mumbai Dr.(P). of Management Studies Indian Institute of Technology. New Delhi Print Production: December. Kharagpur Dr. Mehta School of Management. Sambandam NITIE. of Industrial Engineering Shailesh J. Kharagpur Lt Col. IIT Bombay. . B. SOMS.K. Karol Bagh. New Delhi Laser Composed By : M/s. Sushil (Course Editor) Dept. Sarai Jullena. Deepak Jakate. No part of this work may be reproduced in any form. Further information on the Indira Gandhi National Open University courses may be obtained from the University's Office at Maidan Garhi.Expert Committee (as on 24th March. N. by mimeograph or any other means. D. B. N. Himanshu Kumar Shee (Course Co-ordinator)-On leave School of Management Studies. Kharagpur Management. Kalro IIM Kozhikode Calicut Dr. D N Srivastava Advisor ( Training & Safety) & Head of Distribution Deptt. Mehta School of Management.L. New Delhi Paper Used : “Agrobased Environment Friendly”. B. Indian Institute of Technology Bombay. Atanu Ghosh Shailesh J. Khanna Director. IGNOU. Ministry of Chemical & Fertilizers. New Delhi-110068. Satish Kumar Director (Movement). without permission in writing from the Indira Gandhi National Open University.S. IGNOU New Delhi Dr. Narasimhan Director. Cover Design by M/s. New Delhi Prof . Sambandam NITIE. Tessa Media & Computers. V. 2004 ã Indira Gandhi National Open University. New Delhi Mr. 2000) Prof.Batra FORE School of Management New Delhi Prof. King Kraft. New Delhi by Director. United Phosphorus Limited. IGNOU Prof. Biplab Dutta Vinod Gupta School of Management IIT. of Industrial Engineering and Management IIT. 2004 ISBN-81All rights reserved. of Management Studies Indian Institute of Technology New Delhi Prof. Sanjay S.Karuna Jain Shailesh J. Deepak Jakate General Manager . J. Mehta School of & Management. General Manager .O. Mumbai Dr. Delhi Prof. IGNOU. Jharsuguda Mr. Gaur Prof Sadananda Sahu Dept. Mumbai Prof Sadananda Sahu Dept. IGNOU Dr. Mumbai Mr.Logistics. Kaushik Sircar Assistant Quarter Master General Operations & Logistics. Himanshu Kumar Shee. IGNOU. Ravi Shankar (Course Editor) Dept. ) (Retd. Kaushik Sahu Xavier Institute of Management. Management Development Institute.Logistics. Banwet Dept of Management studies. Dept of Fertilizers. Mumbai Dr. Bhubaneswar Prof N. Mehta School of Management. New Delhi Prof. New Delhi Prof. SOMS. Headquarter 4 Corps Mr. Anurag Saxena (Course Co-ordinator) School of Management Studies IGNOU. Mumbai Prof. Krishi Bhawan.Sahay. New Delhi Tilak Raj. (Coordinator) School of Management Studies. School of Management Studies.) in Cement Group M/S Larsen & Toubro Ltd. Printed and published on behalf of Indira Gandhi National Open University. Mumbai Course Preparation Team (2004) Prof. Gurgaon Prof. IIT. IIT. Amarlal H. Atanu Ghosh Shailesh J. Mumbai Mr. IIT Bombay.

BLOCK 1 LOGISTICS AND SCM : AN OVERVIEW Unit 1: Logistics and SCM . It also converse about Physical Distribution Management (PDM) and its components. It further examines the critical areas of Logistics-Marketing Interface and critical areas of Logistics-Manufacturing Interface Unit 3: Customer focus in SCM comprehends the key processes required to enhance customer focus in the supply chain. It highlights the key processes required to integrate the supply chain. Quick Response (QR) and Accurate Response (AR). It delineates with the concept of Efficient Customer Response (ECR). It further scrutinizes chain relationship within and beyond organization . Unit 2: Principles of SCM defines how the supply chain works.An Introduction discusses about definition of Logistics & Supply Chain Management It discusses the process of development of logistics and its role in the economy.

Logistics and SCM : An Overview 4 .

It is logistics that executes this function.2 LOGISTICS AND SCM A supply chain may be considered as a group of organizations. supply chain.3 1. if the emphasis is on movement of material then we use the most general term i.g. In other words.e.1 1. we would introduce what a supply chain means. Each organization in the chain procures and then transforms materials into intermediate/final products. if the emphasis is on marketing then it is called logistics.9 Summary Self Assessment Exercises References and Suggested Further Readings 1.1 1. This group covers the logistics and manufacturing activities from raw materials to the final consumer. 5 . There may be different supply chain for each product. 1.8 1. raw materials) and intangible material (e. “ A supply chain consists of a series of activities involving many organizations through which the materials move from initial suppliers to final customers.UNIT 1 LOGISTICS AND SCM : AN INTRODUCTION Objectives After going through this unit. This unit will introduce you with the concept of a supply chain.4 1.6. In continuation to this explanation.2 1. and distributes these to customers. Organizations collect raw materials from suppliers and deliver finished goods to the customers.6 define Logistics and Supply Chain Management (SCM). Structure Introduction Logistics and SCM Development of Logistics The Role of Logistics in the Economy Logistics and Competitive Performance Physical Distribution Management (PDM) 1. and discuss Physical Distribution Management (PDM) and its components.5 1. The chain of activities and organizations is named differently as per the situation. if the emphasis is on meeting customer demand then it is called demand chain. if the emphasis is on value-addition then it is called value-chain. If the emphasis is on operations then it is called process. logistics is the function that moves both tangible materials (e. you should be able to: Logistics and SCM : An Introduction · · · 1.1 INTRODUCTION There is a great deal of material that is moved in any organization.g.6. understand the development of logistics and its role in the economy.7 1. information) through the operations to the customers (as a finished product). connected by a series of trading relationships.2 Components of PDM The Systems or “Total” Approach to PDM 1..

. the entire system from the origin of procurement to the final consumption of goods or services. Hence.S. with it acting as an enabler.Logistics and SCM : An Overview The supply chain can be defined as the integral management (within the company and through other companies) of the company’s various logistical stages such as materials procurement. Ideally the supply chain should be a “seamless” chain as shown in Figure 1. 1998 End Customer . and each of the logistical stages within these organizations. it is now possible to have an integrated process view about the logistics and all allied processes related to business. that is. distribution and customer service. yet the decisions they make are mutually dependent upon each other. there is a need for an information system capable of linking together the different members of the chain so that there is an open communication between them. storage. production. In supply chain network we must include all the organizations involved in the production of certain goods or services (from the origin of procurement to final consumption). Raw Material Semi-Finished Products Finished Products End Consumer Distributors Figure1. the supply chain is a network linking and interweaving different supply chains of all the companies involved in a production process. Historically we have moved from physical distribution to logistics management and then to supply chain management. 2: Seamless Supply Chain Source: Sahay B. Thus. who sometimes have no direct relationship and are place in very different geographical locations.1: Typical Supply chain The supply chain activity therefore constitutes complex objects. Raw Material Product Ordering Channel Seamless Supply Chain Material Flow channel 6 Figure 1.1. The Supply Chain concept should be seen as a whole. The concept of supply chain is not new. A diagram depicting the typical supply chain is shown in Figure 1. This major difference seems to be that supply chain management is the preferred name for the actualization of “integrated logistics”.2. as it involves decision-makers from many different companies.

materials management and internal inventory transfer. in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. enhanced customer service and yield a competitive advantage. lower costs. manufacturer. Managing these linkages and delivering the product/service to the customer in a cost effective way is SCM.The importance of logistics can be gained from the fact that logistics and supply chain management costs are in range of 10 to 15 of the GDP for developing countries while it is around 18 to 20 per cent for developed countries. warehouse and stores so that merchandise is produced and distributed at the right quantities. rather than taking the perspective of a single firm or process.” which is now called as supply chain due to its own character. This integration is effected through effective information flows. supply chain management is the process of designing. It is a management philosophy that extends traditional intra-enterprise activities by bringing trading partners together with the common goal of optimization and efficiency. through upstream and downstream linkages. 7 . orders. Definitions Forrester (1961) suggested that the five flows of any economic activity — money. Supply chain management encompasses materials/supply management from the supply of basic raw materials to final product (and possible recycling and re-use). the addition of supply chain management to the marketing model created a truly ‘systems’ approach to the organization and its direct and indirect trading relationships The content of supply chain management with in a firm varies considerably with the type of business. According to Christopher (1992) supply chain is network of organizations that are involved. Supply chain management integrated suppliers to the end consumers and emphasized the need for collaboration to optimize the whole system. in order to minimize system under costs while satisfying service level requirements (Levi (2000)). which gives the “system. planning and implementing change in the structure and performance of the ‘total’ material flow in order to generate increased value. The common thread in these definitions is that supply chain management seeks to integrate performance measures over multiple firms or processes. Figure 1. operational planning and product procurement or MRP. As such.3 shows the different components of logistics management. In effect. order processing. personnel and equipment are interrelated by an information network. Supply chain management has provided the next logical stage in the evolution of competitiveness for the manufacturing organization and added. importantly. a concern for the flow of materials to and from the organization. Logistic coordination: Logistic coordination pertains to forecasting. materials. to the right location and at the right time. Supply Chain Management is a set of approaches utilized to efficiently integrate supplier. technology and capability to enhance competitive advantage. The concept of integrated logistics consists of two interrelated efforts: Logistics and SCM : An Introduction · · Logistics operation: Logistic operation can be basically clubbed into physical distribution management. Supply chain management focuses on how firms utilize their suppliers’ processes.

3: Components of Logistic Management (Source: Douglas M.1. Lambert. Place. Utility Efficient movement to Customer Proprietary Asset CUSTOMERS SUPPLIERS In process Finished Raw Material Inventory Goods LOGISTICS ACTIVITIES · · · · · · · Customer Service Demand Forecasting Distribution Communication Inventory Control Material Handling Order Processing Parts & Service Support · Plant and Warehouse Site · · · · · Selection Procurement Packaging Return Goods Handling Salvage and Scrap Disposal Traffic and Transportation Figure 1. storage. Table 1. storage and manipulation Data analysis Space determination Stock layout Material handling equipment selection Stock storage and retrieval Equipment replacement policies Design for: handling.1: Logistic Element Facility Location Transportation Determining location. Pg-5) A representative list of logistic element for a firm is given in Table 1.Logistics and SCM : An Overview MANAGEMENT ACTIONS Planning Implementation Control INPUT INTO LOGISTICS Natural Resources (Land. Facilities and Equipment) Human Resources Financial Resources Information Resources OUTPUT OF LOGISTICS Marketing Orientation (Competitive Advantage) Time. protection Co-operate with production in : specifying aggregate production quantities sequencing and timing of production Inventories Customer Service Order Processing and Information Flows Warehousing and Material Handling Protection Packaging Product Scheduling 8 . 1998. number and size of facilities needed. Allocation demand to facilities Mode and service selection Carrier routing Vehicle scheduling Finished goods stocking policies Record keeping Supply scheduling Short term sales forecasting Cooperate with marketing in: determining customer needs and wants for service determining customer response to service Sales order procedure Information collection.

...................... 9 ............ the growth of world-class competitors from other nations has caused organization to look for new way to differentiate their organizations and product offerings............................ the supply chain between the organizations becomes longer. 1......................................... Activity 1 Every organization has to move materials to support its operations... ........................... he or she will not understand the big picture or how such action affects or are affected by other activities.. dating back to the earliest form of organized trade......... This gave organization the ability to better monitor transaction intensive activities such as ordering movement and storage of goods and materials......... Combine with the availability of computerized quantitative models............. Logistics cost became a more critical issue for many organization because of globalization of industry............. First.. With rising interest rates and increasing energy cost logistics received more attention as a major cost driver.. Logistics expenditure accounts for around 15-20% of GDP. In essence the sum or outcome of a series of activities is greater than its individual parts.... First.. The idea is that if one looks at action in isolation.............. logistics is of the major expenditures for business......................................... increased emphasis on customer service.... . As this area of study however it first began to gain attention in the early 1990s.......... ........ The system approach simply states that all functions or activities need to be understood in terms of how they effect and are affected by other elements and activities with which they interact.....................................3 DEVELOPMENT OF LOGISTICS Logistics and SCM : An Introduction Logistic activity is literally thousand of years old............... Information technology input has given a next boom to logistics management... this information increased the ability to manage flows and to optimize inventory levels and movement............. growing reorganization of the system approach and total cost concept. Thus by improving the efficiency. Logistics is in itself a system............................... More emphasis has been given to logistics after the Gulf war in 1990-91 when the efficient and effective distribution of store supplies and person were the key factors for success................ Second.......................... What do service companies like Internet Service Providers move? Is the concept of supply chain relevant for these companies? ................... as organizations increasingly buy and sell offshore................. logistics make an important contribution to the economy as a whole........................... Excellent logistics management is needed to fully leverage global opportunities............4 THE ROLE OF LOGISTICS IN THE ECONOMY Logistics play a key role in the economy in two significant ways............................................ more costly and more complex......................... This has affected logistics in two primary ways.1. Other factor contributing to the growing interest in logistics include advances in information technology........... The system approach is a critical concept in logistics................ ......... The profit leverage from logistics and realization that logistics can be used as a strategic weapon in competing the market place................................................................. It is a network of related activities with the purpose of managing the orderly flow of material and personal with in the logistic channel.....

Form. One of the fundamental ways that logistics add value is by creating utility. The five rights of logistics are the essence of the two utilities provided by logistics time and place utility. Time and Place. Porter user a tool called the value chain as shown in the Figure 1.4 to separate buyers. People System & Technology Procurement Inbound Operation Outbound Marketing Logistics Logistics & Sales Service Primary Activity 10 Figure 1. supplier and a firm into the discrete but interrelated activities from which value stems. Value is the amount a customer is willing to pay for the products. Possession. Operation: Activity associated with transforming input into the final product form.5 LOGISTICS AND COMPETITIVE PERFORMANCE Today logistics department appears on the organization charts of many large organizations. Form utility is the process of creating the good or service or putting them in proper form for the customer to use. storing and disseminating input to the product.4: Porter Value Chain Source: Porter. Place utility is the item or service available where it is needed. it is an important activity in facilitating the sale of virtually all goods and services.. Linking logistics activities directly to organization strategic plan can work effectively to support their organization for achieving competitive advantage. 1985. If goods do not arrive at the proper place or in the proper condition. logistics support the movement and flow of many economic transactions. There are four types of utilities namely. Possession utility is value added to a product or service because the customer is able to take actual possession like credit arrangement and loans. From an economic stand point utility represent the value or usefulness that an item or service has in fulfilling a want or need. Inbound logistics: Activities associated with receiving. Porter defines the five categories of primary activity involved in competing in any industry. Time utility is the value added by having an item when it is needed. To understand this role from a system perspective. services provided by an organization. Company Infrastructure Support Activity Organization. Value added is the difference between what the customer pays and the cost to the organization in providing that product or service. The time and place utility are directly related to logistics. The value chain concept may be used to identify and understand the specific source of competitive advantage and how they related to buyer value. no sale can be made. Thus all economic activities throughout the supply chain will suffer. These two utility are not directly related to logistics but these are not possible without getting the right item needed for consumption or production to the right place at the right time and in the right condition at the right cost. Outbound logistics: Activity associated with collecting storing and physical distribution of the product to buyers. Michael E. New York) . 1. “Competitive Advantage”. customer can not buy them. the Free Press. consider that if goods do not arrive on time.Logistics and SCM : An Overview Second.

The effective logistics management can provide a major source of competitive advantage. just in time delivery and value added services that enable them to do better job of serving their customers. promotion etc. repair etc. Today markets have become more service sensitive.5 it is clear that successful companies will often seek to achieve a position based upon both a productivity advantage and a value advantage. Behind this seemingly paradoxical concept is the idea of supply chain integration. A model of the evolution of supply chain is shown in Figure 1.5: Competitive Matrix Source : Christopher. This level of evolution involves the processing of material requirements and planning routines that are short term in nature.Marketing and Sales: Activities associated with providing a means by which buyers can purchase the product and inducing them to do so such as advertising. suppliers and other channel members. In many industries logistics cost represents such a significant proportion of total cost that it is possible to make major cost reduction through fundamentally reengineering logistics process. Supply chain integration links a firm with its customers. functions. As such it integrates their relationships. Service: Activity associated with providing service to enhancer maintain the value of the product such as installation. Logistics management can play a critical role to gain both advantages. There are two bases of success in any competitive context. Cost advantage is achieved through greater productivity and value advantage is pursued through a different plus over competitive offerings. 1992. Hi Va l u e A d v a n t a g e Logistics and SCM : An Introduction Service Leader Cost and Service Leader Commodity Market Lo Lo Cost Leader Productivity Advantage Hi Figure 1. M. companies can gain through service differentiation. they are looking for reduced lead time. The Stage 2 organization reflects the traditional form of supplier management. Logistics and Supply Chain Management From the matrix shown in Figure 1. 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 competitor and secondly by operating at a lower cost and hence at greater profit. The business departments tend to operate autonomously. However such a philosophy can be self-defeating if it leads to an unwillingness to cooperate in order to compete. Customer in all industries are seeking greater responsiveness and reliability from suppliers. Traditionally most organizations have viewed themselves as entities that exist independently from others and indeed need to compete with them in order to survive. The purpose is to improve the effectiveness and efficiency of SC for ultimate consumers. activities. processes and locations.6 Integration starts with the ‘baseline’ organization (Stage 1) with a reasonably informal approach to management by departments. The Stage 2 organization is 11 . The material inventories simply arise in response to reactive management practices.. One is the cost advantage and second is the value advantage. The key requirement of employees is to react to failure and manage as best that they can. In term of value advantage.

The Stage 4 company has begun to realize the benefits of true supply chain management and the ability to synchronize all activities within the factory and to interface the factory with its suppliers and customers. For this company. 6: Supply Chain Integration The Stage 3 organization is internally integrated and has a much greater level of interest in material flow processes from suppliers to customers rather than the ‘grenade over the all’ approach of the earlier two forms. This form of company has full improvement processes within the organization that are encapsulated in medium term plans for the organization and its supply chain. The Four stage of Development Stage 1: Baseline Purchasing Material Control Production Sales Distribution Stage 2: Functional Integration Materials Management Manufacturing Management Distribution Management Stage 3: Internal Integration Materials Management Manufacturing Management Distribution Management Stage 4: External Integration Suppliers Internal Supply Chain Customers Figure 1. In parallel.Logistics and SCM : An Overview focused on the annual budget allocation and departmental cost management. production schedules and material requirements are synchronized by teams of individuals that were once subordinates of separate departments. The organization makes most use of information systems to enhance the responsiveness of the organization and supply chain to deliver products and has 12 . The factory is ‘customer oriented’ instead of product oriented and seeks to partner with key customers and suppliers in order to better understand how to provide value and customer service. Under these conditions. the use of ‘power’ and the constant switching of supply sources to prevent ‘getting too close’ to any individual source. planning systems operated throughout the organization are integrated and demand information. For the purchasing function this implies seeking out the lowest price provider of material requirements often through a process of tendering. the collaborative and participative internal environment is extended upstream and downstream and the planning of supply chain management is recognized formally. The organization has integrated the aspects of the internal supply chain that it can influence and control. the demand and material flow drive the entire system in an end-to-end supply chain and the organization makes use of Just in time materials management techniques.

.................. Holding stock is wasting working capital for it is not earning money for the company........................ it does not make economic sense to provide a level of service that is not required by the customer but leads to an erosion of profits.................................. Although industries and individual firms differ widely in their stockholding policies. 13 ..... Logistics and SCM : An Introduction 1... Physical distribution management (PDM) is concerned with ensuring the product is in the right place at the right time............................. Having established such a network.......................... Business logistical techniques can be applied to PDM so that costs and customer satisfaction are optimised......... Order processing................ from the place of manufacture to the place of consumption......... stock levels are kept to a minimum wherever possible..................... Physical distribution management (PDM) is concerned with the flow of goods from the receipt of an order until the goods are delivered to the customer........1 Components of PDM There are four principal components of PDM namely................. who take responsibility for the management of goods as they move from the producer to the consumer........................ Activity 2 Describe the Supply Chain for a paper manufacturing organization..... 1.... In addition to transportation.. This cost/service balance is a basic dilemma that physical distribution managers face....6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM) There are many decisions that must be taken.......... nowadays....... PDM involves close liaison with production planning.............. when a company organizes a channel or network of intermediaries.6..... It is now recognised that PDM is a critical area of overall supply chain management......... There is little point in making large savings in the cost of distribution if in the long run.......... ..... purchasing..................................... In the past it was not uncommon for companies to hold large inventories of raw materials and components............ The reason for the growing importance of PDM is the increasingly demanding nature of the business environment....... All these areas must be managed so that they interact efficiently with each other to provide the level of service that the customer demands and at a cost that the company can afford....... . sales are lost because of customer dissatisfaction............................ To enhance the nature of collaboration the organization rewards supplier partnerships with sole sourcing agreements in return for a greater level of support to the business and a commitment to on-going improvement of material flow and relationship management.. Warehousing and Transportation............... order processing. in the physical sense.......... To think of the logistical process merely in terms of transportation is much too narrow a view... the organisation must next consider how these goods can be efficiently transferred.............. The model provides a useful means of analyzing the current state of the organization and understanding where the next interventions would be needed in order to improve performance........ . .. Similarly.................. material control and warehousing.......... Stock levels or inventory.also developed a capability in terms of product design that includes customer and supplier involvement............................................ Each channel member must be carefully selected and the company must decide what type of relationship it seeks with each of its intermediate partners.

It is usually easy to calculate because it can be related directly to weight or numbers of units. Few companies can say that they never run out of stock. Warehousing Many companies function adequately with their own on-site warehouses from where goods are dispatched direct to customers. it becomes more logical to locate warehouses strategically around the country. and these must be constantly reviewed. Taken to its logical conclusion this effectively does away with ordering and leads to what is called ‘partnership sourcing’. The efficiency of order processing has a direct effect on lead times. Orders are received from the sales team through the sales department. but in small quantities. This is an agreement between the buyer and seller to supply a particular product or commodity as and when required without the necessity of negotiating a new contract every time an order is placed. an optimum strategy must be established that reflects the desired level of service. Order-processing systems should function quickly and accurately. Stocks represent opportunity costs that occur because of constant competition for the company’s limited resources. When buyers review their suppliers. Even before products are manufactured and sold the level of office efficiency is a major contributor to a company’s image. The key lies in ascertaining the re-order point. Levels of service will of course increase when number of warehouse locations increases. Other departments in the company need to know as quickly as possible that an order has been placed and the customer must have rapid confirmation of the order’s receipt and the precise delivery time. Many companies establish regular supply routes that remain relatively stable over a period of time ensuring that the supplier performs satisfactorily. as are procedures that are designed to shorten the order processing cycle. Very often contracts are drawn up and repeat orders (forming part of the initial contract) are made at regular intervals during the contract period. have made road transport indispensable. or stock management. and the pressure caused by low stock holding and short lead times. but if stock-outs happen regularly then market share will be lost to more efficient competitors. but cost will increase accordingly. 14 The patterns of retailing that have developed. is a critical area of PDM because stock levels have a direct effect on levels of service and customer satisfaction. Accuracy is an important objective of order processing. A good computer system for order processing allows stock levels and delivery schedules to be automatically updated so management can rapidly obtain an accurate view of the sales position. Again. Transportation Transportation usually represents the bulk of distribution cost. Transportation can be carried out in bulk from the place of manufacture to respective warehouses where stocks wait ready for further distribution to the customers. Incorrect ‘paperwork’ and slow reactions by the sales office are often the unrecognised source of ill will between buyers and sellers. This system is used by large retail chains. Inventory Inventory. whereas too high stock levels are unnecessary and expensive to maintain. If the company’s marketing strategy requires that high stock levels be maintained. The optimum stock level is a function of the type of market in which the company operates. Carrying stock at levels below the re-order point might ultimately mean a stock-out. When the . efficiency of order processing is an important factor in their evaluation. this should be justified by a profit contribution that will exceed the extra stock carrying costs. except that the warehouses and transportation are owned and operated for them by logistics experts. When a firm markets goods that are ordered regularly. Costs must be carefully controlled through the mode of transport selected amongst alternatives.Logistics and SCM : An Overview Order processing Order processing is the first of the four stages in the logistical process.

When lead-time is a less critical element of marketing effort. size. The chosen transportation mode should adequately protect goods from damage in transit (a factor just mentioned makes air freight popular over longer routes as less packaging is needed than for long sea voyages). rather than using the services of haulage contractors.e. more storage space. the lesser is the secondary mileage and the delivery cost. Here. letter and parcel post). The greater the number of depots. this mode of transport becomes viable. as well as higher insurance costs. Logistics and SCM : An Introduction 1. A fragmented or disjointed approach to PDM is a principal cause of failure to provide satisfactory service. and produced in large volumes then rail transport is advantageous. some large retail chains have now entrusted all their warehousing and transport to specialist logistics companies. and causes excessive costs. and recognize that logistical systems should be designed with the total function in mind. transport by rail still has advantages. Similarly. air transport is not usually an attractive transport alternative. which is the current cost of capital to a company. and without the cost of bulky and expensive packaging needed for sea transportation.6. For some types of goods. Managers have now become more conscious of the potential of PDM.volume of goods being transported reaches a certain level some companies purchase their own vehicles. Except where goods are highly perishable or valuable in relation to their weight. Inventory Cost: The main elements of inventory holding costs are: Capital Cost: The cost of physical stock. · Storage Cost: Storage cost will increase as the number of depots will increase because there will be a need for more stock coverage. type and location). Delivery cost: This will concern with the secondary transportation cost i. Trunking Cost: This is the primary transport cost in the supply of products in bulk to the depots from the central finished good warehouses or production points. this function has been late in adopting an integrated approach towards it activities. when goods are hazardous or bulky in relation to value. 15 · · · · . it has the advantage of quick delivery compared to sea transport. However.2 The Systems or ‘Total’ Approach to PDM PDM has been neglected in the past. For long-distance overseas routes air transport is popular. This is called the ‘systems approach’ to distribution management and a major feature of PDM is that these functions be integrated. Rail transport is also suitable for light goods that require speedy delivery (e. Figure 1. cost of delivery from the depot to the consumer. endangering future business. Not only do damaged goods erode profits. but frequent claims increase insurance premiums and inconvenience to customers. To plan an efficient logistics structure it is necessary to be aware of the interaction between the different distribution costs and how they vary with respect to the different depot alternatives (number.g. or when lowering transport costs is a major objective. As the number of depots increases this cost will also increases. PDM is concerned with ensuring that the individual efforts that go to make up the distributive function are optimised so that a common objective is realised.7 demonstrates how the individual distribution and logistics cost elements can build up the total logistics cost. more management etc. This is the financing charge.

deterioration of stock. rather than taking the perspective of a single firm or process.7 SUMMARY 16 Supply chain is network of organizations that are involved. The handbook of Logistics and distribution Management Page No .Logistics and SCM : An Overview · · · Service Cost: That is stock management and insurance cost Risk Cost: Which occur through pilferage. logistics can make an important contribution to the economy as a whole. Logistics expenditure accounts for around 15-20% of GDP. Cost Total Distribution Cost Trunking Cost Inventory Cost Storage Cost System Cost Local Delivery Cost No. an increased emphasis on customer service. through upstream and downstream linkages. Factors contributing to the growing interest in logistics include advances in information system technology. suppliers and other channel members. The result will depend on a number of factors –product type. As . of Depots Figure 1.123 The top line on the graph shows the overall distribution cost in relation to the number of depots in the network. Supply chain management seeks to integrate performance measures over multiple firms or processes.7: Total Logistics Cost Source: Croucher Phil et al. service level requirements etc. geographical area of demand. Supply chain integration links a firm with its customers. 1. growing reorganization of the system approach and total cost concept. System Cost: These costs represent a variety of information or communication requirements ranging from the order processing to load assembly lists. damage and stock obsolescence. in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. The minimum point on this curve represents the lowest cost solution. Thus by improving the efficiency of logistics operations.

NY 17 . Croucher Phil. Elaborate. This must be achieved with acceptable costs. elucidate the “total approach” to PDM. Elaborate? “These are many possible structures for SC. Palgrave McMillan (Indian Edition). but the simplest view has materials converging on an organising through tiers of suppliers and products diverging through tiers of customers”. 1998. Logistics: An Introduction to SCM. Prentice Hall.such it integrates their relationships. Describe the evolution of Supply Chain concept. Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services. Fundamental of logistics management. Waters Donald. Massachusetts. activities. Sahay B S. The handbook of Logistics and distribution Management Douglas M. What in your opinion is the most important stage? 3) 4) 5) 1. Christopher. Supply Chain Management for Global competitiveness (Macmillan) Chopra Sunil and Meindl P. 1992. Designing and Managing the Supply Chain. functions. Physical distribution management (PDM) is concerned with ensuring the right item needed for consumption or production to the right place at the right time and in the right condition at the right cost Logistics and SCM : An Introduction 1. Irwin/ McGraw-Hill. London. and Operation. Planning. It is said that the overall aim for logistics is to achieve high customer satisfaction or perceived product value. IL. 2001. Cambridge.. Pitman. Rushton Alan and Oxley John.8 1) 2) SELF ASSESSMENT QUESTIONS “Logistics is the function that is responsible for the flow of materials into. How would you find the best balance? What is Physical Distribution Management? Describe its components? Also. Lambert. through and out of an organisation”. M. Forrester J W 1961. 1998. The MIT press. processes and locations. 2003. Supply Chain Management: Strategy. Industrial dynamics.9 1) 2) 3) 4) 5) 6) 7) 8) REFERENCES AND SUGGESTED FURTHER READINGS Simchi Levi (2000). McGraw Hill.

7 The Logistics-Manufacturing Interface 2. It is important to know about different supply chain processes for having an integrated SCM. Also there is a strong relation between Logistics group and Marketing group in an organization. Operating an integrated supply chain requires continuous information flows. SCM is the management of all key business processes across a number of supply chains.6 2. This information is refined through planning into specific manufacturing and purchasing objectives. SCM is the management of all key business process across a number of the supply chains. Similarly. As materials and products are purchased.Logistics and SCM : An Overview UNIT 2 PRINCIPLES OF SUPPLY CHAIN MANAGEMENT Objectives After reading this unit. You have appreciated the role of Logistics and SCM in the economy.4 2. Successful SCM requires a change from managing individual function to integrating activities into key supply chain processes.5 2. This unit will take you through to these concepts. 18 .2 Logistics and Product Life Cycle Areas of Logistics and Marketing Interaction Customer Service Issues at the Logistics-Manufacturing Interface 2. SCM is an integrated approach that is highly interactive and complex and requires simultaneous consideration of many trade-offs. 2. and examine critical areas of Logistics-Manufacturing Interface. Manufacturing and Logistics are also interrelated.3.2 2. a value added inventory flow is initiated which ultimately results in ownership transfer of finished product to customers. Structure Introduction How does SCM Work? The Logistics-Marketing Interface 2. As shown in Figure 2.1 2.1 2. you would be able to: · · · · 2.1 Summary Self Assessment Questions References and Suggested Further Readings 2. SCM is basically a system that connects an organization with its customers and suppliers. which in turn helps to create the best product flows.4. understand the key processes required to integrate the supply chain. examine critical areas of Logistics-Marketing Interface.1 information flows from customer in the form of forecast and orders to both the enterprise and suppliers.3 define how the supply chain works.3.2 HOW DOES SCM WORK? The supply chain management (SCM) is viewed as a system that links an enterprise with its customer and suppliers.1 INTRODUCTION Now you are aware of what Logistics and SCM mean.

improved linkages with supplies are necessary because controlling uncertainty in customer demand. The companies no longer view sales as selling of their products. 1986 The customer remains the primary focus of the process. Customer relationship teams develop and implement partnering program with key customer. Bowersox et al. but as selling of relationships. solutions. Product and service agreements specifying the level of performance are established with these key customers. manufacturing processes and supplier performances are critical for effective SCM.1: Supply Chain System Source: Logistics Management.2: Supply Chain Process for Integrated SCM Source: Lambert 1998 19 . However. Demand Management Customer Service Management Order Fulfillment Manufacturing Flow Management Procurement Product Development and Commercialization Return Channel Performance Metrics Figure 2. With customer moving to centre stage. more companies have begun to treat a customer as a value independent entity.. The key processes for the integrated SCM (Figure 2.2) are as follows: Customer Relationship Management This is the process to identify the key customers. support and care.VALUE ADDED INVENTORY FLOW Logistics and SCM : An Introduction Enterprise Customers Physical Distribution Manufacturing Support Purchasing Suppliers REQUIREMENT INFORMATION FLOW Figure 2.

qualified. Traditionally production system uses push strategy but in a customer focus environment pull strategy is more effective. easy availability of spares. Customer service is a valuable business activity governing both resources and top management attention. production process has to optimize balance between customer satisfaction and efficiency. It provides the customer with real time information on promised shipping dates and product availability. Customer service provides the single source of customer information. For quick response to customer demand purchasing activities are carried out with rapid communication mechanism such as EDI and interest linkages. warehouse or retail stores. speedy response to service calls from customers. Manufacturers are moving from a push system to make to order mode. orders are processed on a just in time basis in minimum lot size. distribution and transportation plans. Order fill rate can be defined as % of order fulfilled before or on the due date set by the customer. fast repairs. in such case predicting or forecasting demand is the key driver on which all of the supply related decision will depend. Customer service is being offered in many forms such as post warranty support. Suppliers are involved at the early design stage which can lead to reduction in product development cycle times. For the firm to remain competitive it has to sharpen its product development times. In a customer focused business world. Traditionally procurement is carried out on the basis of bid and buys system whereas in new integrated concept long-term partnerships are developed with core group of suppliers. Performing the order fulfillment process effectively requires integration of firms manufacturing. A good demand management system uses point of sales and “key” customer data to reduce uncertainty and provide efficient information flows through out the supply chain. manufacturing process must be flexible to respond to market changes. This requires that customer and suppliers must be integrated into product development process. parts or finished inventory from supplier location to manufacturing or assembly plants. Procurement Procurement is concerned with buying and movement of materials. This reduces the cost and time on the transaction portion of the purchase. demand management is a key to an effective SCM process. Given this variability in customer ordering. Return Channel 20 Managing the return channel as a business process offers the same opportunity to achieve a sustainable competitive advantage as managing the supply chain from an . Manufacturing Flow Management This functional area decides how production should be organized and managed. Product Development and Commercialization In today’s fast changing environment new products are life bloods of a company.Logistics and SCM : An Overview Customer Service Management Increased and intense competitions all around have made customer service as the key differentiator in a marketing system. To implement pull system. The demand management process must balance the customer’s requirement with the firm’s supply capabilities. Demand Management Customer demand in the form of irregular order pattern is the largest source of variability. Customer Order Fulfillment The key to effective SCM is to achieve high order fill rate. This requires the flexibility to perform rapid change over to accommodate mass customization. competent and customer friendly technicians.

.... 21 ....................................................... compile and update customer demand to match requirement with supply........................ ............................................. Effective process management of return channel enables the identification of productivity improvement opportunities and break through projects....... promotion and selling.......................................................................................................... ............... inventory and transportation within many organizations while marketing group is responsible for negotiation................................ Thus the goals of these processes are to: a) b) c) d) e) f) g) Develop customer focused teams that provide beneficial product and service agreement to strategically significant customers Provide a permit of contact for all customers..... not internecine conflicts........................out-bound perspective....................... conflicts arose at the expense of overall organization goal.......... .................................................................................. ..................... Focusing effort on improvement in key business process is the foundation of SCM philosophy. .............. .......................... Therefore it is essential that organizations identify area of agreement and potential conflict..................... Senior management must be keen to actively support cooperation between the two groups........................ As neither group had responsibility for over all channel management............. The organizations had realized that functional interdependence.......................... Despite the realization by logistics and marketing manager that cooperation is essential marketers often criticize logistics department for being cost minimizers having no concern for customer needs while logistics department accuses marketers of chasing sale at any cost.......................... Continually gather..... which efficiently handle their inquiries......... Fill 100% of customer order accurately and on time Enhance profitability by managing the return channel (reverse logistics) Logistics and SCM : An Introduction Activity 1 Take the case of an organization where you are working or about which you know of and identify the key processes within that organization vis-à-vis those proposed by Lambert..........................................3 LOGISTICS-MARKETING INTERFACE Traditionally logistics group assumed primary responsibility for warehousing.................................................... 2................................................. is the key to satisfy customer needs............. ..... Manage supplier partnership that allows for quick response and continuous improvement............................................................................. Develop flexible manufacturing system that responds quickly to changing market conditions............................. This can be assisted by performance measurement that rewards cooperation and a spirit of interdependence that actively discourages parochial behaviour.....................

It is another key area where policy should be developed jointly. Marketing should definitely consult with logistics when making channel decisions. as these decisions have a significant bearing on operational costs and the extent to which desired levels of customer service are achieved. The major area of interaction between logistics and marketing includes (Gattorna 1995): · · Product Design: This can have a major effect on warehouse and transportation utilization (and therefore costs). Number and Location of Warehouses: This is one of the greatest areas of contention and can only be satisfactorily resolved if marketing and logistics develop the policy jointly. the company changes to trimming cost as the product faces stiff price competition and consequent pressure on margins. Customer Service Policies: If marketing opts to offer a very responsive level of service to customer. As channels change. so will the resources required. Order Processing: Responsibility for who receives customer’s orders and the speed and efficiency with which they are processed has a major impact on operational costs and customer’s perceptions of service levels.2 Areas of Logistics and Marketing Interaction In today’s competitive environment organizations are utilizing the benefits of their established logistics/marketing interface to be competitive not in terms of product and price but also logistics services tailored to meet individual customer needs. in the form of facilities and inventory. Market and Sales Forecasts: Marketing forecasts will largely dictate the level of logistics resources needed to move products to customers.e. maturity and decline.3. Inventory Policies: This is another area of contention. different level of logistics support is required by marketing. growth. Later as sales slow down and the product moves into the maturity and decline stages.Logistics and SCM : An Overview 2. For different stages of PLC i.1 Logistics and Product Life Cycle Product life cycle (PLC) is a key marketing concept that affects the relationship between logistics and marketing. These organizations are able to differentiate themselves from their competitors by offering a total service with logistics forming an essential part of the total value chain. This is another area where joint policy-making is preferable.3. In the introduction and growth stage timely cost effective fulfillment of order is a major requirement in ensuring initial acceptance of the product. introduction. Channels of Distribution: Decisions to deliver direct to the customer or through intermediaries will greatly influence the level of logistics resources required. · · · · · · 22 . Pricing: This is the means by which logistics services customer demand affects the overall cost of the product and in turn the organization’s pricing policies. 2. logistics resources. Hence there is need for a logistics manager to understand what marketing is trying to achieve with each product and what appropriate level of logistics support is required accordingly.. will need to be very considerable.

that can be in terms of service like delivery time.1: Manufacturing / logistics approach when the basis for competing is cost leadership (Source: Gattorna 1995) Basis for Competing: Lowest – Cost Competitor Old Approach Cost-reduction programmes Reduce inventory Trim 10% all budget allocations Defer capital expenditure New Approach Eliminate all non-value adding activities/procedures/ tasks etc Reduce the need to buy capacity by shortening internal lead times Reduce the material conversion cost by simplifying processes through integration and technology Emphasize product and process quality so as to reduce costs associated with rework. delivery reliability etc. the manufacturing and logistics functions must respond positively by considering the manufacturing/logistics network as whole and continuous improvement programmes coordinated across the various activities like delivery service. to differ by competitor in some form. Reduce need for inventory through superior planning systems. be the lowest-cost producer in the industry or meaningful differentiation i. The differences in these perspectives are shown in Tables 2. To maintain its competitive position in a dynamic industry.e.e.2. shortened internal lead times.. which every organization has to decide to remain unbeaten in the competitive environment.4 THE LOGISTICS-MANUFACTURING INTERFACE Logistics and SCM : An Introduction Manufacturing and logistics are interrelated so no one can be considered in isolation. where integration is the driver to achieve competitive advantage. Decisions made in these two areas commit the organization to relatively long-lasting cost structures and also determine the manner in which the business competes in its chosen markets. breakdowns etc. superior product etc.1 and Table 2.2 when organizations decide to compete on the basis of cost leadership and differentiation respectively. There are two fundamental competitive strategies. production priority control and purchasing to exploit the synergy available. Cost leadership i.. or in terms of technical advantages like superior features. organizations have evolved new approaches to develop interface between two functions. linking processes etc Which also results in: Emphasize control on expenses particularly direct labour Which also results in: · · · · · · · Inadequate support Poor product quality Ageing equipment/processes Poor customer service An image of being unreliable Poor product availability Poor delivery service · · · · Improved product performance Reduced product variability Improved flexibility Improved responsiveness to market 23 . Table 2. In new environment.

customers. and impact on the logistics network only in terms of the additional capacity requirement where as long term solution demand a re-evaluation of the manufacturing/logistics network not only in terms of the capacity of each component but also the strategic necessity and location of each facility (factory. Short term decisions possess the least risk.e. branch warehouse and final customer delivery. warehouse) in terms of its contribution to the effectiveness of the total network. the issues involved in location. Utilize express transport and centralized distribution to prevent misallocation of stock Initial superior customer service and order entry systems to enhance customer communication Which also results in: Lower costs Improved product performance Reduced product variability An image of reliability Improved flexibility in volume and product mix Logistics link the manufacturing both from characteristics of inputs i. production capacity must be matching in some sensible way to the market demand then in accordance with the production capacity matching is required for the logistics network i. For effective operation of manufacturing/logistic interface there are two primary determinants i. third party contracting.e.. which satisfies most constraints or pressures imposed by the inputs or the markets.. order entry and processing. breakdowns etc. Capacity is related to location and logistics in the following way. For a given manufacturing organization there is a production/branch warehouse configuration. suppliers of raw materials and characteristics of market i.. Short-term solutions can be capacity enhancement by overtime. storage. confused priorities and difficulty in allocating stock to many warehouses New Approach Shorten internal lead times to improve responsiveness to market Emphasize schedule performance to ensure reliable supply Emphasize product and process quality so as to reduce delays caused by rework. outbound transport. Capacity and Location. extension of the existing facility and long-term solution are additional facility in a new location or extensive capacity in new location. second and third shifts. Clearly. capacity and logistics are inextricably linked. In other words..2: Manufacturing / logistics approach when the basis for competing is differentiation (Source: Gattorna 1995) Basis for Competing: Product Availability and delivery time Old Approach Increase inventory to act as a buffer Increase number of branch warehouses Increases capacity to provide flexibility Release orders early to production Emphasize production output Which also results in: Higher costs Negatives cause by the complexity of the system and poor product quality caused by emphasis on ‘getting the product out’ Long internal lead times caused by early release of works orders to give the plant ‘plenty of time’ Stock-outs due to work order overload. 24 .e.Logistics and SCM : An Overview Table 2. The capacity issues are very crucial decision and are required to change as per the market demand and demand locations. procurement. First.e. a change in location and capacity of any one facility requires a review of the location and capacities of all other facilities.

the plant/branch configuration is a major structural input to reducing overall supply chain costs.4. finance) have a vested interest. particularly information technology. though. The systems installed by organizations will need the capability to formally link the customer in a form that benefits both parties. previously ruled out. to be feasible. it is done by one group in isolation from the others. This includes the use of distribution requirements planning (DRP) wherever appropriate. The issues at the manufacturing/logistics interface for better customer service are as follows: Demand Forecasting The general function of product forecasting in the short to mid term is to contribute to the process of ensuring the availability of stock for customers. In a strategic alliance the supplier and the manufacturer agree to a relationship that goes beyond the normal commercial relationship such that each obtains synergistic benefits similar to that obtained by forward/backward integration but with least associated risks and negative attributes. logistics. Plant Configurations The location. Often as not. For the longer term. When the links between manufacturer and customer and manufacturer and supplier are complete. This will be new ground for many organizations and will force a re-evaluation of values and mission in some circumstances. A key feature of this process will be the requirement of involving in an appropriate manner both customers and suppliers. central warehouses and branch warehouses impact heavily on both cost structure and service levels.2. for two reasons: · · Available technology. Master Production scheduling The master production schedule (MPS) is an area where a number of parties (manufacturing. forecasting at the product group level is crucial for manufacturing capacity and flexibility decisions. As such. Systems will also be required to link with suppliers in a manner that gives meaning to the concept of strategic alliances. supplies). The whole emphasis in today’s service intensified businesses are to increase a series of both human and information based technological relationships between customer and the organization so that better customer services and satisfaction to the customer can be realized. marketing. will allow certain plant/branch configurations. There will be an on-going need to reduce (in real terms) the cost of the network. a rethink of the logistics (supply chain) network from supplier through to customer will be required.1 Customer Service Issues at the Logistics-Manufacturing Interface Logistics and SCM : An Introduction Customer service strategy is an on-going process of increasing both the quality and number of links between the manufacturing organization and the customer. In the longer term. and in conjunction with other factors (systems. nature and operating performance of manufacturing facilities. it is the single instrument. which demonstrates the plan for: a) Finished goods inventory levels 25 . Customer and Supplier Oriented System Organizational systems will need to be directly related to the issues of how to bind the customer more tightly to the organization and how effectively integrate suppliers into the overall supply chain with the objective of enhancing customer service. In the operational sense the MPS is primarily concerned with stock availability within a set of constraints such as capacity.

Pitman. J. 1996. 3) Christopher M. McGraw Hill. Macmillan. 1992. logistics and manufacturing get together and agree on a schedule. Plagrave Macmillan Indian Reprinted Ed. the result is a superior schedule. W.. and Operation. J.. In practice.7 REFERENCES AND SUGGESTED FURTHER READINGS 1) Bowersox D. we have discussed how the supply chain works and what are the key processes required to integrate the supply chain. Logistical Management. results in superior customer service. 1995. 2004 .5 SUMMARY In this unit.. 2. 2. when people from marketing. Are there any other processes that you can think of? What are the primary responsibilities of logistics group and marketing group within an organization? Why there is a conflict between the two? What measures can be taken to enhance cooperation? What are the differences between manufacturing/logistics approach when the basis for competing is i) ii) Cost leadership Differentiation 3) 2. Clearly the MPS may be used as a vehicle to integrate a number of parties into the planning and decisionmaking process with the result being a superior plan which.. Closs D. J. Supply Chain Management: Strategy. and Meindl P. 4) Lambert D. 5) Gattorna J. when executed. however.6 1) 2) SELF-ASSESSMENT QUESTIONS Explain various supply chain processes for an integrated SCM. and Helferich O K. 2001. We have also examined the critical areas of logistics-marketing interface and logistics-manufacturing interface. Fundamental of Logistics Management. 26 6) Gattorna. These interfaces are critical for enhancing supply chain performance. 1998. Finally we have discussed how manufacturing-logistics interface could provide better customer service. L. M. Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services. Handbook of Logistics and Distribution Management. Managing the Supply Chain : A strategic Perspective. 2) Chopra S. Planning.Logistics and SCM : An Overview b) c) d) e) f) g) Customer service in terms of stock availability Machine utilization Capacity utilization Labor productivity Output Need for overtime/casual employees and so on. is its potential to involve all interested parties.. The real power of the MPS. & Walter P. Ashgate Publishing Company. 1986. Pearson Education Inc.

9 3. Structure Introduction Customer Service Functional vs. and cut excess costs from the network of the organization.1 3.10 understand the key processes required to enhance customer focus in the supply chain.6 3.8 3. Effective streamlining of the supply chain can improve the customer service levels dramatically.3 3.UNIT 3 CUSTOMER FOCUS IN SUPPLY CHAIN MANAGEMENT Objectives After reading this unit. Innovative Products: SCM Issues Efficient Consumer Response Quick Response and Accurate Response Chain Relationship within and Beyond the Organization SCM as a Core Strategic Competency Summary Self Assessment Questions References and Suggested Further Readings 3. . you would be able to: Logistics and SCM : An Introduction · · · · 3.4 3. Those entities may include suppliers. It is important to clearly understand customer service deliverables when establishing Supply Chain Management strategies. retailers and customers. A supply chain can be viewed as the network of entities through which the material and information flow. carriers.7 3. define Quick Response (QR) and Accurate Response (AR). distribution centers. The customer being serviced is the focal point and driving force in establishing Supply Chain Management performance requirements. · · · The essence of a marketing orientation to business policy Developing Supply Chain Management competency as strategic resource to customer service planning The changing nature of most desired Supply Chain Management practice to accommodate product life-cycle requirements. 27 This unit will discuss the customer focus in Supply Chain Management. reduce excess inventory in the system. The customer is any delivery destination – from consumers’ homes to retail and wholesale businesses to the receiving docks of a firm’s manufacturing plants and warehouses.1 INTRODUCTION Management of a supply chain means managing all the different processes and activities that produce value in the hands of the ultimate consumer. [2] Supply Chain Management competency contributes to an organization’s success by providing customers with timely and accurate product delivery. and examine chain relationship within and beyond organization.5 3. The customer-focused marketing is built on three fundamental concepts. define Efficient Customer Response (ECR). manufacturing sites. [1].2 3.

performance and reliability. Safety stock is kept to take care of demand forecast error and any unanticipated operational or delivery problems. A primary reason for SCM becoming an important managerial issue in the nineties stems from increased national and international competition. Customers’ confidence can be built by providing advanced accurate information on the status of their orders. A customer service programme needs to be evaluated of its performance through measures like goal attainment and relevancy. sales popularity. — · Operational Performance can be measured in terms of speed. flexibility and malfunction/recovery. Organization’s ability to respond to unexpected situation or request for unique customer service shows the flexibility. LaLonde and Zinszer suggested three dimensions of customer service [5]: i) ii) iii) As an activity – that can be managed. One of the key factors for successful marketing is the availability of products and services to the customers. when and where desired by them. Consistency is reflected by execution of large number of orders in expected delivery time. Inventory stocking plans take into consideration forecasted demand. consistency. — — — · Reliability is one of the most important dimensions of customer service quality. profitability and the value of the merchandise. fill rate and orders shipped. Preventing malfunction and having contingency plans for prompt recovery can add value to customer service programme. Basic customer service is defined in terms of availability. — Speed is the time taken for executing an order. operational performance and reliability to all customers. In terms of performance levels – can be accurately measured As a philosophy of management – showing the importance of customer focused marketing They defined: “ Customer service is a process for providing significant value-added benefits to the supply chain in a cost effective way.” Excellent customer service performance is likely to add value for members of the supply chain. communication and transportation technology/ systems. A customer-focused firm will do well to state the level of basic service commitment in terms of availability. rather than giving surprises. — — Normally this is achieved by stocking adequate inventory in anticipation of demand from customers. importance of a product in the product line. locating product throughout the 28 . · Availability is the capacity to offer inventory when demanded by a customer. With the level of development in information. Customers have multiple sources from which to choose to satisfy demand. The common interpretations for customer service are easy to do business with and sensitive to customer needs. the lead-time will continue to be shorter.2 CUSTOMER SERVICE A customer-focused strategy needs to accomodate and develop a combination of products and services that satisfies customers.Logistics and SCM : An Overview 3. The availability depends on three performance measures: stock out frequency.

Market mediation function is less visible but equally important and ensures matching of offerings with customer’s preferences. have stable. It helps a manager to understand the nature of demand for their products and devise the SC that can best satisfy that demand. components and finished goods. transportation. INNOVATIVE PRODUCTS: SCM ISSUES Marshall L. costs have risen to unprecedented levels because of adversarial relations between SC partners as well as dysfunctional industry practices such as an over reliance on price promotions. Physical function includes converting raw materials into parts. Their stability invites competition and leads to lower profit margins. They also require a fundamentally different SC than functional products. But. long life cycles and available at a wide range of retail outlets/grocery stores. Demand changes only make it almost sure that the company will have the wrong inventory. Products can be classified into two categories.1: Functional Versus Innovative Products: Differences in Demand Functional (Predictable Demand) Aspects of Demand Product Life Cycle Contribution margin Product Variety Average margin of error in the forecast at the time production is committed Average stock out rate Average forced end of season markdown as percentage of full price Lead time required for made-to-order products More than 2 years 5% to 20% Low (10 to 20 variants per category) 10% 1% to 2% 0% 6 months to 1 year 3 months to 1 year 20% to 60% High (often millions of variants per category) 40% to 100% 10% to 40% 10% to 25% 1 day to 2 weeks Innovative (Unpredictable Demand) 29 . Each of these two functions incurs physical costs (costs of production. A framework was devised for deciding which SC is the best for a particular company’s situation.1) Fashion apparel and personal computer manufacturers introduce innovations to avoid low margins and to give customers reason to buy their products. Fisher observed [4] that in some cases. Logistics and SCM : An Introduction 3.distribution channel for maximum customer accessibility at a minimum cost becomes crucial. Table 3. predictable demand. don’t change much over time. either primarily functional or primarily innovative based on their demand patterns. and transporting all of them from one point to the next in the SC. (See Table 3.3 FUNCTIONAL VS. which satisfy basic needs. life cycle is short and profit margin is high. Functional products are the staples. The dynamic nature of the market place makes holding inventory a risky and potentially unprofitable business. The root cause of the problems faced by many SCs is a mismatch between the type of product and the type of SC. the demands for these products are unpredictable. inventory storage) and market mediation costs arising out of marked down or lost sales opportunities and dissatisfied customers. (See Table 3. Customer’s buying habits are constantly changing and competitors are continually adding and deleting products.2) SC performs two distinct types of functions: a physical function and a market mediation function.

....................... A study by A.......... For retailers..................................... ........ .... and quality Use modular design in order to postpone product differentiation for as long as possible Manufacturing focus Inventory Strategy Maintain high average utilization rate Generate high turns and minimize inventory throughout the chain Shorten lead time as long as it doesn’t increase cost Select primarily for cost and quality Maximize performance and minimize cost Lead-time focus Approach to choosing suppliers Product Design Strategy A global brand can be greatly benefited by having gathered knowledge of customers and their choices... What are the targets you will set for these organizations for achieving a high image on customer service and evaluating the performance level? ......Logistics and SCM : An Overview Table 3............2: Physically Efficient Versus Market-Responsive Supply Chains Physically Efficient Process Market-Responsive Process Primary Purpose Supply predictable demand efficiently at the lowest possible cost Respond quickly to unpredictable demand in order to minimize stock outs. These numbers indicate that even slight improvements in the process can translate into millions of dollars on the bottom line........................ ...... the job of reengineering their business process and it involved revisiting their supply chain........... flexibility...................................................T............................... ........................ and can create global products.. Some of the critical success drivers to achieve improvements have been suggested and these are: · · 30 Well-defined processes with well-defined guidelines for decision making. forced markdowns and obsolete inventory Deploy excess buffer capacity Deploy significant buffer stocks of parts or finished goods Invest aggressively in ways to reduce lead time Select primarily for speed.... through channel partners................... 3............... which may need to be adapted as per local preferences...... many organizations have been going through..... One Efficient Consumer Response study estimated that 42 days could be removed from the typical grocery supply chain......4 EFFICIENT CONSUMER RESPONSE Since 1980s..............................Kearney estimated that supply chain costs represent more than 80% of the cost structure in a typical manufacturing company................................................. this figure is 70 to 80 %................ freeing up $30 bn in current costs and reducing inventory by 41% in USA................. Activity 1 Define Customer Service for two organizations– one offering a product (Colour Television) and another one offering a service (Personal Banking).......................................................... Removal of the organizational and functional barriers.............................................

as customer gets what he wants Capturing database of customer through a smart card device and link it to his purchase patterns in terms of item. 31 · · . Manufacturer and Distributor. Commitment to Quality. · · · Manufacturing plants are strategically located throughout the US. Make use of such database to forecast future demand and thereby achieving better customer service and less stock out situations. Some of these facilities are self owned and third parties operate others. The ECR includes the following strategies: 1) Widespread implementation of EDI (Electronic Data Interchange). Distributor. Continuous Replenishment of inventory and flow through distribution. Distribution network includes facilities strategically located based on customer demographics. 2) 3) 4) 5) 6) One of the most beneficial aspects from ECR could be building relationship with the Customers: · · Customer satisfaction improves. based on supplier or customer base. both between Supplier and Manufacturer. Logistics and SCM : An Introduction Some of the learning from case studies on SCM a) ABC Foods Company: Materials common across businesses are purchased centrally to take advantage of economies of scale. quantity. up and down the supply chain. Development of supplier partnership. as well as transportation efficiencies. and customers. Distributor and Customer. · Supply strategy includes four key practices: i) ii) iii) iv) Consolidation of the supplier base. Co-operative Relationship between Manufacturer. Greater use of POS (Point of Sales) data obtained by greater and more accurate use of bar coding. Penetration into supplier performance. Cross Docking) Improved Product Management and Promotions. Suppliers. Main focus in distribution was to establish customer partnerships. other items exclusive to a given business unit are purchased by the unit. Inform customers of new arrivals – through direct mailers. size and time-offering volume or value bases incentive scheme.· · Early visibility to changes in demand all along the supply chain. A single set of plans that drives the supply chain operations and integrates information across the supply chain. which was based on ECR concepts including continuous replenishment. (Like JIT (Just-in-time). Could be the best source of Competitive Advantage.

the structural changes may be necessary to enhance and focus on proper co-ordination and collaboration among channel partners. Many organizations have switched over from product focus to customer focus. people. through customer value addition. resources and leadership. New product introduction system will be required to draw major inputs from customer feedback or customer survey. Invoice. skills. Even an innovation can’t assure a very long-term stay and benefits. Structure and Systems ECR has a long-term impact on the effectiveness of the value delivery system to the customers. Earlier firms used to produce goods as per their capacity and convenience to achieve economy of scale and profitability. brokers. and as much quantity as they need. EDI and Bar Coding technology can only enable transfer of POS data to the channel partners and avoid losses due to over/under stocking of products throughout the channel. Through integrated EDI. The Efficient Consumer Response concept popularly known as ECR is a strategic choice for many organizations to survive/grow in the current business environment. ECR movement. retailers. They feel good of having received attention. Now the manufacturing plans are customer driven and there is major dependence on POS data at SKU level (stock keeping unit) for forecasting. They feel happy being cared for. 32 . values and culture. purchase order. They get it at the most competitive price They achieve satisfaction or delight. most efficiently and effectively. when they want it. ECR provides a competitive advantage to differentiate from other players. initially started in grocery industry to respond to the following customer service expectations. Moreover. firm is required to go through the process of implementation. which followed another movement called Quick Response in textile/ apparel industry. Stock Information. keeping in mind past performance and internal capabilities and resources. delivery order. speed. which includes structure and systems. by way of a collaborative relationship between manufacturers. values and culture. Once a strategic option has been chosen after evaluating possible alternatives. Shipping bill. In order to fulfill these expectations organizations will be required to re-orient and review the areas like structure and systems. · · · · · · They get what they want. They enjoy being listened to and being served quickly. Therefore. in many organizations. It has to be done at a faster speed than the competitors and frequency has to be improved due to shortening of PLC. which is driven by competition. technology. Truck Movement Information can be exchanged between channel partners. customer satisfaction and ever changing customer preferences. resources and leadership. people. Application of technology for data capturing and processing to help quick and accurate decision-making is a must. skills. and transporters through application of advancement in Information and Communication Technologies (ICT). we first need to understand what factors have driven a firm to re-look at their current strategy and what are the options an organization has to respond to such factors. failure rates are also to be reduced.Logistics and SCM : An Overview Since the ECR is a strategic option for an organization. wholesalers.

It is very important to note that each partner and the links in the value delivery chain must perform efficiently and continuously strive for further improvement. wherever cross docking will be possible the tasks of and need for a distribution center will be minimum or nil.com has created such alliances with the partners like product/service suppliers. success of implementation will depend on the leadership qualities. Integrated Supply Chain Network demands adoption of similar relevant technologies by the channel partners. Resources Major investment will be necessary to acquire the new advanced technologies and the necessary skills required to operate it. for useful decision making and information sharing. the firm has to review the needs for training of existing resources and acquiring required skill through recruitment. In a situation when some of these Channel Partners are not able to arrange for the resources.Another important system change necessary for more meaningful decisions. sound leadership can play a very important role. purchases. one has to review its imperative for the organization to acquire new skills. To drive the organization and channel partners through the change process may not be an easy task. Channel partners can share data through common sites and consolidate/ process the same. the manufacturer/marketer may be required to find financial resources with an objective to achieve total Supply Chain efficiency. Logistics and SCM : An Introduction 33 . Strategic Alliances can facilitate new product development/introduction and market access or ensuring timely delivery and is coming off age now. The leadership has to ensure executive support. There may be a serious need to improve transportation facility to improve on “Speed to Market” advantage. in a most cost effective way. transporters/couriers and payment facilitators to be successful in their e-commerce venture. In case of adoption of advance technologies. customer service etc. This can be done through owning additional trucks or by outsourcing. Rediff. People. accounts. For example. The Internet revolution will create a new dimension in achieving ECR. Category Management requiring cross-functional skills to decide on product-mix. commitment to change and empowerment. contribution/profitability analysis. Values and Culture Based on the current status of the organization in terms of availability of human resources and skills. speed. new product development. Even one inefficient link can result in sub optimal performance for the total chain. Therefore. responsiveness and the customer satisfaction. co-ordination with manufacturing. the values and culture of the organization have to make necessary adjustment and proper realignment to meet the new challenges. which are the key areas for successful ECR implementation. colour etc). assortments (flavor. is to introduce Activity Based Costing (ABC) instead of using full cost allocation systems. will require new skills. Skill. shipping/transportation. As this new concept thrives on efficiency. Leadership In order to adopt ECR concept as a differentiator. pack size. This may call for some unpleasant decisions from the leadership.

while speeding inventory flows...... number of constituents in each level of the chain....................... Their efforts were on reducing costs within their exiting SC instead of producing overseas and utilizing time as a speed -to-market advantage... the impact of constituents’ performance in the value delivery system in general and to their customers of the chain in particular..... ........................................... Customer’s sales are tracked immediately using EDI with bar code technology...... which combines a number of tactics to improve inventory management and efficiency.................................. Products are replenished daily or in economical batches........ QR applies JIT principles through the entire supply chain....................... This allows inventory reduction. With the application of advanced Communications and Information Technology in the system................................................. Most QRs are between manufacturers and retailers only.................... In order to fully understand the role of supply chain management in an industry it is necessary to study in depth the complexity of the supply chains for specific product groups................................. speeding response times................... 3...... their awareness of this impact and which are the areas that need performance improvement for overall efficiency and effectiveness of the value delivery system.........5 QUICK RESPONSE AND ACCURATE RESPONSE Quick Response is a retail sector strategy.......................... Apparel manufacturing is done at 2 units in US and another one offshore................ reducing handling and obsolescence.................. based on POS transactions transferred from the retailer on a daily or weekly basis.... · · · · 34 ...... It has 20000 SKUs and sold through 6000 different accounts....Logistics and SCM : An Overview Activity 2 What are the learning inputs you could get from the example of ABC Foods Company for implementation of ECR? .................. The partners in the chain must understand what kind of support need to be provided to each other to ensure overall cost and value optimization of the system............. now each of the constituents would be able to serve its customer better and improve the value delivery process............................. QR was first implemented in Textile & Apparel industry and an adaptation called ECR was implemented in grocery industry........... ............................... ........ from raw material suppliers through ultimate customer demand... It replenished inventory at the retailer without a purchase order from the retailer............. Some learning experience from case studies a) Apparel Manufacturer The company sells lower priced brands to discount stores and upscale line to department stores... All products are finished at one site and then shipped to two distribution centers...... lowering number of out of stock products.... When fully implemented................ Implemented flow replenishment along with EDI connections with several major customers......... It allows manufacturer to notify raw material suppliers and schedule production and deliveries as required to meet replenishment needs......

Mass Customization National bicycle’s success of a responsive supply chain was part of new movement called mass customization – building ability to customize a large volume of products and deliver at close to mass-production prices. High profit margins and the importance of early sales to capture market share for new products. they found many ways to shorten the lead time. An engineering change order initiates an implementation process. company solicited early orders from 25 largest retailers. · · SC is a global network that delivers products and services from the supply base to the end customer through an engineered flow of information and material. Crucial flow of information occurs not only within the chain but also from the marketplace to the SC. Suppliers should be chosen for their speed and flexibility. Information and communication must flow within predetermined normal response times and these are critical in maintaining strong vendor relationship and assuring delivery of programs within marketing requirements. distributors. · The uncertain market reaction to innovation increases the risk of shortage and excess supplies. return depots and recycling Partners. SC comprises of: mining concerns. Information is communicated across nodes using various methods to assure delivery of marketing programs. With ever-changing electronics trends. assemblers. At the same time short life cycle increases the risk of obsolescence and thus costs of excess supplies. This enabled them to forecast national demand with a margin of error of just 10%. 35 . avoiding and hedging against uncertainty [4]. retail. end users. increase the cost of shortages. not for their cost alone. but doing so directly contradicts the just-in-time system that automakers vigorously adopted. Accurate Response System Sport Obermeyer.b) Electronico – An Electronics Company Logistics and SCM : An Introduction One division produced corporate computer networks and secondary storage for desktop computers. A lean. resellers/integrators. adopted a blending of three strategies of reducing. most important is to read early sales indication or other market signals and to react promptly. Once employees were told of the benefits of shaving off each day in lead time by way of saving the cost of air-shipment. manufacturer of fashion skiwear. So. · · To reduce uncertainty. A leading Japanese apparel manufacturer produces its basic styles in low cost Chinese plants keeping production of high fashion styles in Japan. where the advantage of being able to respond quickly to emerging fashion trends more than offsets the disadvantage of high labour costs. The critical decisions about inventory and capacity are as to where in the SC to position inventory and available production capacity in order to hedge against uncertain demand. products are short lived and often engineered to order. efficient distribution channel is exactly right for functional cars. component manufacturers. The most efficient place to put buffers is in parts. but totally inappropriate for innovative cars. which involves all departments affected by it. which require inventory buffers to absorb uncertainty in demand.

Thus resulting shortages (stock outs) represent lost sales opportunities. Demand for fashion apparel. These trends drove the Quick Response movement. Unpredictable demand and short-lived products are the hallmarks of the world market for apparel. The model worked out the quantity of each style to make in the early production season (which begins a year before the retail season) and how much to make in February. using blend of historical data and expert judgment.Logistics and SCM : An Overview · Company asked six members of a committee to forecast for all products and selected those styles when all six individual forecast agreed. · · · · · · · UPC code symbols attached to product by the manufacturer. it developed a model for hedging against the risk of both problems. . depending on the preferences and capabilities of the partners. decide which products to make more of. long range forecasts tended to be highly inaccurate. surpluses represent lost revenues consequent to successive reductions (Markdowns). in small initial quantities that could be replenished as the season progressed. shorten order. This enables companies to make smaller quantity in advance. and scanned at POS by the retailer Electronic Purchase Orders transmitted to vendor Vendor marking of retail prices on garments (Pre-retailing) POS data by store. It also resulted in 99% product availability. after early orders are received. see how well is the response for different items early in the selling period and then based on that information. transmitted to vendor Advance Shipping Notices received from vendor in advance of shipment Electronic Invoicing Electronic Funds Transfer 36 The quick response movement had grown with the objective of strengthening the competitive position of the domestic manufacturing industries in the “fiber-textileapparel” chain. The Quick Response Movement “Quick Response” was the term used by textile and apparel manufacturers and retailers to describe buyer-seller partnership relationship in which the buyer transmitted orders via EDI and the seller promised to fill orders quickly. as listed below could be added to these two basic elements.fulfillment lead times and achieve higher order-fill rates. being a function more of taste than of objective consumer needs. This approach. called “accurate response”. The relatively predictable category should be made furthest in advance in order to reserve more manufacturing capacity for making unpredictable products closer to the selling season. has cut the cost of both over and under production in half – enough to increase profits by 60%. This pushed the manufacturers to expand product variety. Retailers essentially looked at indirect costs such as those associated with high inventory levels and long lead times. Using this average forecast as well as data on the cost over and under production. Many other features. Instead they ordered goods much closer to the selling season. The “accurate response” system distinguishes those products for which demand is relatively predictable from those for which demand is relatively unpredictable.[6]. retailers discontinued the practice of ordering large quantities of products in advance of the selling season and warehousing them until sold. often to a point below the cost of production. Due to growing demand uncertainty.

32 days for fabric sourcing and planning. Although imported goods may cost the retailer much less initially. Most important element of QR strategy is an effective information pipeline. EDI computer-to-computer communication of transactions and shipping container marking with bar codes to streamline distribution. Point-of–Sale scanners allow companies to capture the Logistics and SCM : An Introduction 37 . limited introductions to pre-test and fine-tune specific style. apparel manufacturers. colour. This enabled the retailers and suppliers to develop partnerships with the objective “ to have the right quantities of the right goods in the right place at the right time”[8]. requiring 8days for placement of store order. Kurt Salmon Associates has outlined a two-step implementation procedure for achieving an effective QR system. Impact of Technology Never has so much technology and brainpower been applied to improving supply chain performance. QR is intended to reduce overall inventory levels. but typically it takes over four times as long. Forecast error is reduced by planning assortments much closer to the selling season. performing consumer preference tests. Operating on a Quick Response System apparel and textile retailing operations are tied up to the manufacturing operations. 20 days for sewing and a staggering 58 days for the goods to make onto the sales floor. flexible manufacturing. retailers. characterized by shared information and efficient information flows. higher customer service levels. The first step is to establish QR partnerships with customers and suppliers and implementing the VICS (Voluntary Inter-Industry Communication Standards)-endorsed standards of the following technologies: UPC product marking. CAD to make important product design decisions closer to the retail selling season. from fiber production to retail presentation of a finished piece range from 56 to 66 weeks.By April 1993 industry standards had been widely adopted by textile producers. and flexible manufacturing technologies to allow the timely. foreign manufacturers generally require long order lead times (often nine months or more) that may result in larger and more risky inventory investments and consequently more chances of forced markdowns and stock outs at the retail level. The strategy consists of a combination of business practices and technology which are aimed at capitalizing on domestic manufacturers’ strongest competitive advantage – proximity to the domestic markets – by providing more suitable and acceptable products. 7 days for cutting. Under QR mode. economical production of small lot sizes. Though it is contended that a quick response of 30 working days is achievable with currently available technologies. size options. Inventory risk is reduced by producing smaller initial orders and re-ordering more frequently throughout the season based on actual sales data from the POS. and shorter lead times than those offered by foreign competitors. to provide the flexibility needed to quickly respond to shifting markets. The second step aimed at developing real-time merchandising and short-cycle. increase inventory turns and avoid forced markdowns as well as stock outs [9]. with garments in actual production only 6% to 17% of that time. Estimates of the average length of time it takes for a new style of garment to make its way through the traditional apparel pipeline. and transport companies. for a total of 125 days [9]. which is collected at the full SKU level. retailers and apparel manufacturers eliminate much of the risk inherent in the current system. involves the use of point –of-sale data analysis to identify trends.

with suppliers and distributors – presents the greatest opportunities. This has coincided with the emergence of electronic networks that facilitate closer coordination. . And new concepts such as quick response. accurate response. real-time decision support systems Competitive pressure to introduce new products more quickly. are due to the following changes: · · · · · · · · Greater sharing of information between vendors and customers Horizontal business processes replacing vertical departmental functions Shift from mass production to customized products Increased reliance on purchased materials and outside processing with a simultaneous reduction in the number of suppliers Greater emphasis on organizational and process flexibility Necessity to coordinate processes across many sites Employee empowerment and the need for rules-based. Advanced Manufacturing Research. mass customization. Electronic Data Interchange lets all stages of the supply chain hear that voice and react to it by flexible manufacturing. Most product supply systems are out of balance with customer requirements. which emphasizes material and information flow between manufacturers and their trading partners [1]. Having pursued cost cutting measures aggressively. lean manufacturing. Avoid uncertainty by cutting lead times and increasing the SC’s flexibility to produce to order or at least make it at a time closer to when demand materializes and can be accurately forecast. The entire supply chain is only as capable as the weakest link in the system. many companies have reached the point of diminishing returns within their organization’s own boundaries and believe that better coordination across corporate boundaries. The changes required by the management. This also necessitates the integration of data across the enterprise so that all planners in the SC share common information. 3. and rapid logistics.Logistics and SCM : An Overview Customer’s voice. automated warehousing. It is important for organizations to have horizontal and vertical visibility into their SCs. A company can employ three coordinated strategies to manage uncertainty: · · 38 Striving to reduce uncertainty by finding sources of new data that can serve as leading indicators or by having different products share common components to the extent possible so that demand for components becomes more predictable. Each link in the product supply system should be individually capable of producing and delivering what customers order each day. Uncertainty is inherent in innovative products and requires efforts to find how to cope with it by creating a responsive SC.6 CHAIN RELATIONSHIP – WITHIN AND BEYOND THE ORGANIZATION Organizations that work without functional barriers are likely to achieve coordination within the various components of the supply chain. developed a supply chain model. a Boston-based consulting firm. and agile manufacturing offer models for applying the new technology to improve performance [4]. efficient consumer response.

sourcing. Co-ordination. retailers and customers – with an objective to have their longterm preference and business. Trust. they might decide to buy the yarn from a Korean producer but get it woven and dyed in Taiwan. Collaboration. The manufacturing process was dissected and looked for the best solution at each step. The buttons and zippers might come from Chinese plants. all looked like coming from one factory. a truly global product. the focus has shifted to innovation. they adopted an idea of doing it globally by way of pulling apart the value chain and optimizing each step. reliability. shipping. Efficient new product introduction and sales promotion can be explored by way of collaborative relationships among trading partners. In 1980s. mostly retailers of US and EU. because of quota and labour conditions. It draws on Hon Kong’s expertise in distribution-process technology – a host of information intensive service functions including product development. the focus was on supplier partnership to improve cost and quality. Li & Fung is Hong Kong’s largest export trading company and innovator in the development of SCM. supported by advanced Information & Communication Technologies. For an example when it received an order from a US buyer to produce 10000 pcs of garments. 39 . In today’s faster-paced markets. The benefits outweigh the costs of logistics and transportation [7]. Similarly. handling and logistics. flexibility and speed [7]. Distributors and Retailers need to trust each other to establish long-term relationships and provide optimum value to the customer. Forming close. luggage. financing. fashion accessories. If buyer needs quick delivery. Five weeks after the receipt of the order 10000 garments arrived on the shelves in US.Management of Chain Relationship As companies focus on their core activities and outsource the rest. This is a new type of value added. Logistics and SCM : An Introduction Dispersed Manufacturing – Dissected Value Chain. Relationship Marketing is the practice of building long term satisfying relations with suppliers. which partly comes through a well-maintained relationship at each level. and Sharing of information as well as benefits among all the channel partners. toys. Though the level would show “ Made in Thailand”. distributors. but it’s not a Thai product. ongoing relationships even with the carriers or logistic service providers can help to have distinctive competitive advantage in speed to customer. Effectively it was customizing the value chain to best meet the customer’s needs. On behalf of it’s customers. This is achieved by delivering high quality on time. make the garments in Thailand. divide the orders to five factories in Thailand. they work with an ever expanding network of thousands of suppliers around the globe. their success increasingly depends on their ability to control what happens in the value chain outside their own boundaries. The efficiency and effectiveness of customer service is possible through dedicated and motivated channel partners. availability or other customer service factors. Instead of considering which country do the best job overall.· Hedge against the remaining residual uncertainty with buffers of the inventory or excess capacity. This group’s one breakthrough was dispersed production and dissecting the value chain.Labour intensive middle portion is done in southern China and the front and back ends of the value chain in Hong Kong. sourcing clothing. Suppliers. Then. it may be observed that the main pillars of success for ECR are the Integration. with colours and everything perfectly matched. Openness.

Time-based Competition................. Restructuring............................... suppliers.......... distributors........................................... How do you implement a similar system for an international book publisher based in Delhi? What are the technological advances that can be useful for this business situation? .... It is easier to retract lost customers than to find new ones............. Reengineering........................ ............................. Manufacturers will have to increasingly think in terms of delivering value to customers/end-users... The company’s challenge is to reactivate the dissatisfied customer through customer win..................... employees.. advertising agencies.................. organizations need to create distinctive competitive advantages continuously [3]....................... Strategic Issues The strategy of differentiation to satisfy specific customer requirements based on logistics performance/competency is becoming increasingly popular............... consisting of all stakeholders: customers.. It also results in strong economic......... Activity 3 “Li and Fung of Hong Kong has been very successful in a complex and competitive business environment by way adopting dispersed manufacturing. and this will require a complete rethinking in the way a company would need to operate it’s supply chain in the future.................................................. ERP Implementation and Supply Chain Management......back strategies..... fundamental changes in operational relationship are required........rather than between the companies. there is a pressing need of clear strategies to be distinctly different and unique.. In the present century....................... ................. All these improvements are necessary just to stay in the game................................. .......... The ultimate outcome could be building a unique company asset called a Marketing Network.................... The competition.. university scientists. 40 . dissected value chain and effective management of chain relationship” . Benchmarking.. The cost of attracting a new customer is estimated to be five times the cost of keeping a current customer happy.............................. Downsizing.... offering something different from their rivals.. Organizations have been rushing to implement the latest ideas on management and struggling to fit all the pieces together: TQM. if everybody is competing on the same set of variables. transporters and any other service providers........................ Cost Reduction..................... TPM.......... will be between whole networks... But......................... Apart from use of computers......................................... Therefore... and social ties among them and reduce transaction cost and time....................do you agree with the statement.............................................. information and communication technologies..................... retailers.................................Logistics and SCM : An Overview good service and fair prices to other parties over a period of time.... The emphasis is now shifting from making sales to building relationship....... technical................ then the standard gets higher but no company gets ahead.... that is not sufficient because.......... ... ... in future. High tech without high touch may not provide a long-term differentiator......................

phased nature of decision-making cycles in the business world. These tools should be configured so that they are fully integrated. which will reduce implementation costs as well time-to-benefit [2]. It is important to clearly understand customer service deliverables when establishing Supply Chain Management strategies. Excellent customer service performance is likely to add value for members of the supply chain. Managing SC means managing across traditional functional areas in the organization and also interacts with customers and suppliers. intimately tied to the time. Therefore. One of the successful implementation of SCM as a business strategy was the cooperative alliance of Wal-Mart and Procter & Gamble. The inventory availability and customer response time of an organization’s service program may vary based on the prevailing market opportunity and competitive situation. This unit has discussed the customer focus in Supply Chain Management.7 SCM AS A CORE STRATEGIC COMPETENCY Logistics and SCM : An Introduction An effective marketing mix strategy integrates resources for these activities into an effort that maximizes impact on customers. It had deliberated on the key processes required to enhance customer focus in the supply chain 3. one must examine the scope of the decision being made. The cross -boundary nature of management called for incorporating SC goals and capabilities into the strategic plan of the company and use SC to achieve a sustainable competitive advantage [1]. made at each of the strategic. tactical and operational levels. SCM competency is a tangible way to attract customers. The SC problem is mainly a calendaring game. Many organizations have switched over from product focus to customer focus. 3. SCM attempts to satisfy time and place utility by ensuring satisfactory performance of timing and location of inventory and other related services. as well as the authority of the decision maker. who value performance on time and place. the solution procedures embedded in these tools vary. as per customer requirements in a most cost effective manner.8 SUMMARY Supply Chain Management competency contributes to an organization’s success by providing customers with timely and accurate product delivery.3. Both the firms individually committed to build SCM competency before proceeding with their joint partnership. Since decisions.9 SELF-ASSESSMENT QUESTIONS 1) How can customer service be improved by proper implementation of SCM? 2) What are the fundamental concepts on which customer focused marketing is built on? 3) Can you define Basic Customer Service? 4) Why SCM became an important managerial issue during 1990s? 5) Do you see any difference between a functional and an innovative product? How these differences influence the supply chain design and its performance objectives? 41 . differ significantly.

why and how this should be exploited. 1997. Janice H.pp1-31 Satyabir Bhattacharya.Fisher. Robert J. Obermeyer.The Integrated Supply Chain Management”. Walter R. pp: 105-116. APICS. “Making supply meet demand in an uncertain world”.Market Response System”. Case no. Vokurka and Karen L. and Closs David J. Harvard Business Review. Hong Kong style An Interview with Victor Fung”. Case No. October 1996. “Strategic Supply Chain Planning”. 3. 1/1/00. pp103-114 Marshall L. Alber.indiatoday.com/btoday/ 200010/plus/. 1996 Janice H. “What is the Right Supply Chain for your product?” Harvard Business Review. a firm has to review and re-orient it? 9) What are the salient features of Quick Response System? For what kind of product it has been found to be beneficial and why? 10) Briefly explain the “Accurate Response System”? 11) Which are the technological advances. September-October 1998. global and entrepreneurial: Supply Chain Management. pp: 1-7 Sumantra Sengupta and John Turnbull. Harvard Business Review. which are the organizational issues. pp: 49 – 58 Robert D. May-June 1994. “ Quick Response in the Apparel Industry”. and Ananth Raman..1991. “Integrated Supply Chain Management – A key to Effective Manufacturing in the next Millennium”. www.1993.9-593-111. Rev October 12. Buzzell. Third Quarter. Production and Inventory Management Journal. “Logistical Management. pp1-19 Joan Magretta. Hammond and Maura G. which have made possible the application of concepts like ECR and QR? 12) How the chain relationship can contribute to the success of SCM. Lummus.10 REFERENCES AND SUGGESTED FURTHER READINGS 1) Bowersox Donald J. 1998. Rhonda R.Hammond. “Vanity Fair Mills. pp83-93 Marshall L. . “ Fast. March-April. McGraw-Hill International Editions. Is it necessary to extend this relationship beyond the chain.Logistics and SCM : An Overview 6) State some of the strategies that are followed in implementation of Efficient Consumer Response (ECR).html. “ Seamless Optimization of the entire supply chain”. Harvard Business School. Rev April 24. pp: 28-33 2) 3) 4) 5) 6) 7) 8) 9) 42 . Kelly. to further achieve the objectives of SCM? 13) Do you think that there is a linkage between SCM and CRM (Customer Relationship Management)? 14) Can SCM be considered as a strategy for differentiation? If yes. Harvard Business School Publishing.Fisher. IIE Solutions. 7) How ECR can facilitate building customer relationship? 8) In order to achieve benefits of ECR.9-690-038.

Indira Gandhi National Open University School of Management Studies MS-55 Logistics and Supply Chain Management Block 2 DESIGN AND MANAGEMENT OF SCM Unit 4 Logistics : Inbound and Outbound Unit 5 Models for SCM Integration Unit 6 Strategic Supply Chain Management Unit 7 Organizing for Global Markets 5 25 40 56 .

Sanjay S.Batra FORE School of Management New Delhi Prof. 2000) Prof. IIT.L. Himanshu Kumar Shee. New Delhi Paper Used : “Agrobased Environment Friendly”. New Delhi Prof. Mumbai Course Preparation Team (2004) Prof. Dept of Fertilizers. IGNOU Prof.Expert Committee (as on 24th March.S. Karol Bagh. Himanshu Kumar Shee (Course Co-ordinator)-On leave School of Management Studies. New Delhi Laser Composed By : M/s. Mumbai Mr. Sandeep Biswas Institute for Integrated Learning in Management (IILM). SOMS. New Delhi by Director. Mumbai Dr. Anurag Saxena (Course Co-ordinator) School of Management Studies IGNOU. N. Jharsuguda Mr. United Phosphorus Limited. School of Management Studies. of Management Studies Indian Institute of Technology New Delhi Prof. Ministry of Chemical & Fertilizers. . Bhubaneswar Prof N. Biplab Dutta Vinod Gupta School of Management IIT. New Delhi-110068. Indian Institute of Technology Bombay.Logistics. Kharagpur Dr. B. Deepak Jakate. SOMS. Headquarter 4 Corps Mr.K. IGNOU. N. ) (Retd. New Delhi Print Production: December. United Phosphorus Limited. IGNOU. Tessa Media & Computers. of Industrial Engineering and Management IIT.Sahay. without permission in writing from the Indira Gandhi National Open University. Sarai Jullena. Kaushik Sahu Xavier Institute of Management. Khanna Director. IGNOU Dr. Ravi Shankar (Course Editor) Dept. IGNOU. J. General Manager . Banwet Dept of Management studies. Narasimhan Director. Amarlal H. Sambandam NITIE. Mumbai Dr. 2004 ISBN-81All rights reserved. Further information on the Indira Gandhi National Open University courses may be obtained from the University's Office at Maidan Garhi. King Kraft. Management Development Institute. Kaushik Sircar Assistant Quarter Master General Operations & Logistics. Mumbai Dr. Printed and published on behalf of Indira Gandhi National Open University. Gurgaon Prof. Mehta School of Management.Logistics. Sushil (Course Editor) Dept.Karuna Jain Shailesh J. Mumbai Mr. Cover Design by M/s. New Delhi Mr. Deepak Jakate General Manager . Sambandam NITIE. IIT Bombay. by mimeograph or any other means. Krishi Bhawan. S. Mumbai Prof. Delhi Prof. (Coordinator) School of Management Studies. New Delhi Prof. New Delhi Tilak Raj. Kalro IIM Kozhikode Calicut Dr.O. B. Mehta School of & Management. IGNOU New Delhi Dr. Atanu Ghosh Shailesh J.(P). Mumbai Prof Sadananda Sahu Dept. of Industrial Engineering Shailesh J. New Delhi Prof . Atanu Ghosh Shailesh J. B. Kharagpur Management. Indian Institute of Technology Bombay. D. IIT Bombay. D N Srivastava Advisor ( Training & Safety) & Head of Distribution Deptt. Satish Kumar Director (Movement). 2004 ã Indira Gandhi National Open University. Mehta School of Management. No part of this work may be reproduced in any form.) in Cement Group M/S Larsen & Toubro Ltd. IIT. Kharagpur Lt Col. Gaur Prof Sadananda Sahu Dept. Mehta School of Management. V. of Management Studies Indian Institute of Technology.

It finally elucidates Bullwhip effect and illustrates measures to counter them. It helps you to be acquainted with the issues in supply chain domain and strategic decisions in the supply chain. It discusses supplier alliances and illustrates supplier quality management and related problems. Finally it describes Logistics from supplier to manufacturer & manufacturer to consumers Unit 5: Models for SCM integration delineates SCM integration & describes strategies involved in SCM integration. Unit 7: Organizing for global markets begin with defining World Class Supply Chain Management (WCSCM) and International SCM.Inbound & Outbound begins with defining Logistics. information flow and cash flow. It also has a discussion about organization for global markets & global sourcing. . A talk on the subject of Inbound & Outbound Logistics is initiated. Unit 6: Strategic Supply Chain Management thrash out the imperatives for supply chain strategy development. The unit highlights the relationship between material flow. Transportation & Warehousing. It illustrates models for integrating supply and demand chain. It portrays the facets of Logistics i. It discusses international logistics and globalization. It characterizes demand management & visualizes real demand. It also gives explanation of supply chain re-engineering concept.BLOCK 2 DESIGN AND MANAGEMENT OF SCM Unit 4: Logistics . It closes by explaining world-class logistics management & interfacing of logistics. It renders Logistics as a key to supply chain management. The unit tries to identify the steps to be initiated before going global.e.

Design and Management of SCM 4 .

a logisticians phone never stops ringing. It entailed traveling long distances from Calcutta (now Kolkata) to the remotest parts of Bengal & Bihar (some areas of Jharkhand).e.3 4.5 define Logistics. Rightly said. portray Logistics as a key to supply chain management.5. in recent times to be successful logisticians a wider perspective has to be developed with due consideration to the strategic role played by logistic management in an organization.5.UNIT 4 Objectives DESIGN AND MANAGEMENT OF SCM Organizing for Global Markets After reading this unit you would be able to: · · · · · 4. those were the days when it had only a few brands to reckon with. he moves from crisis to crisis.1 4. Structure Introduction Logistics: Definition What is Supply Chain Management (SCM)? Design and Management of SCM Logistics: Inbound and Outbound 4.2 LOGISTICS: DEFINITION We will begin with an illustration. as nothing more than getting the right product at the right place in time and within costs. Transportation & Warehousing.6 4. Take the case of a small time businessman who manufactured and marketed jam.4 4.2 4. and describe Logistics from supplier to manufacturer & manufacturer to consumers.9 4. describe the facets of Logistics i. and from one criticality to another. Logistics is a very intricate yet a very simple subject to learn about. Logistics per se. storage of raw materials. Strategic management of acquisitions. discuss about Inbound & Outbound Logistics. However. movement. but a very complicated subject in case the channels of logistics are not in place and not integrated.11 Logistics Management Integrating Logistics Perspectives in Logistics Summary Self Assessment Questions References and Suggested Further Readings 4. require a lot of coordination and integration at the highest and the lowest of levels.10 4. The load used to be 5 . production and shipment to delivery to end-users are some of the significant tasks of logistics management.1 INTRODUCTION The role of logistics has for long been perceived by many senior managers and chief executives.8 4.7 4.2 Suppliers to Manufacturers Manufacturers to Consumers 4. Cost-effectiveness and speed are the inherent requirements to make the operation a successful one. 4.1 4.

Right from the time you used your tri-cycle to lug the loads your friends carried. How? Once a logistics decision is taken. Therefore. distribution points and transport systems. This would further enable the management to review the number of production options available whether it is manufacturing of components. In almost all cases. packed them into neat containers careful enough to prevent breakages. customer profiles.1: Once you have generally understood the basics of logistics we can now inch forward to the intricacies involved in making this logistics happen and what helps in a successful logistics activity. For a manager the definition would mean involving movement of goods both in the inbound and outbound sides. It is responsible for both incoming goods and distribution of goods to the next member of the supply chain and to the end consumer per se. and later delivered them to another friend and took a few marbles in return of those proud possessions. in a nutshell one has to understand the importance of logistics and its related decision. inadvertently. A logistic activity enables a broader view that has to be undertaken on how the available opportunity can at best be approached.Design and Management of SCM huddled up at the rear (body of the vehicle) neatly packed in bright colored cardboard packages. You must have observed how meticulous he was and so concerned about his products. marked them for the consignor and dispatched them to their destination. Logistics can play a major role in shaping and determining the nature of the overall corporate response to exploit market opportunities (Deshmukh & Mohanty. overall potential of the market. only when. material. unknowingly. 2004). The manufacturer processed the guavas/mangoes/pine-apple etc into a jelly like substance. A soldier can fight a battle in the adverse of conditions. Coming to the proper definition. and stocking them for a further use. the term logistics could be used to cover all aspects of movement. equipment and supplies over long distances across the length and breadth of this country. high level of services in terms of product availability and delivery. the logisticians design and manage the company’s distribution system. That is what is logistics in short. ration and ammunition in all weather and terrain conditions. One must admit here that one learn logistics in a very practical way. The important characteristics of this decision process concern the relationship between fixed and variable costs ab-initio and also through the product life cycle. Failure of logistics will affect your company repute and overall affect the market share. When you played as children. since it’s the key to effective supply chain management. without which logistics is seriously affected. the implications of that will be. bottled them carefully under his eyes. Let us see this through an illustration fig 4. Till date one is doing almost the same thing. the response of the product competitors and an assessment of market risk. mobilizing men. since. Logistics can make or break a company. The two major aspects of logistics are transporting and warehousing. Marketing forecasts precede exploration of market opportunities. stacking your belongings neatly and carefully. The surplus were sent to a badly lit room and stacked neatly by placing bricks under the packages to prevent against damp. storages of material and to deliver the material to the user. the logistician ensures timely supply of stores. assembly operations or a combination approach. labeled them. which consists of warehouses. price/volume combinations and resellers profile is to be identified before the best suited infrastructure is utilized to maximize the opportunities available. This will require a view of the markets. sealed them with molten wax (that was the practice those days). and also the first step towards building a strong market position. 6 . Like in the army it is said that no war can be won without the foresight and planning of an expert logisticians.

It also permits deeper penetration of newer markets far from the point of production. It can also be said as movement from one node of the supply chain to the other. pp. 40 35 COMPANY GROWTH 30 25 20 15 10 05 00 05 PRICE LEVEL 10 15 20 COMPANY EXPANSION 25 30 OPTIMUM 35 40 COST TRANSPORTATION SYSTEM CUSTOMER SATISFACTION PRODUCT Fig 4. both inbound and outbound.1: Basic Block Diagram to Understand Logistics Transportation Transportation happens to be the most fundamental part of strategic logistic management. Transport costs include all costs associated with movement of products from one location to another.2 Transportation Cost Factor and it’s bearing on the Company and Customer 1 Mohanty & Deshmukh in Essentials of Supply chain Management.”1 Therefore. As Deshmukh and Mohanty (2004) says. The average transport costs ranges from 5 to 6% of the recommended retail price of the product.2). materials and services from one area to another. Transportation is the movement of products.DIRECT MOVE OF RAW MATERIALS Organizing for Global Markets OUTLETS BY DIFFERENT MODES OF TRANSPORT PRODUCT PROCESSING IN-DIRECT WAREHOUSING & STORAGE CONSUMERS MOVE OF RAW MATERIALS BY DIFFERENT MODES OF TRANSPORT OUTLETS Fig 4. chapter 7. 7 . “ by providing for the swift and uninterrupted flow of products back and forth through the chain. transportation provides a sort of lubrication to run the chain smoothly. leads to company growth (Fig 4. in order to effectively manage this transportation system the first step would be to establish a cost effective transportation mode. In other words highest customer service in lowest price. 118-119.

which is directly proportional to the customer satisfaction. Next we have to see as to what are the considerations that influence transportation?2 Considerations Influencing Transportation · Customer Communications: in order to obviate delays in transportation and handling of logistics both the suppliers and distributors are relying more and more on electronic transfer systems. which involves physical movement of goods require transport services that varies from mode to mode. Companies therefore have to consider a trade off between price & quality and the costs involved in delivering to the processing point. which will directly affect the customer satisfaction in a negative way.e. reliability and availability. numerical 40 is a variable factor representing the optimum level in terms of costs & growth in X & Y axis. which means extended delivery distances and increase in delivery frequency. 119-121. Your foresight. chapter on Transportation in SCM. i. With the transportation costs coming down from 40 to 30 the product costs lowers to even between 10 and 5.’ says Mohanty & Deshmukh. The product per se will influence the economics of the decision.Therefore. in order to identify the right transport system the following have to be considered: · · Impact of the transport system on the supply chain. i. A low volume and high value product will be able to support higher costs. The three factors as mentioned by Gattoma & Walters required to consider are: · · · Customer Environment Product & company. failure to identify the best transportation mode can directly affect the growth of a company.Design and Management of SCM Where. Sourcing Decisions: the geographical dimension of the source markets can be influenced by low cost transportation system.e. Organization. This will help in considerable reduction in time delays and effect better cooperation between the chains. Transportation system has a strategic bearing on operation of a company. flexibility & integration of available resources in planning stage will be one of the crucial factors that will dictate the choice of transport. and rectify in case you went wrong the first time. Higher transport costs will raise prices. Market Coverage: transportation costs influence the size of markets covered in a big way. The characteristics are: costs. · · · · · · Who are the customers to your product per se? What are the environmental factors? What is the product? What is your company profile? Feedback and reporting both from within and the environment on the choice of transport. ‘reliable bulk freight services could extend the source markets. IT & the internet. The best suitable mode is required to be identified depending upon the nature of product that has to be moved. flexibility. which rises to 30 to 35 and affects company growth to 40. . volume & cost of transportation. Factors that determine the choice of transport mode. pp. · · 2 8 Mohanty & Deshmukh in Essentials of SCM. Therefore.

e. near to the customer hub center. Therefore. together with an in-depth evaluation of overall corporate implications is mandatory. The financial option that could be employed in terms of individual type of equipment. Therefore. selection of the appropriate transportation mode will have a direct bearing on the product costs per se. an understanding of costs and benefits of alternative transport modes. Stage IV: application of matrix analysis for selecting the right transport. The operation needs in terms of usage of the equipment for maximum utilization and minimum operational costs. Moreover. pp130-131. because they impact the customer services and other areas of cost. the type of market will also dictate the decision and will vary considerably. Increase in transportation costs increases the product pricing. Organizing for Global Markets · · An Effective Selection System Transport selection can effectively be resolved by adhering to the five stages of selection framework:3 · · · · · Stage I: identification of those factors affecting the choice of transport selection. The best choice of mode available depending on the distance involved. Stage V: measure and monitor costs continuously. That is why. A Decision Framework Determining an organization’s transport requirement will be based on the following underlying considerations: · · · · · · The available depots.· Manufacturing Operations: cost of transporting has a direct bearing on the location of the manufacturing market center. since speed is more important than cost in selecting the transport mode. Therefore. Stage II: categorize the significant factors and identify the potential risks. Customer Service Decisions: both customer service policy and transportation decisions go hand in hand and hence one cannot be considered in isolation of the other. Product characteristics that will further dictate the type of transport mode to be employed. extraction based units are close to the source of raw materials and the products related to customer satisfaction are closer home. with more relevance to exports. Transportation costs will always have a direct bearing on the product 3 Deshmukh & Mohanty in Essentials of SCM. These decisions are prominent within the purview of company logistics decisions due to the factor of trade off potential that exists between alternative modes of transportation and other logistics functions within the firm. Pricing Decision: transportation happens to be the important component of product costs. their sizes including movement requirements of raw materials to manufacturing units and finished products to the warehouses and on to the consumers. i. its pertinent to overrule the cost factor while servicing the medical customers. The choice of equipment in terms of type of transport for each requirement. 9 . From the above its evident that transportation is one of the important facets of logistics and equally important in the process of SCM. Stage III: determination of the distribution network depending upon the number and size of the depots.

It can also be defined as: · · 10 An integrated system that helps in managing the flow of distribution channel from supplier to the consumers. Selection of the best alternative. increased transport costs will have risen prices and vice versa. storing and shipping. appropriate selection of the right transport mode is necessary for optimum customer satisfaction and for a balanced logistics system of the firm. since this is related closely to worldclass supply management.Design and Management of SCM costs. Warehousing: This happens to be the other important facet of logistics chain and works side-by-side with transportation.e. 4. equipment and manpower availability and transport capacity. location and disbursement. The management of this includes the maintenance of accurate and timely information relating to inventory status. Alternate warehousing plans to meet contingencies in strategy.e. Factors influencing the warehousing decisions are: · · · · · · · · Type of distribution.3 WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)? A simple definition would be. This maximizes customer services by improving product and location positioning. Quantity and potential for obsolescence. Transfer of information. space utilization. Competitiveness. i. In order to develop an effective warehousing strategy the following areas have to be addressed: · · · · · · Documentation of existing warehouses operations. SCM is a systematic method designed to manage the flow of information. It consists of receiving. Managers at all levels should understand this. i. With that as a backdrop to our study let us see the design and management of Supply Chain Management. an integrated. synchronized and a closely knitted chain which links all the supply interacting organization in a two way communication system in order to maintain a high quality of inventory in the most effective manner. Identify the shortfalls within the warehouses that are available including the deficiencies. Update the warehouse strategic plan. Therefore. Documentation of the storage facilities and put forth requirements over the planning horizon. since logistics happens to be the key of SCM. Storage. Warehousing perform a variety of roles as mentioned below: Material handling. materials and services both inbound and outbound. . Economic condition. This ensures timely and accurate information on inventory status. Value of the firm. It is that segment of logistics function that deals with storage and handling of inventories starting from supplier receipt to consumption point. from the supplier to manufacturer to the end customers.

The common factor to all this is one has to go beyond the realms of traditional functioning to include and integrate external entities to include customers and suppliers.3 : A Layout of An Ideal Processing Unit Explaining the Supply Chain 11 . It is associated with all the activities encompassing the upward and downward movement of goods and materials from the nascent stage to the production stage and to the consumer. design. technology. manage and implement value added services towards ultimate customer satisfaction. in order to improve performance of the individual companies and of the supply chain. finances and material under one roof is the ultimate aim of this SCM system. The Chocolate Way You manufacture a particular brand of chocolate. Now. Integrating men. SCM is integrating these activities under one control for better management and for attaining substantial and sustainable advantage. It’s a concerted effort of all in the channel to develop. It can be better achieved through better coordination and relationship. 4. in order to make your product responsive and hold fast into the competitive market you got to maintain a close link with suppliers who will provide the best milk COMPANY MANAGEMENT SUPPLIERS PRODUCT DESIGNER PRODUCT MANAGER MANUFACTURER WORK FORCE TRANSPORT SYSTEM PROCESSING UNIT FINISHED PRODUCT CHOCOLATES LABELLERS TRANSPORT SYSTEM PRICING CONTROL WAREHOUSES STOCKISTS MILK SUGAR COCOA BUTTER FAT SALT TRANSPORT SYSTEM DISTRIBUTORS DISTRIBUTORS DISTRIBUTORS CONSUMERS CONSUMERS CONSUMERS Fig.· · It’s a strategic coordination of all the related business functions within a particular firm and across businesses within the supply chain. a popular one with all age groups. For better assimilation let us put it across this way. information. Organizing for Global Markets · These varied definitions placed above are to guide you to understand the concept of SCM better and can be used as per individual perception.

................ since. Dobler & Starling Tata Mc Graw-Hill page 2....e................................... .......................... The generation of requirement phase is the most important of all the phases.................................. The principle phases of supply chain management are: · · · · What are the requirements and its generation? Sourcing Pricing Post-award activities These phases are all interrelated and interdependent and cannot function in isolation..... (figure 4............................ that one cannot function with out the other and all have to function in close unison and you.. the best coca powder for the flavor... ........ 12 . Integration of these services and managing them under one head is therefore the key to an effective supply chain system in the organization. 4.......................4 DESIGN AND MANAGEMENT OF SCM Internal functions and external suppliers constitute a company’s supply system.................... an effective marketing system and above all the vendor who will carry it and distribute it to my consumers.............. In case the supply chain is not positively been addressed there is bound to be problems in the firm... materials and key services in an optimized manner.................... Supply management is the foundation to successful supply chain management.............. which are involved in identification and fulfillment of requirement for equipment..... 1 World Class Supply management by Burt..... It involves a well conceived strategic planning and long-term tactical orientation........ ........................................ services and equipment is designed during this phase...................... .. so designed...... This is your supply chain and managing this to maintain a high quality at all times is called the supply chain management........................................................ However.................. and there is a world of difference between practicing and preaching.. almost 85% of the cost of materials............... .........Design and Management of SCM for your money...............3).................... as the entrepreneur has to ensure this........................ ....... i............... sourcing.. Activity 1 Visit a nearby industry and understand the SCM system being followed in that organization and co-relate the same with what you have learnt theoretically. It can create a tremendous impact on any company’s bottom line more than any other business function................................................................................. Once you have understood this part of the unit the associated and related matters to supply chain will follow suit.................................................. It is a linkage............. the irony is that supply management is not a contributor to this phase in particular but assumes greater role for the next three phases......... A few flow diagrams have been placed for your better understanding....................... an efficient product manager with an equally trained staff who will design and manufacture what the market requires................................................................................ pricing and post award activities4 ........

It is a critical activity that terminates in identifying the right and the best material along with development of specifications and statements of work that describe these requirements. to the tune of almost 85%. technical assistance and management of the complete contract.Let us now see the four phases of supply management and how best can this be obtained by interfacing each one of them with the other. Therefore in order to ensure appropriate consideration to the services. materials. The exodus of materials. dependability. 83-91 ‘The Foundation’. All the sub phases are inter-related and managed under one head the SCM systems. For example. 6 13 . whose costs. 16. This also includes supplier developments. If the supplies are costly the price of the commodity also rises. Let us see this more closely with this block diagram. pp. That is what are the principal phases of supply chain management (SCM). the transportation cost increases leading to increase in prices of supply.6 Pricing It’s a two way traffic aimed both at the supplier and the manufacturer. pricing forms part of the on-going process in supply management with inbuilt negotiations. It also ensures that the prices are in check and that quality is being maintained. criticalities management. Then what? The mental appreciation quickly says thems following: Organizing for Global Markets · · · · · Budget: How much money can you spend on a system? Brand: Which is the best brand available in the market for the budget you have? Availability: Is it readily available too? Services: In case it is available how are its after sales services? Final selection: What is the best that suits all the above? That is exactly the appreciation one got to do before sourcing. Foresight and planning on the part of the manufacturer plays a leading role in assessing and reacting to such eventualities in a big way. and how do you get them? It is a question that is continuously lingering in the minds of all managers involved with this. when the prices of diesel goes up. supply management should be involved right from the word go during generation of requirement phase. chapter 1 of WCSM. quality and services suits the manufacturers requirements. pp. Harvard Business Review. to arrive at the best deal possible. by Burt. Therefore. Identifying and selection of the best supplier available in the market. Generation of Requirements As an entrepreneur what is your requirement. you have to buy a Music System for example. It’s done in such a way that it benefits the supplier for its effort and also results in lowest cost for the firm who buys the supplies. raw materials and costs per se. 5 “Manufacturing by Design” by D Whitney. in order to strike a balance the job of supply management is to continuously monitor this aspect so as to keep the prices from rising. Sourcing is development of a supply alliance. services and equipments are ‘designed in’ during this particular phase5 . Sourcing When one decides to go shopping just try and visualize what all plays up in one’s mind? Say. and it is an activity by itself. Post pricing This is another important phase which ensures that the firm receives what it demanded. Keeping in mind inflationary trends. July 1988. and that too timely.

5 LOGISTICS : INBOUND AND OUTBOUND Let us now take a closer look at the logistics both inbound and outbound. Identification of the right type of suppliers is therefore the key to effective SCM system. That is the reason contingency planning plays a predominant role in shaping our SCM system. labourer. suppliers.1 Suppliers to Manufacturers The most complicated. Can you envisage the various agencies and steps that are involved in this total system? Let us see them one by one.Design and Management of SCM GENERATION OF REQUIREMENT SOURCING MATERIALS SERVICES COSTS QUALITY TIME STATEMENTS OF WORK SPECIFICATIONS TECHNOLOGY POST-PRICING QUALITY QUANTITY TIMELY PRICE CONTROL PRICING LOWEST COST TO FIRM APPROPRIATE COST TO SUPPLIER Fig 4. Take for example 7 days trucker’s strike in 2004. manufacturers and the consumers. It was bad for economy of the country and above all worse for those manufacturer’s who couldn’t deliver goods on time.5. A strike or a bandh as we call it in India is a happy situation for the fleet owners but a bad time for the drivers. 4. mill owners. the most important phase in any production is the movement of raw materials from the supply point by the suppliers to the manufacturing unit. yet. small timers. So why give the consumer a chance? Plan it in a way that you ensure both quality and quantity in a reasonable time frame. How. 14 · · · · · · What is the raw material that has to be moved? What is the cheapest and the best available with the suppliers? Where is it available? What are the credentials of the supplier? What is the mode of transport being utilized for the move? Is it cost effective? . Let me tell you this is the most intricate part of the system of SCM.4: The Principles and Phases of SCM 4. If your goods don’t reach in time and they are of inferior quality you as an entrepreneur earn a bad name too. let us see.

Production time of 1 to 2 days depending on the type of product works out to 7 ½ / 8 ½ days. i. That is what is an effective SCM system to be followed by every firm. but Cannot be ruled out Available in plenty Desert A mix of good and bad going Medium Rare but at times over speeding results In damages Repair facility restricted to highways only Very rare. Keeping a cushion of 1 day the time taken for the finished product will be anything between 9 to 10 days. to avoid irregularities. Let me be more specific in saying so. bandhs. There could be a number of examples related to movement of stocks and supplies. The road distance works out close to approximately 1600 kilometers. That is the planning involved in making a finished product and achieving your target. As per Indian road conditions it could take anything between 3 to 4 days for the material to reach. road or air. accidents and unrest. prone to severe breakdowns Repair & Recovery Calamities Floods. which is famous for lot of ores and raw materials responsible in shaping our products. Thereafter quality checks and various processes to place these raw materials on the production line will take another 2 days works out to 6 ½ /7 ½ days. riots & strikes Frequent disruptions owing to congestion of population centers 15 . Slides. Some minerals from Sasaram have to be moved to Surat in Gujarat for making some product ‘Y’. One has to cater for these criticalities and therefore foresight in planning is must.e. Suppose there is flood like situation at Sasaram. Table 4. 4th/5th day the truck will reach Surat. All have their complexities and peculiarities.1: Terrain-wise Criticalities Criticalities Going Conditions Time Factor Prone To Mountains Hilly roads. running time works out to 4 ½ /5 ½ days. An Illustration A material ‘X’ has to move from Bihar. These are the gray areas that have to be addressed in totality. Frequent breakdown Road Blocks. Losses in supplies Difficult. quite a lot as per Indian standards. Accidents Related to population Rare. Therefore the total time works out to D+3/D+4. Faster mode Fastest Lesser magnitude. water. that too in great detail. then what? One has to plan for warehousing near Surat where certain stocks catering to these kinds of contingencies have to be catered for. man made obstacles. That is under absolute ideal conditions. Like floods there could be strikes and bandh too. Flash Floods Plains Smooth Going. disasters. Let us see this with an illustration. Unloading time ½ a day. but the underlying basics are the same one has to plan ahead come what may. be it rail. bandh and Strike. Bends & Zigs Slow Severe accidents. since population centers are far apart Link Roads Rough and slow Very slow Loots. India is subjected to numerous disruptions in form of natural calamities. ab-initio.· · · · · What is the time factor involved in the movement? Does weather and climate play a predominant role in moving the raw material? What are the terrain conditions in the areas from where it has to be moved? What is the distance involved? Is it of acceptable quality? Organizing for Global Markets All these have to be addressed before one plans for movement of these raw materials. apart from the fact that the vehicle could also break down en-route. A truck loaded with X leaves Sasaram on D-day (where D is 1).

tractors..... The various criticalities pertaining to logistics in rural areas are: · · · · · · · · Large quantities and more number of collection points....... These are to be consumed round the year....... .. which enjoys a rare mix of both urban and rural pockets at regular intervals......... A mix of intermediaries and direct delivery.......... In mountains the criticalities are far too many and you can understand the aforesaid through this chart in a better way........ Trading in rural areas is difficult and risky too............... Trips are generally one-way and hence not cost effective......... since..................................... From the above it’s evident that criticalities in any form disrupts movement in a big way irrespective of the terrain but you got to plan your time schedule depending on the terrain on which your supplies are moving............................. The various storage places available are: 16 .. ................ Let us discuss them for a while........................... and expendable and have inferior packaging......... movement and packaging of agro products are difficult and time consuming................... logistics are restricted to peak seasons only...... perishable....................... Studies on geography and layout of an area of responsibility and related aspects are therefore important for a manager dealing with logistics.......... Activity 2 Study the aspects of terrain and its implications on logistics management. Storage starts right from the time the harvest is ready till its distributed to the consumers........ Storage in rural areas is another criticality due to restriction in storage areas and because the agro produces are seasonal in nature.. Visit a few places in the hilly and mountainous terrain and understand the implication of these areas on logistics management...................... cycles and bullock carts..... Storage............... Actually most of our supplies move generally from these rural areas and hence you should be aware of these areas in a nutshell.................... boats............... ............ knowledge on these areas is very important so that the suppliers cannot take you for granted on these counts....................... but these are the salient ones and you as a manager have to understand this aspect............... Certain places have to be communicated through handcarts... Therefore............. Materials are bulky.............. both in season and off-season.................Design and Management of SCM Movement of supplies from suppliers to manufacturers differs from place to place. Differences in Urban and Rural Areas India is one such country.......... Uniformity in work is missing................ .... Distance between the manufacturers and users are large..... That is the lay of Indian society and hence one has to understand and be live to the problem........... Terrain plays a predominant role in this aspect and you have to realize this point...... Rural areas require tremendous amount of logistics supply and coordination to make the SCM system effective......................... There are many more to this depending upon the nature of terrain and climatic conditions too..............................

.................... With the processor..... cycles........... Wholesaler.......................5: Rural Area SCM System Activity 3 As a student of Logistics suggest a few practical viewpoints..... .................................................................................................................................................................... Organize a visit to a rural area factory and carry out a feasibility study on how logistics can be improved for better response...................................................... National highway accounts to nearly 5200 km.... ...................................................... which differs urban from rural logistics............. Transport in these areas is still primitive in nature............................................ ....... starting from bullock carts.............................. This is due to bad roads and roads connectivity......... 17 ............................................................................· · · · · · · At the farm itself....................................... ROADS SOURCE WAREHOURSES PRODUCE FACTORIES GOODS MARKETPLACE CONSUMERS CENTRAL POINTS A RURAL AREA SCM SYSTEM: DEPICTING MOVES OF GOODS EX SOURCES TO THE MARKET PLACE Fig 4... ............ Actually movement of goods from rural areas becomes expensive due to its handling costs and number of organizations involved in it.... hand carts... boats.................................. ............................ . Retailer............ Bins and self-help store rooms under stringent conditions... India has one of the largest road networks in the world with approximately 2........................ which is barely 2% of the total roads in the country......... both in terms of management and maintenance.... Organizing for Global Markets The shelf life of these items generally the farm produce are very less and hence planned infrastructure has to be developed for proper storage facility like the cold rooms....................................... Let us see it with an illustration........................ ............................... Village collection centers/collection points.......................... animal transport and even stragglers.................................................5 million kilometers of road network........ rickshaw van............ Market place/selling points.........................................

From the above it’s evident that a manufacturer in the rural area stands at a disadvantage visa-vie his urban counterpart for the following reasons: · · · · · · · Movement of raw materials. . The supplier’s job is to supply the goods in the time frame and price that is fixed initially. for better and even time management. Transport system. Manufacturing takes lesser time in production and distribution thereafter. But the basic stages of these companies too move through pre-designated franchises and not directly. Delivery to the nearest wholesalers. Storage facility. the process is certainly different since. Unlike rural areas the suppliers in the fastest mode deliver the material and services in order to save on time. Wholesalers to retailers. though at times the carriers perforce move through difficult stretches of rural areas. 18 These 7 steps are like any of those 7 days. there are direct marketing that the companies are following these days. air and road at places even waterways. To consumers. What happens in urban areas? Let us see. · · · · · · The procurement is done generally closer home and very near to the towns and cities.2 Manufacturers to Consumers Let us now visualize the various stages involved in moving the finished products from the manufacturing units to the consumers. The company management generally contacts the supplier who has nominated go-downs close to the place of manufacture. 4. It’s difficult to skip one to save on another. They are: · · · · · · · Packaging of goods. Things move more systematically and less time consuming. Yes.Design and Management of SCM Urban Areas Coming on to urban areas.5. Preservation. it doesn’t have to go through the exercise of moving through bad roads too often and poor storage system. Hence. A better market available to the manufacturer for his goods. Loading into carriers/transportation. generally a mix of urban and rural areas. Production. the time taken or cost per se generally remain the same. Availability of market. In a nutshell the SCM involved in managing a rural enterprise is more cumbersome than the urban one. Retailers to market places/stores. Stocking them in warehouses/containerization. Distance from source to market area. but they are numbered. a combination of rail.

6: Problems Involved in Logistics Support From the above it’s evident that labor’s unrest is generally common in the complete process and an effective SCM in position can only help reducing these miscalculations and criticalities. Logistics both inbound and outbound is very intricate in nature. Natural calamities and strikes do pose a problem for the manufacturer and indirectly increases the cost of items ultimately available to the consumers. Let us see this with the help of a diagram.4. Accidents and calamities. A consumer sitting at the comfort of the room cannot virtually visualize how a packet of toothpaste reaches him every time he uses it. and this is what is shown in the diagram above (Fig. What is therefore your ultimate aim in this process of SCM? It’s the response of the consumer for whom you made this happen. TRANSPORT SYSTEM MANUFACTURING UNITS PILFERAGE WAREHOUSES DISTRIBUTORS RIOTS & STRIKES PERISHABLE BREAKAGES LOSSES ULTIMATE AIM LABOUR UNREST WHOLESALERS RATS & RODENTS MARKETS/STORES CONSUMERS RETAILERS NATURAL CALAMITIES RESPONSE OF THE CONSUMERS EFFECT ON COSTING Fig. General costing since at times even double handling is involved. Losses in transit. What actually happens on ground can only be realized by him who makes it happen that way. Rats and rodents. 4. (figure 4. Labor unrest. and side-by-side what is the effect of the problems and criticalities on your product? It affects the costing per se.6).Problems envisaged in movement of products from manufacturing units to consumers are many and can be listed as under: Organizing for Global Markets · · · · · · · · Perishable products. Unavoidable delays in terms of strikes and bandh.6). Once you start thinking on it the various questions that arise are: 19 . Breakages during handling.

your ultimate aim? All of the above are interlinked and have a direct bearing on the net output of the firm. As discussed earlier that the logistics professionals play a vital role in shaping the success of SCM as regards .7: Three Components of SCM The three critical components of SCM are: · · · Supply management Demand management Logistics management 20 You would learn about the supply and demand part of SCM in next unit and would discuss on logistics part of it now.6 LOGISTICS MANAGEMENT Before we went on to this let us see the triangle that is formed in the supply chain management (SCM). 4. then what? How do you transport the finished goods in the time frame available to you? How will your marketer’s distribute or market the products? What will be the response of the consumers to your product. DEMAND MANAGEMENT LOGISTICS MANAGEMENT Fig.Design and Management of SCM · · · · · · · · · · · · · Where does the raw material come from? Who supplies it to you? What is the best course available to you in procuring the right material with in the cost per se from the available options? Who decides on that? You and the management. An effective SCM system in place wards off any such minor shortcomings that can run into problems and criticalities later. How is the material moved and where to? How do you store this? What are the various contingencies involved in this? What if the stores don’t reach on time? What is the option available to you? What would be the losses in production? What would be the losses in packaging? If the production channel breaks down. 4.

since logistics is the foundation of SCM discipline and is responsible for its activities. movement. “ logistics is the part of supply chain process that plans. Logistics management deals with receiving.9) ROLE OF LOGISTICS TRAFFIC CONTROL & TRANSPORT MANAGEMENT WAREHOUSING & STORAGE TO INCLUDE INFRASTRUCTURE INVENTORY CONTROL & MANAGEMENT MATERIALS MANAGEMENT & HANDLING DEMAND FORECAST SERVICE SUPPORT SALVAGE MANAGEMENT & DISPOSAL Fig 4. services and finished product in an SCM system. Logistics is required both at the beginning and at the end of it. effective flow & storage of goods. Needless to mention here is that the transportation cost is the 21 . storage and delivery of material. implements and controls the efficient.9: Role of Logistics An effective SCM system will never be possible without the integration of logistics.8: Domain of Logistics As Coyle puts it. (Fig 4. Logistics include the following role (Fig 4. services and related information from point of origin to point of consumption for the purpose of conforming to consumer requirements”.8) RECIEPT HANDLING MOVEMENT STORAGE Organizing for Global Markets TO MANUFACTURER DELIVERY TO CONSUMERS Fig 4. We sometimes do tend to ignore the role of logistics but the supply and demand chain cannot be met without the integrated and close-knit support of the logistics. storage and warehousing.management of transportation. handling.

In case the planning fails the crackers will land up after Diwali to the dismay of many.e. depending upon the time it has to reach and the time in hand before it is required. which sells these. Where does the shopkeeper get it? He gets from the wholesaler. From the above it’s seen. Therefore. as to what all gets involved in movement of firecrackers. That’s dead stock and is of no use to the consumer. and how logistics play a predominant role in assisting the products to reach the consumers in time. · 22 Produce at Source: This will involve production near to the source of raw material and cheap labor. 4. Certain newer perspective in logistics planning and execution could be as enumerated below. which we shall see in the follow up unit. and you as the guardian have to procure them from the shop. warehousing of materials and delivery is time consuming and at times requires precision synchronization at all levels i.8 PERSPECTIVES IN LOGISTICS One has to continuously think and think rightly to get over the routine criticalities that are involved with logistics. so that closer to the festival the crackers could be utilized at once. Therefore. 4. you will find yourself in a quandary each time. therefore. logistics involves procuring and transporting of the raw materials required to make firecrackers from the source to the manufacturer and once again tran-shifting the finished products to the warehouses near to the target area. It will also involve lesser movement of transport and reduce double handling to a large extent. in order to serve them better and be profitable you got to tailor your logistics and ensure it to be more dynamic with passing time. from the source to the consumer.7 INTEGRATING LOGISTICS Logistics planning has to be integrated with material and capacity planning in order to achieve maximum and optimum level of satisfaction. When this is happening another set of crackers are in the process of moving from Shivakasi for the target area to meet any contingency. How does the company X stock the stockiest? The crackers are packed at Shivakasi and loaded in carriers. There are other disadvantages . Illustration Can you visualize the effort involved in moving crackers from Shivakasi in Tamil Nadu to Kolkata? A child who burst these crackers only have to demand them. from supplier to manufacturer and from manufacturer to consumer. but unless you understand the practical aspects and device methods to tackle them. The needs and requirements of our customers is variable and never a constant factor. What if the warehouse catches fire? That actually depends on the demand per se and supply thereof. The emphasis should be on reduction of cycle time and elimination of waste in order to increase customer satisfaction. and the wholesaler from the distributor/stockiest of that area.Design and Management of SCM heaviest in the entire chain. You have to understand that movement of goods. and even more than product selling prices. in order to maximize customer satisfaction and meeting firm’s goal it is mandatory to ensure that effective storage facilities for goods and services are in place. Theory will surely help you to understand the guidelines involved in logistics. when faced with a criticality.

........ like distance from the target population. ........ or an ideal combo approach...........................................................9 SUMMARY Logistics plays a predominant role in designing and shaping of SCM in a firm........... ............ certainly not more than hiring and facing the problems of trucker’s strike. You have something to call your own................................................... DY MANAGING DIRECTOR /CEO CHIEF LOGISTICS OFFICER (CLO) MANAGER STORES TRANSPORT MANAGER SUPPLY OFFICER COSTING FINANCES SPARES & SERVICES PROCUREMENT WING INVENTORY CONTROL DELIVERY CONTROL WING Fig.......... Organizing for Global Markets · Fleet Management: Can you think of managing your own set of transport? Yes.......... .............................................. Thinking of additional costs and expenditure? Yes.......... and incessant rise of carriage charges....... 4........... The key players of logistics activity that is transportation and warehousing has been amply discussed and will enable you to understand the nuances of selecting the right transport mode for the right product and equipment within the overall gambit 23 ... Logistic activity helps in enabling a broader view to be taken for handling the best available opportunity and how it is to be approached........in this though..... Integration of logistics network...... certainly you can.... Maintaining a fleet is cumbersome today........10: Showing An Integrated Logistics Organization And Inherent Reporting Activity 4 Suggest a new perspective to logistics management keeping in mind the present changing logistics scenario.................... But............... Logistics have to be integrated with the others in the firm for a better coordination............ this can reduce the basic cost of production considerably................................. ..................................... there are......................... Without an effective logistics system the effectiveness of the firms SCM channel is questionable......... which will involve more number of stocking points and areas....................... How? Let us see with the help of a figure.... But. it will help you immensely on a rainy day........................... If we understand and know the economics of logistics activities it is possible to review a number of production options that may include individual production (manufacturing of all components)........................... but if you can maintain a good sixty vehicles along with a minor repair organization........ assembling............ 4..

Mumbai (for basics of Logistics & marketing interface) Deshmukh & Mohanty(2004). Manufacturing by Design. simple and easy to comprehend) Simchi-Levi. Sage India Publishers Burt. Edith (2004). Himalaya Publishing House. 2) 3) 4) 5) 6) 24 . we have understood the designing and management of SCM and the key to effective SCM. Fundamentals of Supply Chain Management. Designing And Managing The Supply Chain. Jaico Publishing House. since the text pertains to Indian context. Tata Mc GrawHill D Whitney (1988). Tata McGraw-Hill Mentzer. the logistics. What are the stages for selection the appropriate transport mode and why? Why is transportation important in a firm’s supply chain? What is more important-inbound or outbound logistics in a supply chain? Give relevant examples of the problems involved in logistics activity. How can we overcome them? What is a supply chain and what is effective SCM? What are the factors that link supply chain? 4. pp. We have discussed the issues pertaining to move of logistics both in-bound and out-bound in the Indian scenario. Explain the various factors of logistics with special reference to transportation. Last but not the least. 4. Harvard Business Review. Essentials of SCM . Mumbai (should be included in compulsory reading. 83-91.10 1) 2) 3) 4) 5) 6) 7) 8) SELF ASSESSMENT QUESTIONS Define logistics and elucidate with appropriate examples in the Indian context. World Class Supply Management. Logistics Management & World Sea-borne Trade. within the scope of this unit per se. Philipsimchi-Levi. David Kaminsky. Dobler & Starling.Design and Management of SCM of cost effectiveness.11 REFERENCES AND SUGGESTED FURTHER READINGS 1) Krishnaveni Muthiah (2003). July 1988.

1 5.7 5. reduced bullwhip effect.8 5.2 5. which proposes a balance in the supply chain involving functional trade-off.1 1 Designing and managing the Supply Chain by Simchi Levi etal. highlight the relationship between material flow. manufacturers.3. Structure Introduction Integrated Supply Chain/ Value Chain Supply Chain Strategies 5.4 5.12 Demand Management Internet and SCM Physical Goods Flow. for example Stevens Model (1989). to the back-end of the supply chain.3 Push Based Supply Chain Pull Based Supply Chain Push-Pull Strategy 5. Supply chain management revolves around efficient integration of suppliers.9 5. Companies have realized over a period of time that integrating the front-end of supply chain.3. define demand management & visualize real demand. increased service level.10 5. various models have been proposed over the years in order to integrate the SCM systems. and effective response to market changes. 120 25 .3. information flow and cash flow. Virtual Flow and Cash Flow Bullwhip Effect A New Perspective to Counter Bullwhip Effect Drivers of SCM Summary Self Assessment Questions References and Suggested Further Readings 5.6 5.3 define SCM integration & describe strategies involved in SCM integration. The main challenge being coordination of the activities within the chain and across it for improved performance. illustrate models for integrating supply and demand chain.UNIT 5 Objectives MODELS FOR SCM INTEGRATION Organizing for Global Markets · · · · · 5.11 5. resource utilization. and therefore.5 5.1 5. reduced costs.1 INTRODUCTION The main objective of the supply chain concept is to integrate and synchronize the service requirements of the consumer/customer with the flow of materials from suppliers in such a way that any conflicting or contradictory situation rising can be balanced out. customer requirements/demands. TMH. warehouses and stores. high customer service. These conflicts could be like. These have to be balanced or optimized. low inventory investment and low operating cost.2 5. the production and manufacturing portions of the supply chain. p. and elucidate Bullwhip effect and illustrate measures to counter them.

facilities. material. there has to be utmost coordination and harmonization between the finance.1: Steven’s Model of Supply Chain Integration . Let us see these perspectives one by one.Design and Management of SCM Development of an integrated supply chain requires management of material and information flows to be viewed from three perspectives: · · · Strategic Tactical Operational. customer group or by a large customer? Stage 1: Baseline. information. At each of these levels. people and the system as a whole. 5.Elevation Attitude Based Material Flow Material Management Manufacturing Management Customer Service Distribution Stage 4 External Integration Material Flow Suppliers Customer Service Internal Supply Chain Customers 26 Fig 5.2 INTEGRATED SUPPLY CHAIN/VALUE CHAIN Integration of Supply Chain & Demand Chain can be seen from three angles as follows: Strategic Level: What should be the focus at the strategic level? · · · What are the objectives and policies for the supply chain and how can they be developed to achieve competitive superiority? How to develop the physical components of the supply chain? How to develop the statement of customer service intent by the product market. Elevation Principally Technology Based Material Flow Purchasing Material control Production Customer Service Sales Distribution Stage 2: Functional Integration Elevation Organization Based Material Flow Material Management Manufacturing Management Distribution Stage 3 Internal Integration .

5. the integrated planning is achieved by using the distribution requirement planning (DRP). the company becomes customer oriented by linking the customer procurement activities with its own procurement and marketing activities. Operational Level: the implementation level in the model.3 SUPPLY CHAIN STRATEGIES The various strategies that has to be followed for an effective integration are: · · 2 3 Push & pull Push-pull Mohanty & Deshmukh in Essentials of SCM. and also plant operating costs and batch volumes.· Developing an organizational structure capable of bridging the functional hurdles. Organizing for Global Markets Tactical Level: This focuses on the means by which the strategic objectives could be achieved. 120-122 27 . Stage 4 extends the integration to external activities. a connection and inter-relationship between the components of the supply chain has to be established and an integrated chain formed for utmost customer satisfaction. pp. The result is usually a lack of control across the supply chain function because of organizational boundaries preventing the coordinated decisions from achieving an overall customer service objective. The various objectives for each element in the supply chain provide the directions for achieving the balance within the supply chain. 8-10. The same is highlighted in the fig 5. Stage 3 accepts the necessity of managing the flow of goods to the customer by integrating the internal activities. its success is likely to be achieved by a bottom-up approach. etc. Steven’s comment concerning supply chain development is equally interesting. manufacturing techniques.1 (Stevens 1989): · Stage 1 is a situation in which the company approaches the supply chain tasks in discrete decisions with a responsibility lodged in each of the task centers. However. Stage 2 of development is denoted by the functional integration of the inward flow of goods through material management. The emphasis is mainly on cost reduction rather than on performance achievement and is focused on the discrete business functions with certain attempts at achieving internal trade-off between purchasing discounts and inventory investment. (Fig 5. 2004. IT is an effective enabler for this process.e. cost-effective product. This is also the supply chain development phase and the strategy and plans for implementation are evolved. JAICO.2 · · · The concept of value chain/supply chain management approach enables a company to react effectively to market swings and changes. This stage is essential before the company can consider integrating customer demand in an overall demand management activity. Customer service is reactive in this case. TMH pp. While doing so. i. manufacturing management and distribution. Implementation plans require a time-phased program for allocation of resources all through the supply chain. and aims at converting the objectives and policies so formulated into workable solutions. thereby ensuring an integrated value delivery based supply chain. JIT (just in time). which says while the impetus for the development of the strategy may be a topdown approach. In this stage.1). in order to get the optimum potential. It involves identifying the necessary resources with which the balance could be achieved. Supply chain integration by Kaminsky.

3 Push-pull Strategy This is an ideal mix of both push and pull strategy in which the first half of the system is based on push method and the remaining half as pull based.2.Design and Management of SCM 5. as regards the production and the distribution decisions are concerned. i. 5. based on average or peak demand? Therefore. since better anticipation is made on customer demands and the retailers Lesser inventory with the retailers A decrease in variability due to reduction in lead-time Decreased inventory with manufacturer due to reduction in variability.2 Pull Based Supply Chain In this type of supply chain the production and distribution is based on demands so that it can be effectively coordinated with true customer requirements rather than forecasts. enhanced resource management and a comparable reduction in system costs to push based system. In a pull based supply chain there is considerable reduction in inventory. the manufacturer bases demand forecasts in orders received from the retailer’s warehouses.e. exists somewhere in between this time line and denotes the time when the company switches from one strategy to the other as illustrated in figure 5. the end of the time line. Inventory in on firms following the pull system is negligible and it responds only to orders per se. Actually. The interface between the two models is push-pull boundary. For example a production manager is in quandary as to how to discern production capacity.1 Push Based Supply Chain Long-term forecasts are the backbone of a push-based supply chain model. 5. Moreover. In order to comprehend the strategy better you have to consider the supply chain time line. Typically though. pull based systems are difficult to implement when lead-time are long and it is not practical to react to the demand information. This is further coupled with fast information flow mechanisms on customer demands to the various components of the supply chain. At the same time. due to need for emergency production change-overs. This system is more attractive in nature because. an integration of push and pull system. since the systems are not planned well in time it’s difficult to take advantage of economics of scale in manufacturing and transportation. it takes much longer for the push based supply chain to react to the changing marketplace. higher inventory levels and higher manufacturing costs. Taking these advantages and disadvantages into consideration the companies have formulated a new system ‘the push-pull’ system. Should it be based on peak demand or average demand? Similarly it is not clear as to how to determine the transportation aspects. The push-pull boundary. a push based chain we find extra transportation costs.3. because planning and managing is (to be discussed later in this block) more difficult. The obsolescence of supply chain inventory as demand for certain products disappears.3. that is. which may lead to3 · · Inability to meet changing demand patterns. the bullwhip effect leads to under utilization of resources. TMH pp. it leads to: · · · · A lesser lead-time. Therefore. 28 3 Supply chain integration by Simchi Levi etal. 120-122 . the time that elapses between procurement of raw materials and the delivery to the customer.3.

.................................... staffing strategies and facilities expansion or contraction”..................4 DEMAND MANAGEMENT Why do we require demand management? It’s primarily required since accumulation of inventories amounting to millions in the supply chain shows absence of demand management in the total system.................. with a 10% possibility of getting tied down to family commitments.............................. with suitable case studies........... ........ ................. 5............................. push-pull strategy is one in which manufacturer builds to order........... from World Class Supply Management by Burt........... Chapter 8................ who builds to stock and thus makes all production and distribution decisions based on forecast.............. customer satisfaction....4 An Example to Elucidate Forecast Accuracy You are part of a counseling class on SCM at IGNOU that meets every day between 1800 hours to 2000 hours............... The counselor asks you approximately as to where will you be one week from now at 2130 hours......2: The Push-Pull Supply Chain System Activity 1 Visit a company and analyze the SCM strategy being followed in the light of present trends worldwide and justify your observation............Consider a computer manufacturer.................... This is a push system.............. the push system is prior to assembly and the pull system starts with assembling till delivery of the product.......... 624-626....................................................... The push-pull boundary is prior to assembly............................ Organizing for Global Markets START TIME PUSH-PULL BOUNDARY END TIME PUSH STRATEGY PULL STRATEGY PROCUREMENT OF RAW MATERIALS DELIVERY TO CUSTOMER Fig........... You respond by saying 90% you will be here for the class............. which implies that component inventory is based on forecast and final assembly is in response to specific customer request............. .................................................. 4 WCDM............................ ............................. 5... “Demand management’s imperative of forecast error reconciliation with the actual order rate of an enterprise is one of the most overlooked potentials in the successful management of inventory levels...... 29 ............ Dobler & Starling..... ........... TMH............................ Therefore... pp.................. Whereas.......................... Let the topic of discussion be forecast accuracy.................

but you as the customer didn’t predict the future too well. 326. The company had done their homework pretty well to convince you on this aspect. with that in mind where will you be 4 years from now. pp. without actually forecasting what is going to be the condition of the sapling planted today after 20 years. al.” So that is what it is just try and visualize how difficult it is for the firms to forecast future demand for their product and services.”5 It recognizes that forecasts are developed at several points through out an organization.” The counselor adds on by saying. how can we establish control in demand management? By: · · · · Execution of effective production schedule Calculation of inventory levels Capabilities and capacity Developing of customer service strategies It is also responsible for smoothing and streamlining production after the master production schedule is in place and been released to internal production and external suppliers. “Demand management also balances the total costs of not meeting the demand against the total costs of adding additional resources required to meet the growing demand. control. Actually. So. pp.” says Burt in his book WCSM. how sure can you be of that? “ Not to sure perhaps I will be where I presume to be at that point in time. smooth. a gamble better avoided. forecast. It accepts forecast from other functions and updates these based on real time demand. 126-128 . supply channels tends to get cluttered and all this can effectively be overcome through a comprehensive demand management. Demand keeps on changing on a day-to-day basis. without a forecast of demand. that is. That is forecast accuracy. Therefore the demand managers should have contingencies in place in coordination with the supply chain members so that necessary modifications could be affected well in time. but doesn’t develop forecast. which they miscalculated. The firms actually utilized the concept of forecast demand in a reversing order and made the consumer/customer go in circles over own probability errors. What is Demand Management? Let us now see what is demand management per se? “It seeks to estimate.Design and Management of SCM The next question of the counselor will be. at the same time? You are partly speechless. balance and influence the demand and supply for a firm’s products and services in an effort to reduce total costs for the firm and its supply chain. as enumerated below: · 5 Demand forecast: A process in which historical demand data are used to develop long-term estimates of expected demand. and say “well one cannot be too sure and probably I will graduate from IGNOU with a degree in SCM and will be trying to cope with a job in hand. Simchi Levi et. It is also directly related to supply in order to adjust the flow of raw materials and services. very difficult to predict in actuality but easy to talk appreciate. coordinate. TMH. Demand Driven Strategies Demands forecast and demand shaping are the two different processes. It is quite akin to the policy on trees plantation adopted by certain firms a few years back. where you purchased trees today and expect a hike 20 years from now. with a may/could be factor. 6 30 Demand driven strategies in designing and managing supply chain.6 Demand Management from WCSM by Burt. which helps in generating information for integrating demand information into the supply chain planning process.

· Demand shaping: It is a process in which the firm determines the impact of various marketing plans such as promotions. which is impact to demand planning. involves matching supply and demand by identifying a strategy that maximizes profit or minimizes transportation costs. Therefore an iterative process must be used to identify the following: · · · · The best way to allocate marketing budgets and supply and distribution resources The impact of deviation from forecast demand The impact of changes in supply chain lead-times The impact of competitors’ promotional activities on demand and supply chain strategies 5. the result is improved forecast accuracy. This information provides insight into the likelihood that demand will be higher (or lower) than the forecast. The firm also determines the best possible way to handle volatility and risks in supply chain. and hence an important output from demand forecast and demands shaping processes is an estimate of the accuracy of the forecast. The next is to analyze the supply chain and see if it can support these forecasts. measured according to standard deviation. increase flexibility and increase profits. Therefore. In either case. Changes are taking place rapidly and the emerging e-business has its inherent advantages and disadvantages. can the firm employ supply chain strategies to increase forecast accuracy and thus decrease error? Let us see with the following approaches: Organizing for Global Markets · · · · Select the push-pull boundary so that demand is aggregated over one or more of the following dimensions: Demand is aggregated across products Demand is aggregated across geography Demand is aggregated across time The objective is clear. But in reality very few have been successful. Many Internet companies have crashed due to their individual logistic gray areas. · · · Use market research. demographic and economic trends to improve forecast accuracy Incorporate collaborative planning and forecasting processes with the customers for better understanding of demands Determining the optimal assortment of products by store so as to reduce the number of SKUs competing in the same market At the end of it the firm has a demand forecast by SKU by location. the so called forecast error. Since aggregate forecasts are more accurate. increase service level. new product introduction and product withdrawal on demand forecasts. the forecast is not completely accurate. called supply and demand management. High demand forecast error has a negative impact on supply chain performance. This is tactical planning. rebates. resulting in obsolete inventory and underutilization of resources. inventory costs and production costs. pricing discounts. E-business strategies supposedly reduce costs. This process. On the other hand some of them have been 31 .5 INTERNET AND SCM The influence of Internet has been tremendous over a very short period of time.

cited in Amelia S. a single entity rather than fragmented groups. Fine. push-pull strategy. E-commerce is the ability to perform major commerce transactions electronically. Clockspeed: Winning Industry Control in the Age of Temporary advantage. Dobler & Sterling WCSM by Tata Mc Graw Hill 7th edition. 44. Now what is ebusiness? It is a collection of business models and processes motivated by the Internet technology and focuses on improvement of extended enterprise performance. equipment and services in an optimized fashion”.5 PHYSICAL GOODS FLOW. this was facilitated by the push-pull model and by a focus on demand driven strategies. in effect the Internet has created a revolution in integrating the SCM and evolving supply chain strategies. At the same time the collapse of many such internet companies does send an alarm that e-business not only makes business but break them too. In most cases. 7 in Supply chain & networks. These companies use the Internet as the driver of business changes.9 The Internet today permits the supply chain managers to manage their supply chains collaboratively and also synchronizes their operations. transshipment so as to ensure effective management of inventory and reduction of distribution costs. direct shipment. many companies have improved performance. 5. European Journal of Purchasing and supply management 5 (1999) p. 7.) .8 Supply system plays a key role in helping the firm satisfy its role in supply chain. p. Companies have realized over a period of time that Internet can have a huge impact on supply chain performance. but eventually most of the companies have landed up with the push-pull strategy. “The role of Carriers in buyer-supplier strategic partnerships: a supply chain management approach. Transactions help in allocating the customer’s money among the members of the chain. Professor Charles of MIT writes. each performing its own function”. virtual flow and cash flow could be seen in more detail. Internet can help in a big way to move away from the traditional push strategies to the pull system. 35-53. increased service levels. “The chain is viewed as a whole. “Supply chain design is the meta-core competency for organizations”. The key to these challenges lies in identifying the appropriate strategies for a particular company and individual product. however. Next is e-business and e-commerce. J. (as specified by Burt in his book WCSM by Mc Graw-Hill. “The relationship of strategic purchasing to supply management”. The net result is: 7 8 9 32 Gentry. J. Burt. and it forms the integral part of e-business. p. reduced bullwhip effect and improved responsiveness to changes in marketplace by integrating the supply chain. Most important is that the traditional companies are required to maintain and effective distribution system depending on environmental factors. David N Burt in his book World Class Supply management says ‘the supply chain extends from the ultimate consumer to the mother earth’ and has explained the same with an illustration. The new supply chain paradigm.” Journal of Business logistics pp. warehouses. though it pushes the inventory upstream. reduced costs. “A firm’s supply system includes all the internal functions plus external suppliers involved in the identification and fulfillment of needs for materials. physical flow. Carr & Larry Smeltzer. Charles H.Design and Management of SCM successful in developing new business models and profited significantly by capturing a sizable market share.7 Only when an ultimate customer buys a product does the money enter the supply chain. VIRTUAL FLOW AND CASH FLOW Related to what we have studied earlier in integration of Supply chain. advocates holding inventory. which we shall see later. The Bottom Line Recently.

Spring 1999. pp. “Transforming Supply Chains into e-chains.) Kevin Werbach. Harvard Business Review. Networks optimize the flow of goods (physical flow) and services. They are so designed that one member doesn’t benefit at the cost of the other. Henriott. the networks are therefore: · · · · Adaptive Speedy Innovative Integrated SCM in essence is based on creation of values. May-June 2000. linear chains. It oversees the organizational relationships in order to get the information necessary (virtual flow) to run the business. Competitiveness. virtual flow (information) and money (cash flow). Tomorrow. Connectivity with customers. 7th Edition. “Syndication: The emerging model for business in Internet era”. Organizing for Global Markets Success of an organization in the near future will be driven by its ability to compete effectively as a contributing member of a dynamically connected supply chain management and not in isolation. physical distribution and cash flow. It focuses on the ultimate customer.16 (Burt and Dobler in WCSM Tata Mc Graw-Hill pp. but the terminology is already dated. a tightly connected e-chain will be a necessity. TMH) Supply chains are relatively easier to describe and visualize. 7-9.” Supply chain management supplement. to get the products delivered (physical flow) and get the finances that generate the business profits 10 11 Lisa L.”11 But the day is not far off that most companies will be an integral part of the supply networks worldwide.· · · · Reduced costs.3: Supply System’s Role in helping the Firm satisfy its role in its Supply Chain (Adapted from ‘The Supply Chain’ By Burt In WCSM. who is once again the generator of funds. running from raw material producers to distributors to retailers. companies have connected with one another in simple. It is a network of business processes used to deliver products and services from raw materials to end customers through an engineered flow of information. 85-93. suppliers and other partners and be able to interact quickly is critical to survival. Profitability. 33 . Time management. “Traditionally. p.”10 MOTHER EARTH EXTRACTORS/ MINERS SUPPLIERS/ CONVERTER CONVERTER OEM DISPOSAL END CUSTOMER DISTRIBUTOR SOURCE OF FUNDS MATERIALS & SERVICES PHYSICAL INFORMATION VIRTUAL FUNDS/CASH FLOW Fig 5.

al. Chapter 1 WCSM By Burt.7 BULLWHIP EFFECT “Failure to accurately estimate demand and share information among supply chain entities can result in bloated inventory levels due to cumulative effect of poor information cascading up through a supply chain12 . but also with those outside the firm.4: An Ideal Supply Network (Adapted From Supply Networks. 5. TMH . 627-628 13 Value of information. with a cascading effect on the supplier who feels the necessity to increase capacity to meet the trend. just as supplier has added additional capacity to meet the increase in demand. Dobler & Starling. Either ways the inventory gets bloated. END CUSTOMERS DISTRIBUTORS EXTRACTORS CONVERTORS OEMs MOTHER EARTH AN IDEAL SUPPLY NETWORK Fig 5. 2004. if the lead-time increases so will the buyer increase order quantities (based on conventional recorder point calculations).13 12 34 ‘The Bullwhip Effect’ Chapter 27 towards world-class supply chain management. and reasons why companies fall pray to this effect and how best can they reduce it if not eliminate. This ‘phantom’ demand in SCM is called as bullwhip effect. If a firm doesn’t have information of the demand it will unnecessary carry a load of additional inventory or even increase the lead-time to cater for the uncertainty. This is an integrated and extended enterprise concept and includes not only relationships with internal business functions. WCSM by Burt. which happens to be the basic benchmark in understanding the supply. To add fuel to the fire. What has been explained above is just the tip of the iceberg. This is in fact quite natural in a way. demand falls off because the buying firm has excessive stock available. ‘the increase in variability as we travel upwards in the supply chain is referred to as the bullwhip effect. in Designing & managing the SC by Samchi Levi et. The resultant is firing of employees. Dobler & Starling) With this as a backdrop we come to bullwhip effect. This will result in the supplier interpreting this to be growing customer demand. selling of assets in order to reduce the capacity. second edition. says Burt in his book WCSM. In other words. TMH.Design and Management of SCM (cash flow). demand and inventory management. since SCM strategies are changing rapidly with growing involvement of IT and electronic media. pp.

When the shortage period is over. This would entail providing information on customer demand in each stage of the supply chain. To determine the impact of centralized demand information on the bullwhip effect. with longer lead-times. That is another reason why stocks vanish from the market prior to budget month. managers generally use standard forecast smoothing techniques to estimate average demand and demand variability. Price Fluctuation: This can also lead to bullwhip effect. and so on. 14 Value of Information in Designing & Managing Supply Chain. · · · · After having seen the factors leading to the bullwhip effect we now go on to how to reduce the bullwhip effect by centralized information. This is accentuated by certain manufacturers and companies of offering promotions and discounts at certain times on certain commodities. which can vary significantly more than the actual customer demand. which in effect leads to increase in variability. in order to identify and control the bullwhip effect its pertinent to understand the main factors that contribute towards increase in variability in the supply chain. then the wholesaler will observe a large order. leading to all kinds of distortions and variations in demand estimates. Inflated Orders: Inflated orders placed by the retailers during storage periods increase the bullwhip effect. each stage of the supply chain can use the actual customer demand data to create more accurate forecasts. How and why? If demand information is centralized. Batch Ordering: The impact of batch ordering is simple to understand. The important characteristics of forecasting are that as more data are observed. leading to a significant change in order quantities.Therefore. If batch ordering is used by the retailer. followed by another large order. a small change in estimate of demand variability implies a significant change in safety stock and recorder level. followed by several period of no orders. If prices fluctuate the retailers tend to stock up when the prices are lower. the user is forced to change the order quantities.14 Organizing for Global Markets · Demand forecasting: Traditional inventory management techniques practiced at each level in the supply chain lead to the bullwhip effect. In order to calculate safety stock levels and recorder points. the more we modify the estimates of the mean and standard deviation in customer demands. the retailer goes back to the standard orders. Such orders are common when retailers and distributors suspect that a product will be in short supply. rather than relying on the orders received from the previous stage. 35 . Since safety stocks strongly depend on these estimates. the wholesaler sees a distorted and highly variable pattern of orders. we in effect multiply the estimates of the average and standard deviation of the daily customer demands by the lead-time. Lead Time: Increase in variability is magnified with increase in lead-time. as happens while using min-max inventory policy. As discussed earlier in unit 5. thereby increasing variables. we have to distinguish between two types of supply chains: one with centralized demand information and a second with decentralized demand information. Thus. and therefore anticipate receiving supply proportional to the amount ordered. Therefore. as described below. Impact of Centralized Demand Information Centralizing demand information within a supply chain can reduce bullwhip effect considerably. pp. 104-106.

5: Supply chain with centralized demand information · Decentralized Demand Information: the second type of supply chain is the decentralized one. In this particular chain. Here once again the wholesaler uses a moving average with p observations of the orders placed by the retailer in order to forecast the mean demand. the wholesaler must estimate the mean demand depending upon the orders received from the retailer. In this case the retailer doesn’t make its forecast mean demand available to the remainder of the supply chain. The distributors target level is utilized to place orders in the fourth stage of the supply chain. forecast technique and inventory policy in this case has been centralized. The distributor who finally places the demand to the factory.Design and Management of SCM · Supply Chain with Centralized Demand Information: In this type of supply chain the retailer (who is the first stage) observes customer demands and forecasts his demands with moving average method finds his target inventory level on the forecast mean demand. FACTORY DISTRIBUTORS STOCK/GOODS FLOW WHOLESALER DEMAND FLOW/ INFORMATION FLOW RETAILER Observe Customer Demand. Find Target Inventory. the demand information. Thereafter. and places the order to the distributor. in this stage as we move up the supply chain the orders become larger and the variable increase with every stage. CASH FLOW CONSUMERS Fig 5. and places orders to the wholesaler. follows the same process. receives the order along with the retailers forecast mean demand. in both the types of the supply chain the variance of orders become larger as we go up the chain so that the orders placed by the wholesaler are larger than those placed by the retailer. The wholesaler who forms the second stage of the supply chain. Place Orders. Again. It is seen that the orders move additively in the centralized system and multiplicative in the decentralized one. it uses this forecast to determine the target inventory level and places an order with the distributor. the fourth stage in the supply chain. 36 Actually. The difference in the two types of supply chains is in terms of how much the variability grows as we move from stage to stage. Instead. Forecast Mean Demand. each stage of the supply chain receives the retailers forecast demand and follows an order-up-to inventory policy based on this demand. uses this forecast to determine its target inventory level. and so on. In other words in the . Therefore.

.................................... Therefore.............................. For a moment let us get into a model called direct information system (DIS)........... Activity 2 Understand the aspects of Bullwhip effect and analyze the same with a practical case study................ consumer behavior.............................................. In 37 .......... since the complete system is based on demand predictions and this is a variable factor....8 A NEW PERSPECTIVE TO COUNTER BULLWHIP EFFECT We have seen that bullwhip effect continues to stay in spite of our relentless efforts...... this will ease out transportation......................................... Hence.................................... to include peculiar habits as available in the Indian context and differs state-to-state... Let us see this with a live example An area ‘X’ has a vibrant population and uses 2 popular brands of toothpaste ‘Y’ & ‘Z’... Resultant to this is over stocking and if not sold you land up with a clogged inventory........ why don’t we put our minds together to find some solution to counter this effect and remove it almost completely? It can be considerably reduced................. Therefore more often than not the centralized system can effectively reduce the bullwhip effect..... if we gave it a fair try............... market research and area study into effect to counter this problem..... It’s also important to note that even with the centralized system the bullwhip effect remains.. an integration of these factors under one common head the DIS............................. How do you find that out? Through your retailers/wholesalers who tell you this month people are asking for more number of Y to Z? Can you actually believe them? Since you believe them you aggravate your problems of existing Bullwhip effect.....................decentralized system where only the retailer knows the customer demand can lead to higher variability than a centralized one........................ warehousing and material handling activities Last two to three years consumption report analysis Last but not the least....................... .............. since the demands were more predictive than actuality.......... Let us take into cognizance of the various environmental factors.. in which we allow the manufacturer to get direct information from the consumer bases rather than the retailers and wholesalers or the distributors....... in which the customer demand is available at each stage........ it will be correct to say that it can only reduce the effect but not eliminate it completely.... ......... Say 50% uses ‘Y’ and the other 50% uses ‘Z’.......... ..................... particularly when the lead times are large................. Keeping the trends of our present day advertisements people can sway from Y to Z and vice versa............. ....... region-to-region A detailed market research An area study compendium to know about the area per se.... It will require the following: · · · · · A thorough knowledge on the consumer behavior........... Organizing for Global Markets 5.... Try and visit a firm to understand the effect of Bullwhip on SCM systems and how does the company plan to negate the effect to some extent.....

requires tremendous coordination to implement. This has dramatically . products and services. and you reach a common average of demands from one particular area. A TWO WAY TRAFFIC CONSUMER BEHAVIOUR RETAILER MARKET RESEARCH TECHNIOUES FEEDBACK/DEMAND CONSUMERS CONSUMERS CONSUMERS Fig 5. The first driver is the behavioral changes in the top management of global companies. Let us see this with a figure to remove any ambiguity of sorts. this month you got 400 toothpastes that never sold. Let us see this mathematically. in site. This will give a more realistic figure than a predictive one. 700 under presumed ideal conditions uses ‘Y’ and the balance 300 uses ‘Z’. In the 21st century. informational and managerial demands are being redefined. That has been the trend for the last 3 months plus minus 10% here and there. the rapidly exploding liberalized global market is creating enormously diversified customers. Out of 1000 customers in an area. which are being manifested in innovative supply chain developments. wherein your own representatives are on the move continuously taking direct feedback from the consumers. DIRECT INFORMATION SYSTEM MANUFACTURER ENVIRONMENTAL REALITIES DISTRIBUTORS AREA STUDIES WHOLESALER DIRECT TO CONSUMERS.9 DRIVERS OF SCM 38 SCM is indeed the most dominating paradigm in contemporary business and is slowly emerging as powerful creators of sales and revenue growth. This month things were different and you find your brand ‘Y’ has dipped to a low of 300. The new millennium is creating conditions and an entirely different type of challenge. These inputs can then be compared with that you received from the retailers/wholesalers/distributors.e. Yes! But how long could you afford to do that? Another 3 months? It’s better you tide over this persistent problem once for all by activating the DTC (direct to consumers) method. Organizational.Design and Management of SCM order to nullify this effect you could get your DIS activated and find out the actual on ground situation and believe your ‘eyes to the ears’. What do you do now? Think of a sale gimmick and rush out your stock? Under ideal conditions.7 : DIS model for negating bullwhip effect by DTC link (Direct to Consumer) 5. i. Looks simple on paper.

You discussed the relationship of goods flow. Philipsimchi-Levi. act and believe in how they can improve their responsiveness towards their clientele groups. Explain e-business and e-commerce. European Journal of Purchasing and Supply Management 5 (1999) p. Discuss the role of Internet in SCM. information flow and cash flow in SC integration? Explain with appropriate diagram. “The relationship of strategic purchasing to supply management”. 44. Designing And Managing The Supply Chain. 39 3) 4) 5) 6) . Tata Mc GrawHill Deshmukh & Mohanty (2004).10 SUMMARY In this unit we have focused on the concepts like models for SCM. pp. J. How do you link goods flow. Fundamentals of Supply Chain Management. decide. What is Bullwhip effect? Explain the various permutations and combinations to reduce this effect in SCM.11 1) 2) 3) 4) 5) 6) 7) 8) SELF ASSESSMENT QUESTIONS Integration of supply and demand chain will go a long way to build and effective SCM system. “The role of Carriers in buyer-supplier strategic partnerships: a supply chain management approach. World Class Supply Management. the third driver is discipline of supply chain cost economics. Dobler & Starling. What are the reasons for variability in the supply chain? Explain in detail with relevant examples. Explain the various models of SCM. Explain push-pull model with relevant examples. Carr & Larry Smeltzer. simple and easy to comprehend) Simchi-Levi. Explain with examples demand and demand management. The second is concerned with making quality products to retain customers. cited in Amelia S. David Kaminsky. Kevin Werbach.” Journal Of Business Logistics pp. Essentials of SCM. J.12 REFERENCES AND SUGGESTED FURTHER READINGS 1) 2) Burt. 5. Jaico Publishing House. 5. May-June 2000. learn. information and cash flow. so as to make every stage of the management accountable and responsive. fourthly is creation of a value innovation process and fifth the decision making process. since the text pertains to Indian context.(1999).altered the way people think. Mumbai-23 (should be included in compulsory reading. Tata McGraw-Hill Mentzer. Bullwhip effect and measures to reduce this effect were also deliberated. Organizing for Global Markets 5. 35-53. Sage India Publishers Gentry. 85-93. Discuss with examples. Edited (2004). You deliberated the stages of integration of supply chain and learnt about integrating supply and demand chain to include demand management. Harvard Business Review. You have learnt about value chain system. “Syndication: The emerging model for business in Internet era”.

let us now take a closer look at the strategic supply chain management. The imperatives are: · · · · · · Shorter product life cycle.1 6.7 6. integration of supply and demand chain. both in terms of policies and strategies.6 6. strategy development.8 Supply Chain Re-engineering Summary Self Assessment Questions References and Suggested Further Readings 6.3 Problems of Quality How to Find the Qualified Supplier? Quantity Survey of Suppliers 6. The imperatives above create a continuous pressure on the companies for frequent changes. Timely delivery. The successes in the manufacturers of today revolve around certain basic services related to both product management and consumer satisfaction. Low cost delivery options.1 Developing and Managing the Relationship Supplier Quality Management 6.4. and explain supply chain re-engineering.1 6.4. and in a way force the 40 .2. both production and to the end user.3 6.1 6.3 Trends in SCM Strategic Decisions Strategic Supply Management Activities 6.2 discuss the imperatives for supply chain. Waste management.3.Design and Management of SCM UNIT 6 STRATEGIC SUPPLY CHAIN MANAGEMENT Objectives After reading this unit you would be able to: · · · · · 6.2. Structure Introduction Supply Chain: Growth 6.5 6.2 6.4. illustrate supplier quality management and related problems.2.4 Supply Alliances 6.1 INTRODUCTION After having seen the various models for SCM integration.2 6. Reduction in costs. be acquainted with the issues in supply chain domain and strategic decisions in the supply chain. Quality control. discuss supplier alliances.

It is a network of facilities that perform the tasks of procuring the raw materials.1 Logistics has always been the backbone to infrastructure for the manufacturers. Where. inventories and sales were also ignored. controlling. SCM involves planning. transformation of materials to finished products and further distribution of goods to the end user. This can further be classified under: Pre-transaction Elements: Relating to corporate policies and program. Activities relating to customer services. A centralized logistics function was given the responsibility of controlling costs with emphasis on maximization of service level. infrastructure.companies to stay abreast of the latest. During initial evolution it was felt that logistics that involved transporting and warehousing couldn’t effectively influence the strategic goals and hence. transport them. storage. 41 · 1 Deshmukh & Mohanty in Essentials of Supply Chain Management. in right quantity and at the appropriate place. warehousing. the imperatives for growth of supply chain are: · Enhanced customer expectation: Competition worldwide has led to maximum emphasis on customer service over the years. extensive investment needn’t be done. and inventories and sales ignored. order processing. It was in the seventies that the management explored the scope of reducing the distribution costs. Within the purview of SCM logistics has been the art and science of procuring. the sale will be lost to a competitor who offers in time. According to the world competitiveness report competitiveness is equal to multiplication of competitive assets and competitive process (Deshmukh & Mohanty). The concept of total cost management was evolved in order to optimize the total costs rather than costs of activities taken in isolation. if the product doesn’t reach in time. competitive assets include technology. speed. and transportation and end delivery from the point of origin to the point of consumption as part of consumer/customer requirements. and the functional chain emanating from supplier to the delivery options to the end user. the customers. The imperatives for supply chain strategy are: Organizing for Global Markets · · · · · · Global sourcing Global networking and marketing Revolution in global business process Customer centric management activities Integrated planning system Integration of functional activities in the supply chain towards a common goal for competitive advantage 6. Slowly but steadily the aspects of logistics got integrated with the other functional activities of the supply chain. marketing and finance operated independently.2 SUPPLY CHAIN: GROWTH According to Hicks. The value of customer service has acquired such dimension that. people and government institutions. implementation. an ideal substitute. and competitive process include quality. p 13 . In the final stage logistics were accorded due importance in the strategic planning. The value of the product can only be determined when the product reaches the customer in time and at the required place. customization and services. Production. producing and delivering products and services at the right time. were formulated and incorporated with the operational and strategic plans. As we have seen earlier.

This principle can be extended both ways in the supply chain-upstream to customers and downstream to distributor. economic trends. improve service levels. Post-transaction Elements: These are those aspects dealing with after sales service. with emphasis on continuity and a seamless end-to-end pipeline. transportation and delivery. technological advances. repair.2 The benefits are: Shorter delivery lead times Reliable delivery Lesser schedule disruption Lower stock levels Lesser quality problems Stable prices Higher priority to orders The basic philosophy of this alliance is that the supplier is considered to be the extension of customer relationship. customer complaints and replacements. Organizational Integration: Organizations today need to be broad-based integrators. product and delivery reliability. assume greater importance to specialists to integrate materials and operation management with delivery. consumer’s drive and volatile markets. IT is slowly proving to be a great integrator for various functions. inclined towards the achievements of market place successes. reduce costs and increase flexibility.Design and Management of SCM · · · Transaction Elements: These are those variables involved directly in physical distribution. · 42 2 Third Party Logistics: Outsourcing operations like storage. It Essentials of SCM by Deshmukh & Mohanty pp. therefore. Impact of Globalization: Present global environment is forcing the organizations to incorporate the world in their strategies and analysis. · · 6.1 Trends in SCM The major trends in SCM are: · · · · · · · · Co-maker Ship: It is defined as the development of a long-term relationship with limited number of suppliers on the basis of mutual confidence.e. retailer and users. i. The key to quick response is pipeline management. With growth in outsourcing the trend towards co-maker ship also increases manifold. This is mainly due to shortened product life cycles. and the companies have to rightfully integrate and manage the facilities and markets available in this backdrop. warranty. Today. based on managing systems and people that deliver the service. Certain key factors like.2. Pressure for Quick Response: Customers today expect a better and quicker response owing to the value added services being provided by the manufacturers. Logistics. making reliance on forecasts difficult and dangerous. the firms today cannot ignore them. 16-18 . a process where manufacturing and procurement procedures are linked to requirements of the market. assumes greater strategic significance. Generalists. Companies therefore must identify and analyse factors that differ across nations and determine the impact on the operations functions. therefore. competitiveness. Transportation and distribution therefore assumes greater importance in such scenario. spanning from supplier to the customers. i.e. It seeks to meet the competitive challenges of increasing the speed of response to the market needs.

IT. warehouses and certain infrastructure requirements. In order to ensure success. and allows firms to acquire new technologies and enter newer markets. Due to influx of IT. and consequent delay in labeling.2. it has to be noted that postponement shouldn’t compromise the desired service level.2 Strategic Decisions Strategies are a set of important decisions derived from a decision making process of the top management in the organization. DRP can be called the key to logistics and JIT productions. companies should 43 . material management and accounting at large. The top management in the company forms the strategic decisions and successful execution of these decisions should provide a cutting edge to the organization. oil & lubricants (FOL) in unblended state · · · · · However. capabilities of the service provider and the resulting pay off. Therefore though third party logistics could be cost effective. focusing on value activities and eliminating non-value added activities. Areas that require strategic decisions are warehousing. It also helps in streamlining and re-engineering of various processes. This has further helped in in-bound logistics. has to conform to well defined strategies formulated by the company from time to time. Examples of postponement are: Delayed labeling Shipping in bulk Transferring to small containers at warehouses Delay final assembly Stocking fuel. inventory levels. certain aspect does merit attention. and make versus buy. transportation. However. and hence will dwell on IT and makers versus buy. The cost savings on transportation and storage are attained by keeping products at the highest level and by moving goods through the supply chain in large. DRP on the other hand helps in estimating inventory requirements at stocking areas and ensures supply sources are able to meet the demand. We have already seen warehousing and transportation in detail in unit-4 and 5. It incorporates policies on safety stocks. Yet. These outside service providers may not at times perform up to the requirements of the manufacturer and would result in loss of image of the firm. packaging and pricing till the last moment is called principle of postponement.also helps in reducing costs on trucks. Organizing for Global Markets · Principle of Postponement: The time when the product is ready for sale is known to the organisation. the strategic changes that are being incorporated in the supply chain. 6. information and relation between demand forecasts. in order to match both supply and demand. · IT Solutions and Integration: IT solutions will play a significant role in information building all through the supply chain. ERP has been able to provide a wide information base with an aim to optimize resources. manufacturing and distribution schedules. · Enterprise Resource Planning (ERP) & DRP: ERP systems are basically information integrators and they help in binding various business processes in an enterprise. Because of minimal inventory that is held. transportation. DRP helps in both short term and future production and distribution resources. generic quantities (Deshmukh & Mohanty 2004). at times the firm should use these depending upon the organization’s needs. The sole objective is to minimize the risk of carrying finished product to the various points of the supply chain by delaying the product differentiation to the latest possible moment before customer purchase.

Initiatives of changes are functional in nature and seldom reflect the cost of the system. leverage an organization gets and the quality and confidence in working with the vendor. and achieve the same result. it is also important to assess the effect of IT on the organization as a whole and its capabilities. companies that have benefited from integration are pacing ahead with confidence. This effort will help in identifying the best course available to the manufacturer and the area that it is to be applied. Application of new information requires redefinition of goals and skills of the enterprise’s people resources. Their custodians as a means of providing breathing space and as ways of providing some hidden flexibility respond to protect lead times. This may also mean having a supplier who can provide the same support through IT rather than having an engineer in site. It has been seen that having a supplier that can work in a simultaneous engineering way with the company is the main aspect in order to avoid costs associated with unnecessary design complexity. The response to the issue of managing the supply chain included having a fully integrated business. the core business issues.Design and Management of SCM address several queries centered on proper alignment of information technology tools and the expected increase in productivity and services. These decisions are arrived at after considering the factors like. Identifying the very scope of the business problem that is to be addressed is the most important in this complete exercise. 20 . and some of the vehicle manufacturing companies were structured in a way where the input were raw materials and output the finished product. the driving forces for global manufacturers have ranged from becoming a tiered global supply system in the West to the Japanese Kereitsu based company supply system. It enables the organization not only to rethink but also leverage new information. IT affects the business in 3 ways:3 · · · The integrated process requires managers for restructuring the cultures and capabilities on values providing continuous improvement and teamwork. a desire to protect functional boundaries and a lack of understanding the related consequences. More often than not. they are institutionalized. although there are quite a few near fully integrated companies in the developing nations till date. However. capacity. both up and down streams of individual processes. the way things get done can reflect convenience for doers. Make buy decision is a strategic decision and the area that has to addressed in this is development of the total cost model (Deshmukh & Mohanty). computer integration and workstation technology. like graphics. · · Actually. pp. The next consideration is the aspect of labour 44 3 Deshmukh & Mohanty in Essentials of supply chain management. The following are the reasons propounded by Christopher (1992) for not following the integrated supply chain: · Few managers retain a grasp of a process from one end of the pipeline to the other. The individual functional lead times contain slack and where these become embodied in a processing system. At the same time. and IT as a whole have further aided in integration vigorously. · Make versus Buy: The main organization focus today is on outsourcing of non-critical components. As a result.

Wars and conflicts that can affect availability of materials resulting in price increase.elements. All these have to be considered in a structured manner and not in isolation. Technology Access Control: All supply management organization’s develop and update technology road maps. It also provides inputs on constraints that may affect strategic initiatives. The following activities have to be performed to ensure effectiveness of the strategies: · · Strategy Updating: Commodity teams must identify materials. Supply management provides input to the strategic planning process on threats and opportunities in the supply world. Consolidation among suppliers: to the extent of monopoly. Strategic Sourcing: The firm should manage and develop its supply base in line with firm’s strategic objectives.3 Strategic Supply Management Activities Organizing for Global Markets As per Burt and Dobler. Commodity Strategy: Must develop and update sound commodity supply strategy. collaborative or alliance) for each commodity class.2. accounting and information technology must cooperate in the collection and application of supply data to facilitate the strategic supply planning. · · · · Data Management: Supply management. Integrated Supply Strategy: Supply management should develop and manage the firm’s supply strategy based on wholesome integration strategy and not in isolated strategies. Risk Management: Actions should be taken to ensure minimum disruption of supplies and price increase. supply management focus on ten strategic activities: · Environment Monitoring: Monitoring the supply environments to identify threats and opportunities. which lists critical current and future technologies to be pursued. Supply Management Organization: The organization of the supply management system must enhance the effectiveness and efficiency of the system in attaining the primary objective. once again the need for simultaneous engineering is required mainly in those off-shore areas with low labour rates. Identification of the appropriate relationship (transactional. 6. items of equipment and services that are strategic in nature or should formulate a strategic plan for obtaining them. They can further be classified as: · · · · · Changes in legislation: affecting the workplace. A firm should change its strategy based on such changes. Action should be at hand to protect these technologies that yield a competitive edge and ensure are not transferred to competitors. Here. to include material shortages affecting both price and availability of purchased materials and services. This can affect both price and availability. Corporate Strategic Plan: Supply management should join the marketing and operations as the key players in development of each of the firm’s corporate strategic plan. over and above issues like labour rate inflation and challenges of overseas sourcing. is an important task of supply managements. Its knowledge of the firm’s supply world may be a vital source of input for strategic planning. 45 . Several actions that should be taken are: · · · Periodic review of the active suppliers.

Institutional trust is a key prerequisite to supply alliances. DATA MANAGEMENT SUPPLY CHAIN/ NETWORK SOCIAL RESPONSIBILITIES INTEGRATED STRATEGY UNDERSTANDING KEY SUPPLIERS ENVIRONMENT MONITORING STRATEGIC SOURCING STRATEGIC SUPPLY ALLIANCES · Legislation changes · Wars & conflicts · Consolidation among suppliers COMMODITY STRATEGY · Periodic review · Identify relation · Optimize supply base · Strategy updating · Technology access · Supply management organisation · Risk management FIRM`S SURVIVAL AND SUCCESS Fig 6. Rapid growth of American society of Alliance Professionals is a testimony to the industry’s recognition of importance of these activities.Design and Management of SCM · Optimization of supply base with coordination and combination with several forces to increase the importance of the firm’s supply base.1 Strategic Supply Management 46 . · Strategic Supply Alliances: Developing and managing the supply alliances frequently are two of the most crucial and most strategic activities undertaken by any firm.

.............. equipment........ facilitating the inclusion of woman-owned......... and possible independence of their core technology suppliers’... Supplier Discussions: It’s an informal forum for gaining and sharing learning..... Therefore in order to develop and manage these relationship and alliances a firm has to continuously endeavor to identify methods to facilitate these relations.. and representatives from marketing...... The main objective being learning of key strategies to support the buyer’s business........· Supply Chain/Networks: These help in developing and managing of supply alliances. supply management 47 · 4 Fine........... Clockspeed... .. ‘ the farther you look upstream in your technology supply chain...... chief operating officer....... IT & relationship skills are essential prerequisite for personnel assigned to the task........................ 95......... learning and future goals... Riggs & Robbins spelt out these relations in their book ‘The Executive Guide to Supply Management Strategies’............... Charles Fine in his book Clock speed writes.......................... they are: · Annual Supplier Meetings: Annual supplier meeting is a common phenomenon in maintaining direct relationship with the suppliers by the buyer firm....3 SUPPLY ALLIANCES As seen above supplier alliances plays a key role in strategic supply chain management activities across the board. 6.. ............. .4 Social Responsibilities: Supply management must develop and implement programs that will protect the environment............................................ Supplier is as important as the customer and that has to be realised in the true sense. but it lays the foundation of a buyer supplier relationship in the long run... between the representatives......... but is more complex.................................... technologies.......... like the chief executive....... ........................... minority based and small business in our economy to promote values in the workplace......................... It requires extensive planning and is expensive...... survival.......... They study and understand the industries that provide the key materials.... p... fig 6.. Activity 1 Understand the difference in strategies in supply managements and how it builds up a company to be successful in the international arena? ......................................................... Organizing for Global Markets · · The above provides the understanding of supply managements responsibilities both strategic and tactical........ and services........ Understand Key Supply Industry: Its impact is directly proportional to the knowledge of related industries in which it buys...... Customers are foolish if they don’t spend any time or resources thinking of the health.. the more volatility you see... which if executed effectively and efficiently will be a key to the firm’s success and survival............................. It is used both as a teaching and learning platform as well as the opportunity to distinguish one’s organisation as a supply management leader.1.... cost structures............................................ competitive nature and culture............. It dwells on the buyer’s management performance....

Unexpected criticalities that may arise can be sorted out with a ‘we shall overcome’ attitude. This is the time when the buyer requires a dependable supplier who can provide the required process. · Workshops and Seminars: These are aimed at creating opportunities for supply-stream innovations. Collaborations/Partnership: This is supposed to be the most successful supplier buyer relationship in recent times. cost and time aspects. Training: Teams from both sides as designated should undergo appropriate training in being constructive team players. ethics over expediency. These are based on mutual interdependence and respect. designing.1 Developing and Managing the Relationship Supply managers at all levels should ensure and tailor appropriate actions during the planning and management of such alliances mentioned above. Specialized Training: Plans have to be evolved and developed for specialized training involving variance of products. cost analysis and cost management. These alliances begin with careful selection of source during the product design process. The most important in these relationships is the integration of the buyer and supplier as long as the relationship is beneficial to each other. Such discussions open the door for newer set of goals and collaborations. · · · · · · · · 48 . towards a successful supplier relationship. Communication System: The teams should develop and integrate an effective communication system responsive to the needs and requirements of both the firms. They both require each other and have to work hand in glove. Objectives: Certain objectives have to be established in areas. Monitoring: Results have to be continuously monitored and reported to the management level. It provides the base for continual improvement. including quality. integration. Like: · Instituting a Cross-Functional Team: A team so designated should be in place to handle such alliances.Design and Management of SCM and research divisions. Supportive: Inter-firm team members should realize the importance of such alliances and support the alliance goal in letter and spirit. It’s a forum that builds trust and respect. Trust Building: Measures to improve trust between the two organizations have to be developed and implemented too. Visits: Periodic visits by the respective team members to each others site has to be resorted to for confidence building and co-location of key technical persons. The supplier at the same time requires a responsible customer for its product and services. It’s in the interest of both the firms to support each other’s operations and their respective goals. design and technological support for a successful product. It reviews the buyer’s progress and goals in the backdrop of shift in strategies and policies. · 6. and develop and manage appropriate measures for the alliance to be successful. value analyses. and also in cross-functional team skills.3. concepts and innovations required to guide and organize discussion and work sessions. which will benefit all the participants. It composes of members of supplier participants who provide material and services that are critical to the products made available at the marketplace. engineering. which is responsible for development.

This was resorted to by traditional methods of sampling of the incoming raw materials. quality control was never a problem since it was dependent on the quality of raw materials. wherein the Japanese companies developed a zero-defect program for their products. The main objective of this unit is to discuss the problems of quality and how to generally overcome these issues. Therefore.Management of supply contract is a challenging responsibility and a critical too. some key features have to be evolved for a better buyer-supplier relationship and its effect on the quality assurances on the whole (we have seen this in the last unit of buyer-supplier relationship/alliances). Identification: Identify and develop qualified and capable suppliers who can assure of quality. and specifications and also engineering changes promptly. Development: Developing methods for detecting the deviations through reproduction and trials. 49 . This would generally lead to longer customer delivery time and cascading decrease in profits. for quality assurance. we will now see the quality control aspects of supplier units. This was never a full proof system and the lacunas were too many. In every organization there is a wide diversity of functions and structures for quality planning and control. primarily based on quality of the raw materials they procured. With this as a preamble let us see the problems of vendor / supplier quality. Quality management dates back to the 80’s. designs. 6. some activities that are to be followed are: · · · · · Mission: The company’s mission and policies on supplier quality relations have to be spelt out clearly (as for ISO-9000).4.1 Problems of Quality The suppliers till late had been providing natural/semi-processed materials to the manufacturers for their finished products. Organizing for Global Markets 6. Under such circumstances. and hence the first step to quality assurance is a structural basis for the procurement system that should be organic in character and reflect the concern for quality control in developing the relationship of the interdependent organization throughout the supply chain. which implicitly inferred that there will be some non-conforming parts. and weeding out the lesser variants. Assistance: Provide assistance to the supplier on quality related problems and overcome them. and resulted in longer lead-time to correct the specific problems or adjustments to the operating systems. Today things have changed considerably and most of the companies are engaged in different type of purchases and procurements. “The buyer and suppliers were almost quasi-independent and had little interaction between them” (Deshmukh & Mohanty. particularly very complex and highly engineered subsystems with critical interfacing with other components. However. Communication: Communicating essential and helpful information. that will be used in the manufacturing operations resulting in lower material productivity and higher manufacturing costs. 2004). Companies have to continuously generate and develop newer ideas and innovations to maintain these relations and work in unison to a common goal without jeopardizing each other’s interest in the overall gambit of supplier buyer alliances and relationship.4 SUPPLIER QUALITY MANAGEMENT After having seen the supplier-buyer relationship.

i. it is in development stage for use in quality functions (Desmukh & Mohanty. big and small. The buyers’ generally maintain database on prior performance of these companies. However the following evaluation methods could be used to get the best from the best: · Reputation: This is a variable factor and differs from company to company. sometimes. For a big company it is of significance and for a smaller company it’s almost obscure. Does the supplier have the ability to respond to the buyer’s requirements? Does he require assistance in any form? This and many. The buyer should carry out an in-depth selection of the supplier and provide a fair opportunity to even the smallest to prove its worth. No supplier would like to loose out/compromise on the aspects of faith and reliability that has been bestowed on it by the buyer unit. Opportunity: This is another factor because of which many small suppliers loose out on a buyer’s search radar. Faith & Reliance: This is another aspect that will help in getting the right supplier when the company requires the most. At times certain obscure suppliers qualify to the requirements of the manufacturer and provide the goods as required. design and subcontract management.4. Database: Maintaining a database in financial function has been very effective.4. and such information on the supplier will provide the right weightage for the supplier selection. · · · · · 6. A detailed survey and market search will help in identifying the best that can deliver the best within the cost per se. can be answered by help of visits to the supplier’s site by a team of specialists or through a balanced questionnaire. The limiting factor is the right chance at the right time. These activities are not sacrosanct and depend on the following: · · · · · Nature of goods being purchased Volume of the purchase Total suppliers Repeat purchase Research. Surveys: The purchasing and procurement division of a company is carrying out the selection of the appropriate supplier. The following are the survey evaluation on the supplier:5 50 5 Assuring the Quality Procurement System in Essentials of SCM by Desmukh & Mohanty . it does pay huge benefits in the long run. which enables the buyer to select the appropriate supplier conforming to the buyer’s requirements. 2004).3 Quality Survey of Suppliers It’s an evaluation process.Design and Management of SCM · Review: Periodic review of the performance of the supplier through supplies rating and follow up actions against poor suppliers. under ideal conditions of course. Clarity of information is an important factor in this selection process.2 How to Find the Qualified Supplier? A very tedious process and action at hand by the buyer firm is to find a suitable supplier who can generally meet the benchmark of the purchaser. 6. ‘the best from the best within the cost’.e. Trial & Error: Sometimes this procedure will also help in choosing the correct supplier for the manufacturer. however.

Procurement function therefore plays a key role in getting the best from the best available in the open market. 51 . Appraisal: Appraisal of personnel from viewpoint of quality is very difficult. Geographical location and close proximity is a reason to search for a supplier closer home. Samples are taken and checked with the vendor and buyer’s gauge to compare the gauging systems. due to turnover of key personnel. The areas for evaluation are: · · · · Quality Price Performance Production capabilities A supplier survey is analogous to a profit and loss statement.· Policies/Practices on Quality: These are the basic guidelines based on which the quality assurance of the supplier can be determined. This kind of checking reduces the risk to both the supplier and the buyer. but the pertinent questions that should be addressed are: · · How well do the objectives of the quality program conform to the buyer’s needs? How well the practices of the quality control program conform to the objectives? The objective of this evaluation is to arrive at a judgment of how well supplier’s programme operates. Improving quality therefore should shift from desire to compulsion in the quality assurance of supply agencies. that is. But. the main problem is to evaluate the policies and determine the degree to which they are to be implemented. but selection for a long-term supplier in high volumes is a tedious process and should start early. Increased competition in the economic scene worldwide results in heavy dependence on quality as both an endogenous and exogenous factor. The aim of the survey is to determine whether the procedures are in vogue or not. Procedures and Actions: These are the procedures for handling quality problems like gauge control deviations from existing specifications. neither to tabulate the efficiencies nor rationalize the shortcomings. Organizing for Global Markets · · · For a new product line searching for a capable supplier is indeed a difficult task and this can well spell the difference between success and failure of any new product. and maintenance and housekeeping records. This results in the other elements that aid in quality control to have an ever-expanding role. but discovering the technical competence and attitude to quality can be established. discipline. without a rating of sorts. Therefore. it speaks of the status at any one point in time and will not guarantee of the status at any other time. this could be just subjective at times. They are the real intentions that are to be implemented in a variety of degrees. the communication of the survey must continue for a long time towards a good partnership. Facilities: These are related to tests and inspection that meet the quality requirement of the purchased product. The prospective suppliers can be located by any methods. a general attitude of quality control can be found out through auditing. It plays a predominant role in the in ensuring quality in an organization. Yet.

and today has reached the stage of professionalism where it is revolving around customer focus in a big way. Business transformation from the concept ‘what we make we sell’ to a more flexible concept of ‘what the market want us to sell’ can effectively be achieved after a competitive analysis and a supply chain diagnostic review. as evolved by Harrington. as highlighted by Stevens’ model of supply chain integration. which was later termed as ‘business process re-engineering’ (BPR). costs. and integration between the competition and customer demands. They are: 52 · · · · · · · · · · · · Elimination of bureaucracy Eliminating duplication Value added assessment Simplification Process cycle time reduction Error proofing Upgrading Simple language Standardization Supplier partners Broader picture improvement Automation . performance of pockets of excellence is generally downgraded (from customer’s viewpoint) due to poorly performing suppliers and customers in the supply chain. production facilities. The management of material suppliers. 1993) Supply Chain Management (Stevens’ 1989) The fundamental rethinking and radical redesign of business process to achieve dramatic improvements in critical. but SCM is not a traditional improvement technique. such as cost. The comparison between SCM & BPR is as shown in the table 6. attitudinal and organizational attribute. Hammer & Champy in 1993 identified these changes and improvements and packaged these ideas into concept of ‘business re-engineering’. quality.5 SUPPLY CHAIN RE-ENGINEERING Business structure is continuously changing from one phase to another. and distribution services and customer linked together via the feed forward flow of material and the feedback flow of information. however. service and speed. which we have seen in our earlier units. services and lead times. However. 2004 (Essentials of SCM) Business (Process) ReEngineering (Hammer & Champy.1 : As Adopted from Deshmukh & Mohanty. contemporary measures of performance. to streamline the process. In order to understand this further a wider perspective of the supply chain needs to be taken keeping in mind the 12 steps of BPI. It is well understood. The areas in common between BPR and SCM seems to be very few at a cursory glance. Achieving internal integration is a desirable stage. that effective transformation is only possible after a series of phased step involving technological reorganization. in an introspection of BPR & SCM reveals that there is more than one common link between the two.1 Table 6.Design and Management of SCM 6. but a philosophy that helps in improvement not involved with functional reviews. These changes have shown remarkable improvement in company performance measures such as quality.

followed by internal integration. if a radical redesign is taken. We should as a matter of fact. Now. it involves a change in inter-company attitudes from adversarial to that of mutual support. let us see whether BPR internal re-engineering is equivalent to the functional and internal integration stages in the Stevens’ model? Actually. only the process should be sought and redesigned. by philosophy. in stage 4 of the supply chain is generally successful because of the financial position enjoyed by the big companies. Therefore in spite of BPR being a later model. Efforts to optimize a function are considered a waste in this system. cross-relationship between both the stages is to be highlighted more vigorously. Stevens’ model is still valid in the light of BPR concept. internal or external or a combination approach may be the goal depending upon product. Therefore. Both internal and external integration is required to be achieved for improving performance in the supply chain management. is directly dependent on customer finances which enables the continuity of the supply chain. market conditions or where advantage could be gained for the supply chain. full integration is achieved. will lead to improved operating performance (Deshmukh & Mohanty). Backward integration is a very difficult process in supply chain integration. this integration involves extending the internal management to supplier focus and customer orientation in order to create a strategic partnership. Yet. This can be achieved by examining the pre-requisites and techniques used in integration stages of SCM and in virtuality. i. Whereas. Therefore. under ideal conditions. Stevens’ integration. Initially. Therefore. Therefore. The intermediate steps are different. and step 11 is for the customer satisfaction.e. does bring together a trans-departmental view which. Let us now see the various categories covering the parallels of essentials between SCM & BPR. in order to benefit the most. and then integrate the appropriate cross-functional processes at a later stage. the strategies in the supply chain should have common aim of improving the performance of the chain from the perspective of the consumer/customer. Such companies generally bend rules of supply chain integration and manipulate smaller members of the chain to their financial ends. structure and technology. to attain this step. Improvement in the overall performance level and integrating of the core functional areas as one single function does negate the poor performance of the surrounding functions. which is in fact very crucial to a successful supply chain integration. nonexistent planning and control structures across departments are optimized to departmental goals resulting in customer necessities not being catered to. step 10 is for supplier side. business process integration turns to business process re-engineering. i. backward integration is a contentious issue. Customer understanding will in a big way change the entire philosophy from pushing products to selling goods as per customer requirements.From the above its evident that the first 9 steps are operational. in the supply chain scenario. the first and the final stages are similar in both BPR & Stevens’ model. Therefore. Though. without internal reorganization does not exploit all the benefits of true supply chain integration. never lose sight of the fact that business in the supply chain. Stevens’ model suggests that external integration.e. through this table: Organizing for Global Markets 53 . but the final structure is customer centric with major changes in culture. since. It is mandatory to initially bind the functions along a process line. industry. if performed correctly. Therefore. Side by side in the Stevens’ model step 3 moves to step 4. Stevens’ model opts for functional integration. by reducing the suppliers. since BPR calls for one-leap changes on a process-by-process basis. Functional integration in BPR is not necessary. though more details of reorganization stages are required. The functional integration stage.

2: Parallels of Essentials between SCM & BPR (excerpts from Hammer & Champy. Those who follow the SCM philosophy would have traversed the path as BPR after having re-engineered own processes.6 SUMMARY This unit highlights the common foundations. Davenport. Continuity in step changeover improvements. 2004) Area for change BPR (Business Process Reengineering) Supply Chain Management Terminology Process · · · · · · · · · · · · · · · · · · Elimination of wastes Speed up process Concentration on core processes Board level commitment A management that questions A workforce that questions Multi-skilled workforce Attitudinal changes Technological changes IT a key to BPR Break the rule Treat vendors as adversaries Customer focus Constant innovation Constant product/process innovation Analysis by paralysis is not beneficial Take a holistic view · · · · · · · · · · · · · · · Reduce non-value added activities Lead time reduction SCM positions each firm to do what it does best Board level commitment with a logistics champion at board A management that questions A workforce that questions Multi-skilled workforce Attitudinal changes Technological changes IT a key to SCM Partnership sourcing Deep penetration to customers bases Constant innovation at the interfaces of the company Streamline processes Aggregate modeling can aid the redesign strategy and take a systems view People Technology Innovation Analysis 6. · Transforming a business from inward looking to outward looking. 54 · · . which are indicative of the important difference between the two. seeking core processes and creating leaner structures. · The change management associated with re-engineering has to be handled smoothly and skillfully. with an added advantage of the involvements of the high teams for continual reengineering. Continual re-engineering allows a company’s quality initiatives and re-engineering to be completely and effectively integrated. a must for SCM integration through re-engineering. Grover et al. and strategic placements of these ideas on the marketplace. The existing philosophies such as SCM (integrated) as mentioned in this unit covers a large portion of the BPR ideas. Stevens & Deshmukh & Mohanty. · Inquisitiveness throughout the organization will facilitate re-engineering. · This is applicable at the higher echelons as these positions give a wider perspective. The various points for learning in SCM re-engineering are: · SCM is not a traditional improvement technique but that which facilitates improvement.Design and Management of SCM Table 6. the drive for improved business operations. which underlie both SCM & BPR philosophies. · Integration being the mainstay between the customers and competition. yet a few ideas have to be added to the model: Radical approach for internal integration. Sustaining the spirit of re-engineering throughout the corporate culture is a big issue that requires serious attention. not associated with functional/departmental reviews that focus internally.

Explain the parallels between the BPR & SCM philosophy. Tata Mc Graw-Hill Deshmukh & Mohanty (2004). World Class Supply Management. Dobler & Starling. Simchi-Levi. Fundamentals of Supply Chain Management.8 REFERENCES AND SUGGESTED FURTHER READINGS Burt. Organizing for Global Markets 6. Mumbai-23. Designing And Managing The Supply Chain.7 1) 2) 3) 4) 5) SELF ASSESSMENT QUESTIONS Explain in detail the process of re-engineering. Tata McGraw-Hill Mentzer. Essentials of SCM. Philipsimchi-Levi. David Kaminsky. Explain the sentence with examples. Jaico Publishing House. Edith(2004). SCM and BPR have a common goal and are interrelated. It is a fact.6. What are the benefits of re-engineering in supply chain? Explain the benefits of integrated approach for implementation of SCM. Sage India Publishers 55 .

which together define a comprehensive change in the prevailing environment of hyper-competition. customer satisfaction. This particular unit is focused on world-class supply chain management.2 What is WCSCM? Features of World –Class Companies 7.1 7. Structure Introduction Strategies for WCSCM 7.3. quality management & SCM re-engineering let us see SCM as organized for global markets. shorter product life cycle and growing changes in the market place are becoming the norm. characterizing a world-class supply chain. and in most advanced economies. talk about organization for global markets & global sourcing.1 INTRODUCTION After having seen the strategic SCM.2 7.7 Summary Self Assessment Questions References and Suggested Further Readings 7. supplier alliances.3 Globalization 7. World-class is a wide term extending over a vast spectrum of correlated developments.2 define WCSCM and International SCM.4. discuss international logistics and globalization. which is spreading rapidly in almost all countries across the globe.1 They are: · · 56 1 At the marketing level. world-class supply chain is defined by the integration of new productive capabilities out of available resources. More and more companies are coming forward to provide customized value based services to their clientele and at the same time maintaining a high volume of production. e-business and e-commerce have become the business drivers of today with companies able to converge geographically through the electronic media. p. It refers Essentials of SCM by Deshmukh & Mohanty. At the organizational level.6 7.3.Design and Management of SCM UNIT 7 ORGANIZING FOR GLOBAL MARKETS Objectives · · · · · 7.1 7.4 International Logistics 7.4.5 7. and integration of product and services.2.2. Internet.1 7.3 Organizing for Global Markets Stages to Global SCM Supply Channels 7.3.2 Integrating Logistics World Class Logistics Management (WCLM) 7. and describe world-class logistics management & interfacing of logistics. identify the steps to be initiated before going global. Broad product range. At the same time data warehousing and data mining is allowing the companies to contact the customers over a wide front and at the same time maintain a one to one contact.1 7.282 .

2004. Marketing.2 STRATEGIES FOR WCSCM WCSCM is a result of the developments of the world-class manufacturing model and is to be capable of operating profitably in a competitive environment to the factors of uncertainty and unpredictability. p 283 57 .to the physical facilities and knowledge base irrespective of the location within one group or cooperating companies. in Essentials of SCM by Deshmukh & Mohanty. With this as a backdrop let us now see the strategies for World-Class Supply Chain Management (WCSCM). Introduction of new products at 2 to 3 times the rates. 50% of the current design/development lead-time. Reduction in support labor by 50% or more. WCSCM is a process that is value centric. Schonberger. motivation and productive performance (White. they are: · · · · · · · Reduction of inventory by 50% or even more. It is an ongoing process from buying a product to buying a solution on a long-term basis. 1990 as also in Deshmukh & Mohanty in Essentials of SCM p 282 WCSCM Chapter 17. movement. The world-class manufacturing model is summed up by Schonberger’s agenda that included:2 · · · · · · · Design & organization. Organizing for Global Markets · · At the individual (people) level. Operations. 1987) has identified the performance characteristics of manufacturing systems through seven fundamental objectives for step change. Quality and problem solving. The companies that are able to respond to the structural and functional changes in this changing market place can emerge profitable in the long run. Capacity. Improve quality to parts per million. skilled and knowledgeable workforce as the ultimate differentiators. The Cranfield Competitive Manufacturing Model (New. Human resources development. Reduction in costs by 30% or more. empowerment. 7. sourcing. 1994). At the management level. the development and emergence of a flexible. Accounting and control. world-class supply chain is governed by a philosophy of leadership. and therefore all the processes like development. production and distribution of products and services are centered on value generating paradigm. Reduction in manufacturing lead-time by 50% or more. services and concepts. WCSCM can be conceptualized under three basic dimensions:3 · 2 3 Enrichment of Customers: Represents varying degrees of collaboration and interaction in defining products.

Policy Making: These companies use benchmarking methodologies to seek and evaluate the best policies and practices for setting agendas to tide over the old traditions and new set of thinking. and motivation. defining the corporate activities. i. because it satisfies personal goals and · · · 58 . and at the same time offer its product through the supply chain at the competitive market place with a value for money. Company and Customers: Represents linked networks of workstations. World-class denotes to be able to sustain oneself. 7. Value for money is becoming a strategic necessity in this competitive world. They work towards eliminating of wastes and create competitiveness. is provided meaningful jobs and is involved intimately in decision-making and problem solving the company will develop. high quality at reasonable prices at the appropriate time.1 What is WCSCM? Before getting on with the various components of WCSCM. The top management in such circumstances performs the role of a visionary force and the middle management involve in coaching and training the subordinates. opening new channels for newer customers. For profit. coaching. and operational plans to add value to company’s products and services.2 Features of World –Class Companies The world-class companies as compared to non-world-class companies are featured by a set of different characteristics as under: Management Level: The various tasks performed by them are: · Visionary: Has a set of managers who are continuously improving performance through leadership. objectives.2. we must understand the working definition of this term. But. by servicing the existing customers. A Linkage between Suppliers. economies that are liberal will require restructuring their operating policies and a complete reformulation of the systems to eliminate wastes and create a value base. shared databases. In order to meet the challenges of globalization. tools and facilities. The supervisory staff executes the role of facilitator and supporter of the employees in eliminating waste.e. They have to realize this aspect and identify what and how to do it. dealings with suppliers. in this competitive market and at the same time make profits in the long run. 1990). In actuality. It is a proven fact that if the employees are treated equally and with respect. which further results growth. to strive towards previously unreachable goals (Senge. It has to be understood that every company aims to make profits. Human Resource Development: They generally involve their employees and their staff through extensive training programs for providing them the skills and knowledge base to achieve these policies and goals.Design and Management of SCM · · Recognition of Company by the Customers: Quality speaks. goals. a company got to sell its product at a cost higher than its costs. 7. reduction in costs and adding to value added services. Long-term Strategies: They generally have a long-term strategic plan. The Tata Group is one such living example. and reduction in fixed price to shared risks and recognition.2. worldclass denotes being able to provide the better value than the competition without going broke. for the manufacturer the realities like increase in costs of labor and energy continue to pressurize them. vision.

These developments of common corporate goals are necessary for competing successfully. Organizing for Global Markets · Holistic Approach: The management policies and practices are so tuned that it provides a holistic approach. team efforts and selected key variables necessary for adding value to its product. · Quality Control: They can further be divided as under: · Customer Focus: These companies establish relationship and linkage with university systems. Measurement and Rewards: It is recognized that what gets measured and rewarded gets done (Deshmukh & Mohanty 2004). control the products based on statistics and encourage decision making at operating level using local data sources on key variables for comparisons against customer needs. promoting research and educational activities for longterm competitive advantage. performance and specifications. and integrate the cross-functional teams for a better quality product in a faster time frame. All these activities are aimed at customer focus and service. since suppliers are important to success and crucial too. Simple performance related policies are used towards human resource improvement. Tata group is once again one such example of human resource development. Team approach to product development and improvement has allowed many companies to achieve 4 to 6 fold improvements in product reliability. which helps in integrating the objectives and activities of different functional areas. Hearing the ‘voice of the customer’ is the key issue. Customer Oriented Products: These companies aim at customer driven strategies for product development and marketing. and intellectual commitment for product concepts. marketing & distribution for responding and communicating the needs of the customer throughout the organization.company objectives. evolving from financial controls and dictated standards. manufacturing. One has to continuously determine the customer requirements and expectations. It’s customer definition of value that counts for a faster and flexible supply chain. Partnership: Vendor partnership provides a win-win situation as regards quality improvement and new product development efforts. 70-90% reductions in warranty costs. and develop new ones (Deshmukh & Mohanty 2004). Innovation: These companies are innovators. who constantly experiment to improve existing products and processes. Process Control: These companies. Providing leadership by the top management in an eventuality can obviate losses in certain circumstances. The Sahara Group has of late started to show results. Quality Improvement: There is no compromise in quality as far as such companies are concerned. Lesser variability and greater capability. 59 · · · · · · . These companies seek outwardly for such partnership like relationship. 40-50% reduction in workmanship and 20-40% reductions in product costs. organizing customer contact. It is a key for becoming world-class manufacturers and the top management can influence this aspect more than anyone else. thereby avoiding short term dictates. since It is more of cultural changes than technological. The quality improvement department continuously serves as a support and coordinate functions for quality improvements and excellence all through the organization. Cross-functional Teams for Product Design: These companies use design.

Information is the basic survival of any organization. · Communication Systems: These companies recognize the importance of effective communication skills and strive to establish and maintain simple procedures so as to provide timely and accurate information flow throughout the manufacturing enterprise (Chatterjee 2000). process inventories and materials handling. Improvements in manufacturing lead-time from 10-12 weeks. · · 60 . TPM (Total Productive Maintenance): In these organizations preventive and predictive maintenance are given importance. principal of USA (understand. These companies use multi-disciplined and multi-level work teams to standardize and simplify changeover procedures. Information Technology (IT): It can be utilized in a big way to the competitive advantage of an organization. the human issues are dealt in a serious manner.Design and Management of SCM Integrated Operations/Production: They are further sub-divided as under: · Cellular Manufacturing: The main focus in standardizing and simplifying their manufacturing operations and related instructions. provides quantum leaps. often implemented through cellular manufacturing. · · · Technological Advances. Shankar says. At every stage of technology deployment. Continuous flow processing. Data mining and warehousing and ERP are the technological solutions available today. thus reducing equipment downtime during job changeovers and allowing production in smaller lot sizes. It is the responsible of the top management to do so across the organization. reducing complexity. The required resources are so deployed so as to make the interface more and more active. with focus on standardization. simplify and automate) is extensively applied by these companies. the end user. simplifying and proving the integrity of the manufacturing process before automating. Human & Technology Interface: These companies recognize and acknowledge the interface and importance of humanity and technology. both directional and feedback oriented. All these don’t happen automatically. and application of the policies to strive better to eliminate waste and creating better value for the customer. to one to three days are common along with corresponding reductions in work-in-process levels from weeks to days. Standardization: World-class companies rely on high technology and automation more as complementary tools than as part of the manufacturing strategy. but with the interference of the management’s leadership. a key requirement for flexible production. in their organization. Demand-based Processing: These companies believe that by adopting an enlarged view of manufacturing operations even at the cost of allowing machines to sit idle can provide gains in plant efficiency and quality. based on worker involvement so as to minimize occurrence of machine downtime. Automation before standardization creates non-solving problems. It is the management’s responsibility to provide effective. pushing the machines to their optimum usage can yield poor quality products and longer manufacturing lead-time. over and above wear and tear of the machines. The main purpose being shortening the lead-time and remove non-value added activities. and facilitating the effective use of continuous-flow processing concepts for reducing lead-times. whereas. It focuses on flexible changes and decisions and avoids making expensive changes and inflexible decisions. simple and appropriate information to the workforce for better results. thereby.

...........3 GLOBALIZATION WCSCM is responsible for those actions and values responsible for continuous up gradation and improvement of the development..................................... which needs to be addressed as a candidate of global sourcing:5 4 5 WCSM........... VISION & STRATEGIC PLANNING HOLISTIC OBJECTIVES & SYSTEMS THINKING DEVELOPMENT OF HUMAN RESOURCES VENDOR INTERFACE INTEGRATION OF PRODUCTION & OPERATIONS CUSTOMER SATISFACTION FORESIGHT IN PLANNING QUALITY CONTROL REWARD SYSTEM SOCIETAL CHANGES WORKER SATISFACTION LEVEL MARKET GROWTH ULTIMATE COMPANY AIM COMPANY PROFILE BRAND NAME Fig 7...............9 (Burt & Dobler in WCSM Tata Mc Graw-Hill pp.................. It is indeed necessary in that case to appoint a Chief Supply Officer at the organizational level equated in stature and responsibility like the marketing.. The main objective is to.......1.......3.. The transformation has to be planned very carefully and executed well with the commitment of the top management and their involvement......... ................................. ................. chapter 1 by Burt.... p............... engineering and operations............................................................................................4 7..ROLE OF TOP MANAGEMENT AND ITS BEARING ON SCM Organizing for Global Markets TECHNOLOGY ADVANCES/ DEVELOPMENT LEADERSHIP..................... but concentrates in continuously improving the system with an ultimate goal of upgrading the competitive capability of the firm and it’s supply chain..... “Foreign Sourcing: Is it for you?” Pacific purchaser................................ 7................................ Raul Casillas......... 6-7........................ .. pp.................................... survival and mere existence of both the supplier and the customer................................................. A world-class supply manager is not departmentally or internally focused.1 Organizing for Global Markets Before going global you got to answer the set of six questions.. Dobler & Starling.......................) 61 ..................... ... improve the profitability. design & management process of a firm’s supply system............................................ November-December 1988............. .... 361-369.... to see the firm grow to a world-class status........... Senior management must always recognize supply management’s critical nature and support the required transformation............................: A Model for Supply Chain Excellence Activity 1 Identify the role of management in integration of SCM and its positive implication on the organization through a case study you have encountered..........

.... asking the following questions: · · · · · · Does sufficient engineering support exist to efficiently facilitate engineering change orders (ECOs) when they occur? Will the buyer be able to allow sufficient time to phase out existing “in the pipeline” inventory? Will the supply managers firm take the responsibility for providing the necessary education and training for those that will have to interact with and support foreign suppliers? Is the firm ready to make a financial commitment for expensive trips to the supplier? Is the management willing to change the approach.. PhD... ........................................... p... global sourcing is possible.................... These areas are the characteristics of an organization first entering the global purchasing arena.........2 Stages to Global SCM Most of the firms today are replacing the term international sourcing by a broader philosophy of “global supply management”........... 7....... July 1997.............................. 365-366) Joseph R Carter................. 3 (Burt & Dobler in WCSM by Tata Mc Graw-Hill pp................. “The Global Evolution”’ Purchasing today.. Monczka & Robert J.. 6 7 Burt & Dobler in WCSM by Tata Mc Graw-Hill pp........ p................................................. ....................... Spring 1991.................................3................................................................ Trent..... ............... minimizing prices............... as suggested by Joseph Carter:8 · Stage One: International Purchasing : Organizations focus on leveraging volumes.....7 The three stages of world class wide sourcing is as follows.............6 Activity 2 Visualize the impact of globalization and its effect on Indian companies and how they could effectively gear up to the international order? .. and managing inventory costs..............Design and Management of SCM · · · · · · Does it qualify as high-volume in your industry? Does it have a long life (two to three years)? Does it lend itself to repetitive manufacturing or assembly? Is demand for the product fairly stable? Are specifications and drawings clear & well defined? Is technology not available domestically at a competitive price and quality? If the answer to all the six questions is yes... Global Sourcing: A development Approach”’ International Journal of purchasing and materials Management................... 33 (Burt & Dobler in WCSM by Tata Mc Graw-Hill p........... then the supply manager may want to evaluate the support network within his/her firm.................... in some cases even policy matters of how business and related transactions are conducted? Is the buyer aware of the environment? If the answer is positive to both sets of these questions........................... 369-370 (7th edition) Robert M.. 365) 8 62 ..............................

duties and investigation of potential supplier’s add to these expenses. Competitiveness will enhance the chances for the firm to get the best deal keeping in mind reliability and low cost options. These organizations have effectively minimized risks in offshore sourcing and have sourced worldwide for technology leadership. supporting production strategies. 7th edition. so as to enable the purchaser firm to reduce the number of contracted suppliers and pursue collaborative or alliance relationship at the appropriate time. Once the initial hiccups are stabled many international sources have proved more dependable than those closer home.9 · Superior Quality : A key reason to global supply management is to obtain the required level of quality. most are at this stage. Organizing for Global Markets · (As enumerated by Burt.” Burt. It requires additional efforts as compared to regional/domestic sourcing. however. . Quality could be very high in the products of a particular country and unacceptably low or inferior in another. Stage Three: Global Supply Management : Organizations optimizes supply networks through effective logistics and capacity management. it’s very seldom that a company’s total cost of material through global sourcing could be lowered. specifically in meeting the time schedule. cost of material being cheaper compensates these expenses. Lower Cost : There are a lot of add on expenditures that are involved during international sourcing compared to domestic ones. 63 · · · · 9 “World Class Supply Management. The biggest criticality or complexity of purchasing goods from foreign countries is the wide variability available in the open market. Communications. Dobler & Starling in their book World Class Supply Management) Let us now take a look at the reasons for doing global sourcing. An entrepreneur who fails to identify this will loose out on the product competition too soon. Advanced Technology : Globally this is more advanced as compared to domestic products and materials. Better Timed : Another good reason for global tendering is to meet the schedule requirements. Although this is loosing its significance. With this in the backdrop let us now see the reasons for purchasing the goods and services from international sources. Yet. This aspect has in fact improved considerably over the years and so has the capability of the suppliers in meeting the growing requirements. Dobler & Starling Tata Mc Graw-Hill pp. and servicing customer markets. 366-367. Broadening the supply base doesn’t increase the quantity of suppliers but increases the options of finding better suppliers. but yields greater profits in the bargain. services and the dependability factor. yet the managers worldwide are still looking at international sourcing for the critical quality requirements. Larger Supply Base : International sourcing increases the number of possible suppliers resulting in a choice among many. but natural.· Stage Two: Global Sourcing : Organizations focused on global opportunities will put more emphasis on supplier capability. Of those that have sourced offshore for some time. transportations. Advantage will always be of the manufacturer who can identify the right source of the technologically superior material in order to maintain a monopoly in business. The difference comes in quality. Lead-time between orders and delivery is lesser as compared to domestic sourcing and more reliable too.

WCSM. there are chances that there is a risk of production outside the control of the domestic firm. offsets or counter trade.Design and Management of SCM Larger Customer Base : Global sourcing can create opportunities to sell in countries where the buyer’s suppliers are based. a much costlier option although. there is a requirement to tap the aerial route. Fig 7. Here the international suppliers/non-domestic suppliers are required to procure materials in the buying country as part of sales transactions.2. Inventory Increase : There could be an increase in inventory in such conditions. it’s not so easy as it seems and one has to keep this at the backdrop before setting out. · · · · 10 11 12 Chapter Strategic Sourcing: WCSM by Burt & Dobler Tata Mc Graw-Hill. p. ‘Additional Inventory’ paragraph 3 of Potential Problems.2(a): Global Tendering There are however certain criticalities in going global too. 368. global sourcing is generally resorted to due to high level of quality control. paragraph 4 of Potential Problems. the freight costs. · Cultural Aspects : These are mostly in relation to beliefs and superstitions that are generally prevailing in Asian and African countries. Longer Timeframe : Longer lead-time in shipping of material and services from international sourcing creates a major problem. pp. These are real issues and shouldn’t be ignored. and this can never be determined. This kind of tying makes both marketing and supply management far more challenging than when pure money transactions are involved. and p. fig 7. Such an arrangement of competing and selling in many countries makes it a necessity to enter into some kind of agreement to purchase items from that particular country. “Lower Quality”. Like for example. WCSM. This would entail stringent measures to be adopted by these countries to improve the labor laws to tide over this menace. and administrative cost to determine the actual cost of buying from global resources.12 Labor Problems : This is a growing problems world over.2 (a). 368. Therefore to obviate such criticalities inventory-carrying cost must be added to purchase price. 368-369. wherein there are tremendous trade restrictions.2(b). Generally through sea. SUPERIOR QUALITY TIMELINESS ADVANCED TECHNOLOGY GLOBAL TENDERING LOWER COST LARGER SUPPLY BASE LARGER CUSTOMER BASE Fig 7. Hence. mainly in the third world countries. which frequently leads to manufacturing tolerance problems for buyers of US products and vice versa. 64 . Yet. which are prone to storm damage. With minimal trade restrictions sales opportunities could arise just out of interaction itself.11 Inferior Quality : As mentioned earlier. some countries have arrangements like barter. every region has its belief and faith that revolve around their day-to-day dealings.10 These are generally due to the versatile regions available across the globe. the United States is the only major non-metric country in a metric world. however. resulting in “off-spec” incoming material.

DiOrio. The supply manager venturing into global sourcing is advised to solicit the advice of the contemporaries from the local supply management association. Direct procurement is the easiest and lowest cost option to procure goods globally. 370. January 2001. p. typical intermediaries are as mentioned below:15 13 14 15 “The Opacity Index: Launching a new measure of the effects of opacity on the cost and availability of capital in countries World-wside (Executive Summary)”. These increase the cost of doing business. translators cost. A. in fact. Contract & property right laws. 1-3. yet.com/. It entails dealing with all the associates in procurement by the buying firm along with the facilities. Burt. Certain. Dobler & Starling in WCSM. Therefore. Fig 7. Guide to Purchasing 1987. inadequate logistical support complicates communication and product distribution in the long run. 7. a risk factor called the “opacity index” has been developed to address the risk costs associated with conducting business in a specific country. and distances involved. & Strategic Sourcing WCSM. intermediaries will play a key role in streamlining the efforts of procurement through international sources. http://www. pp.2.3 Supply Channels After having decided to go global the next step is to infer the supply channels that are to be used. pp. Price Waterhouse Coopers. CRITICALITIES IN GOING GLOBAL CULTURAL ASPECTS LABOUR PROBLEMS HIGH OPACITY INFERIOR QUALITY LONGER TIMEFRAME INVENTORY INCREASE COST FACTOR OPACITY INDEX · Corruption at bureaucratic levels · Contract & property right laws · Economic policies · Accounting policies · Business regulations. investors and supply managers involved in global activities have been aware that the risk of conducting business varies from country to country. in most of the cases it avoids many unforeseen problems.· Cost Factor : There are a considerable amount of add on costs due to the communication factor. Business regulations. Moreover. N. 370-371.opacityindex. 7.2 (b): Criticalities in going Global China for example has a higher opacity in comparison to USA. London. “International Procurement”. High Opacity : Bankers. p. limited resources in supply management may make direct procurement infeasible more often than not. Recently. TMH. 369. 65 . p.14 Though sourcing through the intermediaries is costly option.13 It addresses the following areas: Organizing for Global Markets · · · · · · Corruption at bureaucratic levels. ‘Supply Channels’ Strategic sourcing in WCSM by Burt.3. Tata Mc Graw-Hill. US have fewer hurdles of types mentioned above and very less corruption. However. Economic policies. the simplest way to procure globally. Accounting standards.

though they handle all clearing of shipping and customs. like selling in USA & receiving commission ex foreign exporters. Logistics is a strategic resource and its importance has to be understood by one and all (the functional members in the supply chain). like Citibank. for predesignated material. Hitachi America is also such an example that was created primarily to look after the interest of North American market. they mediate between the buyer & the seller from different nations. by everyone in the firm. They handle all the clearing and handling of material but hold no financial responsibility of the principal. but are not involved in clearance/shipment of the material. However. They have an added advantage over the others and are listed in directories and trade publications. They receive the commission from both the buyer & the seller. a good amount of competency has to be achieved and a well-defined logistical mission and objective has to be committed to. They often do act as special purchasing agent against commission. These subsidiaries offer to set prices in the local currency and deliver material to buyers with all duties paid. HSBC and Alcatel. especially by the top management. These offices facilitate business transactions and interactions in the foreign country and surrounding areas. They including all intermediary activities carry out all the risks of clearing. But. Various offices like the IPO (international procurement offices) are set worldwide to tide over these intricacies.Design and Management of SCM · Import Merchants: They buy the goods for their own account and sell through their own outlets. Brokers: Just like the marriage brokers. in order to achieve this strategic influence. They slowly develop the host managers over a period of time and train them according to their requirements. work in progress and finished inventory to support business unit strategy’. Subsidiaries can increase sales and lower employment costs by the principal of sons of the soil concept. lest you fall prey to the upheavals of the host country. Most of the MNCs in India are following this principle. Commission Houses: They generally act for exports abroad.4 INTERNATIONAL LOGISTICS ‘Logistics management includes the design and administration of systems to control the flow of material. Subsidiaries: They are established by MNCs in countries where a physical presence is required to improve competitive capability and/or meet host government restrictions. at times they could block flow of technical information since they are remote from manufacturing and marketing decision. Bills are generally never billed to them. They don’t have any fiscal responsibility of the seller. 66 . Akin to most of the publishing houses that carry out reprint of the popular titles worldwide from established publishing house and also act as their subsidiary in India. Trading Companies: These are large companies that generally perform all functions like the agents/groups listed above. · · · · · The above are the intermediaries for global trade and an organization interested in going global should perforce follow the proper channel. just like the import brokers. They receive their commission from the seller and hence their primary interest is the exporter. 7. Agents: These are representatives or firm that carry out the selling. (Krishnaveni Muthiah 2003).

Organizing for Global Markets LD OR W S AS CL S IC ST GI LO CL AS SD EM AN D M AN AG EM EN T T EN EM AG AN M W OR LD Fig. International Logistics management deals with receiving.3 (a). storage and warehousing is concerned.3 (a) World class supply chain management The Three Critical Components of WCSCM are: · · · World class Supply management World class Demand management World class Logistics management As discussed earlier.As brought out earlier in unit 4.3(b): International Logistics management 67 . the triangle that is formed in the supply chain management (SCM). Fig7. RECIEPT HANDLING MOVEMENT STORAGE TO MANUFACTURER DELIVERY TO CONSUMERS Fig. international logistics can be well comprehended with this figure. the logistics professionals play a vital role in shaping the success of WCSCM as regards management of transportation. services and finished product in a WCSCM system. Logistics is required both at the beginning and at the end of it. at a global level. We sometimes do tend to ignore the role of logistics.3 (b). movement. 7. 7. but the supply and demand chain cannot be met without the integrated and closeknit support of the logistics. storage and delivery of material. handling. fig 7.

and even more than product selling prices. 7. ROLE OF LOGISTICS TRAFFIC CONTROL & TRANSPORT MANAGEMENT WAREHOUSING & STORAGE TO INCLUDE INFRASTRUCTURE INVENTORY CONTROL & MANAGEMENT MATERIALS MANAGEMENT & HANDLING DEMAND FORECAST SERVICE SUPPORT SALVAGE MANAGEMENT & DISPOSAL Fig. Fig 7. The emphasis should be on reduction of cycle time and elimination of waste in order to increase customer satisfaction. The coordination aspects required are tremendous and detailed planning is required before execution of the logistics movement.e. warehousing of materials and delivery is time consuming and at times requires precision synchronization at all levels i.3 (C): Role of Logistics An effective SCM system will never be possible without the integration of logistics. Needless to mention here is that the transportation cost is the heaviest in the entire chain. effective flow & storage of goods. “ logistics is the part of supply chain process that plans. 7. 68 . since logistics is the foundation of SCM discipline and is responsible for its activities. Logistics include the following role. implements and controls the efficient.4. in order to maximize customer satisfaction and meeting firm’s goal it is mandatory to ensure that effective storage facilities for goods and services are in place. services and related information from point of origin to point of consumption for the purpose of conforming to consumer requirements”.1 Integrating Logistics Logistics planning has to be integrated with material and capacity planning in order to achieve maximum and optimum level of satisfaction. Therefore. The needs and requirements of our customers is variable and never a constant factor.Design and Management of SCM As Coyle puts it. from supplier to manufacturer and from manufacturer to consumer (unit 4). in order to serve them better and be profitable you got to tailor your logistics and ensure it to be more dynamic with passing time.3 (c). Therefore. You have to understand that movement of goods. But things at the international level are much complicated.

through out the supply chain. In order to achieve excellence and a competitive advantage in the global market the companies have to continuously modify their strategies in order to remain embedded in the international markets since. It is quite unfortunate that supply management and logistics don’t collaborate the way it should in many companies. and other functional areas are never geared adequately both in skills and know how to manage the interrelationship based on which the successful supply chains are built. Product testing prior to delivery. the competition level is much more. 69 .5 SUMMARY Moving towards a global market requires detailed planning. more often than not the changing pace of market and technological advances mandate the requirement of a team based effort and a collaborative approach to logistics planning and execution. accounting. Focus is generally ‘outward’ towards extended enterprise. marketing. engineering. productivity. A sound strategic plan.4. effort should be there to collaborate these functional areas and integrate them to perform better. Actually. flexibility and integration. Enhanced Logistics Competency: Logistic competencies of the supply chain members are continuously being gauged by survey and related activities. Real Time Trace Ability of Materials and Product: WCLM organizations employ paperless inventory status and movement in real time.7. Actually. A well-conceived and accepted strategic plan is to be evolved which has to be far-sighted and look after the long-term aspects of the company. specialized marking and labels. Logistics characteristics for each type of customer are incorporated into each product’s specifications. and tracking of products through the supply chain are some of the events involved in WCLM. · · · Each of the functional areas in SCM is important to each other and together they serve an important role in achieving WCSCM. 7. cost reduction and manufacturing flexibility. Effort is on to reduce waste and continuous improvement in all spheres. The integration of these functional areas is what separates the excellent from the lesser ones. foresight. packaging for unique storage related to the type of product being shipped. which determine competitive advantage and profitability. IT. establishing the strategic plan is the first step towards achieving excellence. however. finance. and hence. These are the value added activities that take place and are enhanced as per the customer requirements. makes the ultimate difference in the amount of gains achieved in quality. This would not only gather efficiency but at the same time will eliminate wastes in a big way. the key components of value. The professionals in logistics. Foundation of a company will also play a leading role in establishing itself globally. quantity. and not be myopic in nature.2 World Class Logistics Management (WCLM) The third side of WCSCM triangle. is the WCLM include the following: Organizing for Global Markets · Value-added Activity: WCLM ‘tailors’ products to the consumers/customers needs and requirements. Collaborative Cross-functional Teams: (as discussed earlier in same unit): They involve both the customers and the suppliers and integrate their respective functions under one head.

’ JAICO. ‘World Class Supply Chain management’. (Eighth reprint) 70 . 2) How can you organize your company for global markets? Give relevant examples to elucidate your point. Keeping the above in mind we can conclude by saying that this will not only help us to become successful supply chain professionals but also help us in becoming better human beings in this far reached professional and busy environment. 3) ‘Design & Management of SCM’. Tata Mc Graw-Hill.’ by Himalaya Publishing House. (2003). Philip Simchi-Levi. discuss the same in the global context. Simchi-Levi. David Kaminsky. in order to remain in this competitive world the supply management professionals must have the following ability: · · · · · · Develop a strategic point of view with relation to global supply management Deal with continuous changing scenario Dealing with diversity in culture Work with and within distributed organizational structures Work with others as team members and leaders Communication aspects. ‘Essentials of Supply Chain management. Mumbai. 5) Dr KK Khanna. 4) Burt. Dobler & Starling. Mumbai. a firm’s approach to global supply management progresses from a reactive mode to a proactive one. 3) Explain the interfacing between logistics and functional members of the supply chain.7 REFERENCES AND SUGGESTED FURTHER READINGS 1) Krishnaveni Muthiah. Publishing House. 5) Explain global sourcing and its advantages and disadvantages. 7. 4) Logistics is a strategic resource. How can you arrive at the best course of action for global sourcing? 6) Explain world-class management model in respect to SCM. Therefore. with examples. Tata Mc Graw-Hill. Edit (2004). 7. ‘Logistics Management & World Sea-borne Trade.‘Physical Distribution Management & Logistical Approach’ Himalaya Publishing House. 2) Deshmukh & Mohanty.Design and Management of SCM More often.6 SELF ASSESSMENT QUESTIONS 1) Explain in brief international SCM. (2002).

Indira Gandhi National Open University School of Management Studies MS-55 Logistics and Supply Chain Management Block 3 IT ENABLED SCM Unit 8 Information Technology : A Key Enabler of SCM Unit 9 Intelligence Information System Unit 10 IT Packages in SCM 5 22 46 .

Management Development Institute.) in Cement Group M/S Larsen & Toubro Ltd. Mumbai Course Preparation Team (2004) Prof. ) (Retd. SOMS. of Industrial Engineering Shailesh J. Deepak Jakate General Manager . Mumbai Dr. N. IIT Bombay. Atanu Ghosh Shailesh J.S. Sandeep Biswas Institute for Integrated Learning in Management (IILM). Banwet Dept of Management studies. New Delhi-110068.Logistics. B. School of Management Studies. Tessa Media & Computers. Mumbai Prof Sadananda Sahu Dept. Himanshu Kumar Shee (Course Co-ordinator)-On leave School of Management Studies. Kharagpur Dr.K. Sambandam NITIE.Karuna Jain Shailesh J. B. J.Expert Committee (as on 24th March. B. Mumbai Dr. (Coordinator) School of Management Studies. Amarlal H. IGNOU Prof. Headquarter 4 Corps Mr. D.(P). Sambandam NITIE.O.Logistics. New Delhi Laser Composed By : M/s. Ravi Shankar (Course Editor) Dept. Karol Bagh. S. Kharagpur Lt Col. Gaur Prof Sadananda Sahu Dept. IIT Bombay. Mumbai Dr. IIT. United Phosphorus Limited.L. Bhubaneswar Prof N. 2000) Prof. Dept of Fertilizers. V. Mehta School of Management. Atanu Ghosh Shailesh J. General Manager . Mumbai Mr. Narasimhan Director. IGNOU New Delhi Dr. Mehta School of & Management. Mumbai Mr. . Mumbai Prof. Kharagpur Management. 2004 ã Indira Gandhi National Open University. Deepak Jakate. D N Srivastava Advisor ( Training & Safety) & Head of Distribution Deptt. Indian Institute of Technology Bombay. IIT. Delhi Prof. Himanshu Kumar Shee. Anurag Saxena (Course Co-ordinator) School of Management Studies IGNOU. Gurgaon Prof. Kaushik Sircar Assistant Quarter Master General Operations & Logistics. New Delhi Prof. Satish Kumar Director (Movement). Krishi Bhawan. IGNOU. Kalro IIM Kozhikode Calicut Dr. No part of this work may be reproduced in any form. of Industrial Engineering and Management IIT. King Kraft. New Delhi by Director. SOMS. 2004 ISBN-81All rights reserved. Indian Institute of Technology Bombay. New Delhi Mr. by mimeograph or any other means. New Delhi Print Production: December. of Management Studies Indian Institute of Technology New Delhi Prof. Mehta School of Management. Biplab Dutta Vinod Gupta School of Management IIT. Sanjay S. Khanna Director.Batra FORE School of Management New Delhi Prof. Mehta School of Management. New Delhi Tilak Raj. Sushil (Course Editor) Dept. Jharsuguda Mr. New Delhi Prof. IGNOU Dr. Cover Design by M/s. Further information on the Indira Gandhi National Open University courses may be obtained from the University's Office at Maidan Garhi. of Management Studies Indian Institute of Technology. New Delhi Prof . IGNOU. without permission in writing from the Indira Gandhi National Open University. Ministry of Chemical & Fertilizers. IGNOU. New Delhi Paper Used : “Agrobased Environment Friendly”. N. Printed and published on behalf of Indira Gandhi National Open University. Kaushik Sahu Xavier Institute of Management.Sahay. Sarai Jullena. United Phosphorus Limited.

SAP. It also had a discussion on a few success stories of software packages to the SCM.BLOCK 3 IT ENABLED SCM Unit 8: Information Technology: A Key enabler of SCM enables one to be on familiar terms with the importance of information in Integrated Supply Chain Management. It discusses the categories of information and their role in Inter organizational setup. it describes Information Technology and its applications in Supply Chain Management for increasing efficiency. It portrays the advantages and limitations of software packages of SCM. Enterprise Resource Planning (ERP). and Distribution Resource Planning (DRP/DRP-II). i2/RHYTHM. It describes the methods of determining the information requirements for a supply chain. It describes a few software packages such as BaaN. It ends with comparing ERP and Supply Chain Planning (SCP). It discusses about Materials Requirement Planning (MRP). Finally. particularly in the supply chain context. Unit 10: IT packages in SCM highlights the importance of software packages in Business. . Unit 9: Intelligence information system deliberates the recent developments in the information system.

IT Enabled SCM 4 .

discuss the categories of information and their role in Inter organizational setup. in which we live and work.9 Introduction Information and Technology in the Integrated Supply Chain Importance of Information in Integrated Business Inter Organizational Information Systems (IOIS) Information Requirements Determination for a Supply Chain Information and Technology Applications for SCM Summary Self Assessment Questions References and Suggested Further Readings 8. 5 . describe the methods of determining the information requirements for a supply chain. The amount of calculation power that is available to mankind is increasing at an exceptional rate.1 INTRODUCTION To survive. collation and refinement. a whole world within and around the physical world. It is changing all aspects of our life style.4 8. For any organization to succeed. All organizations have certain objectives and goals to achieve.7 8. to transmit it with high accuracy and to manipulate it at will. thrive and beat the competition in today’s brutally competitive world. Computers and communication are becoming integral parts of our lives.1 8.UNIT 8 INFORMATION TECHNOLOGY: A KEY ENABLER OF SCM IT Packages in SCM Objectives After reading this unit you would be able to: · · · · recognize the importance of Information in Integrated Supply Chain Management. all business units should work towards this common goal. Structure 8. organizations have to make Information Technology an ally. But each department or business function in the organization will have its own goals and procedures. information is critical. Information technology is revolutionizing the way. The success of an organization rests in resolving the conflicts between the various business functions and making them do what is good for the organization as a whole. For this. one has to manage the future. In order to deliver quality information to the decision-maker at the right time and in order to automate the process of data collection. IT has a major role to play in any organization.6 8.3 8. Managing the future means managing information.5 8. harness its full potential and use it in the best possible way. The digital revolution has given mankind the ability to treat information with mathematical precision. and be familiar with the Information Technology and their applications in Supply Chain Management for increasing efficiency. Everybody should know what is happening in other parts of the organization.2 8.8 8. These capabilities are bringing into being.

These organizations linked together to acquire. This database will eliminate the need of the isolated data islands that existed and in each department and make the organization’s data accessible across the departmental boundaries. and should guide organization to adopt the most viable business practices. In this unit. from suppliers to the ultimate and users.1). IT should assist in specifying the objectives and strategies of the organization. purchase.2 INFORMATION AND TECHNOLOGY IN THE INTEGRATED SUPPLY CHAIN As discussed in the earlier Blocks. we will learn the importance of the information required for effective supply chain management and a number of information technologies and the application of the information that organizations are using to make information readily available across the supply chain. convert/manufacture. assemble. At the departmental level. and procedures to achieve them. At this level. At the organizational level. service providers and customers (See Figure 8. IT ensures seamless flow of information across the different departments and develops and maintains an enterprise – wide database. 8. availability of high quality information for better decision-making and faster response times. This enterprise– wide sharing has many benefits likes automation of procedures. 6 . the supply chain management is concerned with the flow of products and information between the supply chain members that encompasses all of those organizations such as suppliers. IT must ensure a smooth flow of information across departments. IT should also aid in developing and supporting. and distribute goods and services. producers.IT Enabled SCM IT has a major role to play both at the organizational level and at the departmental level.

Prior to the 1980s. the information revolution was well accepted in the world’s advanced economics. This means that organizations are moving toward a concept known as Electronic Commerce. and electronically ordered. where transactions are completed via a variety of electronic media. These technologies and capabilities began to grow exponentially since 1985. providing means for multiple organizations to coordinate their activities in an effort to truly manage a supply chain. receiving forms. many standard business processes and functions such as customer order processing. the explosion of the Internet and the world wide web. and error prone. and perhaps even the survival. unreliable. Leading-edge organizations no longer require paper purchase requisitions. place orders. little doubt remains about the importance of information and information technology to the ultimate success. and between supply chain member organizations. and manual accounts payable “matching” process. optical fiber networks. were paperbased. inventory management. All required information is recorded electronically. However. IT Packages in SCM 8. the need to constantly monitor inventory levels. manufacture. invoices. and expedite orders will soon become a thing of the past. implementing redesigned cross-functional processes. Three factors have strongly impacted this change in the importance of information. bar codes. automated voice mail. and stored in databases. 7 . Today. information was often overlooked as a critical competitive resource because its value to supply chain members was not clearly understood. and distribute their products. purchase orders. firms that are embarking upon supply chain management initiatives now recognize the vital importance of information and the technologies that make this information available.By 1980. CD-ROM catalogs. utilizing cross-selling opportunities and capturing the channel to the customer underpin the competitive positioning of business. In many instances. With the application of the appropriate information systems. Conducting business in this manner was costly because it decreased firms’ effectiveness in being able to design. including electronic data interchange (EDI). electronic funds transfer (EFT). In the current competitive climate. Cycle time reduction.3 IMPORTANCE OF INFORMATION IN INTEGRATED BUSINESS Information is the key to the decision making in Business. information and technology must be conceived of broadly to encompass the information that businesses create and use as well as a wide spectrum of increasingly convergent and linked technologies that process the information with the emergence of the personal computer. The old “paper” type transactions are becoming increasingly obsolete. and purchasing were altered through the use of computer technology. During this period. and associated transactions are performed with the minimum amount of human intervention. and a variety of others. In a sense. the information systems and the technologies utilized in the supply chain represent one of the fundamental elements that link the organizations into a unified and coordinated system. develop. fax. coded. a significant portion of the information used to flow between functional areas within an organization. Recent developments in database structures allowed part numbers to be accumulated. these paper-based transactions and communications were slow. Timely and accurate information is more critical now than at anytime. During this period. procure. The cost and availability of information resources allow easy linkages and eliminate information-related time delays in any supply chain network. of any supply chain management initiative.

......... ........ How would you implement your plan? What are the problems? ........ customers... retailers.............. 2) 3) The need for virtually seamless bonds within and between organizations is a key notion in the essential nature of information systems in the development and maintenance of successful supply chain.. The foundation of the ability to share information is the effective use of Information Technology within the supply chain............. finance.........IT Enabled SCM 1) Satisfying........................... lost revenues............................ most efficient......... distribution and transportation internally. ineffective transportation........... carriers............ Appropriate application of these technologies provides decision makers with timely access to all required information from any location within the supply chain............. This is termed to be bullwhip effect.... ................... Clearly................ to customers.......goals which need to be achieved.... In fact.........4 INTER ORGANIZATIONAL INFORMATION SYSTEM 8 In supply chain management. the need to share information across the supply chain is of paramount importance...... many organizations are implementing some form of an inter-organizational information ............. Information is a crucial factor in the managers’ abilities to reduce inventory and human resources requirements to a competitive level................... These members are continuously supplied with information in real time....... Information flows play an essential role in the strategic planning for and deployment of resources....... That is...... reduction in the total inventory and savings in the company’s’ transportation costs ........ which is commonly being experienced by the consumer goods industries.... inaccurate or distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies such as excessive inventory investment........ and service providers are the members and are linked through the ultimate level of integration................................. .................................................. poor customer service............ in fact pleasing................. sales.............................. 8..... producers........................... purchasing.................. as well as inter organizationally.. Activity 1 Develop procedures to elicit and define information needs for making a decision for an organization of your choice...... customers have become something of a corporate obsession......... Suitable technologies such as bar codes and scanners have been developed and applied in the portions of supply chain and remove inaccurate or distorted information.......... and invoices has become a necessary part of the total customer service experience............ ... and retailers across the supply chain will improve fill rates of the customers service.............. and information about issues such as order status. misguided capacity plans.. product availability.... creating inter-organizational processes and link to facilitate delivery of seamless information between marketing................... suppliers............. Recognizing the critical importance of information in an integrated supply chain environment.................... increase forecast accuracy.. manufacturing. and missed production schedules.... delivery schedules....... and effective manner has become critical................................. the suppliers........... Serving the customer in the best........

Five basic levels of participation for individual firms within inter organizational system are: 1) Remote I/O node. and on-line professional tool support systems. minimally. productivity improvements. As organizations explore development of IOISs to support their supply chain management efforts. Since that time. Information sharing requirements are well beyond those of a manufacturer. such as ordering (i. manufacturing. a variety of buyer-supplier order-processing systems. 3) Multi participant exchange node. such as order processing. in which the member literally becomes a datacommunications/data-processing utility that integrates any number of lowerlevel participants and applications in real time. These organizations may (buyer-supplier) or may not (credit clearing house) have a preexisting business relationship. in which the member participates from a remote location within the application system supported by one or more higher-level participants. inbound transportation. Among the earliest forms of IOISs were those developed by time-sharing services and on-line database vendors. the insurance industry. and its distributor’s need to process orders in a consistent way. format. warehousing. transaction transfer. which would previously have been performed manually or through other media. in which the member develops and shares a network with diverse applications that may be used by many different types of lowerlevel participants. 4) Network control node. and finished products). such as the mail. inventory-level review. marketing. Existing implementations serve the grocery industry. services. and priority across several vastly different constituencies. in which the member develops and shares a single application such as an inventory-query or order-processing systems. IOIS participants may therefore be at a level lower..system (IOIS). in which the member develops and shares a network inter-linking itself and any number of lower-level participants with whom it has an established business relationship. sales. orders for component parts. All relevant information ultimately must circulate to and among all organizations between the supply chain’s point of origin and its point of consumption. inventory management. new technologies have been integrated to produce systems of increasing capability. and the transportation industry. The participant shares a network of diverse applications with any number of participants with whom it has an established business relationship. 2) Application processing node.e. and customerservice information. and product/market strategy. The development of an IOIS for the supply chain has three distinct advantages: cost reductions. The potential impact of such systems on the way business is conducted was recognized as early as the 1960s. forecasts. What must exist is a computer-based electronic link between the two organizations that automates some element of work. Developing a common language in terms of planning. higher. outbound transportation. or equal to the IOIS sharing organizations. the Treasury Department’s decision support system. the drug wholesaling industry. order-status checking. Although organizations recognize the importance of an IOIS IT Packages in SCM 9 . IOISs are the systems based on information technologies that cross organization boundaries. and finally 5) Integrating network node. Examples of such implementations include electronic funds transfer (EFT) systems. they will be faced with several challenges. shipment tracking information or. An IOIS is an integrated data-processing/data-communication system utilized by two or more separate organizations. with more systems coming into existence each year.

............... and top managers in the considered organization? Compare these indicators with that of another organization.............. ......................... ..................................... When developing information systems to support an integrated supply chain.......... analysts must identify supply chain management problems and decisions for the member organizations.................. the decisions that must be made across 10 ........................... What are the most frequent indicators for evaluating the performance of lower...... For a supply chain management............................. it is necessary to include all of the functions involved in an information system in order to facilitate the development of the system that allows information to flow crossfunctionally......... Therefore............................... 1) Business Systems Planning (BSP) is a structured interview technique developed by IBM.............................................. The result of this process is a set of tables listing the problems that must be addressed....... .. it is important to use appropriate method that ensure all information requirements are identified.........5 INFORMATION REQUIREMENTS DETERMINATION FOR A SUPPLY CHAIN It is important to ensure that the right information are captured and used to manage the supply chains effectively (doing right things) and efficiently (doing these things well)..... It focusses on the identification of problems and decisions associated with an organizational process and determine what information is needed to address them........... 8............... Therefore................... Four fundamental mistakes are commonly made when determining information requirements and these are: 1) Viewing systems as functional instead of cross-functional 2) Interviewing managers individually instead of jointly 3) Not allowing for trial and error in the detail design process 4) Asking the wrong questions during the interview. and ends/means analysis are suggested for this purpose........................ Much of the information needed to make decisions within a given function will come from sources outside the function................... ..................................................... Activity 2 Consider your organization or an organization with which you can freely access for information......................................... including business systems planning..... a cross-organizational session using several structuralinterviewing techniques.... no one standard approach is being utilized in terms of technology or information.............. critical success factors.................. middle...... Viewing systems as functional instead of cross functional is a very narrow and inappropriate perspective to take in the information requirements determination process..... this cross-functional perspective needs to be extended to be crossfunctional and inter-organizational.................IT Enabled SCM for effective supply chain management.... To properly determine information requirements across organizations...................... ........................................... because the information required to make decisions within one organization may come from another supply chain member...........................................

Tables 8. their associated efficiency issues.3 : CSF–CSF/Information Critical Success Factors Information · Integrated supply chain performance measurement system · Performance measures for integrated supply chain. · Historical performance for measures. For the supply chain. This interview technique consists of two phases. respectively. As one might imagine. Table 8. First. The second phase deals with means. Table 8. 3) Ends/Means (E/M) analysis focuses on what it takes for an organization to be both effective (doing the ‘right’ things) and efficient (doing these things well) and on the information needed to manage it. Table 8. Table 8. most of the organizations have common CSFs. the analyst identifies the ends that the supply chain members consider important. and the information required to address them.4 and 8. and the information needed to address them. · Performance measures for individual member organization. Once the CSFs are determined. CSFs have to be identified for each of the member organizations. 2) Critical Success Factors (CSF) focus on key performance areas that must function effectively for the organization to be successful and associated information requirements.5 present Ends and Means analysis examples. · Actual performance for supply chain and organizational measures. the effectiveness issues associated with the ends. 11 . and the information needed to address them. Table 8.1: BSP–Problems/Solutions/Information Problems Solutions Information IT Packages in SCM · Reduce order fulfillment cycle times between supply chain member organizations while maintaining or reducing total supply chain logistics cost. · Need to understand current order fulfillment performance between supply chain members and logistics cost/performance trade-offs across the supply chain. · Order fulfillment performance for each organization · Total supply chain logistics cost · Order history between supply chain members · Inventory carrying cost per item for each organization · Transportation cost and lead times by different modes and carriers. · Targets/goals for measures. the information needed to address the CSFs is then identified.3 presents critical success factors (CSF) example.the supply chain.2 present Business Systems Planning examples.1 and 8.2 : BSP–Decisions/Information Decisions Information · How to transport product X · Carrier and mode used by competition · Transportation cost and performance by mode and carriers.

Costs. Production Process information 5. Competitive information 9. Key contacts for each organization. Production information 2. Inventory information 7. Prototyping was introduced as a way to overcome these problems by validating systems requirements through experimenting. Table 8. · Minimize total supply · · chain logistics cost Activity-based cost accounting information Maximize profit · Customer preferences (features. There will be some redundancy in the information requirements identified when using multiple structured interview techniques. and testing the system until the development team and users are satisfied that they have identified all of the information requirements for the system being developed. in a worst-case serve as systems that are totally unusable.Supply chain process and performance information Examples of Information contained in Categories Product specifications. competitive product offering. time) · Profit by supply chain member organization · Supply chain performance (order fulfillment cycle time. Process descriptions. production plans. Rs.5 : Ends/Means Analysis – Means/Efficiency/Information Means Efficiency Information · Monitor inventory performance: . Transportation information 6. inventory levels. price/cost. quality.) . time. etc. promotional plans. Sales and marketing information 10. The outcome of this approach to systems development has resulted in systems that need to be changed the day they are implemented and. 12 .4 : Ends/Means Analysis – Ends/Effectiveness/Information Effectiveness Information · Reduce order-fulfillment cycle times across the supply chain in a way that improves customer satisfaction. product lead times. The specific information identified for the supply chain consists of ten primary categories.6 : Supply Chain Information Categories Information Categories 1. partner roles and responsibilities. refining. inventory-carrying costs. product sales history Customer forecasts.Organization inventory levels (days.IT Enabled SCM Ends Table 8. Commitments. Traditional systems development also does not allow for trial and error when designing information systems.Total supply chain inventory levels (days. cost. performance measures. customer sales history. Benchmarking information. management team Product line. lead times.6. customers’ satisfaction. Table 8. Point of-sale information. customer satisfaction).) . This helps to ensure that the analyst has a comprehensive and accurate set of information requirements. inventory locations. delivery. market share information. Supplier information 4. Supply chain alliance information 8. These categories and examples of information contained within them are shown in Table 8. Capacities. cost Inventory levels. Rs.Turns .Service levels . sales term & conditions. capacity. Carriers. Customer information 3. cost. meeting schedules. · Minimize cost required to measure inventory performance · Actual cost for measuring each factor The result of each of the structured interview techniques is a set of tables that identifies areas of concerns across the organizations and the associated information needed to address these concerns.

Activity 3 Select a typical manufacturing organization and describe the dependencies that exist among the departments. Prepare a dependency chart showing information and material flows. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. .............................................................................................................................

IT Packages in SCM

8.6

INFORMATION AND TECHNOLOGY APPLICATIONS FOR SCM

Many innovations on technology-based approaches are well suited to the enhancement of supply chain management, including Just-in-Time, Quick Response, Efficient Consumer Response, and Continuous Replenishment – all rely heavily on the information made available through the latest technological advances. In the development and maintenance of the supply chain’s information systems, both hardware and software must be addressed. Hardware includes computers, input/output devices, and storage media. Software includes all of the system and application programs used for processing transactions, management control, decision-making, and strategic planning. A few examples of software titles that address some aspect of supply chain management are presented below: 1) Base Rate, Carrier Select, and Match Pay (Version 2.0) developed by Distribution Sciences, Inc., with which users can compute freight costs, compare transportation mode rates, analyze cost and service effectiveness of carriers, and audit and pay freight bills; A new software program developed by Ross Systems, Inc., called Supply Chain Planning is an integrated suite of constraint-based planning tools that provide demand, replenishment, and manufacturing tools for accurate planning and scheduling of those activities. This software provides an end-toend enterprise-resource planning solution incorporating the most advanced supply chain planning capabilities available. A technology partnership between Procter & Gamble Distributing Co. and Sabre Decision Technologies resulted in a software system called Transportation Network optimization, which allows shippers to give bidding, in twin streamlining the bidding and award process. Logistility Planning Solutions was recently introduced to provide a program capable of managing the entire supply chain from demand to supply by synchronizing customer demand and supply constraints through the provision of Internet enabled communications about forecasts, inventory, and replenishments for all members of the chain.

2)

3)

4)

Several technologies have gained popularity recently, due to their ability to facilitate the flow of information across the supply chain. Electronic commerce, Electronic Data Interchange, Bar coding and Scanning, Data Warehouse, Internet, Intranet/Extranet, World wide Web, Decision Support systems are a relatively

13

IT Enabled SCM

recent phenomenon for supply chain management applications. These are discussed in the following sections. Electronic Commerce Electronic Commerce is the term used to describe the wide range of tools and techniques utilized to conduct business in a paperless environment. Electronic commerce therefore includes electronic data interchange (EDI), e-mail, electronic founds transfers, electronic publishing, image processing, electronic bulletin boards, shared databases, and magnetic/optical data capture (such as bar coding), the Internet, and Web sites. Electronic commerce is having a significant effect on how organizations conduct business. Companies are able to automate the process of moving documents electronically between suppliers and customers in such a manner that the entire process is handled electronically; no paperwork is involved. With the rise of the Internet and the ability to transfer information cheaply and effectively over the whole world, electronic commerce is becoming a major focus for many organizations and represents a significant opportunity for integrated supply chain management efforts. Electronic Data Interchange Electronic data interchange, commonly referred to “EDI”, is the computer to computer interchange of business documents and/or information between trading partners in standard data format. Where, trading partners means, cooperation between companies is required to get the EDI systems running properly. Computer-to-computer and standard data format mean information must be precisely formated so that a computer can process the information without human assistance. EDI replaces the traditional forms of mail, courier, or fax. It is being utilized to link supply chain members together in terms of order processing, production, inventory, accounting, and transportation. It allows members of the supply chain to reduce paperworks and share information on invoices, orders, payments, inquiries, and scheduling among all channel members. The benefits of EDI are numerous: quick access to information, better customer service, reduced paperwork, better communications, increased productivity, improved tracing and expediting, cost efficiency, competitive advantage, and improved billing. EDI improves productivity through faster information transmission as well as reduced information entry redundancy. Accuracy is improved by reducing the number of times an individual is involved in data entry. The use of EDI results in reduced costs on several levels, including: 1) Reduced labour and material cost associated with printing, mailing, and handling paper-based transactions; 2) Reduced telephone and fax transmissions; and 3) Reduced clerical costs. EDI is also tremendously beneficial in counteracting the bull whip effect described earlier in this unit. Through the use of EDI, supply chain partners can overcome the distortions and exaggerations in supply and demand information by using technology to facilitate real-time sharing of actual demand and supply information. Although about 20 percent of all retailer orders for consumer products were placed via EDI in 1990, that percentage had grown to well over 60 percent by the end of 1995. Clearly, firms are realizing that the use of EDI to facilitate information sharing throughout the supply chain is beneficial. In general, EDI is used for communication of business information such as purchase orders, invoices, bills of lading, shipping instructions, production sequences, inventory or order status, fund remittances, and point-of-sale information (in the case of retailers).

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EDI cuts down time delays, labor costs, errors, inventory and uncertainty. Business with EDI reduces the paper work, which is about 4 to 7% of the value of the goods traded. The EDI activities are the following: 1) Sales return could be analyzed and fed into the ordering process; 2) Orders could be raised to reflect both demand and known stock availability; 3) Instruction could be sent to distributors in parallel with the orders to ensure fast delivery; 4) Carriage by road, rail, sea, or air could be booked simultaneously; 5) Customs clearance documents could be available in advance of goods arriving, avoiding hold ups; 6) Payment instructions could be issued to banks to ensure prompt payment. Bar Coding and Scanning At its most basic level, bar coding refers to the placement of computer readable codes on items, cartons, containers, and even railcars. This particular technology application drastically influenced the flows of product and information within the supply chain. As noted throughout this unit, information exchange is critical to the success of supply chain management. In the past, this exchange was conducted manually, with error-prone and time-consuming paper-based procedures. Bar coding and electronic scanning are identification technologies that facilitate information collection and exchange, allowing supply chain members to track and communicate movement details quickly with a greatly reduced probability of error. The critical point-of-sale data that organizations such as Wal-Mart provide to their supply chain partners is made possible through the use of bar coding and scanning technology. This same technology is critical to transportation companies, such as FedEx, by enabling them to provide their customers with detailed tracking information in a matter of seconds. Bar code scanners are most visible in the checkout counters of the supermarket. They scan the black-and-white bars of the Universal Product Code (UPC). This code specifies the name of the product and its manufacturer. Bar codes are used in hundreds of situations, ranging from airline stickers on luggage to blood samples in laboratories. They are especially useful in high-volume tracking where keyboard entry is too slow and/or inaccurate. Other applications are the tracking of moving items, such as components in PC assembly operations, railroad cars at various locations, and automobile in assembly plants. The general benefits of Bar Code technology in the supply chain environment are: Speeds data entry, Enhances data accuracy, Reduces material-handling labour, Minimizes on-hand inventory, Monitors labour efficiency, Improves customer service, Reduces product recall, Verifies orders at receiving and shipping, Reduces work-in-process idle time, Monitors and controls shop floor activity, Improves shop floor scheduling, Optimizes floor space, and Improves product yield/reduces scrap. Data Warehouse Generally, a data warehouse is a decision support tool for collecting information from multiple sources and making these information available to end users in a consolidated, consistent manner. The concept originated in the 1970s, when corporations realized they had many isolated information systems “islands” that could neither share information nor provide an enterprise-wide picture of corporate activities. Recently, there has been a renewed interest in this concept, as organizations adopt distributed computing architectures while they leverage their isolated legacy systems. Rather than trying to develop one unified system or linking all systems in terms of processing, a data warehouse provides a means to combine the data in one place and make it available to all of the systems.

IT Packages in SCM

15

IT Enabled SCM

In most cases, a data warehouse is a consolidated database maintained separately from an organization’s production system databases. It is significantly different from a design standpoint. Production databases are organized around business functions or processes such as payroll and order processing. Many organizations have multiple databases, often containing duplicate data. A data warehouse, in contrast, is organized around informational subjects rather than specific business processes. The data warehouse, then, is used to store data fed to it from multiple production databases in a format that is readily accessible by end users. Data held in data warehouses are time-dependent, historical data and may also be aggregated. For example, separate production systems may track sales and coupon mailings. Combining data from these different systems may yield insights into the effectiveness of coupon sales promotions that would not be immediately evident from the output data of either system alone. Integrated within a data warehouse, however, such information could be easily extracted. One immediate benefit of data warehousing is the one previously described in the example about sales and marketing data. Providing a consolidated view of corporate data is better than many smaller (and differently formatted) views. Another benefit, however, is that data warehousing allows information processing to be off-loaded from individual (legacy) systems onto lower-cost servers. Once done, a significant number of end-user information requests can be handled by the end users themselves, using graphical interfaces and easy-to-use query and analysis tools. Accessing data from an updated information warehouse should be much easier than doing the same thing with older, separate systems. Furthermore, some production system reporting requirements can be moved to decision support systems – thus freeing up production processing. Internet In terms of advancement in technology and communications capabilities, perhaps the most influential development over the past decade has been the adaptation of the Internet from strictly government and research applications into the areas of commerce and mass communications. At the most basic level, a network of networks, the Internet provides instant and global access to an amazing number of organizations, individuals, and information sources. Through systems like the popular World Wide Web (the web), Internet users are able to conduct organized searches on specific topics as well as browse various web sites to discover the vast resources available to them through their computer. The Internet offers tremendous potential for supply chain members to share information in a timely and cost-effective manner, with relative case. Many organizations are now exploring the numerous opportunities provided by the Internet. For example, the Internet provides opportunities for the development of EDI systems. It also provides an incredible source of information about potential suppliers of products and services. A few examples of the type of information available on the Internet are provided under the World Wide Web heading. Although the potential benefits of supply chain applications on the Internet are substantial, as with any emergent technology, certain issues must be resolved. A key Internet concern is the issue of privacy, the level of security for information. Privacy of information transmitted on the Internet is an issue for all users, particularly in the use of credit-card members and other sensitive information. For supply chain members already struggling with the challenge of freely sharing information, these issues only add to their concerns.

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These issues may soon be resolved. Currently, web software called ‘merchant’ server is in advanced stages of development. Although present applications are being developed to assist with consumer transactions, such as providing secure conduits for payment information and transactions, other applications are not far behind. One approach for such security problems is the development of the supply chain’s own Internet. Intranet/Extranet Intranets are networks internal to an organization that use the same technology that is the foundation of the global Internet. Many industry analysts expect such corporate networks to provide most of the revenue for computer hardware and software vendors over the next few years as an increasing number of business expand their internal networks to improve efficiency. By using Web browsers and server software with their own internal systems, organizations can improve internal information systems and link otherwise incompatible groups of computers. Internal networks often start out as ways to link employees to company information, such as lists, product prices, or benefits. Because internal networks use the same language and seamlessly connect to the public Internet, they can easily be extended to include customers and suppliers, forming a supply chain “Extranet” at far less cost than a proprietary network. World wide Web The World Wide Web is the Internet system for hypertext linking of multimedia documents, allowing users to move from one Internet site to another and to inspect the information available without having to use complicated commands and protocols. The implications of the Web for business applications are obvious and farreaching. Web-based technology and tools have been developed in virtually every industry and forms of commerce. Supply chain functions are no exception. For instance, Enterprise Transportation management was recently launched by Metasys Inc. through the Oracle Web Applications Server; this system deploys a variety of critical information about transportation and distribution applications throughout the supply chain. Further, the system can be accessed with any Javaenabled browser. Access may be controlled through a corporate network, via the Internet or an Intranet Web site. The number of Web sites relevant to supply chain management is growing at a rapid pace. From specific sites providing information about the capabilities and fees of potential supply chain partners to educational sites developed primarily on reference tools, the number of sites and variety of information available on the Web is impressive. Examples of the Web sites available include the following: 1) www.con-waynow.com provides information about the expedited motorcarrier arm of Con-Way Transportation Services, providing information about the company’s services, market coverage, and truck fleets, as well as direct e-mail links to Con-Way NOW’s sales, operations, and human resources departments. 2) www.gebn.bus.msu.edu provides access to Global Procurement and Supply Chain Benchmarking Initiative home page. The Global Procurement and Supply Chain Benchmarking Initiative is a third-party procurement and supply chain benchmarking effort housed in The Eli Board Graduate School of Management at Michigan State University. The primary mission of this group

IT Packages in SCM

17

IT Enabled SCM

is to collect and disseminate information concerning the best procurement and supply chain strategies, practices, and processes being employed by companies across a wide range of industries worldwide. 3) www.supply-chain.com developed by the Supply Chain Council provides a valuable reference source introducing shippers to the Council’s mission and supply-chain reference model, a leading edge benchmarking tool being developed for specific supply chain applications. Most of the supply chain related professional societies have highly informative home pages. These Web sites typically provide information about the organization’s objectives, educational and training opportunities, educational products, reference libraries, job placement services, discussion forums, conferences, and membership requirements. Decision Support Systems By the early 1970’s the demand for all types of Industrial Software started to accelerate. The increased capabilities and reduced costs justified computerized support for an increased number of non-routine applications. At that time, the discipline of decision support systems (DSS) was initiated. The basic objective of a DSS is to provide computerized support to complex non-routine and partially structured decisions. At first, the cost of building a DSS prohibited its widespread use. However, the availability of low-cost personal computer around 1980 changed this situation. Desktop PCs, which are easily programmable, made it possible for a person with limited programming ability to build useful DSS applications (e.g., spreadsheets with built-in-macros). This was the beginning of the era of end-user computing. Analysts, Managers, many other professionals, and Secretaries began building their own systems. Given the complexity of supply chains, development of DSS to assist decisionmakers in terms of both the design and operation of integrated supply chains is likely to increase. These DSS will help decision-makers identify opportunities for improvements across the supply chain, far beyond what even the most experienced manager could provide through intuitive insight. Supply chain-wide DSS will allows management to look at the relationships across the supply chain, including suppliers, manufacturing plants, distribution centers, transportation options, product demand, relationships among product families, and a host of other factors to optimize supply chain performance at a strategic level. Supply chain DSS requires large amounts of both static and dynamic information from the member organizations. The static information includes production rates and capabilities for all supply chain entities, bills of material, routings, and facility preference. The dynamic information includes forecasts, orders, and current deliveries. Using all of this information to solve, for example, a quick-response scheduling problem across the supply chain is virtually impossible with a single technology. However, all the data can be readily obtained from existing information systems through Structured Query Language (SQL) using various relational databases or the “supply chain data warehouse” if one exists. Specific technologies that may be utilized for an effective supply chain management DSS include: SQL interface, Expert system rules, Scheduling algorithms, optimization (Linear programming capabilities), Blocked scheduling, Multisite/multistage scheduling, Graphical user interface, User definable database, Available-to-promise, and Demand management.

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Activity 4 Examine the suitability of e-commerce, Electronic Data Interchange and Bar Code System practices of Indian Organizations. For this, refer National/ International Journals or select an organization known to you. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. ..............................................................................................................................

IT Packages in SCM

8.7

SUMMARY

The sharing of information among supply chain members is a fundamental requirement for effective supply chain management. At the ultimate level of integration, decision makers at all levels within the supply chain members organizations are provided with the information they need, in the desired format, when they need it, regardless of where within the supply chain this information originates. Providing the decision-makers within the supply chain with the ‘right’ information, in the necessary format, and in a timely manner is a major challenge. The information requirements determination approaches presented in this unit have been effective in ensuring that these information requirements are met. The information systems and the technologies utilized in these systems represent one of the fundamental elements that “link” the organizations of a supply chain. The range of technologies available to support supply chain management efforts is vast and ever changing. Unfortunately, there is not a single “right” IT solution to supply chain management. Organizations need to explore various options to arrive at a solution that provides the functionality required for their specific supply chain management initiative. Towards this end, benchmarking integrated supply chain efforts to identify “best practices” is essential. Supply Chain Management initiatives are unlikely to succeed without the appropriate information systems and the technology required to support them. These important decisions should be made by a cross-functional, inter organizational management group that can afford to manage the constraints related to the time and resources required to develop a supply chain information systems strategy. The team should implement the strategy, and ever see its ongoing performance.

8.8

SELF-ASSESSMENT QUESTIONS

1) Define Information Technology. What are the advantages and disadvantages of adoption of IT in Indian Manufacturing Organizations? 2) What is the value of information? How would you try to assess the value of information to a decision-maker? 3) Explain briefly the Inter Organizational Information system. How is IOIS important for effective supply chain management? 4) What are the fundamental mistakes commonly made while capturing information? How would these mistakes be eliminated in SCM?
19

1999.com. W..R. Georgia. Jr. Internet. 1998. Prentice Hall. and Ellram L. and Nichols.. : Supply Chain Management: The basics and beyond. Stock. Ltd.M. 1998.. al. 3) Handfield. J.Caps. : ‘Fundamentals of Logistics Management’ Mc-Graw Hill... Who are the service providers of EDI in India and their terms and conditions? 15) Compare and contrast EDI. or http://www. Give examples of information contained in these categories. 1999.Irwin.IT Enabled SCM 5) Give various supply chain information categories.M. on stockholders or customers? What kinds of effect occur and what problems are created for these groups? 9) What is the IT enabled organization design variables? How do they supplement or replace conventional design variables? 10) What are the risks for a small company connecting itself electronically with major customers? 11) What kinds of employees are most likely to be replaced by Information Technology? Does your answer depend on the type of system? Are the decision levels affected? 12) Write a brief note on the following: i) ii) iii) iv) v) vi) vii) Electronic commerce Electronic Data Interchange Bar Coding and Scanning Data Warehouse Internet Intranet/Extranet World Wide Web viii) Decision Support System 13) What are the advantages and disadvantages of using Bar Code and Scanning System in the Manufacturing Organizations? 14) Give a list of potential benefits of using Electronic Data Interchange (EDI).. 2) Copacino. Lucie Press. Inc. 20 . Atlanta. 6) What are the major advantages and disadvantages of inquiry systems in which data are captured on-line but files are updated later – say at night? 7) How would you measure the extent of unemployment created by the implementation of IT? What factors tend to mitigate the problem of increased unemployment if it actually occurs? 8) Does IT have an impact beyond the organization.. USA. How are they applied in SCM? 8.L.9 REFERENCES AND SUGGESTED FURTHER READINGS 1) CAPS Logistics. R. et. D.B. 4) Jonathan Blain. : Introduction to Supply Chain Management. for example. St.. 5) Lambert. Prentice-Hall of India Pvt.C. E. : Using SAP R/3. and Intranet/Extranet. 1997.

McGraw Hill. E-Commerce..8. IT Packages in SCM 8) Oden. Spring.A. Inc.S.C.. 1990. Mc-Graw Hill. Inc....C. J. 1993. Langen Walter. Vol. Wadsworth Publishing Co. 2000.W. 21 . Jr. 11) Senn. 10) Rosen.3. : ‘Software Engineering: A Practitioner’s Approach’. Inc. : ‘Information Systems in Management’.T. : Integrating the Supply Chain. 1992. 1999.. K. H. The McGraw-Hill Companies.19. No.. 9) Pressman. R. and Howard A.42. International Journal of Physical Distribution and Materials Management. 1989. R.A.S. : ‘Production and Operations Management: An Applied Modern Approach’.6) Lucas. : ‘Information Technology for Management’. John Wiley & Sons. Vol.. and Lucier.. California Management Review.L. : E-Retail: Gold Rush or Fool’s Gold?. 1997...A.. G. 7) Martinich J.. Hand Book of Material and Capacity Requirement Planning. 12) Stevens.. No. H. Inc. G.

8 9.6 9. All these planning capsules focus and make use of the intelligence information system for an effective and efficient business.1 9.9 9. In this unit. and to compare the ERP and Supply Chain Planning (SCP).2 9.4 9. A company is very likely to store information on its competitors’ sales as well. 22 . there are many opportunities today to use intelligence information system to aid decision-making. and Distribution Resource Planning (DRP/DRP-II).11 to learn about the recent developments in the information system.1 INTRODUCTION Decision-making is a key activity for management. As an example. the distribution requirement planning and the supply chain planning are presented. for examples. to learn about Materials Requirement Planning (MRP). Enterprise Resource Planning (ERP).3 9. Today. the paradigm shifts in manufacturing.10 9. SCP (Supply Chain Planning) Summary Self Assessment Questions References and Suggested Further Readings 9. firms routinely monitor a variety of activities.5 9. Information that a bank has just approved a loan to our firm reduces our uncertainty about whether we shall be in a state of solvency or bankruptcy next month. Given the wealth of information kept in corporate databases. This information reduces our uncertainty about whether an event such as a cricket match will be held. Information is tangible and intangible entity that reduces uncertainty about some state or event. sales and production. the early information systems developed during the 1960s and 1970s often had few implications for decision-making.IT Enabled SCM UNIT 9 INTELLIGENCE INFORMATION SYSTEM Objectives The objectives of this unit are to enable you: · · · 9. the materials requirement planning. consider a weather forecast predicting clear and sunny skies tomorrow. Unfortunately. Information used primarily for control in the organization reduces uncertainty about whether the firm is performing according to plan and budget. the enterprise resource planning. particularly in the supply chain context. Information derived from processing transactions reduces uncertainty about a firm’s order backlog or financial position.7 9. Through these the organizations achieve the competitive advantage for global competitiveness. Structure Introduction Changing Paradigm of Manufacturing Materials Requirement Planning (MRP) Manufacturing Resource Planning (MRP-II) Enterprise Resource Planning (ERP) Distribution Requirement Planning (DRP) Distribution Resource Planning (DRP-II) ERP vs.

demanding workforce and increasing competition. with its new open policies towards foreign investments.2 CHANGING PARADIGM OF MANUFACTURING IT Packages in SCM Since. These innovations place greater emphasis on manufacturing excellence – an important consequence of global competition in the global economy. Large lot sizes are better because we amortize setup and change – over times over more units. Expected to have a larger market life. by manufacturing enterprises who were caught up between high technology spurred by heavy investment. excellent processes. purchase price variance and overhead absorption rates.9. Self-contained Line personnel shouldn’t challenge current practices. clear and transparent controls. The manufacturing function is undergoing through a period of extra-ordinary revitalization. Increased global competition. quality. informed customers. promoting product delivery and enhancing flexibility to absorb markets varied needs. the Indian companies have to strive for manufacturing excellence by improving product quality. 1950. and open market policies through privatization are positioning it to harness the benefits in the new surge in globalization of economics.1: Changing Paradigm of Manufacturing Old Rules of Manufacturing Produced to forecast Uniform/standardized Low on information content Characterized by a specific market niche. Constantly try to economically reduce lot size and setup times. This revitalization is also seen new manufacturing technologies. making their price competitive. Quality is inspected at the end of line. efficient production goods flow. Layout the factory by function Always keep people busy and equipment humming. vastly upgraded quality standards empowered with total quality programs and innovation experiments in the management of people in the organization. Table 9. intelligent customers. renewed emphasis on productivity. This requires attention on customer oriented products. This means. Inventory is an asset. These technologies are being accompanied by innovation in management of manufacturing systems. carefully engineered job. technology adaptation. global trade is growing at a faster pace than the overall growth Gross Domestic Product (GDP) of the world. New Rules of Manufacturing Produced to order Highly variable/customized High information content Characterized by multiple market niche Expected to have a shorter market life Open ended platform for upgrades/information/services The person closet to the problem is the world’s best expert Cellular layout Make only as such as you need only when you need Inventory is liability Measurements focus on improvement rates in cost. new political and economic environments. the best tools and equipment. Building quality in throughout entire process. Every segment of manufacturing enterprise has gone through close scrutiny and as a result excellent and efficient new technologies emerged and earned their due place in the organization. flexibility and value-added activities and customers satisfaction. These innovations are in effect answers to the challenges placed on the prominent manufacturing capability. and global trade will put pressure on Indian companies to become more efficient. Traditional performance measures such as labor and machine efficiencies. 23 . overhauling of customs and duties. fewer stringent rules toward repatriation of profits. Indian Government.

1. unless instructed otherwise by order modifiers. manufacturers recognized that planning dependent items differently from independent items (using MRP) could produce lower inventories and lower stock-out rates. The second was the perception that a company had to choose between investing in high quantities of inventory or having excessive stock-outs. DRP and SCP are a few solutions that gained significance to meet the current business challenges. The first was the enormous task of setting up schedules. Order modifiers. and subassemblies) in a coordinated manner. and coping with schedule and order changes. MRP logic will always plan inventory to the lowest possible amount. Material Requirements Planning Inputs Figure 9.1 illustrates the five major sources of information required for MRP to operate: 24 . The main purposes of an MRP system are to control inventory levels and assign operating priorities for ordered items. The intelligence information systems consisting of MRP. To this end. The operating philosophy of MRP is that materials should be expedited when their unavailability would delay the overall production schedule.3 MATERIALS REQUIREMENT PLANNING (MRP) The materials requirement planning system is a major element in a manufacturing company and is also the heart of MRPII (Manufacturing Resource Planning). It views inventory from the vantage point of the stock-room. and deexpedited when a schedule change postpones their need. Practitioners used inventory-planning techniques that were designed for independent demand items. they enlisted the power of the computer to handle much of the burden of keeping records and determining material requirements. ERP. Until the 1970s. including safety stock and lot sizes are discussed later in this unit. MRP is a computer-based information system designed to order and schedule ‘dependent’ demand inventories (raw materials. 9. the materials planning process in manufacturing environment suffered from two problems. Additionally. These may be briefly expanded as follows: 1) Inventory Order the right part Order in the right quantity Order at the right time (start data) 2) Priorities Order with the right due date Keep the due date valid The motto of MRP is getting the right materials to the right place at the right time. keeping track of large numbers of parts and components. resulting in high inventories and frequent stock outs. MRP is as much a philosophy as it is a technique. trying to insure that there will always be “just enough” on hand to meet projected demand. and as much as an approach to scheduling as it is an approach to inventory control. Starting in the late 1960s and early 1970s.IT Enabled SCM The new rules of manufacturing that cause the changing paradigm of manufacturing are compared against the old rules of manufacturing – shown in Table 9. component parts.

allocated stock. safety stock. released production and purchase orders. required to produce one unit 25 .1: MRP Inputs and Outputs Production Plan Demand Data Rough Cut Capacity Planning MPS Inventory Status Planning Data Figure 9. and lead-time. verifying the schedule’s feasibility or causing the master schedules to revise the schedule. The item master file provides planning data on each item to guide the MPS planning process.2: Inputs to Master Production Schedule Master Production schedule states which end items (items that are sold to customers) are needed. and firm planned orders. on which specific dates. such as: lot-sizing rule to be used. interplant requirements. distribution warehouse requirements. The production plan provides a set of constraints on the MPS. is a list of all the materials. The MPS must take into account all types of demand data for the items being scheduled including: sales forecasts. The MPS must know how much is available to accurately determine how much to orders.2. Rough cut capacity planning determines the capacity requirements to implement the Master Production Schedule. and safety stocks. as shown in Figure 9. service demand forecasts. 1) The Bill of Materials (BoM). shrinkage factor. and the quantity of each. in what quantities. The MPS has five major inputs. also called a product structure or parts list. customer orders. and when these items will be produced. This requires the inventory status information on hand inventory.IT Packages in SCM Bill of Materials Master Production Schedule Action Report Item Master MATERIAL REQUIREMENT PLANNING Primary (orders) Report Orders Requirements Pegging Report Figure 9.

because they will come into our plant from external sources. no matter at how many levels it is used in a product. because they will be procured internally. We can also categorize the incoming orders (both shop orders and purchase orders) in a different manner. such as customer orders and service parts. as the basis for calculating the amount of each raw material required for each time period. Just as there are two types of requirements. such as part description. MRP uses the bill of materials. and MRP planning factors (lot sizes. Customer orders also contain such additional information as the customer name and ship to address. such as various costs. Table 9. There are two types of requirements: Internal (which will be used within the plant to make other products).IT Enabled SCM of a manufactured product. and the date we promised to ship. and no matter whether it is currently stock-on-hand or not. These are similar to our external requirements. which will be procured from outside our plant. and the quantity already issued from the stock room. or parent. the date on which it is needed. 4) Orders are computerized record of a future stockroom issue receipt that will increase stock-on-hand. the quantity required. 2) Item Master in an MRP system is a computerized file with a complete record for each item. plus dynamic data. and External (which will be sent outside the plant. or whether it is still planned. which tells whether the order has been released.2. there are two types of orders: a) Shop orders (or work orders or manufacturing orders). or in how many products. The engineering Bill of materials (often called the parts list) for a simple product (ball-point pen) is as shown in Table 9. The categories are: 26 . 3) Requirement is a computerized record of a future stockroom issue that will diminish stock-on-hand. unit of measure. or part.2: Engineering Bill of Materials (Parts List) for ball-point pen Item No. and scrap rates). safety stock. b) Purchase orders. The BOMs represent the actual sequence of fabrication and assembly. which will be manufactured within our own plant. the date on which the customer wants delivery. A typical requirements record contains the item number of the part required. current quantities on hand and on order. These are similar to our internal requirements. 1 2 3 4 5 6 7 Description Barrel Tip Spring Refill Cap Plunger Clip Quantity 1 1 1 1 1 1 1 Make or Buy Make Buy Buy Buy Make Buy Buy Drawing File No. lead times. The item master record for a part contains many types of information. Because MRP systems are part-oriented. including: static data. has one and only one record. 26079 26080 20091 20026 26048 26032 26054 In an MRP system. Each item. a Bill of Materials (BOMs) file is an up-to-date computerized file that contains a single record for each individual parentcomponent relationship. the Item Master File is the heart of the system.

a) Scheduled receipts (or open order, or released order), which is an order that has been officially released, either in the shop or to a supplier. A scheduled receipt commits our company to take action and spend money. b) Planned order, which exists only in the computer, and perhaps some printouts at this point. Our company has not yet been authorized to spend money; no supplier or shop has been authorized to start work on this order. Planned order can become scheduled receipts only when a human expressly takes action, this is one of the primary responsibilities of a materials planner. An MRP order record contains considerable data, including item number being ordered, order quantity, original due date, actual received quantity, revised due date, quantities in MRB (Material Review Board) and scrap, supplier (if purchase order), and other information. Activity 1 Identify and discuss the different Bill of Material Database in an organization. Does the Bill of Material Database vary from department to department? Why? Draw a Bill of Material “tree” for one of a typical product that you know. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. Material Requirement Planning Logic and Mechanics The logic underlying MRP is to use the product structure (BOM) and lead time information to determine when purchase and production orders should be released so that materials are obtained just when they are needed. 1) Exploding the Product

IT Packages in SCM

The first step is to use the BOM to ‘explode’ the product into a production (or assembly) time chart. Figure 9.3 is a production time chart for the spider climber (It is the playing implement that kid uses in the children’s park). The explosion begins with the time the end product is needed and then works backward through each production or purchasing activity that must be done to make each succeeding item. For example, consolidating and packing a spider climber requires one day of lead time, so if a supply of climbers is required at time T, shells, leg supports, ladders, and bolts and nuts must be available one day earlier, at time T-1. Welding and coating a shell requires three days of leadtime, so an order to begin welding shell quads must be released three days earlier, or at time T-4. Casting and demolding shell quads also has a three-day lead-time, so an order to cast shell quads must be issued and aluminum ingots must be available at time T-7. Figure 9.3 shows that the cumulative lead time for producing a spider climber is eight days, so the company would have to initiate production or purchase activities at least eight days before climbers are required.

27

IT Enabled SCM

Pack Products Order Aluminum pipe Obtain Aluminum ingots* Cast shell quads Weld and coat shell Cut leg support

8

7

6

5

4

3

2

1

Days before shipping of End-product
*

Order point Items not ordered by the MRP system, materials are always in stock.
Figure 9.3: Production Time Chart for the Spider Climber.

0 End Product Available

2)

Developing the Material Requirements Plan

The next step is to construct a material requirements plan for each item in the BOM, as illustrated in Figure 9.4. Master Production Schedule Day Quantity 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 20 10 0 11 30

Spider Climber Gross requirements Projected on hand Scheduled receipts Net requirements
28

20 0 0 20 20 30

30 0 0 30

Planned order release

Shells Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release Shells Quads (× 4) Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release Leg supports (× 4) Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release Pipe (× ¼) Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release Ladders (× 4) Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release Ladder Legs (× 2) Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release 160 160 0 0 160 240 240 0 0 240 80 80 0 0 80 120 120 0 0 120 20 30 20 0 0 20 30 0 0 30 80 80 0 0 80 120 120 0 0 120 80 120 80 0 0 80 120 0 0 120 20 30 20 0 0 20 30 0 0 30

IT Packages in SCM

29

IT Enabled SCM

Figure 9.4: (Contd..) Pipe (× 4) Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release Ladder Steps (× 7) Gross requirements Projected on hand Scheduled receipts Net requirements Planned order release 560 840 560 0 0 560 840 0 0 840 160 240 160 0 0 160 240 0 0 240

Figure 9.4: Material Requirements Plans for Spider Climber

A material requirements plan is a production or purchase schedule for an item that makes up the end product. The procedure begins by converting the gross product requirements in the MPS into net product requirements. The gross requirements are the number of units actually required (desired) at the beginning of each time period. The requirements are the gross requirements less any available inventories and any scheduled receipts, where the available inventories are total inventories for the item at the beginning of the period less any desired safety stock (in the MRP, available inventories are normally labeled as projected on hand). The scheduled receipts are replenishment orders that have already been placed, either in our plant (shop orders) or at a supplier (purchase orders). These will increase the inventory on hand. Hence,
(net requirements)t = (gross requirements)t – (projected on hand + scheduled receipts)t (projected on hand)t = (total expected inventory)t – (safety stock)t

Gross product requirements are transferred from the MPS to the material requirements plan for the end product, and the net requirements are computed, as shown in figure 9.4. The next line in the material requirements plan is the amount of product or material planned to be received through production or from a vendor at the beginning of the time period. Under lot-for-lot ordering (production) we order or produce exactly what is needed in a time period so that the planned order receipts will equal the net requirements. (It may be noticed that in Figure 9.4, the planned order receipts is combined with the net requirements). The final lines in the material requirements plan for an item is the planned order releases. This is the amount that must be ordered (internally through production or externally from a vendor) at the beginning of a time period so that the planned order receipts occur when needed. Therefore, the planned order releases equal the net requirement (or planned order receipts), except that they are offset by the lead-time. For example, in figure 9.4 the net requirements for the spider climber are 20 units on day 9 and 30 units on day 11. The lead-time for final consolidation and packing is one day, so the planned order releases for the climber must be 20 on day 8 and 30 on day 10.
30

9.4

MANUFACTURING RESOURCE PLANNING (MRP-II)

IT Packages in SCM

As we have noted, MRP is a production planning system that converts an MPS into planned order releases. Manufacturing resource planning (MRP-II) is a philosophy that attempts to incorporate the other relevant activities of the firm into the production planning process. In particular, the financial, accounting, and marketing functions of the firm are tied to the operations function. As an example of the difference between the perspectives offered by MRP and MRP II, consider the role of the master production schedule. In MRP, the MPS is treated as input information. In MRP II, the MPS would be considered a part of the system and, as such, would be considered a decision variable as well. Hence, the production control manager would work with the marketing manager to determine when the production schedule should be altered to incorporate revisions in the forecast and new order commitments. Ultimately, all divisions of the company would work together to find a production schedule consistent with the overall business plan and long-term financial strategy of the firm. Another important aspect of MRP II is the incorporation of CRP (capacity resource planning). Capacity considerations are not explicitly accounted for in MRP. MRP-II is a closed-loop cycle in which lot sizing and the associated shop floor schedules are compared to capacities and recalculated to meet capacity restrictions. An MRP-II system may convert information from the material requirements plans into specific work schedules for departments and machines, evaluate department workloads and capacity conditions, generate shipping documents and customer invoices, and produce management reports on production and financial performance. Typically, these systems have feedback mechanism (and therefore called closed-loop MRP systems) so that if department, machine, or personnel capacity limits are exceeded, the material requirements plans and corresponding production schedules are revised to stay within capacity limits.

9.5

ENTERPRISE RESOURCE PLANNING (ERP)

In the past, most of the planning covered only limited routine operational requirements, with focus on historical record keeping and accounting. The business functions in the enterprise were using information technology to automate the departmental activities, to fulfill only individual and departmental needs and objectives, not realizing the effect on other functions. However, the enterprise is the group of people with a common goal, which has certain resources at its disposal to achieve this. The group has some key functions to perform inline with the goals. Resources are anything, which cost money. Resources include raw materials, purchased parts, and produced parts, personnel, processing machine capacity, material handling capacity, tools, fixtures, NC programs and such others as needed to produce the end items. Planning is to ensure that nothing goes wrong and also putting necessary functions in place. ERP is the method of effective planning of all resources in an organization. Every organization committed to making and selling goods and services has three major objectives:

· · ·

To provide maximum customer service To minimize inventory carrying cost To optimize plant operation
31

IT Enabled SCM

Unfortunately, these objectives are basically conflicting in nature and represent certain trade-offs. Sales department requires all the inventory necessary to service their customers and at the same time production flexibility to meet changing demands. Factory desires a constant production schedule with long runs and less overtime. Finance insists on keeping the capital investments to a minimum. More often they end up with the managers nightmare:

· · ·

More was bought than required More was used than essential More was produced than sold

ERP is an attempt to bridge the gap. It is defined to be a company wide planning system which works around core activities of business and has all logical interfaces to achieve seamless flow of information within the supply chain and value stream. Such systems can optimally plan and manage all the resources of enterprise to run the business with high level of customer service at lower cost and improved productivity. The evolution of ERP took over three decades, during which the continuous improvement for integration and planning with creative thinking by innovators developed this comprehensive planning and control framework. Three ancestors of ERP serve as milestones:

· · ·

1960’s Material Requirement Planning (MRP) 1970’s Closed Loop MRP 1980’s Manufacturing Resource Planning.

During this it also absorbed the new techniques proven to produce business benefits from Just-in-Time (JIT) and Business Process Reengineering (BPR). In 1960’s the computerized production and inventory control systems began to provide better methods of ordering materials and control inventory. It uses master production schedules (What are we going to make?), bills of material (What does it take to make it?), and inventory records (What do we have?) to determine future requirements (What do we have to get?), which is called as Material Requirement Planning (MRP). In the changing conditions of manufacturing environment, the priority planning and capacity planning were tied in with MRP to accommodate the variations in demand and supply using feedback from tactical plans and execution levels. This closed structure is called as closed loop MRP. The next generation, Manufacturing Resource Planning (MRP-II), plans to forecast sales, to set production rates and resources levels integrated with investments decisions before translating the business plans to Master Production Plans (MPS). In the new generation ERP, the whole supply chain management concept is incorporated extending the planning concept to trading partners where the complete visibility throughout the enterprise is possible and the concept of virtual enterprise is supported using electronic commerce. This incorporates the techniques, Just-in-Time (JIT) and Business Process Reengineering (BPR), particularly in the areas of work empowerment, human engineering and waste reduction. The benefits of JIT are never fully realized unless it is being applied within the rational framework without which one could easily make wrong part at wrong time with utmost efficiency. The drawback of MRP II was the planning based on lead times, which never asked for improvement and taken as it is. The BPR is becoming an essential tool before and while ERP implementation concentrating on reduction in non value adding activities and work simplification causing reduction in cycle time.

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ERP consists of different modules integrated into one system. The modules are: 1) Distribution and transportation which serves day-to-day logistics using forecasting tools, extensive planning, comprehensive sales, purchasing, warehousing, packaging, inventory management and electronic commerce. 2) Order management integrates customer order processing into master production schedule, supports multiple sites and currencies, electronic commerce for real time information. 3) Manufacturing module supports master production schedule, material requirement planning, capacity planning, supplier scheduling and shop floor control. 4) Finance module delivers high level of visibility of financial transactions, supports accounts payable, accounts receivable, different costing methodologies, general ledger and electronic commerce. 5) Human resource module integrated with pay-roll track skills, capabilities, experience and training needs of an organization, prepares and maintains organization structure. 6) Quality management lets user tap collect, distribute and analyze critical quality information and uses powerful statistical tools to monitor and control products and processes. 7) Maintenance management calls for optimal schedules for personnel, availability of spares, and effective maintenance tasks. It handles all types of maintenance, keeps details of equipments, generates spare parts and maintenance requirements automatically. 8) Project module supports cost management of projects includes estimates, bids, scheduling, planning, budgeting, purchasing, tracking, billing, and integration with finance, manufacturing and distribution operations. Why a Company Pursues a New ERP Solution a) The company wants to achieve performance improvements, such as reducing operational costs, gaining competitive advantage, improving customer service, and improving or reengineering business processes. b) The existing system in the company is not able to support its needs and requires significant information system resources for maintenance and support. c) The system uses multiple points of input, often with duplication of effort. d) Staff members are unable to answer questions easily or respond to information requests by key customers or suppliers. e) The enterprise has grown through mergers and acquisitions and contains a variety of incompatible systems f) Key information is updated on a batch basis instead of in real time.

IT Packages in SCM

A few ERP software modules and their features are presented in Unit 10.

9.6

DISTRIBUTION REQUIREMENT PLANNING (DRP)

Distribution Requirement Planning (DRP) is a management process that determines the need of inventory stocking locations (store, distribution center, regional distribution center, central DC, manufacturing DC, or warehouse that carries product for sale) and ensures that supply sources (third party supplier, a regional distribution point, or a factory) will be able to meet the demand. This is accomplished in three distinct phases.

33

These include: a) Which product is needed. and a forecast that varies between 80 and 120 per week (see Figure 9. It then recommends what actions must be taken to expedite or delay purchases and/or production. d) Outstanding purchase orders and/or manufacturing orders by product purchased and/or manufactured. e) Required level of production and/or purchases by product and by supply source. thereby synchronizing supply and demand. manufactured. b) Customer orders for current and future delivery. manufacturing. f) Modes of transport used as well as deployment frequencies. On-hand Balance : 500 Safety Stock: 200 Lead Time: 2 weeks Order Quantity: 300 Mumbai Store Vitamin C Tablet 100/Bottle Past Due 1 100 2 120 3 90 Week 4 110 5 120 6 100 7 8 Forecast In Transit Projected on hand Planned Shipments. b) Transportation capacity needed by mode of transport by stocking locations. thus closing the loop among manufacturing. purchasing. manpower.5: DRP Logic for a Mumbai Store . and purchasing lead times.5). logistics. Date Planned Shipments. once all inputs are received. c) Needed space. DRP Logic Consider a company manufactures distributes and sells pharmaceuticals and supports a network of six retail stores. we will track the planning for vitamin C tablets packaged in bottles of 100. DRP generates a time-phased model of resource requirements to support the logistics strategy. and equipment capacity by stocking locations.– Receipt. Specifically. Second. DRP receives input from the following: a) Sales forecasts by stock keeping unit by stocking location.– Ship Date 34 80 120 500 400 280 190 80 -40 Figure 9. Third. The store at Mumbai has 500 of this product on hand. d) Required inventory investment by stocking locations and in total. 200 as a safety stock.IT Enabled SCM First. This third phase forces integration and feedback into the system. g) Safety stock policies by SKU by stocking locations. DRP compares the required resources to what is currently available at supply sources. and where and when it is needed. how much. and the customers. e) Logistics. and distributed. h) Normal minimum quantity of product to be purchased. c) Available inventory for sale by stock keeping unit (SKU) by stocking locations. and what will be available in the future.

The planned shipments provide enough stock to last until week 8. at which point the store will probably run out of stock and go on back order in week 5. for example. a shipment of 300 units must arrive in week 3 to prevent the inventory from dropping below the desired safety-stock level. an order of 150 is in transit. The store manager needs more of the product delivered in week 3 to keep the balance from dropping below safety stock. Figure 9.In Figure 9. Forecast sales for the week are 100. leaving a projected balance of 400 at the beginning of the next week..7. they are subtracted from the 500 on hand. let’s expand it to all the stores for the Vitamin C product. On-hand Balance : 500 Safety Stock: 200 Lead Time: 2 weeks Order Quantity: 300 IT Packages in SCM Mumbai Store Vitamin C Tablet 100/Bottle Past Due 1 100 2 120 3 90 Week 4 110 5 120 6 100 7 8 Forecast In Transit Projected on hand Planned Shipments.e. no product is in transit. In the case of the Indore store in Figure 9. The situation shown in Figure 9.– Receipt. In the beginning of the first week. If that were the cases. Therefore.5. This order should be sent from the supply source in week 4. another order must arrive in week 6. 500 are on hand. are shipped at a time. This logic reduces the on-hand balance by the quantities forecast for each week. The projected on-hand balance dips below the safety stock of 200 in week 3 (projected on-hand balance of 190). Figure 9. although the store will drop below safety stock in week 6. One shows the planned shipments on the date they are due to arrive at the store (planned shipments – receipt date). or four full cases. the shipment should be ordered from the supply source in week 1.5. Now that we have seen how DRP functions in one store.6 includes this planned shipment (i. and it is due to arrive in 35 . The other shows the planned shipments on the day they are due to be shipped from the supply source (planned shipment – ship date). future order) from the supply source in the two lines labeled planned shipments. the product in transit would be added to the projected on-hand balance in the week that it is due to arrive. The following examples (Figure 9. Date Planned Shipments.6: DRP Logic for a Mumbai Store with Planned Shipment The replenishment lead-time for vitamin C at the Mumbai store is two weeks.– Ship Date 500 80 120 400 280 490 300 380 260 460 380 260 300 300 300 Figure 9.7) show DRP displays for the other stores and are similar to the DRP display shown for the Mumbai store. and normally 300 bottles.6 shows the complete picture of the Vitamin C product at the Mumbai store. The same mechanism ripples through the schedule. In the example in Figure 9. which means that more product must arrive by week 5 to keep the product from going on back order. the projected on-hand balance is determined by means of the simple computations. Since the replenishment lead-time is two weeks. Therefore. The order was shipped because the lead-time is two weeks.5 will occur if nothing is shipped from the supply source.

a planned order is overdue for shipment.7). the manager of the store could determine whether the supply source is shipping on time. DRP gives the people operating the system complete flexibility in scheduling any item at any stocking locations. are similar to the Mumbai store. – Receipt. Perhaps sales were greater than forecasted. the shipment might not have been sent from the supply source on time. New Delhi. as shown in Figure 9. because of the visibility that DRP affords. In that case. and safety stock (SS) are different for each store. The in-transit quantity is added to the projected on-hand balance in the week the order is due to arrive. This is the planned shipment for 300. and safety stocks can be different for different products at the store. order quantities. Nothing is in transit. Chennai & Bangalore Store Vitamin C Tablet 100/Bottle On-hand Balance : 160 Safety Stock: 75 Lead Time: 2 weeks Order Quantity: 150 Indore Store Past Due 1 40 2 50 150 160 120 220 175 125 85 190 150 100 150 150 Week 3 45 4 50 5 40 6 45 7 40 8 50 Forecast In Transit Projected on hand Planned Shipments. In the case of Calcutta store (Figure 9.6 and 9. but there are several planned shipment from the supply source to the stores. so the product was needed in Calcutta earlier than anticipated. Date Planned Shipments. (This is not apparent in the figures 9. The situations at the New Delhi. the lead times. Chennai & Bangalore Store . In addition. the manager could determine the problem well before a stock out occurs. The lead-time (LT). Each product at each store. The Bangalore store is in the same city as the supply source. however. order quantities (OQ). – Ship Date On-hand Balance : 160 Safety Stock: 75 Lead Time: 2 weeks Order Quantity: 150 Calcutta Store Past Due 1 120 2 130 Week 3 115 4 125 5 140 6 7 8 Forecast In Transit Projected on hand Planned Shipments. – Receipt. so its lead-time for product is only one day. Calcutta. Chennai and Bangalore stores. so each store can be scheduled independently if desired. Calcutta. New Delhi. – Ship Date 36 110 125 105 300 180 350 300 235 110 270 300 160 335 230 300 300 300 300 Figure 9. The store manager can now see what material is in route and when it should be expected.7: Indore. There could be several reasons for the past-due order. Or.IT Enabled SCM week 2. Date Planned Shipments. Moreover. Indore.7 because only one of many products is shown. which appears in the past-due time period. is scheduled independently).7.

Date Planned Shipments. – Ship Date On-hand Balance : 120 Safety Stock: 50 Lead Time: 1 weeks Order Quantity: 150 140 120 95 80 60 180 150 155 140 110 150 Chennai Store Past Due 1 25 2 15 Week 3 20 4 25 5 20 6 20 7 25 8 15 Forecast In Transit Projected on hand Planned Shipments.8: Summary of Planned Shipments to the Stores . – Receipt. Date Planned Shipments.On-hand Balance : 140 Safety Stock: 50 Lead Time: 3 weeks Order Quantity: 150 IT Packages in SCM New Delhi Store Past Due 1 20 2 25 Week 3 15 4 20 5 30 6 25 7 15 8 30 Forecast In Transit Projected on hand Planned Shipments. Date Planned Shipments. – Receipt. – Receipt. – Ship Date Past Due Mumbai Indore Calcutta New Delhi Chennai Bangalore Total 300 300 400 95 120 295 180 385 300 300 Week 3 295 195 385 290 170 300 300 1 300 2 4 300 150 5 6 7 8 300 150 150 300 300 150 750 450 300 300 300 300 0 0 37 Figure 9. – Ship Date On-hand Balance : 400 Safety Stock: 150 Lead Time: 1 day Order Quantity: 300 120 95 80 60 185 150 165 145 120 105 150 Bangalore Store Past Due 1 105 2 115 Week 3 95 4 90 5 100 6 110 7 8 Forecast In Transit Projected on hand Planned Shipments.

the inevitability of lumpy demand. Lumpy demand is one of the reasons why it is so important to have visibility in the supply chain system. This gives tremendous visibility into the distribution network. The demand on the supply source is lumpy. you might expect that the demand on the supply source would be smooth as well. Figure 9. a planner or buyer needs to be able to see what product is needed and when it must be shipped to meet the needs of the stores in the systems without DRP. etc. buyers see the true needs of the supply chain system. with demand in any one-week nearly the same as demands in other weeks.8 illustrates this point very well. For example. but in week 3 it jumps to 750.7. Yet. The better buyers see what the stores need in the future. Based on this. It is a dynamic model that looks at a timephased plan of events that affect inventory. With DRP. in week 2 the demand is only 150.7 DISTRIBUTION RESOURCE PLANNING (DRP-II) Distribution Requirements Planning (DRP) has been defined as the application of MRP principles to the distribution environment. Order Entry Forecasting Invetory Control Bill of Distribution Open PO`s/MO`s Transportation Planning & Scheduling Resources Requirements Planning & Scheduling Yes Sales & Operations Planning Make Buy Purchase & / or Inventory Planning (MPS) = DRP plans/cchedules & Key Output Interface = Key Input Interface PO = Purchase Order MO = Manufacturing Order 38 Figure 9. the opposite is true. buyers must use averages – hence. Because the demand on the supply source can vary so much from one week to another. however. forecasts for New Delhi and Chennai stores are nearly the same from week to week. 9. integrating the special needs of distribution networks of retailers.9: Distribution Resource Planning Process . the better they are able to meet those needs and resolve problems before they occur.IT Enabled SCM In figure 9. and enables buyers to realistically plan for the needs of the stores.

. financial plan and budgeting...... and financial flows..... Demand management 4.......................... Manufacturing flow management 6... DRP applies the time-phased logic to replenish inventories in multiechelon warehousing systems............ Procurement 7....g...........8 ERP VS........... Returns channel (reverse logistics) · Demand forecasting · Planning of product production & capacity · Detailed routing 3. SCM: Supply Chain Management is the logistics of managing the pipe line of goods from contracts with suppliers and receipt of incoming material............ It is to be noticed that the accurate forecasts are essential ingredients for successful DRP-II systems..... Production planning · Master production schedule · Material requirement planning 39 .. control of work-in-process. : Comparison of key processes of ERP & SCM ERP Key Processes 1.............. and SCM that suits your organization or an organization of your choice........... and finished goods inventories in the plant.................Distribution Resource Planning (DRP-II) is an extension of distribution requirements planning...... manpower levels...................... IT Packages in SCM 9.............. More details may be found in reference on MRP-II......... transport capacity (e..... ....... DRP-II extends DRP to include the planning of key resources in a distribution system – warehouse spaces...... transportation plan.... and more importantly manufacturing plan such as master production schedule........................ However......... predicting warehouse space requirements and predicting labour requirements and equipment needs....... ERP..... Business planning 3... MRP-II.................. SCP (SUPPLY CHAIN PLANNING) ERP: Enterprise Resource Planning is company wide planning systems.. which works around core activities of business and has all logical interfaces to achieve seamless flow of information within the supply chain context.......9 depicts the DRP-II system schematically......... Order fulfillment 5......... DRP-II.................. trucks. Sales and Distribution SCM Key Processes 1... A DRP-II system translates the forecast of demand for each stock keeping unit (SKU) at each warehouse and distribution center into a time-phased replenishment plan............ Such systems can optimally plan and manage all the resources of enterprise to run the business with high level of customer services at lower costs and improved productivity..... Figure 9..... railcars)..... Activity 2 Prepare a feasibility report for the recommendation of MRP.. Customer relationship management 2......... . Table 9............. DRP..... From the above definitions of ERP and SCM one may understand that there is a great deal of commonality......... . the software designers consider the key process shown in Table 9........................ Customer service management · Order entry · Delivery scheduling 2. Product development and commercialization 8. to contracting the movement of finished goods through the channels of distribution..

the fourth point-to expand the view of the supply chain is critical. current inventory levels. 5. Logistics · · · · Inventory management Warehouse management Delivery management Purchasing management Supply Chain Management Pitfalls Supply chain management faces the following 14 key pitfalls: 1) 2) 3) 4) 5) 6) 7) 8) 9) No supply chain strategy Inadequate definition of customer service Inaccurate delivery status data Inefficient information systems Ignoring the impact of uncertainties Simplistic inventory stocking policies Discrimination against internal customers Poor coordination Incomplete analysis of shipment methods 10) Incorrect assessment of inventory costs 11) Organizational barriers 12) Product-process design without supply chain consideration 13) Separation of supply chain design from operational decisions 14) Incomplete supply chain strategy. In addition. This system would support the opportunity for improved supply chain performance: the integration of control and planning support systems. Second. and sites are rewarded for taking a system-wide. the design of the product or service should give consideration to the cost and service implications for the existing or proposed supply chain. Appropriate data include past performance. Supply chain members should embrace the systems approach with the realization that each member’s activities have an impact on the others. which ignores the systems approach. as well as forecast data. ERP Key Processes Shop Floor Control SCM Key Processes · Production orders · Scheduling. database should be integrated throughout the supply chain to ensure operational control. This in turn would reduce independent decision making. divisions. For example. dispatching & job costing. First. the organization should institute supply chain performance measurement. The suggested approaches deal with design and measurement. There are however excellent ways to overcome these problems. so that individuals.IT Enabled SCM 4. positions and schedules. 40 . The last two issues concern internal and external measurement. The organization must redesign its incentives. Thus. inventory measurement should be viewed across the supply chain instead of local assessments. supply chain approach.

The capacity and production planning gets very complex. The major benefit of SCOR is that it gives inter-organizational supply chain partners a basis for integration by providing them. although the complexity of the chain may vary greatly form industry to industry. SCP is just an example of hundreds of software titles that address some aspect of supply chain management. On the surface. such as late delivery of materials. Once the Master Production Schedule is complete. and Logistics. and the distribution of these products to the customers. and checks the customer’s credit line. and manufacturing tools for accurate planning and scheduling of various activities. This naturally leads to Shop Floor Control. often for the first time. to be able to contrast to SCP software. Business Planning consists of demand forecasting. therefore simulation tools are provided as part of R/3 that can help managers to decide how to overcome shortages in materials. A new software program developed by Ross Systems. Therefore. planning of product production and capacity. and rescheduling proposals. First. The planned orders from the MRP are converted to production orders.Supply Chain Planning (SCP) Managers responsible for supply chain process improvement planning. ERP Vs. promising continued growth into the future. implementation. It gave people the chance to look at the supply chain with company-wide needs in mind. Order proposals are used to order materials and issue production orders. which is a notable achievement. The development of software applications pertinent to supply chain management is currently a hotbed of activity. The most distinguishing characteristic of ERP systems is their comprehensiveness. SCP A supply chain is a network of facilities and distribution options that performs the function of procurement of materials. Sales and Distribution covers order entry and delivery scheduling. and order proposals. Business Planning. We take SAP’s R/3 package (refer unit 10 for details) and try to differentiate between ERP and SCP by taking this as a model. The exception report brings to attention situations that need attention. Shop Floor Control. The MRP list shows the details of shipments and receipts for each product and component. This module also naturally checks on product availability to ensure timely delivery. Production Planning. it helps to review the relevant functions of R/3 in detail. this would seem to cover anything that SCP claims to provide. labour. that data is fed into the MRP (Materials Requirements Planning) module. and measurement received a much-needed framework to guide their efforts in November 1996 when the 69 members Supply Chain Council introduced its Supply Chain Operations Reference Model (SCOR). or time. The framework helped to break down functional silos and allowed people to look at real issues and practices supply chain management improvements. an MRP list. transformation of these materials into intermediate and finished products. with something tangible to talk about and work with. This software provides an end-to-end enterpriseresource planning solution incorporating the most advanced supply chain planning capabilities available. and the detailed routing information that describes where (in which work cells) and in what sequence the product is actually made. Supply chain exist in both service and manufacturing organizations. It turns out that the various departments are now talking in the same language. R/3 broadly covers Sales and Distribution. called Supply Chain Planning (SCP) is an integrated suite of constraint-based planning tools that provide demand replenishment. Inc. IT Packages in SCM 41 . This leads to production scheduling. The MRP has three principle pieces of output: an exception report.

the various material. supply. Here is a description of Manugistics latest version: “Navigating your way through mountains of supply chain information is made easier with Supply Chain Navigator’s state-of-the-art graphical user interface. disaggregation.” This sounds a lot like what R/3 does. and to perform real-time simulations of adjustments in the constraints. assuring timely delivery to the customer. RHYTHM goes beyond traditional planning solutions like MRP (Manufacturing Resource Planning) and DRP (Distribution Resource Planning) by simultaneously considering demand. RHYTHM plans and optimizes the supply chain as a continuous and seamless activity that integrates all planning functions across the supply chain. balancing or echelon-skipping requirements within the distribution network will need to augment their existing ERP applications with advanced SCP functionality or risk incurring distributions costs that are at least 10 percent higher due to expediting. and delivery. from acquiring raw materials to manufacturing products to distributing finished goods to the consumer. Production & Capacity Planning. capacity. it also seems to be very close in functionality to SCP products such as those from i2 and Manugistics.i2. This intuitive GUI gives you complete visibility into the inner-workings of the supply chain – through demand. The leading SCP products generally have many other enhancements as compared to the ERP packages. and transportation – all at your fingertips. The purchasing function is also usually grouped under logistics.IT Enabled SCM dispatching. While ERP systems provide a great deal of planning capabilities. This functionality is representative of all the major ERP vendors. R/3 has detailed functionality to order needed materials. The more leading edge SCP products are able to consider all the relevant constraints simultaneously. showing where problems are. So really. This is a relatively 42 . and Logistics. and PeopleSoft. Getting answers from an overloaded ERP systems may take hours. manufacturing scheduling. This is caused by the static sourcing tables used in ERP systems. The overall process summary looks like: Sales & Forecasting Data. and to schedule and track distribution. Many employ visible maps of the entire supply chain. including SAP. and demand constraints are all considered separately. what’s the difference? The description of i2’s Rhythm product line (found at http://www.com) is slightly different: “RHYTHM’s Supply Chain Planner provides advanced planning capabilities to leading companies in many industries. capacity and material constraints”. But that functionality is actually a SAP version of the SCP product made by i2. Finally. Oracle. Enterprises with multi-echelon distribution networks that have aggregation.com) has the following description of supply chain management: “Effective supply chain management enables you to make informed decisions along the entire supply chain. in relative isolation of each other. the Logistics system takes care of rest. whereas getting them from a separate SCP system may take minutes or seconds. Production Execution. schedule and track the manufacture of products. and also have many more jobs to do than just SCP. ERP systems have a harder time adding this more dynamic functionally because they are chiefly concerned with transaction processing.manugistics. Logistics in this case consists of inventory and warehouse management. However. which SAP is selling as a separate module. SAP has added similar functionality. So what’s the difference? The Manugistics web site (http://www. This provides a better idea of the chief differences between ERP and SCP systems. low order fill rates and inventory imbalances. Baan.” Just recently. and job costing.

.....................................9 SUMMARY How to best extract value from information technology resources is a major challenge facing both business and IT managers....... implementations should become somewhat simpler and thus shorter and less expensive.. and Baan and People Soft both have recently acquired smaller SCP vendors to integrate into future releases of their ERP products.............. and more experienced implementers in job market... Oracle and the other ERP vendors also have APIs that i2 and other vendors can use as common denominator middle-ware to interface to..... claims to work by simply pointing and clicking on a sending application (such as SAP) and a receiving application (such as Manugistics) and then selecting the processes to link together.... which is often a trial and error process.... and often turns into a nightmare................. This software.. this is only a temporary relationship if SAP..... ............... but it hits the main points........ This software is designed specifically to allow ERP and other systems to share processes and data....... Discuss the suitability of the selected case study in Indian context...................... The ERP vendors have awaken...... and are rushing to add more sophisticated supply chain functionality to their ERP products..... since these products have many naturally overlapping features................. have their way. No programming is required. Although it seems that all the leading SCP vendors are partnered with the all the leading ERP vendors. Activity 3 Select a case study from a National/International Journal.. Now.. this means that each vendor has to change their middle ware interface software quite often.......... they should push a lot of the smaller SCP and ERP vendors out of business. With the industry shakeout...... particularly as they turn their focus on searching for competitive benefits of strategic information systems and striving for benefits beyond process reengineering........................... One other key development that should be noted is the rapid convergence that is happening between ERP and SCP software.................. Oracle. ... .... 43 ........ This search becomes increasingly complex for those organizations attempting to operate in supply chains with multiple participants........................ since there will be less products to integrate......... doesn’t usually perform well...simplistic explanation of the key differences between the ERP vendors’ SCP modules and the leading SCP only products........................ However..................... ..... how is data kept consistent between them? i2 uses SAP’s ALE (Application Link Enabling) to exchange data between R/3 and Rhythm (i2’s SCP product suite)............................. And the SCP vendors are also expanding their functionality................... although more are appearing.. IT Packages in SCM 9.... which discusses the selection and implementation of either ERP or SCM.... Oracle has also added a SCP module............ and possibly better solution to this problem is SIS (Specialized Integration Software)................. etc........................................... A newer...... This removes the core of developing an interface to every other vendors software.... which runs on Windows NT....... Following SAP’s example........... As the ERP vendors move heavily into the midsize market with their new supply-chain bolstered products............. further encroaching on the area inhabited by the ERP vendors.... The major company in this area is Cross Worlds Software Inc...........................

the key processes vary and hence the differences are reflected in the software. and improved productivity. Because of the destructive left foot of Transylvanian superstar Vladimir ‘Toze’ Kickofski. Inc. perfect order completion. Identify the sources through which these inputs are obtained. and 200 in week 12. process reliability. The benefits of this tool includes. 9. Illustrate the basic mechanics of the logic for a simple product like a ballpoint pen. However. receives orders for footballs from the Paramutuel Foot ball League (PFL). This application makes use of recent developments in information technology. Give your answer for both Make to Stock (Make to Forecast) and Make to Order situations. Supplier reliability. ERP and DRP are a few business intelligence that automate the enterprise activities. Each year Sputter Sports. inventory cost reduction. It takes one week to assemble an order of footballs up to 500 units. the PFL orders a single quantity of balls. Additional features are being handled in the SCM. However. A comparison of ERP and SCP reveals that there exists a great deal of similarity between these two approaches. A football is composed of a leather cover. Prepare a flow chart for Material Requirement Planning logic. Why inventory control system is not practiced for dependent item material planning? Give major inputs of MRP. The sets that include MRP. particularly in supply chain context. so Sputter Sports wants to determine when the materials necessary to produce the order should be obtained. cycle time reduction. Assume all the necessary data for your selected product. reduction of lead-time. and a string to lace the leather cover after the bladder has been inserted.IT Enabled SCM In this unit. a rubber bladder. It takes one week to cut and stitch 100 footballs with the current work force. schedule attainment. the recent development in the information system. which takes only one week to purchase. total supply chain and total cycle time are the key performance indicators that need to be continuously measured and monitored for competitive advantage. reduction in operating costs. Distinguish between independent and dependent demand inventory system. delivery days on hand. supplier lead time. and Sputter does not plan to enlarge its facilities or work force for this order. Sputter Sports plans to ship 300 footballs in week 8. replenishment lead time. The lead-time to obtain bladders is five weeks and they cannot be purchased in orders of less than 250. Sputter has no other customer for footballs. Sputter purchases bladders already molded with the inflation valve as an integral part of it.. has been reviewed. Records of past purchases indicate that it takes two weeks from the time of order until the skins are delivered. 2) 3) 4) 5) 44 . SCM software product developers keep these indicators for benchmarking their products. the supply chain planning (SCP) emerged as a new tool for an integrated business. 200 in week 10.10 1) SELF-ASSESSMENT QUESTIONS “Making changes in a manufacturing company is probably the hardest thing that civilized man has ever set out to achieve” – give your comment on this statement in context with the organization switching to supply chain management. One hundred strings for the footballs are cut from on cowhide. Sputter purchases pigskin in sheets large enough to make four footballs. change overtime. The changing paradigm of manufacturing from old rules to new rules of manufacturing required an intelligence information system.

Inc.19.. 12) Rosen.B. 1992. : Integrating the Supply Chain. Hand Book of Material and Capacity Requirement Planning... 1989. Mc-Graw Hill.M. R.C. and Ellram L. R.T. : ‘Distribution Resource Planning: The Gateway to true Quick response and continual replenishment’... : ‘Fundamentals of Logistics Management’ Mc-Graw Hill. 10) Oden. How are these processes different from one another? 13) What are the supply chain management pitfalls? How are these pitfalls being eliminated? 14) Briefly explain the supply chain planning and a few software for SCP. A.A. 2) Copacino. John Wiley & Sons. : E-Retail: Gold Rush or Fool’s Gold?.. 1999.C. John Wiley and Sons.. No. 1997..... : ‘Software Engineering: A Practitioner’s Approach’... How is the safety stock decided in such distribution system? 11) Compare and contrast DRP and DRP-II. Inc.. al.. 1993. G. 6) What is MRP-II? How is it different from MRP? 7) Define ERP. USA. K. : Bills of Material: Structured for Excellence. E. Inc. and Lucier. Wadsworth Publishing Co. H. 8) Martin. R. Jr. 3) Dave Garwood. 1997. Inc. 6) Lambert.. IT Packages in SCM 9.3. W. et.. E-Commerce.11 REFERENCES AND SUGGESTED FURTHER READINGS 1) CAPS Logistics. Ltd. H. (b) a product structure tree. : ‘Information Technology for Management’. 2000. Spring.A. J. Langen Walter. McGraw Hill.J.Irwin. and Nichols.L. : Using SAP R/3. California Management Review. 13) Senn. Inc.Caps.. 1999..C.A.S. : Supply Chain Management: The basics and beyond. 4) Handfield. Prentice Hall. J. Lucie Press.R.S... D. Georgia. 12) Give the key processes considered in both ERP and SCM. 1998. Atlanta. : Introduction to Supply Chain Management. and (c) plan Sputters’ material requirements for this product.. 14) Stevens. : ‘Information Systems in Management’. Vol. 11) Pressman. : ‘Production and Operations Management: An Applied Modern Approach’.. 1999. Stock.. Inc. The McGraw-Hill Companies. 1998. International Journal of Physical Distribution and Materials Management. 8) Why a company pursues a new ERP solution? 9) What are the three distinct phases of Distribution Requirement Planning? 10) Explain the DRP logic for a medium size soft-drink manufacturing company.M..8. No. Jr. 9) Martinich J. G. Prentice-Hall of India Pvt.42. or http://www. 45 . Dogwood Publishing Company.com. St. 1995. 1990. Give its tangible and intangible benefits. 1997. Inc. 15) “The leading SCP products generally have many features as compared to ERP software packages” – Give your elaborate remarks on this statement. Vol.L. 5) Jonathan Blain. 7) Lucas. and Howard A.W.Show (a) the master production schedule.

As a result.1 10.2 10. and to know a few success stories of software packages to the SCM. managers from supervisor to CEO encounter information technology on a daily basis.10 Selecting the Right ERP Package i2 Technology Contribution of the Software Packages to the SCM Summary Self –Assessment Questions References and Suggested Further Readings 10.5 10. The design of multi-user applications is much more complex than the design of a personal computer system for an individual user.2 BaaN IV BaaN ERP 10. Advantages and Limitations of Software Packages Architecture of ‘SAP R/3 ERP’ Solution Architecture of BaaN ERP Solution 10.9 10. to know a few software packages such as BaaN.4. One of the most important parts of using the technology is the design of information systems. Many more people are involved in the process. They must take advantage of the ability that Manufacturing and Information Technology give them to change the way work is done. Structure Introduction Role. Today’s MBAs need the knowledge and confidence to deal with issues related to technology. Organization distributes the responsibility for technology to all levels of management and to different geographic locations. Users now would like to access a number of different applications on different computers through a LAN and probably the Internet as well. SAP. Users may design systems for themselves alone.8 10. to know the advantages and limitations of software packages of SCM.6 10. During the past five years computers and communications technologies have proliferated in offices and homes.4.4 to know the importance of software packages in Business. Managers have to take advantages of the technology. i2/RHYTHM.1 10. Skilled and creative managers are required to accomplish these goals. each with unique 46 . They must apply technology aggressively if they are to compete successfully in our global economy.1 INTRODUCTION Organizations have the opportunity to become more efficient and competitive.3 10.IT Enabled SCM UNIT 10 IT PACKAGES IN SCM Objectives The objectives of this unit are to enable you: · · · · 10. Much of the distribution of technology to end-users results from the rapid diffusion of personal computers or workstations. or they may be one of many users of a system designed by others. they must make decisions about how to use the technology.7 10.

and more easily used solutions for enterprises than traditional client/server systems that have been able to deliver. Packages have been available since the first days of computers. In the face of strong market forces created by electronic commerce and mounting competition. We have moved from vacuum tube processors to micro-electronic devices that are capable of processing 200 million instructions per second. A new computing paradigm is quickly emerging. Better hardware performance. corporations can no longer plod along historical tracks or seek the preservation of the status-quos. software is any prepared set of instructions that controls the operation of computer system for computation and processing. Companies are discovering that old solutions do not work with new problems. we can no longer look to the past as a guide to the future. or distributed objects. each new version improving with earlier version.2 ROLE. languages. Their primary purpose is to control all processing activities and to make sure that the resources and power of the computer are used in the most efficient manner. The aim of it is to provide highly configurable. ADVANTAGES AND LIMITATIONS OF SOFTWARE PACKAGES The context in which software has been developed is closely coupled to almost five decades of computer system evolution. 47 . As we approach the year 2000 plus. The other reason why the packages are going in popularity is the standards set by personal computer packages. supply-chain application software implementation is accompanied by the confusion and misconception that is inherent in any software and business method.and often conflicting needs and expectations. Because they are much easier to use them traditional programming languages. smaller size. Computer programs are sets of coded instructions that cause the computer to perform a series of operations that accomplishes a specific purpose. but there has been an explosion in their sale and use. The programs are written in programming languages specially developed languages or commands that make it possible to specify calculations and other processing in terminology that can be converted to particular operations by the computer system. The business parameters have changed. Package programs are software written by a vendor to be sold to multiple customers. Commercially prepared programs are developed by manufacturers or companies that specialize in software. and so have the risks and payoffs. There are packages around today in their respective forth or fifth (or more) version. Despite its promise. Such language allows users to develop sophisticated programs for retrieval of data with only a fraction of the instructions needed when programs are written in procedure-oriented languages. Intranets. fourth-generation languages are frequently utilized by non-programmers (such as managers). Computer users as well as computer specialists often refer to software packages when they discuss how a system will be used. Software is the general term describing programs of instructions. and routines or procedures that make it possible for an individual to use the computer. more faulttolerant. more scalable. as opposed to user-prepared instructions. In a general sense. and lower cost have precipitated more sophisticated computer-based systems. One of the reasons for this proliferation is that the technology has matured. Fourth-generation languages are in wide spread use to supplement procedure oriented programming languages. IT Packages in SCM 10. It is called network-centric computing. The term is often applied only to commercially prepared packages.

..........................sap....................3 ARCHITECTURE OF ‘SAP R/3 ERP’ SOLUTION A SAP product is a suite of standard software made up of individual programs that have been written to carry out computing tasks in the most efficient manner possible........................... Every implementation will need a SAP R/3 Basis module that provides the elements of the SAP R/3 runtime system......................................... However. The SAP R/3 Applications A SAP R/3 application is a set of programs that has been designed for a specific types of business data processing....... The SAP R/3 Basis (R/3 Standard System) All R/3 installations include a set of components that form the core of the system and are referred to as R/3 Basis............ The SAP R/3 has open system architecture and applies the client/server concept across multiple levels......................... The ABAP/4 Development Workbench and R/3 Customizing Component......manufacturingsystems.............. the most pressing question-facing companies is: what is the right technology that protects investment in a changing environment? The answer appears to lie in network-centric computing discussed in the following sections..... Under each application are grouped the modules most likely to be associated with the title of the application........................com www...........lean-e-business..........................IT Enabled SCM The questions range from: · What software is best suited for supply chain management? · How can the costs involved and return on investment of a sofrware be estimated? · What are the key design issues in developing information architecture? · How can software and management issues be aligned to gain the maximum value? Of these.... Each application addresses a main sector of business activity...... the R/3 Reference Model is used to select which module components will be needed in the target system................................ When designing an implementation...i2..................... ....................... ranging from financial accounting to human resources......... SAP R/2 is a system for mainframes......................................................... ... ......................... Activity 1 Get access to the following Web sites in the Internet and update your Knowledge on IT software packages in Supply Chain Management: · · · · · www.............com ....................com www................................................com www. 10.. It provides the users with a set of tools to build a suite of integrated programs that can be fitted exactly to the requirements of the company and modified as the company develops.......................... It includes the fundamental tools and functions of the R/3 Data Dictionary............................................. the fully integrated design of all SAP 48 .............. .....................mrp3.... the SAP R/3 Reference Model............................com/solutions www.....

For example. Some of the components of a module may be optional. Some application modules depend on other applications. Some of the functions within a component may be optional.standard business programs allows great flexibility in the assembly of modules to form a specific implementation.1 : Major SAP Application Each application is fully integrated with the R/3 Basis. the Controlling (CO) module depends on the Financial Accounting (FI) module. This flexibility allows each R/3 installation to be built to fit exactly the unique requirements of the Client Company. MAJOR R/3 APPLICATIONS AND THEIR MODULES 1) Financial Accounting (FI) · · · · · · General Ledger (FI-GL) Accounts Receivable (FI-AR) Accounts Payable (FI-AP) · · Legal Consolidation (FI-LC) Special Purpose Ledger (FI-SL) 2) Controlling (CO) · Product Cost Controlling (CO-PC) · Overall Cost Control (CO-OM) Activity-Based Costing (CO-ABC) Sales & Profitability Analysis (CO-PA) Project Control (CO-PRO) 49 . This allows each application to communicate with any other application. IT Packages in SCM MM Materials Management SD Sales and Distribution FI Financial Accounting CO Controlling PP Production Planning R/3 BASIS CLIENT/SERVER ABAP/4 AM Fixed Assets Management QM Quality Management PS Project System PM Plant Maintenance HR Human Resources IS Industry Solutions WF Workflow Figure 10.

A workflow management system is intended to manage business processes automatically or semiautomatically by controlling the sequence of activities. It should ensure that the appropriate steps are carried out at the right moment by specific people or groups. according to the sector of industry for which it has been designed. Personnel Planning and Development (HR-PD) Personnel Administration (HR-PA) Employee Management (PA-EMP) Benefits (PA-BEN) Compensation Administration (PA-COM) Applicant Manager (PA-APP) Personnel Administration (HR-PA) · · · · · Seminar and Convention Management (PD-SCM) · Personnel Development (PD-PD) · Workforce Planning (PD-WFP) · Organizational Management (PD-OM) Personnel Planning and Development (HR-PD) · Room Reservation Planning (PD-RPL) · · · · Time Management (PA-TIM) Incentive Wages (PA-INW) Travel Expenses (PA-TRV) Payroll (PA-PAY) 8) Plant Maintenance (PM) · Equipment and Technical Objects · · (PM-PRM) Preventive Maintenance (PM-PRM) Maintenance Order Management (PM-WOC) · Maintenance Projects (PM-PRO) · Service Management (PM-SMA) · Plant Maintenance Information System (PM-IS) 9) Quality Management (QM) 50 · Planning Tools (QM-PT) · Inspection Processing (QM-QC) · Quality Certificates (QM-CA) · Quality Notifications (QM-QN) . 6) Industry Solutions (IS) An Industry Solution is an enhancement of the standard R/3 system that may include some or all of the components of any R/3 applications. SAP Business Workflow is devoted to developing and managing the flows of work and information that will make a business as effective and efficient as possible.IT Enabled SCM 3) Fixed Asset Management (AM) 4) Project System (PS) · · · Basic Data (PS-BD) Operational Structure (PS-OS) Project Planning (PS-PLN · · · Approval (PS-APP) Project Execution/Integration (PS-EXE) Information System (PS-IS) 5) Workflow Workflow refers to the movement of work items through a series of operations that add value to these items. or by particular data processing programs and the machinery they control. Some of the industry solutions offered by SAP are for the following sectors: · · 7) Public Sector (IS-PS) Oil (IS-OIL) · · Hospital (IS-H) Telecom (IS-T) · · Banks (IS-B) Real Estate Management (IS-IS) Human Resources (HR) This application provide an integrated human resource management system through the use of the components of the Personnel Planning and Development (PD) module and Personnel Administration (PA) module. It also refers to the flows of information that must take place if this added value is to be optimized.

the requirements of enterprise controlling can be met by the components of the Controlling (CO) module. For example.10) Production Planning (PP) IT Packages in SCM · Basic Data (PP-BD) · Sales & Operations Planning (PP-SOP) · Kanban/JIT Production (PP-KAB) · Repetitive Manufacturing (PP-REM) · Master Planning (PP-MP) · Capacity Requirements Planning (PP-CRP) · Assembly Orders (PP-ATO) · Production Planning for Process Industries (PP-PI) · Material Requirements Planning (PP-MRP) · Plant Data Collection (PP-PDC) · Information System (PP-IS) · Production Orders (PP-SFC) · Product Costing (PP-PC) 11) Materials Management (MM) · Materials Requirements Planning · · (MM-MRP) Purchasing (MM-PUR) Inventory Management (MM-IM) · Invoice Verification (MM-IV) · Information System (MM-IS) · Electronic Data Interchange (MM-EDI) · Warehouse Management (MM-WM) 12) Sales and Distribution (SD) Master Data (SD-MD) Basic Functions (SD-GF) Sales (SD-SLS) Shipping (SD-SHP) · · · · · · · · Billing (SD-BIL) Sales Support (SD-CAS) Information System (SD-IS) Electronic Data Interchange (SD-EDI) SAP Configuration and Customization by Applications Programmes By itself the SAP program will not be very friendly to an individual user. It will not know what sort of business is to be conducted or exactly how the User Company wants to invoice and conduct other interactions with its customers. 2) Extra integrating functions can be provided to interact with a group of SAP application modules. but in addition. If the SAP implementation is to look and behave as if it really understands the company it is working for. Naturally the SAP software expects to be told how to behave in a specific company and has standard routines. the Enterprise Controlling (EC) product is available as a separate module and includes functions not available in the Controlling (CO) module. 51 . the Logistics General (LO) module is designed to provide integrating functions for the following modules: · · · Sales and Distribution (SD) Materials Management (MM) Quality Management (QM) · · Production Planning (PP) Plant Maintenance (PM) 3) Where there are many companies in a particular sector of business that share a specialized requirement. a SAP partner may develop a specialized enhancement of the R/3 system that can be marketed as an “Industry Solution”. it will have to be configured and customized. The experts who do this are referred to as Applications Programmers or Applications Developers. Development of SAP Product Range in Three Directions 1) A function within a SAP component may be elaborated so as to become a complex module. For example. which help the company experts to set out what has to be done in a format that SAP can accept.

It is also available on Windows NT. 10. IBM. The BaaN IV common contains the following tables: 1. The architecture of both versions is described here.4 ARCHITECTURE OF ‘BAAN’ ERP SOLUTION Baan company’s ERP solutions are available as BaaN IV (the older version) and BaanERP (the latest version).1 BaaN IV The BaaN IV software can run on many platforms. Digital. it can run on various UNIX platforms supplied by HP. etc. It also has a budget system. Employee Master BaaN IV Finance The finance package allows users to extract financial transactions from the sales and manufacturing areas and post them to the general ledger without having to key any transaction. Menu Browser [User:] · · · · · · · · · · · · · · BAAN IV Common BAAN IV Finance BAAN IV Project BAAN IV Manufacturing BAAN IV Distribution BAAN IV Process BAAN IV Transportation BAAN IV Service BAAN IV Enterprise Performance Manager BAAN IV Enterprise Modeler BAAN IV Constraint Planning BAAN IV Tools BAAN IV Utilities Distributed Data Collection Figure 10. Following modules are included in the finance package: 4.2 shows the menu browser displayed to the user having access to all the packages of BaaN IV.4. 5. All the files that are used in more than one module are stored in this package. or.IT Enabled SCM 10. Customer Master Supplier Master 52 .2 BaaN IV Menu Browser BaaN IV Common The BaaN IV common package allows you to maintain the common master data. Sun. Figure 10. This data is used by all the BaaN IV packages. and an activity base module. third-party databases such as Oracle or Ingress can also be used. The software can use database provided by the software manufacturer. Logistic Tables 2. for example. Financial Tables 3.

It can also provide control for all operations related to product’s fabrication. 53 . Cost Allocation 9. 4. 7. The goal is cost-effective management of each project according to the time schedule. Project Planning 5. Hours Accounting Project Progress Project Monitoring Project Invoicing BaaN IV Distribution The Distribution package is designed to take care of day-to-day logistical management in production and trade companies. 13. 4. Project Budget 4. It includes following modules: 1. The package is fully integrated with all other packages of BaaN IV. and replenishment control. 11. 9. and capacity required. MPS. 2. It also includes all the inventory related functions such as inventory control. Repetitive Manufacturing Shop Floor Control Hours Accounting Project Budget Product Configuration Product Classification Project Control Quality Management System 6. Financial Statement 7. 8. MRP-I. 5. distribution requirements planning (DRP I). within the specified budget and to the required quality. 10. General Ledger Accounts Receivable Accounts Payable Cash Management Fixed Assets 6. 3. and CRP. The project package provides all the tools necessary to control project accounting and planning. 6. 7. It is a reliable source of information on market trends and developments. It is especially suited to project-driven companies for the coordination of multiple projects. The following modules are included: 1. 5. allocation of personnel and equipment to projects is critical in costeffective operation. Project Requirements BaaN IV Manufacturing The manufacturing package provides all the manufacturing planning functions such as. Engineering Data Management Item Control Bill of Material Control Routing Cost Accounting Master Production Schedule (MPS) Material Requirements Planning (MRP) Capacity Requirements Planning (CRP) 9. location control. 15. Furthermore. which will maximize company profits. 12. 14. Project Estimating 2. Electronic Data Interchange (EDI) IT Packages in SCM BaaN IV Project BaaN IV project is designed to support the management of projects through all stages. Project Definition 3. A planning requirement process accurately tracks costs for the project-related industries. from estimating tenders to delivery and throughout the guarantee period. This package contains all the programs to create and manage the sales orders. Financial Budget System 8. 8. 2. 3. 16. labour management. This package is linked with all the software’s other functions to provide the information necessary to successfully manage the project within the enterprise environment.1.

Warehouse Control 12. Distribution Requirements Planning 6. Production Management 7. Routing 4. 54 5. 6. Distribution Requirements Planning 12. 7. 8. Tables 13. It keeps track of transportation costs and determines cost trends. 3. 3. 2. Inventory Control Lot Control 10. 9. . Cost Accounting 3.IT Enabled SCM BaaN IV Distribution Package Contains the following Modules: 1. Sales and Marketing Information 6. Purchase Control 4. Replenishment Order Control 8. It can handle all types of transportation modes. Common Data 14. Item Control 2. and the grade of items. Following are the modules provided in the process package: 1. such as the chemical industry. It is able to account for the potency. 5. Location Control 11. 8. Hours Accounting 8. Formula Management 3. the acidity. It has powerful modules for managing warehousing and packaging. 9. Electronic Data Interchange (EDI) 7. 5. Quality Management System Employee Control Address Control Transport Fleet Management Transport Fuel Control Hours and Expense Control Central Data Entry 7. Cost Accounting BaaN IV Transportation The Transportation package helps in managing transportation orders and to maximize equipment use. It helps manufacturers of identical product in different containers. Sales Control 5. Capacity Requirements Planning 6. Simple and fast data input and control Extensive purchase and sales statistics Comprehensive forecasts and planning techniques Interface with the graphical module enterprise performance manager Interface with EDI Use of multiple currencies Use of multiple warehouses Multi-company solution including supply chain management. It also helps to keep track of the various batches processed. 2. 4. It includes the following modules: 1. Transport Control Invoicing Control Packing Control 10. BaaN IV Process The Process package is designed to help manage the entire supply chain of any company operating in a process environment. Electronic Data Interchange 11. Distribution Parameters Characteristics of BaaN IV Distribution 1. Item Control 2. 4.

The enterprise performance manager is especially meant for middle and top management. 4) You can create maintenance contracts and record warranties together with associated warranty terms for each customer. and manufacturing modules are available in this module and they can be displayed using various formats. 3) This data helps in analyzing the causes of malfunction in the fastest possible way. 7) Finally. 2) An installation bill of material that lists the components requiring servicing including their serial numbers and service history can be linked to each installation. Service Analysis Control 6. 3. and distribution modules. finance.BaaN IV Service The Service package can be used to manage all the repair and warranty information for supporting installations in the field. 2. 5) Calls reporting malfunctions can be recorded even as you are on the phone. the service activities can be invoiced and a detailed service history is built up. With this package: 1) You can register at which customers and locations specific installations are situated. The data of the distribution. · · The tool can be used interactively to get an overview of the overall business performance by using Ishikawa fishbone diagrams. This package currently provides MPS functionality with both finite and infinite planning methods. A set of predefined performance indicators is available and new indicators can be defined very easily. Inventory Control IT Packages in SCM BaaN IV Enterprise Performance Manager The enterprise performance manager (EIS) incorporates tools that are designed to given various levels of management access to the data in the BaaN IV tables. These figures can be fetched from the integrated BaaN IV repository and can be linked to the persons responsible in the organization. 55 . Service Tables Installation Control Contract Control Service Order Control 5. Item Control 7. The modules included in this package are: 1. 6) Based on periodic maintenance obligations and calls a service plan is drawn and service job sheets are printed. Via a flexible user interface the enterprise performance manager can drill down to the basic figures. The EIS module is fully integrated with the manufacturing. Cost Accounting 8. finance. 4. BaaN IV Constraint Planning The constraint-planning package provides planning functionality that takes into account capacity and materials constraints. It can be used as a business-benchmarking tool during BaaN IV implementation and optimization cycles (business process reengineering) and as a management and reporting tool at tactical and strategic level. · BaaN IV Enterprise Modeler (formerly known as Orgware) Enterprise modeling is a process in which customers can map all the processes used and then develop an accurate and complete implementation plan.

Application Customization 13. 2) Open Component Architecture 3) Fully integrated allowing for consistency and visibility across the enterprise 4) Comprehensive international capabilities. 10. supporting multiple languages.. the successor to BaaN IV has the following enhancements. Terms and Definitions 15. over the older version: 1) Order to Cash foundation for all Baan business solutions. This allows for the collection of data through the use of devices such as laser scanners etc. The data collection vendor must supply an interface to BaaN IV to create a functional solution. 56 . This package has tools to facilitate the communication between BaaN IV and other databases.IT Enabled SCM BaaN IV Tool The Tools package consists of all the programs designed to maintain and customize the application.2 BaaN ERP Baan ERP. It also includes programs to manage the database. 4. Software Installation Application Configuration User Management Device Management Job Management Database Management Audit Management Text Management Menu Management 11. 5) Modular components that allow for incremental implementation and migration. 5. Business Objects 12. etc. Translation 16. The exchange module can be very useful for multi-site applications as it facilitates the communication between two sites. spreadsheets. Desktop Management 10. report writer. This package facilitates the implementation of the software by helping in creation of master files imported from other software. tax structures and currencies including the Euro. 2. as claimed by Baan Co. Following modules are included in the Tools package: 1. Application Development 14. 3. 9. 6. and sessions manager are the options that allow the developers to tailor BaaN IV to user’s needs.4. and user profiles. Software Distribution 19. Generate Exchange Scheme Distributed Data Collection This package allows the users to interface between BaaN IV and third party data collection such as vendor’s data collection systems. with the real time update of the interfacing BaaN IV module. 7. Documentation 17. Import Module 2. Export Module 3. The form manager. SQL Queries BaaN IV Utilities The existing utilities allow users to easily import or export information between BaaN IV and any other system. This module can also be used to convert data of older versions of the application to new versions. 8. devices. In short this package provides the needed bridge between all other sources and BaaN IV and includes following modules: 1. Conversion 18.

Planning and Control Capacity Requirements Planning* Master Production Scheduling* Material Requirements Planning* * These modules come with extensive enterprise planning capabilities Benefits 1) Open architecture design allows for a seamless and simplified integration with popular CAD packages via “BaanEngineering” elements. B. 13. 18. 2) Graphical simulations help analyze a ‘what if’ impact on financial requirements. Production Control 9. 7) The integrated quality management tool enables a wide range of statistics (from raw material to finished goods) to be monitored resulting in continuous improvement in manufacturing quality. It includes: 1. Hours Accounting 6. Engineering Change Control 4. Financial Reporting System 6. Cash Management 5. 15. 14. 4) Planning is integrated at every level and across multiple sites allowing smooth and consistent operational activity. Cost Accounting 9. Production Planning 10. 8) Multiple valuation methods help the company identify cost drivers and reduce product costs. 3) The system’s object orientated configurator supports different production strategies. Fixed Assets 7. 16. Accounts Payable 2. Cost Price Calculation 3.BaaN ERP Includes the Following five Components: (a) (d) Manufacturing (b) Distribution. BaaN Finance BaaNERP Finance module is designed to meet dynamic financial management and reporting requirements around the world. 11. Engineering Data Management 5. enterprise planning simulates alternative plans and reactive planning. Project IT Packages in SCM A. Product Configuration 8. Project Budgeting Project Control Repetitive Manufacturing Routings Shop Floor Control Tool Requirements. Bills of Material 2. 5) Within a dynamic environment. Accounts Receivable 3. Financial Budgets System 4. and (e) Finance (c) Tools. Sales Invoicing 57 . General Ledger 8. 17. 6) Planning and tracking capabilities are extended to improve production resource management issues such as inventory. capacity and inventory. 12. BaaN Manufacturing BaaN ERP Manufacturing Module Includes: 1. Product Classification 7.

reporting and analysis. consolidation. 4. Multi-currency functionality allows the company to hold up to 3. In addition the system supports project invoicing for all the different contractual agreements found in project environments. BaaN Accounts Payable streamlines vendor payments. 2. this component manages the entire spectrum of . 3. It supports checks. 6. Provides cost analysis and cost allocation functionality on both at detailed and summarized levels. which results in effective cross-functional management. 10) Central point invoicing. BaaN Project The project module provides the control and visibility the company needs for profitable operations from estimates and bids through site installation and maintenance.home currencies therefore complementing and complying with the Euro regulations. Project Monitoring Project Planning Project Progress Project Requirements Planning Benefits 1) 2) 3) Real time control of all aspects of project management Integration of project management and manufacturing resource enhancing visibility and timely consolidated reporting. logistical and contractual structures can be modeled and the resulting project activities report. Superior visibility enables the company to immediately focus and act on financial information to help increase margins. The link with Baan Manufacturing allows all the relevant. 7. revenue and cash flows. electronic banking and payment on consumption. 58 To help develop the best solution for meeting customer requirements and balancing business constraints. Accounting operations are simplified and duplicate data entry is eliminated with parameter-driven posting and updating tools. 8. cross functional information about each project to be easily accessible for effective enterprise resource management. Costs can be proactively tracked via budget links.IT Enabled SCM Benefits 1) 2) 3) 4) 5) 6) 7) 8) 9) This independent system allows for easy solution configuration to meet changing business strategies. Integration with Hyperion financial software provides advanced budgeting. BaaN Distribution 4) 5) D. Organizational. C. Baan Project Module includes: 1. resources to be allocated. An integrated planning and scheduling system environment results in activity networks to be defined. International business requirements are met with the use of multi-dimensional ledger and dual sets of books. and ‘what if’ analysis to be conducted. Project Budget Project Definition Project Estimation Project Invoicing 5.

7) Sophisticated supplier contract and release management enable your company to take advantage of economies of scale. Helps create tailored applications to meet special requirements. Sales Management Benefits 1) Extensive simulation capabilities optimize purchasing and internal inventory decision making. 5) Integration with the Aurum Front-Office suite enhances the capabilities of Baan Sales solution. sales. customer service. Client/Server Tools 4.distribution. The selection team must have top-level representation from all major functional areas including production. BaaNERP Tools includes: 1. Helps in developing the Baan applications in such a way that they are kept independent of third party products. Open System Tools End User Tools Documentation Tools Software Distribution 2. 59 . finance and accounting. The selection and implementation of ERP is primarily an operations management initiative and decision. Facilitates integration of Baan applications with third-party products.5 SELECTING THE RIGHT ERP PACKAGE 1. Implementation Tools Benefits 1) 2) 3) 4) BaaNERP enables quick reaction to new trends in the marketplace that require software or software configuration changes. and logistics for manufacturers and distributors. 3. 3) With integrated workflow management and order templates. the vice president of manufacturing. BaaN ERP Tools 2. 5. 6) Purchasing is simplified with online requisitioning. distribution. 4) Shipping constraints. 10. sales. Translation Tools 8. order processing is speeded up. and other key players be involved and support the chief information officer (CIO) in the ERP selection and implementation process. and information systems. order blocking algorithms and multi-level ATP component checks are supported by the system. marketing. BaaNERP Distribution modules includes: 1. not an IT or MIS project. Developer Tools 6. 2) Top-down planning supports any distribution strategy. Purchase Management 3. 7. E. human resources. 8) EDI is key in enhancing the speeds of communication with trading partners as well as providing a solid link between distribution operations and manufacturing planning. Warehouse Management IT Packages in SCM All Baan applications are built using flexible BaaNERP Tools to handle business needs that require software or configuration changes. hence it is critical that the chief executive officer (CEO).

The vendor should be asked to build and demonstrate business processes and transaction scenarios based upon the company needs. A tentative schedule should be prepared for the selection process and implementation. gauge the vendors’ commitment to training and customer services. and get a sense of their overall business philosophies. potential vendors can prepare scripted demonstrations. 9) The team should also find out which ERP packages the competitors are using or implementing.IT Enabled SCM 2. time frames. 5. 10) After narrowing down the choices. goals. some possible needs. The team must develop consensus on several critical issues that will shape the entire project budget. i2 emerged in 1988 as a supply chain management leader with innovative new products that streamlined the entire supply chain management process. 12) Finally the project team must visit the sites of other companies that are using the particular ERP product to see how the software system functions in actual applications and assess vendor support. 11) Once the scripted demos narrow down the alternatives. problems. This document helps in focusing the internal team’s efforts and also becomes a valuable tool for potential ERP provides to understand the business and its needs. 10. both during and after initial implementation. team members must conduct site visits of the top ERP candidates’ solutions to see the vendors working environments. i2 has created the latest 60 . The team should determine what critical business needs/problems the company is trying to address and what benefits are to be gained from ERP. the top two or three vendors should be invited to demonstrate how their products could be tailored to the specific work environment. 8) The project team must determine its differentiating points to ensure that a vendor’s product plays to those strengths. and benefits are: · · · · · · · Reducing inventory investment Increasing fulfillment rate Lowering transportation costs Simplifying the manufacturing process Gaining market share · · · · · · · New product planning and introduction Customer service programs Company downsizing Company expansions into new areas or markets Potential acquisitions 6) The team should then develop a document containing: Total number of customers Company goals Company’s most significant A narrative on how the company business process – areas conducts its business that set it apart 7) By putting these business processes in the form of key (transaction) scenarios. and deliverables. Through consistant innovation and dedication to providing value. 4. 3. A project leader must be selected from among the team members.6 i2 TECHNOLOGY i2 Technology is the recognized leader in supply chain planning and optimization with more than ten years of experience in optimizing business process.

as well as personalize the entire shopping experience.business to business e-commerce applications that have changed the way companies are doing business. These aspects. bringing the right products to market quickly and efficiently. a collection of electronic market places dedicated to delivering advanced Business to Business solutions. Globalization. Most e-Business solutions today focus on making promises with little or no consideration of integration across business process. i2 has been named one of Forbes ASAP’s Dynamic 100 software companies. managing their relationships and providing superior customer service. the terms of engagement have changed. i2 recently launched TradeMatrix. customer care. i2’s forward-thinking solutions consider the real conditions of companies to optimize every key business process-from product design to customer relationships. In the past. product development and planning. TradeMatrix offers a full breadth of services that range from procurement. With industry leading customers and partners. and streamlining their entire supply chain. commerce. i2 is the only company in the Leader’s Quadrant in Gartner Group’s “Supply Chain Planning Magic Quadrant. help buyers make sound decisions based on real-time availability of information. retail. What type of decision intelligence will give your company the velocity to achieve excellence in all areas 61 . IT Packages in SCM iii) Customer Intimacy: Engaging the right customers. Their thought leadership is evident in the innovations they have established over last decade. Rhythm Solutions i2 RHYTHM solutions offer the intelligent answer for decision-making across the enterprises. With i2 solutions. Velocity. Operational Excellence: Manufacturing and delivering the right products at the right time. For the second consecutive year. or the ability to make intelligent decisions at high speed. RHYTHM offers a complete solution for Business Process Optimization (BPO) by offering the optimization. The organization is well on its way to meeting its goal of $50 billion in value. The RHYTHM solution has delivered billions of dollars in measurable value for major companies in a wide range of industries. can transform any organization into a high-velocity eBusiness enterprise. a company could succeed by pursuing excellence in just one of these areas. RHYTHM’s holistic end-to-end solution provides the ability to segment the market on a product level. Historically. i2 is the established leader in SCM and intelligent eBusiness. customers are able to attract and retain new clients. RHYTHM software optimizes and integrates Key business processes. fulfillment. leading companies have achieved success by mastering one of the three core business disciplines: i) ii) Product Leadership: Developing and launching innovative products at the right time. while delivering intelligent e-Business through collaboration with trading partners. is necessary in this real-time economy. and forward visibility required for highvelocity business. integration. increasing competition and the Internet have added incredible velocity and complexity to today’s business landscape. while managing the product life cycle from concept to phase-out. with an audited $7 billion of value already documented as of October 1999. while collaborating with trading partners at maximum efficiency. However. combined with i2’s proven supply chain planning and optimization solutions. Rhythm Software Solutions i2 consistently creates the standards that others adopt. i2’s mission is to create $50 billion in audited value and serving for its customers by the year 2005.

reduce cost-of-sale and ensure customer satisfaction. Supply Chain Management: Rhythm’s supply planning optimizes the match of supply to demand. iv) Inter Process Planning: to integrate the above three processes. TradeMatrix participants are able to harness the power of the Internet. full-service eBusiness by managing all customer issues through one solution. Their SCM customers are able to reduce unnecessary expenses. With innovative solutions and core competencies. Tradematrix Solutions Success in connecting the participants in a supply chain has been the driving force behind i2’s most exciting solutions. 2) TradeMatrix Commerce Solutions TradeMatrix commerce service enables personalized service. Customer management offers companies the opportunity to maximize revenue. 3) TradeMatrix Fulfillment Solutions TradeMatrix Fulfillment solution optimally responds to customer requests and intelligently manages customer orders. maximizing resource utilization and profitability. create a competitive advantage and deliver on their promises to the customer. 1) TradeMatrix Procurement Solutions TradeMatrix Procurement services is a hosted procurement service that reduces the cost of purchasing and procurement effort. increase profit margins and will reduce research and development costs. reduce cost-of-sale and increase customer satisfaction. while lowering inventory and decreasing the time-to-market for new products. 4) TradeMatrix Customer Care Solutions The TradeMatrix Customer Care solution allows participants’ customer to assess information quickly. The commerce service allows participants to maximize revenue. Its fulfillment solution allows participants to improve customer service and increase margins and profitability. 62 . resolve problems and receive support instantly. improve revenue and meet fulfillment commitments. i2 is uniquely qualified to deliver the most robust eMarket places to the industry. Representing a natural extension of i2’s recognized leadership in optimizing business processes RHYTHM provides advanced planning and optimization of the following key processes: i) Product Life Cycle Management: Rhythm product life-cycle management solution ensures product innovation for maximum market share and profitability.IT Enabled SCM of your business. increase market share. ii) iii) Customer Management: Rhythm’s customer management enables personalized. increase market share. v) Strategic Planning: for accurate long-term decision-making and scenariobased analysis of competitors. eBusiness by managing all customer issues through one solution. Companies that use their product lifecycle management solution will increase market share. TradeMatrix offers the following solutions.

..................... corporations are looking beyond their “internal enterprise” to the extended “virtual enterprise” – the collection of trading partners who cooperate to provide products to customers – as the new frontier for improving responsiveness to customers and increasing market share....... increase revenues.. Now. companies gradually reached parity.................... 7) TradeMatrix Product Development Solutions TradeMatrix Product Development solution allows companies to accelerate product innovation for maximum market share and profitability........................................ .............. i2............. paper.. This discussion may enlighten your knowledge on the price........... Among many.............................. and SCM software products.... the software developing companies intend to establish a leadership position as the premier provider of supply chain management software....... 6) TradeMatrix Planning Solutions TradeMatrix Planning solution is a service that enables companies to make better decisions across the entire value chain.............. metals............ are the 63 ............................. competition for market share has never been fiercer................................ and hardware requirements to run the applications for a company........................ IT Packages in SCM 10.... features and limitations of the software packages... implementation strategies....... automotive........... Companies gain product margins.......... prepare a report on how to select software for a company’s applications? ...... i2..... BaaN.................................... Competitive initiatives are being formed between the members of extended supply channels to protect their position against alternative competing channels....... Discuss in detail about ERP.........7 CONTRIBUTION OF THE SOFTWARE PACKAGES TO THE SCM On the front lines between manufacturers and their customers...................................... But in each case. minimize product obsolescence and maximize storage effectiveness............... Pioneering efforts adopted in the early 1990’s in the apparel industry (Quick Response) and grocery industry (Efficient Consumer Response) are now being applied in other industry segments........ and these methods generated diminishing returns................... Activity 2 Fix an appointment with marketing personnel of either SAP...... training. such as industrial machinery..5) TradeMatrix Retail Solutions The TradeMatrix retail solution gives companies an opportunity to capture more demand........................................ ......... In order to enhance the competitiveness of its customers........... Today................... BaaN............ In the past............. strategies for improving corporate profitability and competitiveness have shifted from marketing-focused (1960’s) to finance-focused (1970’s) to operations-focused (1980’s) methods.................. .. and consumer electronics........... ...... increase market share and show a reduction in R&D costs..... SAP................. or TCS software companies... etc...................... decrease costs and improve ROA........... as these methods were adopted and gained widespread acceptance......

.............. monitor events based on actual execution.............. the anticipated benefits of IT packages in SCM include: 1......... competitive prices..................... ............... Company pressures are creating significant impact on today’s manufacturer................ BaaN’s vision of supply chain management extends for beyond traditional enterprise requirements planning (ERP) or advanced planning and scheduling (APS) capabilities............... and provide the ability for both centralized and collaborative planning and scheduling............................. .............................. ............... the company’s competition is driving to find alternative ways to achieve these goals without sacrificing the quality of product.......... Activity 3 Visit any Manufacturing Organization.................. Discuss with the systems Manager to find out what preparations are required before implementation of software package........... 10...................... ............ More than ever........8 SUMMARY For a company experiencing accelerated growth.............................................................................. .......................................... be expected that the supply chain solutions provides the ability to optimize supply chain activities....... and timely product...... and determine corrective action using advanced simulation and evaluation capabilities.. Finally............... Improved visibility and decision support for long-term capacity planning and capital investment.............. vendor managed inventory (VMI).................................. transportation planning............ demand management......... sales force automation.... which proposes to go for ERP or equivalent software package. and includes customer interaction......................... There are concerns for providing the customer with quality service..................... and will feature “total scalability and configurability” which will address in a single solution the requirements of large manufacturers as well as those of mid-tier and small manufacturers...... Prepare a report of your discussion............................ Enterprise Benefits: · · 64 Better management of complexity across the entire supply chain.......IT Enabled SCM few companies committed for the contribution of the software packages to the SCM............ For example.. Technologies such as publish-and-subscribe over the Internet. This will enable supply-chain planning to exceed beyond the boundaries of a single corporation.. proactively visualize potential problems.. It may therefore.. increasing the efficiency and visibility of the supply chain is the key to increasing productivity..... The results of this analysis are then propogated upstream and downstream throughout the supply chain to keep material. as well as message passing are utilized...................... The supply chain solutions discussed in this unit will completely integrate multiplant planning and scheduling... production and transportation resources synchronized...... and web enablement applications... .......................................

65 . Give your choices with justifications – both technical and economical. and Distribution modules of BaaN IV. what criteria can be recommended to measure the performance of manufacturing organization? Explain the merits and demerits of your recommendations. 8) How is the Project module of SAP R/3 comparable to that of BaaN IV? 9) How is the right ERP Package selected for a medium sized manufacturing organization? 10) Can ERP software package be applied in (i) Process Industry (ii) Service Industry? Why and why not? 11) Discuss i2 Technology software products for manufacturing applications. Financial Benefits: · Reduced inventory costs. and large manufacturing organizations. 3.2. with better alignment of production with demand. 6) Compare and contrast ERP software products of at least two established brands. medium.9 SELF ASSESSMENT QUESTIONS 1) What are the deciding factors for a manufacturing organization to switch from the current work practice to that of IT based? 2) What is the right technology that protects investment in a changing environment? Give your answer specific to an Indian Manufacturing Organization. · Reduced operating costs through better utilization of resources. 10. Shop floor Benefits: · Improved inventory management and control IT Packages in SCM · More efficient production through optimized scheduling. · Less waste. 3) Identify suitable IT packages to suit small. 13) BaaN and SAP have ventured to enhance their software products for supply chain management environment. What salient features are found in i2 products? 12) Compare and contrast ERP software package of either SAP or BaaN with i2 package. 5) Explain briefly each module of BaaN IV. 4) What are the various modules of SAP R/3? Briefly discuss the content of each module. Finance. enabling longer runs and fewer changeovers. 7) Give important benefits of Manufacturing. Is this a right approach? Why and why not? 14) What steps are to be followed while implementing IT software packages for supply chain management? Do these steps vary from package to package? How are they standardized? 15) In the IT based supply chain management.

. Inc. Lucie Press. 12) Rosen.. Jr.. 11) Pressman.A. 1998.: ‘Distribution Resource Planning: The Gateway to true Quick response and continual replenishment’. 1997. 1999.Irwin. Langen Walter. and Ellram L. Stock. Hand Book of Material and Capacity Requirement Planning. W..S.42. 1998. 1997. E-Commerce.... Wadsworth Publishing Co. 13) Senn. Spring.. Inc. Georgia. John Wiley and Sons.J. H. : Integrating the Supply Chain.. Inc.. Jr. 9) Martinich J.A. : ‘Software Engineering: A Practitioner’s Approach’.R.C. A. McGraw Hill.. 14) Stevens. : Introduction to Supply Chain Management.: ‘Fundamentals of Logistics Management’ Mc-Graw Hill.8.. 1999. Ltd. al.. John Wiley & Sons. 66 .: Supply Chain Management: The basics and beyond. 2) Copacino.C. 1992. USA. E.com. Prentice-Hall of India Pvt. 1990. Inc. and Lucier. J. The McGraw-Hill Companies. California Management Review.B.10 REFERENCES AND SUGGESTED FURTHER READINGS 1) CAPS Logistics. 1989.. and Howard A. R. International Journal of Physical Distribution and Materials Management.M. G.. 10) Oden. : Using SAP R/3.. R. : E-Retail: Gold Rush or Fool’s Gold?. : ‘Production and Operations Management: An Applied Modern Approach’.. : ‘Information Systems in Management’.IT Enabled SCM 10. and Nichols.L. Inc. Inc.L..W. Mc-Graw Hill. or http://www. 5) Jonathan Blain.. et. 1999. St. G..: ‘Information Technology for Management’. Vol.T. No. 1993.Caps. 1997. 3) Dave Garwood: Bills of Material: Structured for Excellence. Dogwood Publishing Company.S.C. Atlanta. H. Inc. Vol. D. 6) Lambert. K.3. 4) Handfield. J.19. 2000. 7) Lucas.M. 1995. Prentice Hall.. R. 8) Martin.A. No.

Indira Gandhi National Open University School of Management Studies MS-55 Logistics and Supply Chain Management Block 4 COST AND PERFORMANCE MEASUREMENT IN SCM Unit 11 Cost Analyses and Measurement Unit 12 Best Prictices and Benchmarkin for SCM Unit 13 Performance Measurement and Evaluation of SCM 5 13 25 .

Kaushik Sahu Xavier Institute of Management. New Delhi Tilak Raj. Sambandam NITIE. by mimeograph or any other means. Printed and published on behalf of Indira Gandhi National Open University. Himanshu Kumar Shee (Course Co-ordinator)-On leave School of Management Studies.K. King Kraft. IIT Bombay. IIT Bombay. Atanu Ghosh Shailesh J. New Delhi-110068. Ravi Shankar (Course Editor) Dept. Cover Design by M/s. Mumbai Course Preparation Team (2004) Prof.Batra FORE School of Management New Delhi Prof. New Delhi Prof. IGNOU Prof.Expert Committee (as on 24th March. New Delhi Prof. Gaur Prof Sadananda Sahu Dept. Kalro IIM Kozhikode Calicut Dr. Mumbai Dr. 2004 ã Indira Gandhi National Open University. V. Deepak Jakate. (Coordinator) School of Management Studies. Mumbai Mr. Sambandam NITIE. of Management Studies Indian Institute of Technology. IGNOU New Delhi Dr. 2000) Prof. IIT. IGNOU Dr. Bhubaneswar Prof N. General Manager . of Management Studies Indian Institute of Technology New Delhi Prof. Jharsuguda Mr. Indian Institute of Technology Bombay. Headquarter 4 Corps Mr. Further information on the Indira Gandhi National Open University courses may be obtained from the University's Office at Maidan Garhi. Sarai Jullena. No part of this work may be reproduced in any form. B.Karuna Jain Shailesh J. New Delhi by Director. Sandeep Biswas Institute for Integrated Learning in Management (IILM). of Industrial Engineering and Management IIT. Khanna Director. Anurag Saxena (Course Co-ordinator) School of Management Studies IGNOU. IGNOU. Mumbai Dr. Mumbai Prof Sadananda Sahu Dept. N. Sanjay S. New Delhi Paper Used : “Agrobased Environment Friendly”.Logistics. Kaushik Sircar Assistant Quarter Master General Operations & Logistics. Mumbai Mr. United Phosphorus Limited. Delhi Prof. Management Development Institute.O. Mumbai Prof.Sahay. . Atanu Ghosh Shailesh J. Narasimhan Director. Mehta School of & Management. N. ) (Retd.S. Tessa Media & Computers.) in Cement Group M/S Larsen & Toubro Ltd. Gurgaon Prof. B. D N Srivastava Advisor ( Training & Safety) & Head of Distribution Deptt. Amarlal H. J. IGNOU. Deepak Jakate General Manager . New Delhi Laser Composed By : M/s. Mehta School of Management. 2004 ISBN-81All rights reserved. Krishi Bhawan. Mehta School of Management. Kharagpur Lt Col. New Delhi Prof . Satish Kumar Director (Movement). Mehta School of Management. Kharagpur Dr. Biplab Dutta Vinod Gupta School of Management IIT. School of Management Studies. Banwet Dept of Management studies. United Phosphorus Limited.L.(P). Dept of Fertilizers. Ministry of Chemical & Fertilizers. SOMS. S. Mumbai Dr. IGNOU. without permission in writing from the Indira Gandhi National Open University. Karol Bagh. New Delhi Print Production: December. New Delhi Mr. D. Himanshu Kumar Shee. of Industrial Engineering Shailesh J. Indian Institute of Technology Bombay. IIT. Sushil (Course Editor) Dept. Kharagpur Management. SOMS.Logistics. B.

It identifies the reasons for the requirement of benchmarking. . Unit 13: Performance measurement & evaluation of SCM deliberates the need for performance measurement in a supply chain. It makes you familiar with the underlying performance measurement concepts. It also describes various methods and techniques that could be employed for the performance measurement of Supply Chain Management. It illustrates the costs that are incurred due to logistics.BLOCK 4 COST & PERFORMANCE MEASUREMENT IN SCM Unit 11: Cost analyses & measurement discusses about Cost analyses & measurement in terms of Logistics. It recognizes the process in which benchmarking can effectively be brought about. Finally it comprehends what elements are involved in bringing about change management. It draws out the potential benefits of performance metrics exercise. It describes cost drivers and Activity Based Costing (ABC) etc. It also gives some insights on customer profitability analysis Unit 12: Best practices & Benchmarking for SCM comprehends the role of benchmarking in business. Finally it illustrates barriers to effective Performance Measurement and explores future directions in performance measurements. It also addresses the challenges faced in bringing about benchmarking process.

Cost and Performance Measurement in SCM 4 .

1 INTRODUCTION Many a times it so happens that even if a company has good products. 11. competitiveness etc.2 11. However in reality. We will also study about the logistics cost and ways to reduce them. It is also important to prepare a business plan and improve strategic decision-making. Overhead costs are replacing the direct costs of labor and purchased materials.2 COST DRIVERS As businesses have become more complex. and have an insight from customer profitability analysis. Structure Introduction Cost Drivers Activity Based Costing (ABC) Logistics Cost Customer Profitability Analysis Summary Self Assessment Questions References and Suggested Further Readings 11. transportation etc.g.7 11. It has plethora of satisfied customers.1 11. the elements of cost also have become complex. This is important in order to generate opportunities for cost improvement for probable objects that are generating losses. There are many ways to determine object cost like intuition. labor. As managers attempt to understand and manage cross-functional business processes. Many reasons are cited for this like lack of sales.5 11. guessing. Major factors for determination of market price are competitors (those who are offering a similar product) and customer value.) and the overhead cost. Total cost for a cost object is determined by the direct cost (e.UNIT 11 COST ANALYSES & MEASUREMENT Objectives After reading this unit you would be able to: Cost Analyses and Measurement · · · · 11. It is here that one finds the need for determining the “true” cost for a cost object (product. traditional cost accounting and activity based costing.. illustrate Logistics cost. the main reason for this is the lack of knowledge of possible losses. it offers good service like delivering the products on time.8 discuss Cost analyses & measurement in terms of Logistics. The company has sufficiently good productivity and growth levels. define Cost drivers and Activity Based Costing (ABC) etc.3 11. These overhead costs are incurred on technology and the managers who maintain productivity and production. material.6 11. harder times. Even then it fails to achieve sufficiently good profitability levels. or customer). 5 . organizations are finding that traditional approaches for managing these costs are ineffective. service.4 11. job. In this unit we will discuss about cost drivers and Activity Based Costing (ABC).

of orders processed No. the number of customer orders received in a specific period. of enquiries No. of customer accounts No. of Unit Loads Distance/ Delivery No. of Maintenance Calls No. of Sales calls Activities Order Picking Order Packing Order Checking Returns (Handling) Cost Driver No. A cost pool is a grouping of costs caused by related cost drivers and activities. of Customers Deleveries No.1: Identifying activities.1).Cost and Performance Measurement in SCM Business processes need to be mapped so that the activities and associated drivers are identified and their relationships analyzed. Gattorna illustrated the concept of cost drivers with an example (Figure 11. of Orders No. of orders processed No. of items picked No. of Installations No. No. of orders received No. of invoices No. The need of identifying the cost drivers arose due to the dissatisfaction with the conventional cost accounting. etc. which comprised of identifying activities and the cost drivers & cost pool associated with them. of cheques. of items held in "stock" *No. Cost Pool: Order Administration Cost Driver No. of items per invoice No. cost drivers and cost pools within the value chain Source: Gattorna & Walters (1996) . of Return Journeys COST DRIVERS SECONDARY ACTIVITIES Cost Pools * Inventory * Facilities Cost Driver * No. of items returned Cost Pool: Service Activities Installation Maintenance Rectification Cost Driver No. A positive cost driver results in a revenue. production or support related activities that generate profit. Gattorna (1998) defined cost driver as factor that creates of influences cost. of picking documents No. e. Cost-driver analysis identifies the cause of cost. of Order movements through the facility 6 Figure 11. These problems were summarized by Christopher (1998) as follows: · · Activities Order Generation Order Entry Inventory Checking Credit Check Order (Backorder) Acknowledgement Generate picking instructions Invoicing Payment Processing Credit Adjustments There is general ignorance of the true costs of servicing different customer types/channels/market segments.g.of items No. of items packed No. The most useful way to analyze costs is to do it in terms of the various stages of the overall value chain of which the firm is a part. A negative cost driver causes unnecessary work and reduces profitability. Costs are captured at too high a level of aggregation. COST DRIVERS PRIMARY ACTIVITES (LOGISTICS) Product Service Customisation Design and Development Specific Services Specific Equipment Cost Allocated to Specific Customers Cost Pool: Order Assembling Cost Pool: Marketing Activities Promotions & Advertising Selling Activities Cost Driver No. Analysis like ABC helps to understand variable cost behavior and cost-of-quality for activities and processes. of visits Cost Pool: Order Delivery Activities Order Scheduling Order Loading Order Delivery Retrurns (Pickup) Cost Driver No. of credits.

One can use ABC when overhead is high. ABC uses a more logical basis for allocating the costs.3 ACTIVITY BASED COSTING It is a more accurate cost management methodology. “Activity based costing (ABC) is an accounting technique that utilizes cost attachment rather than cost allocation to determine the actual cost of products and services”.yet products don’t make profits. 11.· · · Full cost allocation still reigns supreme Conventional accounting systems are functional in their orientation rather than output oriented. The real beauty of an ABC model is that it forces organizations to adopt a cost management paradigm that focuses on understanding their processes. e. Let us take an example of a manufacturing company. It is based on the fact that cost objects consume activities and activities consume resources. poor quality) Collecting activity data Calculating product cost · · Activity based costing (ABC) highlights the customer characteristics in terms of the buying behavior and distribution requirements. but also more importantly. We would first use the traditional cost accounting method and then use ABC to demonstrate the difference. Companies understand product costs but not customer costs. It identifies each expense category to the particular cost object and makes “indirect” expenses “direct”. Cost Analyses and Measurement The above discussion highlighted lack of visibility in costs as they are incurred in various stages in logistics. customers do.g. Litt in one of his articles commented. they soon recognize that their products or services are produced through cross-functional business processes. The ABC can be performed by: · · · Identifying activities Determining cost for each activity Determining cost drivers (Cost drivers are the factors that affect the cost of an activity. ABC has the ability to clearly define the critical attributes of today’s business processes. products are varied. Once an organization accepts this paradigm. Christopher(1998) stressed the need for capturing the costs as products and orders flow towards the customer. which sells its products through a network of dealers to the industrial users. It is here that Activity Based Costing (ABC) comes into picture and the key to ABC is to define the “cost drivers” from the logistics point of view. It focuses on indirect costs (overheads). cost of errors is high and competition is hard. 7 . reflect how effectively the process performs. It depicts the cost attached at each level of activity and thus decides about the true cost. These processes contain a wide variety of activities that not only define the process. It is this consumption of resources that drives costs. ABC also makes it easier to understand variable cost behavior and cost-of-quality for activities and processes.

1 2 3 4 5 6 Table 11. of orders received No. There is a lack of visibility of the costs across from the logistics point of view.2. of items No. of invoices No. of items per invoice No. of enquiries No. of Orders No. 8 . 2 Order Assembling No. of items returned 3 Order Delivery No.Cost and Performance Measurement in SCM Sno. of Customers Deliveries No. of Installations No. This costing is based on costs of each activity and thus a representative of the true cost. of items picked No. of cheques.No.1 that the costs are functional in their orientation rather than output oriented. of visits 6 Inventory/ Facilities No. of customer accounts No. Table 11.1 and table 11.2: Activity Based Costing (ABC) S. In the table 11.as shown in the table 11. you will see the difference. etc. of picking documents No.000/. The ABC model thus forces organizations to adopt a cost management paradigm that focuses on understanding their processes and prevent losses. of Order movements through the facility Total 4085 950 485 625 1075 425 Cost (in thousands) 525 One can see that once you got the idea of true-costs you can save a possible loss of Rs 170. of orders processed No.2.1: Traditional Cost Accounting Method Traditional Cost Bases Salaries Wages Depreciation Rent/Electricity/Telephone Maintenance Fuel Total Cost (in thousands) 889 926 400 1100 225 375 3915 You can see that in table 11. of Sales calls 5 Service No. of items held in “stock” No. of Return Journeys 4 Marketing No. of Unit Loads Distance/ Delivery No. of Maintenance Calls No. of orders processed No. No. of items packed No. 1 Activity Cost Bases Order Administration Cost Drivers No. of credits.

...... The cost of logistics varies from industry to industry e........... This is especially true with respect to mergers or acquisitions..... This approach is called “Mission Costing”........................................ it must begin by addressing two key starting points.................. significant low hanging benefit opportunities may be waiting in the Logistics area..... Do an activity based costing (ABC) for the fees of a course for the management program of IGNOU......................... accurate and complete calculation of current Logistics costs......... The task of identifying the customer service targets and business goals must be a collaborative effort including all stakeholders within the organization and even key 9 ... Its Material Production and Distribution Division (MPDD) prints and dispatches the study material to the students............. In context of logistics....... a clear identification of the firm’s Customer Service / Business Goals............. 2004)........ Christopher (1998) defined the concept of “mission”............ environmental conservation and human resources increase...... a mission is a set of customer service goals to be achieved by the system within a specific product/market context... building material say bricks will have very high logistics costs as compared to Pharmaceuticals...................... Since logistics begins from start and continues till the end....... The successful achievement of defined mission goals involves inputs from a large number of functional areas and activities....... land.............. Let us discuss some expense saving strategies for the logistician (Ashcroft.. A good logistics costing system is thus based on 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............................. It is generally believed that logistics costs are 15-20% of the turnover.... safety........... and secondly a detailed........Activity 1 IGNOU is a service industry in its own right........... Schools develop the course material...............g....... Companies who have yet to squeeze all possible benefits from their supply chain......................... ....................4 LOGISTICS COST The performance of a supply chain can be illustrated with the help of total logistics cost........ There is a need of a trade-off based cost accounting system that is activity based and a change in any process is followed by a change in the costs............. the costs associated with it are of immense importance in the supply chain. Logistics has an impact on the overall financial performance of a company...... It has an effect on return on assets (ROA).. .............. One can visualize this organization from a supply chain perspective also........ However there is also a general belief that new productive models and good practices are effective in reducing the cost of logistics.......... firstly... ........... Cost Analyses and Measurement 11........................ Logistics becomes more and more expensive as the cost of fuel......... To define the logistics cost one must define the desired outputs from the logistics system and then seek to identify the costs associated with providing those outputs.............. ......................... Missions are specific to the type of market served. For a Lowest Cost Logistics approach to succeed................ Regional Services Division (RSD) supports the students and Student Registration and Evaluation Division (SRED) keeps the students records and evaluations...........

As customer profitability was calculated on the basis of gross profit only. To derive the real profitability of customers many other things are to be taken into account.3: The Customer Profit and Loss Account (source: Christopher (1998)) Revenues Less Costs (Attributable costs only) · Net Sales Value · · · · · · · · · · · · · · · Cost Of Sales (Actual Product Mix) Commissions Sales Calls Key Account Management Time Trade Bonuses and Special Discount Order Processing Costs Promotional Costs (Visible And Hidden) Merchandising Costs Non-Standard Packaging/ Unitization Dedicated Inventory Holding Costs Dedicated Warehouse Space Material Handling Costs Transport Costs Documentation/Communications Costs Returns/Refusals · Trade Credit (Actual Payment Period) Christopher (1998) also presented a model for customer profitability analysis. which should be included when doing an analysis. the next step is to Benchmark them against companies in similar business and industry areas (you will read it in more detail in the next unit). The basic principle of customer profitability analysis thus depends on identifying the cost saving opportunities if business is done only with ‘good’ customers only. These systems were based on the formula given below: Customer Profitability = Net sales revenue generated by the customer in a given period – Costs of goods sold for actual product mix purchased.5 CUSTOMER PROFITABILITY ANALYSIS Earlier accounting systems were unable to add value to a particular customer. carried out on a participative basis to ensure consensus and buy-in on the results. It explains the deductions from the gross sales 10 . Customer profitability analysis illustrates the cluster of customers who are not worth serving or in other words are not providing profits. Logistics costs identified by incorporating all business costs incurred due to logistics functions. material handling costs. support costs and transfer credits. Once these cost numbers are known to be accurate and truly representative.2. Many of the costs like cost of service. inventory and warehousing costs that depends on the customer characteristics.Cost and Performance Measurement in SCM customers. The model is presented in figure 11. 11. Christopher (1998) gave a checklist of costs. Another approach to drive these costs down is to utilize ABC Costing methodologies (as discussed earlier). Table 11. order processing costs and transport costs.

direct costs. Customer profitability matrix is another approach for getting some generalized guidance for making strategic decisions. Finally this unit has touched upon logistics cost and customer 11 .2: Customer Profitability Analysis: A Basic Model source: Christopher (1998) 11. returns etc are subtracted to give a net contribution to overheads and profit. This unit has highlighted another approach to costing that is activity based costing (ABC). A negative cost driver causes unnecessary work and reduces profitability.6 SUMMARY It is evident from the discussions in the sections of this unit that logistics costs have a huge impact on the total costs. attributable indirect costs etc. After all these steps one gets the customer’s gross contribution.value of the order like the discounts. By ABC one can generate opportunities for cost improvement for probable objects that are generating losses. It is therefore important to manage them well. It has been proved over a period of time that the traditional approaches to costing results in business losses. Cost Analyses and Measurement GROSS SALES VALUE TRADE DISCOUNT NET SALES VALUE PRODUCTION COSTS PRODUCTION CONTRIBUTION CUSTOMER RELATED COSTS(DIRECT) *SALES CALLS *IN-STORE PROMOTIONS *BONUSES *MERCHANDISING OVERHEAD COSTS(INDIRECT) MARKETING CONTRIBUTION *SALESFORCE MANAGEMENT *NATIONAL AD CAMPAIGN DIRECT INDIRECT MARKETING COSTS DISTRIBUTION SERVICE COST CUSTOMER RELATED COSTS (DIRECT) *TRANSPORTATION *PACKAGING *STOCKHOLDING *WAREHOUSING *TRADE CREDIT *ORDER PROCESSING CUSTOMER GROSS PROFITABILITY CUSTOMER CONTRIBUTION TO COMPANY OVERHRAD PROFIT Fig 11. The main purpose of doing this exercise is to get an idea of the less profitable customers vis-à-vis more profitable customers. A positive cost driver results in a revenue. production or support related activities that generate profit. The main idea behind all these approaches is to develop an accounting system that routinely collects data on customer’s profitability. It can guide the managers to derive strategies for managing customers with high servicing costs. Any other customer related costs like trade credit. We have studied about cost drivers in logistics.

In the subsequent unit you will be studying about the benchmarking and best practices and methods of measuring the performance of a supply chain. Palgrave Macmillan. Evaluate this statement from the cost point of view. Pitman Publishing. What are cost drivers in a supply chain? Take the case of a paper manufacturing company and portray all its cost drivers. What is Customer Profitability Analysis? Why it has gained importance in the recent times. not companies” what exactly does he mean. http://logistics. “Managing the Supply Chain: A Strategic Perspective”. “Logistics and Supply Cain Management: Strategies for reducing cost and improving Service”.gantthead. Is it ethical to deny a customer that is not profitable? 2) 3) 4) 5) 11. Closs & Cooper (2002). 2004.W.com/article. What were the reasons for the fall of management accounting? Explain activity based costing and mention the benefits it had over the management accounting.7 1) SELF ASSESSMENT QUESTIONS “Logistics Management impacts not only upon the profit and loss account of business but also upon the balance sheet?” Comment! When Christopher says that “supply chains compete. Harrison. Indian Reprinted ed.cfm?ID=18628 Christopher Martin (1998). 2004. “Lowest Cost Logistics”. 2) 3) 4) 5) 6) 7) 12 . Supply Chain Logistics Management.Cost and Performance Measurement in SCM profitability analysis. 2nd edition.com/od/ strategicmodeling/a/aa071604. Pearson Education Jeff Ashcroft(2004).about. “Learning the ABCs of Cost Analysis”. “Logistics: An Introduction to Supply chain Management”. Indian Reprinted ed. Litt(2001). & Walters D.L.8 REFERENCES AND SUGGESTED FURTHER READINGS 1) Bowersox. McGraw-Hill (International Edition) Bradley S.htm Waters Donanld (2003). 11. Gattorna J. Logistics Management and Strategy. Financial times. (1996). Palgrave Macmillan. at http:// www. Hoek (2002).

with the emphasis upon continuous improvement and organizational learning. through prioritizing improvements.6 12. CEO: Xerox Corporation once said. at its worst it can be an expensive and time – consuming piece of corporate tourism.3 12. or standard. Starting from an analysis of existing activities and practices within an organization. benchmarking is imitation and stealing – “creative swiping”! At its best it is skillful appropriation and adaptation requiring imagination and innovation. Benchmarking is an external focus on internal activities. or those companies recognized as industry leaders”. A benchmark can be established at any level of the organization. in any functional area. to searching for the off-the-shelf improvement strategies in a specific area of a logistics or supply chain activity. Structure Objectives Introduction Importance and Role of Benchmarking Methodology for Benchmarking Change Management and Benchmarking Challenges Faced in Implementation of Benchmarking Case Studies Summary Self Assessment Questions References and Suggested Further Readings 12. recognize the process in which benchmarking can effectively be brought about address the challenges faced in bringing about benchmarking process comprehend what elements are involved in bringing about change management.e. from assessing the performance of the entire operation. Organization that introduces benchmarking correctly can use it to make a quantum leap in their performance. Within logistics and supply management. and develop a culture in which managers and staff constantly searches for improvements.2 12.UNIT 12 BEST PRACTICES & BENCHMARKING IN SCM Objectives After reading this unit you would be able to: Cost Analyses and Measurement · · · · · 12. “Benchmarking is the continuous process of measuring product.8 12.4 12. by which each activity can be measured or judged.0 12. requiring senior management’s commitment. In some senses. The focus is primarily upon the role. to attain a competitive edge. functions or operations in order to achieve continuous improvement.9 understand the role of benchmarking in business empathize reasons why benchmarking is required. services and practices against the toughest competitors. The ultimate goal is to be better than the best i. the objectives are to understand existing processes.7 12.1 12.5 12. processes and 13 . or activities and then to identify an external point of reference. It is a long-term process. benchmarking can be used for a number of different purposes.1 INTRODUCTION David T Kearns. strategic issues.

14 . it is often undertaken as a response to an information need associated with a project or issue within the organization. “ Are we doing the right things?” – in other words. and with other external sources. considerable attention must be paid to how the activities are organized and performed. but are perceived to be operating sub-optimally. The mere comparison of operations and costs is not sufficient. While every process can be improved. What needs to be done to ensure long-term success? Where do management see the potential for competitive advantage? Benchmarking helps to identify those features critical to ongoing success. Only through the process of continuous benchmarking a process against itself. 12. projects or ventures are fundamental to the long-term success of any business. as well as those parts of the organization that are less important and from which resources may be diverted. While benchmarking can be performed at any time.Cost and Performance Measurement in SCM practices. rather than just the magnitude of the performance gap. structure or capability? Roles. an organization must eliminate Non-ValueAdding Activities (NVA) in the process itself. Benchmarking then can be used to target strategic issues. gain enough information to prioritize competing projects and establish an overall program of events geared towards achieving optimum economic value added.2 IMPORTANCE AND ROLE OF BENCHMARKING Benchmarking provides the basis for meeting and exceeding stakeholder expectations. Benchmarking targets the critical success factors (CSF’s) of a specific organization. What responsibilities. The situations that may trigger the benchmarking process are: · · · · · Operations / Logistics and Supply Chain improvement efforts. Questioning the roles within an organization leads to the question. an often-overlooked issue is getting the most value out of every rupee spent on process improvement. cost reduction targets that were deemed aggressive months ago can quickly become the Industry norm. rather than on the bottom line and numeric measure of performance. Management / Organizational changes Merger & Acquisitions Competitive Threats Cost Reduction Initiatives Benchmarking in any of these situations is a logical step in developing new objectives. can this be truly assessed. the question of effectiveness – while assessing processes raises concerns about whether things are being done right – in other words. services and tasks are offered to a customer or client by the organization? How do these compare with other organizations in terms of process architecture. Understanding its potential benefits requires understanding the type of benchmarking to be deployed and the purpose of conducting such an exercise. the question of efficiency. in this instance are bundles of services provided either to external customer or to an internal customer. a “role” describes in essence what a person or function does for an organization. In Benchmarking. To leverage the most value from processes. Every process within any organization consumes resources. that are of high importance to the business. setting new performance standards and metrics and redesigning process and procedures. Benchmarking supports the targeting of processes or process elements. The identification and the setting of new goals. This will provide good understanding of how superior performance has been achieved. The environment within which any organization operates changes rapidly.

Knowing the strengths and weaknesses of competitors is important to strategic decision-making. It is more so a call of the day for companies to maintain their competitive advantages. Drivers are the causes of work. the goal has to be a cross-functional view of the value chain needed to meet customer expectations in an efficient and effective manner.A company benchmarks because it wants to be the best. Studies can be focused vertically upon functions and department. or horizontally upon specific processes or activities. Most organizations can learn from the experience of others.3 METHODOLOGY FOR BENCHMARKING In most companies traditional measures are based on fiscal and legal requirements. operations develop their own set of KPI’s and measures – that may be unrelated to the financial results – to identify levels of customer satisfaction and market needs. it’s critical success factors (CSF’s) and the key performance indicators (KPI’s). The objective is to identify and analyze best performance within the confines of the organization’s own boundary. While Internal Benchmarking focuses on specific functions or processes. activities or functions. even though they may have very different customer requirements and competitive environments. The technique of benchmarking can be focused on specific processes. Competitive benchmarking helps to level the playing field. the search for industry best practices and subsequent efforts to maintain competitive superiority effectively provide the basis for superior performance. The problem with these measures is that they are based upon derived information and have no clear relationship to the organization’s operational data. But here again it is important to bear in mind that any form of continuous improvement in one part of the business does not just push to another area of operation – a phenomenon known as the “waterbed effect”. Significant improvements are often made through Internal Benchmarks and these are often the first steps in a benchmarking process. Internal Benchmarking is the analysis of existing processes and practices within various departments or divisions of an organization. This has led to the development of the Balanced Score Card Concept (Kaplan & Norton. To this end. An associated issue is the depth to which the analysis is to be performed. While early forays into the world of benchmarking might be constrained to functional or departmental performance. and drive performance to this level or beyond. benchmarking should not be considered as an optional activity. In essence. These are then often used for planning purposes to facilitate comparison. In conducting Internal Benchmarking. This division often leads to conflict in the evaluation of performance. The process will facilitate an understanding of the basic activities that constitute the processes within the organization and the drivers associated with these. Competitive Benchmarking looks outwards in order to understand how direct competitors are performing. step-out improvement that so many organizations are searching for today. Almost any study that requires detailed examination of the organization’s operations results in a greater understanding of how the business works. the management is looking at itself first before thinking about comparisons outside. On the other hand. A well-planned. but this is only part of the answer. 1996) 15 . but it is less likely to provide that innovative. Much can be gained by making comparisons with organizations that have to adopt a fundamentally different approach to the same or a similar task. Industry Benchmarking looks beyond the competitive relationship and looks for trends. systematic and structured benchmarking program can provide organizations with a number of important benefits. Cost Analyses and Measurement 12. the triggers that set in motion a series of activities.

definition. As part of the continuum of measures it is important to recognize that qualitative measures are a mid. for example through an existing benchmarking network or through an industry trade association. All approaches are fundamentally the same and are based on Deming’s Plan–Do–Check–Act (PDCA) cycle. relevance is sacrificed. they appear to possess certain “magic” and people tend to believe these hard numbers. therefore improvement effort cannot be spared too thinly. Therefore in developing benchmark measurement the goal is to develop a metric that is as “hard” as it can get without losing vital insights provided by the “softer” more intuitive qualitative indices. But. Failure to achieve this will result in major problems in both the analysis and comparison activities. but these techniques will never have precision to back them up. and the organization is identified and gained agreement from partners. At the other end of the range are highly quantitative measurements such as cost per unit. Hard measures make the user feel as though they are real. and all areas cannot be addressed simultaneously. with each gain in precision. though.point in terms of ‘hardness’ or reality.Cost and Performance Measurement in SCM Measurements can either be quantitative (numeric) or qualitative (opinion based). but are likely to have developed better processes to deal with them? How should the different areas of interest of partner organizations be accommodated within the process? Step 3: Data and Information Collection Once it has been decided what to benchmark. how will confidentiality be addressed? Are they likely to have significantly better activities and operations? Can best–in-class organization be easily identified and what can be offered to them in exchange which is of interest to them? How many benchmark partners are required? Which organizations have similar requirements for operational processes. In any supply chain there are too many activities and processes to benchmark all of them in one go. Quantitative and qualitative benchmarks are not being viewed as isolated categories. All the participants must sign off the common understanding and a forum needs to be established to discuss and resolve any queries that arise during the process. terminology and time periods. There are many tools for approximating qualitative characteristics with numbers. processes. or productivity measures. The key here is to achieve commonly agreed understanding of the activities. Facts with numbers attached to them take on a life of their own. Step 1: Prioritize what to Benchmark The first step focuses on the processes and activities that the organization believes will yield the maximum benefit. which ultimately may lead to rejection of the output by key managers. A Systemic Approach Many organizations have developed their own process. for example assessment of customer or employee satisfaction. Step 2: Identify Comparable Companies Benchmark partner selection can be determined by a benchmarking mechanism. At one end of the continuum are highly qualitative measurements. the next step is to determine the process for data and information collection. a number of issues need to be considered: · · · · · Should competitors be approached? If so. When this is not done. 16 .

Deadlines for each stage of the data and information collection need to be set, monitored and adhered to otherwise it would be considered a lengthy process. Step 4: Determine current performance gap Once the data and information have been collected, the analytical stage needs to be converted into useful outputs. High-level analysis should be used to sensecheck the data and information provided. Queries should be addressed to the supplying organization and resolved quickly. Data might be aggregated and particular attention should be paid to the following:

Cost Analyses and Measurement

· · · ·

Data normalization methods; Root cause analysis; Best practice characteristics identification; Identification of relevant process enablers.

When all the data and information have been accepted and analyzed, comparisons need to be made and gaps analyzed. The analysis should utilize an agreed framework, focusing on the key areas of interest. These could be points of greatest difference or similarity and should be presented in a way that will focus the recipients upon the required actions. The output should:

· · · · ·

Assess the overall comparisons in the areas of interest; Seek to explain whether there are broader business reasons for some of the differences; Identify the major performance gaps where the real opportunities for major improvements lie; Set targets and realistic time-scales; Outline what is required to close the gaps.

Step 5: Project future performance levels Analyzing the benchmark performance gap can be done as a snapshot or as a trend over a period of time. Either method may be appropriate for the function or process being studied. Indeed, both may be applied simultaneously. When cost, productivity or quality is the metric under study, sometimes it is useful to look at the historical trend as well as the current gap. Additionally, projecting future performance levels of productivity within your own organization against that of the benchmark partner’s – given the current rate of improvement for each creates projected targets for improvement. This approach helps the intent to increase the rate of innovation and improvement within the organization. Step 6: Communicate findings and gain acceptance It is a known fact that people do not like change, especially change that appears to be for ‘change sake’. In order to ensure the success of any benchmarking program it is imperative that a detailed communication plan is created and revised regularly during the course of the initiative. Even with the support of senior management, there may be resistance to change from lower organizational levels. This resistance to change primarily stems from fear; fear of job losses, loss of status, control, resources and so on. In order to plan for and mitigate against such events, a stake-holder or field analysis might be used to identify potential areas of resistance and methods of overcoming any such concerns.
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Cost and Performance Measurement in SCM

Step 7: Establish functional goals Once outline targets have been drawn up, detailed functional (or cross-functional) goals can be established. The secret in using benchmarking to achieve breakthrough change is to synthesize key actions taken after consideration of all information available, to generate innovative approaches. After the enablers of performance within a specific organization environment have been assessed, careful consideration should be given to the adaptability of these enablers to the organization’s circumstances. Step 8: Develop action plans The action plans describe each of the key actions at a functional level required to achieve the desired goals. Action plans can be as detailed as required; in some instances they can even identify the core tasks, the desired levels of performance required, and the changes in the process, behavior or systems required to support their achievement. Step 9: Implement and monitor All the time and effort expended to this stage is worth very little if the output does not provide clear plans for change, and these are not implemented in real and lasting improvements. Having achieved a successful implementation, the organization must continue to monitor the operational performance, and assess whether there are other organizations that have now developed superior processes or practice. Step 10: Recalibrate benchmarks The continuous search for improvement will inevitably result in further development of the processes and practices, and some revisiting of benchmarking efforts. Activity 1 Many organizations have developed their own methodology for benchmarking process. Visit an organization of your choice and study its benchmarking process. Do their process is also based on Deming’s Plan–Do–Check–Act (PDCA) cycle? ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. .............................................................................................................................

12.4 CHANGE MANAGEMENT AND BENCHMARKING
Clearly the process of benchmarking focuses on customers and performance improvement with the potential for significant advances in efficiency and effectiveness. Benchmarking is used extensively by many organizations to help understand their relative positioning and efficiency of operations. Benchmarking networks; full time benchmarking manager and consulting assignments are evidence of the continuing interest in this area. Benchmarking raises an organizations consciousness. It provides an external focus on the internal activities and derives an organization to the conclusion that there are

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always opportunities within every organization to learn something new. To achieve operational excellence an organization needs to experiment in all parts of the business. Everyone – from top management to down below – has to be willing to roll their sleeves up and get their hands dirty, constantly asking ‘why?’ The role of benchmarking in this environment is to provide the creative spur and to unearth a path that has worked for others in achieving operational excellence. Benchmarking is about learning from others as well as learning by doing. It cannot be learned from a book or a seminar; it has to be practiced. The more the practice the greater is the potential for innovation within your business. As described earlier Benchmarking has four distinct phases:

Cost Analyses and Measurement

·

Phase 1: Planning Identifying what to benchmark, selecting comparative companies or indeed parts of your business and determining how the data collection activities are to be performed.

·

Phase 2: Analysis Analyzing internal levels of performance and comparing these with the target organization’s performance. Also, projecting future performance levels and setting targets in order to attain less time–perishable levels of competitive advantage.

·

Phase 3: Integration Communicating benchmark findings and helping the organization come to terms with what needs to change in order to achieve new and lasting levels of performance. Developing realistic and achievable functional goals to enable this vision.

·

Phase 4: Action Managing Change and developing specific action plans in order to make the desired levels of change a reality. Once implemented, the monitoring of progress via a set of clear KPI’s is of paramount importance, allaying any drift back to old habits. Finally a recalibration of benchmarks is required in order to lead the business to the next level of operational excellence.

Good benchmarking is about managing continuous improvement strategically; identifying stakeholders and ensuring their interests are being met by any benchmark based initiative and managing change. Benchmarking is a tool for enacting change. The critical success factor for any change is the creation of additional value in the eyes of the stakeholders of the business. Benchmarking is all about finding new ways of enacting business processes and using companies precious resources to serve its stakeholders needs in a better way. To achieve this change benchmarking studies have to be very specific, comparable and have a predefined set of performance drivers and KPI’s. Without any one of these a benchmarking study cannot hope to be effective. In putting benchmarking to work in the supply chain it is worth keeping in mind that change will occur once the process has started. By its very nature it will cause participants to look at their new world with a new set of eyes. Problems will be uncovered and new and creative solutions will be developed. Benchmarking removes some of the politics and guesswork out of the development of continuous improvement targets within organizations. This is due to the external, politically neutral, nature of the analysis. Some people like to know exactly where they stand and what is expected of them. If measures are used to guide or assess

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Cost and Performance Measurement in SCM

performance these must not be vague or non-descript. Metrics without clarity can lead to individuals incorporating these into a workable framework of their own. The problem is that this framework might not be what management had in mind! Effective continuous improvement starts with a rigorous analysis of process flows – what work is done where and why is it done in way it is done. Report outputs are analyzed and the ‘why’ question is repeated many times. Continuous improvement must be managed strategically with all those involved clearly understanding why a particular course of action is being followed, where improvement targets have come from and how and by whom it is expected that the improvements will be implemented. Benchmarking solves this problem. It develops a set of objective measures within an organizational framework, stabilizes the improvement program and provides all parties with a clear understanding of why a particular course of action is being followed, customer surveys, completed as a part of a benchmarking exercise, will point specifically to the areas that need improvement. Benchmarking if managed effectively holds the key to unlocking an individual’s defenses. It creates a logical, prioritized and importantly achievable path to good practice and operational excellence. Unlocking the power vested in individuals and teams in this fashion is the catalyst for organizational creativity and innovation.

12.5 CHALLENGES FACED IN IMPLEMENTATION OF BENCHMARKING
Irrespective of the type and scope of benchmarking, the critical factors that are needed to be ensured are as follows:

· · · ·

Senior management supports the process of benchmarking and are committed to continuous improvement. The objectives are clearly defined at the outset. The scope of the work is appropriate in the light of the objectives, resources and time available and the experience levels of those involved. Sufficient resources are available to complete projects within a given timeframe and that projects are selected based upon a prioritization linked to the achievement of competitive advantage. Benchmarking teams have a clear picture of their organizations performance before approaching others for comparisons. Stakeholders, particularly staff and their representatives are kept informed of the reasons for benchmarking and the progress made throughout the course of projects. Wherever practical, staff should be involved in undertaking benchmarking to make most of the opportunities for learning from other initiatives.

· ·

As with many management techniques and processes, benchmarking provides organizations with problems as well as benefits. These occur as consequence of:

· · ·
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The existing organizational culture Incorrect application of the techniques The nature of the process

Benchmarking applications may be limited by the management culture. Benchmarking takes a normative approach to the management – there are industry

best practices that can be generalized between sectors and organizations. As with most programs that require major organizational change, considerable inertia may be experienced from individuals and departments, especially those with the most to loose. These are inevitable issues around the identification of best practices and the adoption of processes that are not valued by that particular organization’s customers. There is however difficult judgment calls to make around the introduction of new practices where quantum jump is required. Incorrect benchmarking can often lead to wrong conclusions. Benchmarking may lead to a culture of imitation rather than innovation; to adopt rather than adapt and to achieve parity rather than superiority. This type of approach will never result in competitive advantage. When the process is approached for the first time, it is worthwhile learning from others who have built up experience of applying benchmarking within their own operations. This is where membership of benchmarking clubs and network proves invaluable. In general it is important to avoid: · · · · · · Benchmarking for benchmarking sake. Focusing entirely on comparisons of ‘hard’ performance measures rather than the ‘softer’ processes and activities that enable the attainment of good practice Spending too long on one part of the process at the expense of others Expecting that benchmarking would be quick or easy Expecting to find benchmarking partners comparable in all respects to your own organization Asking for information and adapt without being prepared to share it with others at conversely expecting organizations to share information that is commercially sensitive

Cost Analyses and Measurement

12.6 CASE-STUDIES – BENCHMARKING IN ACTION ·
Case 1: Supply Chain structures and responsibilities As a part of the broader organizational change program, a multinational fast moving consumer goods (FMCG) manufacturer, XYZ Inc. wanted to investigate different approaches to the management of its supply chain activities across the country. The company had developed a country-based structure but recognized that there were significant opportunities to be gained from changing at least some of this structure. The company wanted to look at how businesses in different sectors approached the fundamental management issues that were key to their success. These included: · Division of responsibilities · Central versus regional management structures · Support for customer facing operations · Information systems · Implementation and change management Given the sensitivity of the area of interest and the need to assure potential partners of confidentiality, a consultancy was engaged to act as the intermediary and run the process. Initial discussions produced a preliminary document; this was then developed into a questionnaire that could be used in face-to-face interviews. A number of potential partners were identified, approached and subsequently engaged. All participants were taken through the same interview

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Cost and Performance Measurement in SCM

process to ensure consistency of approach, terminology interpretation and response. At the conclusion of the process, all data was analyzed, comparisons were drawn and the key finding identified. The summary report was than circulated to all participants and a presentation given to the FMCG manufacturer’s management group of XYZ Inc. This process allowed the company’s management group to compare and gain insights into how companies with similar challenges had developed different roles, responsibilities and structures. The management group then prepared an evaluation of strategic options and gained agreement to conduct follow-up. Face-to-face benchmarking meetings with the two most benchmarking partners. The output of this second stage process formed major part of the proposals to change the supply chain responsibilities and structures. The proposal was accepted and gradual implementation process provided for progressive centralization of responsibilities.

·

Case 2: Outsourcing logistics – Benchmarking for success A major sportswear and accessories manufacturer was considering outsourcing its logistics operations to a third party logistics (3PL) service provider. One of the key concerns held by the management team was the achievement of improved levels of operational performance at lower cost. How was this going to be assessed, how should the 3PL service provider be selected and how could its performance be measured on an ongoing basis? In order to gain answers to these questions the manufacturer engaged a consultancy to develop an assessment framework. The brief was to design a set of processes to enable the organization to construct and manage a sourcing relationship based on a number of balanced, benchmarkable, metrics Initially a model describing the logistics function and its associated activities was developed. This covered activities such as: Goods receiving inspection Warehouse operations Dispatch inspection Shipping Distribution planning and control Transportation management Support Management and administration

Data was then requested internally covering cost drivers, resources consumed – including FTEs (full time equivalents), capital equipment and volumes – and quality and performance metrics. This data, once harvested and validated, enabled and development of detail set of performance metrics characterizing the organizations current logistics function performance. These measures were both quantitative and qualitative, covering unit costs, productivity, cycle times and quality and performance metrics. The next step was to compare these data with a reference group of data from organizations with a similar set of operational characteristics. The consulting organization engaged to support this initiative already had a significant database from previous engagements and was therefore able to provide reference group data to support this phase of the project.
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The analysis that followed identified the areas where the organizations performance was better than that of the reference group mean and where there was opportunity

for improvement. This latter set became improvement challenges for the chosen 3PL service provider. This exercise also provided the base case upon which to assess and select the appropriate 3PL service providers offering. It also enabled a framework upon which a set of ongoing, balanced performance metrics could be developed in order to manage the sourcing relationship over time. Negotiations with the selected 3PL service provider led to a three-year sourcing contract, with clearly identified performance improvement objectives agreed between both parties at the outset. The manufacturer also had a management framework in place that could be used to assess the competitiveness of the service providers offerings on an ongoing basis, providing information to ensure full value was achieved from the service provider / service recipient relation they had created.

Cost Analyses and Measurement

12.7 SUMMARY
Benchmarking is designed for action, rather than just to answer the question “How are we doing?” It is a means to an end and not the end itself and is most powerful when used as a tool to develop best practices rather than to solve a specific problem. To benefit from this approach, organizations must first recognize that always there are others who can perform activities and tasks better than they currently do and that lessons can be learnt from how they do this. Ultimately the greatest benefits may come from a better understanding of the business and a change in culture to a proactive, creative organization that strives for supply chain excellence and continuous improvement. When used correctly, benchmarking is a powerful management tool that provides a much-needed external view of the organizations environment and especially the requirements of its customers. Above all else, the application of benchmarking process can lead to competitive advantage through cost-leadership and differentiation based upon excellent customer service.

12.8 SELF ASSESSMENT QUESTIONS
1) 2) 3) 4) 5) 6) Define Benchmarking. Define it’s role in improvement of organizational efficiencies What are various kinds of challenges faced during the process of benchmarking? Benchmarking is a continuous process. Express your opinion in favor or against it giving reasons. What the various challenges especially in the area of Human Resources faced during Benchmarking process? Highlight the Key issues in Benchmarking Case 1. Highlight the Key issues in Benchmarking Case 2.

12.9 REFERENCES AND SUGGESTED FURTHER READINGS
1) Handfield Robert B & Nichols Jr. Earnest L (1999), “Introduction to Supply Chain Management” Prentice Hall.
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Vol. Stewart. G. P. Hausman Warren H. Asian Books Publication. 38-44. R. The Practice of Supply Chain Management. London.. “The balanced scoreboard-measures that drives performance’’. (2000). 2nd Ed.S.S. 8 No. B. 3) 4) 5) 6) 24 . Dec.. “Supply chain performance metrics”. “Supply chain performance benchmarking study reveals keys to supply chain excellence”. “Logistics and Supply Chain Management: Strategy for reducing cost & improving service”. 2. (1992). January-February. Kaplan. pp.D. and Norton. (1995). 71-9. Sahay. Harvard Business Review. pp. Logistics Information Management.Cost and Performance Measurement in SCM 2) Christofer Martin (1999). Pitman Publishing. “Supply Chain Management”.

with emphasis on continuous improvement across the extended supply chain.4. i. better customer service and increased profitability. but many of them still lack in selecting the proper performance measures for a fully integrated supply chain.6 13.2 13. Firms have now realized the potential of SCM.e.9 13. 25 . there is an emerging requirement to focus on the performance of the extended supply chain or network in which company is a partner.7 Supply Chain Balanced Scorecard Hierarchy Based Measurement System Function Based Measurement System Perspectives Based Measurement System Supply Chain Operations Reference Model Dimension Based Measurement System Interface Based Measurement System 13.6 13.4.5 13. but also the end supplier (suppliers’ suppliers) to end buyers (buyers’ buyers).8 13.1 13. The competition is at a chain or network level.4.1 13.11 A Comparison of Measurement Systems Selecting Measures Methods for Setting Performance Targets Total Cost of Ownership Summary Self-Assessment Questions References and Suggested Further Readings 13.3 13.4.4.4 13.UNIT 13 PERFORMANCE MEASUREMENT AND EVALUATION OF SCM Objectives After reading this unit you would be able to: Cost Analyses and Measurement · · · · 13. An extended supply chain is one that involves not only tier one buyers and suppliers.10 13. supply chain vs.4. There is a shift in focus from an intra organizational performance to inter organizational integrated supply chain performance.3 13.5 13.4 Justify the need for supply chain performance measures Describe supply chain performance measurement systems Compare supply chain performance measurement systems Select measures for measuring the supply chain performance Structure Introduction Need For Supply Chain Performance Measures Measurement Systems Supply Chain Performance Measurement Systems 13. Supply Chain Management (SCM) plays a key strategic role in increasing organizational effectiveness and accomplishment of organizational goals such as enhanced competitiveness.1 INTRODUCTION In today’s world. supply chain. Today’s management can’t afford to focus only on company’s performance in a vacuum.4.2 13.7 13.

Supply chain performance measures differ from traditional performance measures as it crosses company boundaries i. as supply chain metrics are primarily internally focused functional measures like lead-time.). which makes the decision of selecting the right performance measures more difficult. The reason for this is the high level of interdependence intermingled with independence and autonomy of the firms in an integrated SC. distribution. on-time delivery. but they do not indicate how well key processes have been performed or how effective the supply chain is in meeting the primary objective like customer satisfaction. overall profits etc. tier one buyers and suppliers. This makes the choice of supply chain performance measure(s) difficult. including product availability. Supply chain performance crosses organizational boundaries since it include raw material components. Every member is fully autonomous but highly dependent on the performance of other members.e. The objective of managing the supply chain is to synchronize the needs or demands of the customers with the flow of materials from suppliers to achieve a balance between the conflicting goals of customer service and satisfaction and low supply chain cost. there is often lack of insight for the development of effective performance measures and measurement system needed to achieve a fully integrated extended supply chain. but it is limited to measuring the performance of immediate SC i. This complexity is due to many factors and one of them is the objective of SC itself.Cost and Performance Measurement in SCM In a supply chain the problem lies at the interfaces that is at the boundary of two organizations. the organizations have started measuring performance beyond the traditional boundaries of firm. However. Single performance measure for entire supply chain is not adequate for effective supply chain because it will not cover all pertinent aspects of the supply chain.e. Supply chain performance also crosses all functional links like procurement. In an increasing number of instances. Supply chain performance also crosses traditional functional linkages such as procurement. and all the necessary inventory and capacity in the supply chain to deliver that performance in a responsive manner. These measures do not capture how the extended supply chain has performed and fail to identify areas of improvement in competitiveness. Supply Chain Performance refers to the extended supply chain’s activities in meeting end-customer requirements. The process of choosing appropriate supply chain performance is difficult due to the complexities of supply chain. 26 . Figure 13. these measures are purely financial (for example return on assets. manufacturing. sales and distribution etc. In many instances. subassemblies and finished products and distribution through various channel to the end customer.1 shows the evolution of performance measures for SC from single enterprise single measure to multiple enterprises multiple measures. SCM needs to be assessed for its performance. it includes suppliers and distributors. In many companies. marketing &sales and R&D etc. inventory levels etc. manufacturing. These conflicting goals cannot be accomplished together at a time and hence there is a need to strike a balance between them. stakeholders’ value for each firm in the extended supply chain. in order to evolve an efficient and effective supply chain. Like in any other case. the metrics that management refers to.

2 NEED FOR SUPPLY CHAIN PERFORMANCE MEASURES To excel and win in the today’s competitive environment.1: Evolution of performance measures for supply chain 13. Several factors that contribute to management’s need for new types of measures for managing the supply chain include: · · · · · · · · · The lack of measures that capture performance across the entire supply chain. rather than narrow company-specific or function-specific measures. Hausman (2000) Figure13. which inhibit chainwide improvement. The requirement to align activities and share joint performance measurement information to implement strategy that achieves supply chain objectives. The complexity of supply chain management. To achieve this goal. performance measures that support global supply chain performance measurement and improvement are needed. The requirement to go beyond internal metrics and take a supply chain perspective. supply chain need continuous improvements. The requirement to allocate benefits and burdens resulting from functional shifts within the supply chain. The need to determine the interrelationship between corporate and supply chain performance. The goal of encouraging cooperative behavior across corporate functions and across firms in the supply chain. The desire to expand the “line of sight” within the supply chain. The need to differentiate the supply chain to obtain a competitive advantage.Cost Analyses and Measurement Organizational boundary Single Enterprise Cross Enterprise Single Dimensions Multi Source: Warren H. 27 .

· · · · What to measure? How are multiple individual measures integrated into a measurement system? How often to measure? How and when measures re-evaluated? In recent past quite a few supply chain performance measurement system are reported in literature. if called for to action.3 MEASUREMENT SYSTEMS Management veterans argue that measurement is a key to continuous improvement. Measurement systems have been used in process management. some of the important ones are discussed in the next section. Effective reengineering requires an in-depth understanding of the supply chain processes and their linkages. 28 . Following questions must be addressed to create a sound performance measurement system.Cost and Performance Measurement in SCM Recent studies indicate that supply chain performance affects more than 85 percent of a manufacturer’s costs and a large percent of its revenues (Supply chain council 1998). And this lead to variety of maxims like “ you can’t manage what you don’t measure “ and “anything that gets measured gets done”. namely financial perspective. The successful companies are reengineering their supply chains to decrease costs and improve customer satisfaction. Characteristics of effective measurement system An effective measurement system is one that has following characteristics (Beamon 1996): · · · · Inclusiveness: measurement of all pertinent aspects Universality: allow for comparison under various operating conditions Measurability: data required are measurable Consistency: measures consistent with organization goals 13. Monitoring SC performance through proper measurements is. internal business perspective. 13. therefore.1 Supply Chain Balanced Scorecard A measurement system based on balance scorecard (Kaplan and Norton 1992) uses four perspectives.4. has suggested the following definition of a measurement system: A set of related measures – described by rules and procedures for the collection.4 SUPPLY CHAIN PERFORMANCE MEASUREMENT SYSTEMS A performance measurement system can be defined as the set of metrics used to quantify both the efficiency and effectiveness of action. who focused on the order process in his work. innovation and learning perspective. customer perspective. 13. compilation and communication of data—that in combination reflect key performance aspects and characteristics of the process in question effectively enough to admit intelligent analysis. An in-depth understanding can only permit the development of a performance system and the setting of improvement goals against benchmarks. necessary and can help the organizations to identify opportunities for optimization. and Ljungberg (1994).

in addition to nonintegrated measure. This model describes the links of different perspective to goals of SCM and then what are the measures to be adopted in each perspective. rather then solely upon their firm itself. SC balance scorecard emphasizes the interdependent as well as independent nature of supply chain and reorganizes the need to ascertain the extent to which firms effectively work together and functions are coordinated and integrated. It also stimulates management to create other measures appropriate to their unique circumstances but it lacks in aligning overall supply chain objectives with objectives for companies. which is shown in figure 13. The balance scorecard incorporates integrated measures. Brewer and Speh (2000) have developed a model for a balance scorecard in the supply chain context. of shared data set/ total data set Performance trajectories of competing technologies Financial Perspective Goals 1) Profit Margin 2) Cash flow 3) Revenue growth 4) Return on assets 1) 2) 3) 4) Measure Profit margin by SC partner Cash to cash cycle Customer growth and profitability Return on SC assets Figure 13.When a supply chain point of view is embedded within the balance scorecard framework the internal perspective of the scorecard is extended to include both the inter-functional and inter-organizational partnership perspectives.2.2: Supply Chain Balanced Scorecard Framework (Brewer and Speh. Customer Perspective Goals 1) Customer view of product/services 2) Customer view of timeliness 3) Customer view of flexibility 4) Customer values 1) 2) 3) 4) Measure Number of customer contact points Relative customer order response time Customer perception of flexible response Customer value ratio Cost Analyses and Measurement Internal business perspective Goals 1) 2) 3) 4) Waste reduction Time compression Flexible response Unit cost reduction Measure 1) Supply chain Cost of ownership 2) SC cycle efficiency 3) No. of choices/ avg response time 4) % of SC target Cost achieved 1) 2) 3) 4) Innovation and learning Perspective Goals Product/process innovation Partnership management Information flows Threats and substitutes 1) 2) 3) 4) Measure Product finalization Point Product category commitment ratio No. that motivate employees to view their firm’s success as dependent upon the success of entire supply chain of which they are part. 2000) 29 .

Incoming stock level .1: Hierarchical Based Measurement System (Gunasekaran 2001) Level Strategic Performance metrics Total supply chain cycle time Total cash flow time Customer query time Level of customer perceived value of product Net profit vs. can be used and managed by the middle management.2 Hierarchy Based Measurement System Under hierarchical framework measures are classified into strategic.1.Cost and Performance Measurement in SCM 13. In some cases.4. tactical and operational levels of management. and in terms of tangible and intangible benefits. such as cost savings. like improved quality. As shown in table 13.Work in progress -Scrap level -Finished goods in transit Supplier rejection rate Quality of delivery documentation Efficiency of purchase order cycle time Frequency of delivery Driver reliability for performance Quality of delivered goods Achievement of defect free deliveries * * * * * * * * * * * 30 The metrics are further distinguished as financial and non-financial so that a suitable costing method based on activity analysis can be applied. a metric is classified as both financial and non-financial. A similar explanation can be given for the rest of the metrics given in table 13. the accuracy of forecasting techniques. the buyer-supplier relationship can be quantified in terms of financial performance achieved.1. flexibility and deliverability. For example. Table 13. and fair decisions can be made. . This is done to assign them where they can be best dealt with by the appropriate management level. assigned to the tactical level based on an overall system decision in a supply chain. productivity ratio Rate of return on investment Range of product and services Variations against budget Order lead time Flexibility of service systems to meet particular customer needs Buyer supplier partnership level Supplier lead time against industry norm Level of supplier’s defect free deliveries Delivery lead time Delivery performance Accuracy of forecasting techniques Product development cycle time Order entry methods Effectiveness of delivery invoice methods Purchase order cycle time Planned process cycle time Effectiveness of master production schedule Supplier assistance in solving technical problems Supplier ability to respond o quality problems Supplier cost saving initiatives Supplier’s booking in procedures Delivery reliability Responsiveness to urgent deliveries Effectiveness of distribution planning schedule Financial Nonfinancial * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Tactical Operational Cost per operation hour Information carrying cost Capacity utilization Total inventory as: .

Marketing. A clear guideline can’t be made in such a system to put the measures into different levels that can lead to low level of conflicts among the supply chain partners.4. Looks at the entire chain in isolation.4. Organization and Strategy.2 are: System Dynamics. It doesn’t provide the top-level measures to cover the entire supply chain with the company strategy. The figure 13.3 below shows the customer order path and then it covers what are the measure available in each process. The different approaches to SCM lead to different awareness of what should be measured to assess performance. Cost Analyses and Measurement 13. 31 .3: Customer Order Path (Christopher 1992) Function based measurement system covers the detailed performance measures applicable at different linkages of supply chain. Operations Research/Information Technology. Logistics. which gives the localized benefits that may harm the total supply chain benefits. Approach is easy to implement and targets can be dedicated to individual departments.3 Function Based Measurement System In this system the measures are aggregate to cover the different processes in the supply chain. The six different perspectives as shown in table 13. 13. Sales and marketing function Customer order status Ship customer order Purchasing Accounting Inventory available Customer order Back order Invoice Credit check Production schedule Inventory file Process order Warehouse withdrawal Production Shipping documentation Transporting schedule Figure 13.Hierarchy based measurement system ties together the hierarchical view of supply chain performance measurement and maps the performance measure specific to organization goal.4 Perspectives Based Measurement System This system presents six unique sets of metrics to measure performance of SCM.

flexibility Customer satisfaction. market share. and reviewing comparable benchmarks. material. Many companies use the SCOR model to understand and improve their supply chains. SCOR models integrate the well-known concepts of business process reengineering. order cycle time. The SCOR model is the only supply chain framework that links performance measures. bulk product.1 Identify. benchmarking. including equipment. It also provide a different vision to look supply chain . supplies. 32 All market interactions. SCOR defines supply chain as the integrated process of plan. etc. and third-party logistics providers. from your supplier’s supplier to your customer’s customer.2: Six perspectives of SCM (Otto and Kotzab 2002) Purpose of SCM Managing the trade-offs along the complete supply chain. deliver and return spanning suppliers’ supplier to customers’ customer. make. and software requirements to a detailed business process model. Performance measures Capacity utilization. SCOR spans: All customer interactions. spare parts. stock-outs. time to adapt change in demand Logistics cost per unit. inventory level. lead times. time lag for demand information. channel cost Operation Research Logistics Calculating optimal solutions with a given set of degree of freedom Integrating generic processes sequentially. Time to market Strategy Perspective based measurement system looks the supply chain in all possible perspectives and provides measures to evaluate each perspective.5 Supply Chain Operations Reference Model One way to understand a supply chain is to use a process model. work and information flows. large consumer product manufacturers. The Supply Chain Council created the SCOR model which is a framework for examining a supply chain in detail. source. These companies include aerospace and defense manufacturers. aligned with operational strategy. The heart of the SCOR system is a pyramid of four levels (Figure 13. Marketing Organization Determining and mastering the need Transaction cost. best practices.Cost and Performance Measurement in SCM Perspective System Dynamics Table 13. defining and categorizing the processes that make up the supply chain. and process measurement into a cross-functional framework. time to deliver Integration. P1.How to link different perspective to optimize global supply chain perspectives and there can be trade off exist between measure of one perspective with the measure of other perspectives. service level.4. Pictureize & aggregate SC Requirements 13. vertically and horizontally Segmenting products and markets and combine both using the right distribution channel. density of to coordinate and manage relationship relationships Merging Competencies and relocating into the deepest segment of the profit pool ROI. distribution cost per unit. assigning metrics to the processes. software.4) that represent the path a company takes on the road to supply-chain improvement. from the understanding of aggregate demand to the fulfillment of each order . from order entry through paid invoice All product (physical material and service) transactions.

4 Establish and Communicate SC Plans Implementation Level Decompose Process Elements) Figure 13.1 Identify. Level 4 defines practices to achieve competitive advantage and to adapt to changing business conditions. It requires a well-defined infrastructure. Picturize & Aggregate SC Requirements P1. Implementation of such an exhaustive system requires fully dedicated managerial resources and continuous business process reengineering to align the business with the best practices.Cost Analyses and Measurement Description Comments Level 1 defines the scope and content for the Supply Chain Operations Reference-model. Level 3 defines a company’s ability to compete successfully in its chosen markets.4: Three levels of SCOR Source: Supply Chain Council) SCOR does not attempt to describe following business process or activities: · · · · · Sales and marketing (demand generation) Research and technology development Product development Some elements of post-delivery customer support Links can be made to processes not included within the model’s scope. where applicable · System capabilities required to support best practices · Systems/Tools · Companies “fine tune” their Operations Strategy at Level 3 Companies implement specific supplychain management practices at this level. Top Level (Process Types) Configuration Level (Process Categories) Process Element Level (Decompose Processes) P1.3 Balance Production Resources with SC Requirements P1. Companies implement their operations strategy through the configuration they choose for their supply chain. SCOR assumes but does not explicitly address: · · · Training Quality Information Technology (IT) SCOR provide the detailed and exhaustive list of performance measure for each activity and process. Access & Aggregate SC Resources P1.2 Identify. aligns the detailed performance measures with the strategic objectives and provides the best practices and IT sources for each measurement. A company’s supply chain can be “configured-to-order” at Level 2 from core “process categories”. Here basis of competition performance targets are set. such as product development etc. and outputs · Process performance metrics · Best practices. resources and project based completion approach. and consists of: · Process element definitions · Process element information inputs. 33 .

3 contains some common service metrics used in these two environments. Also. of backorders Aging of backorders Freq. they track responsiveness and velocity of execution. or how long it takes to complete an order. Table 13. Every supply chain should have at least one performance measure on each of these three critical dimensions.4. “Aging” refers to maintaining data on how long it takes to fill a backorder. The Line Item Fill Rate is the percentage of individual “lines” on all customer orders. Build to order (BTO) Quoted customer response time % on-time completion Deliver process on time $ of Late Orders No.Cost and Performance Measurement in SCM 13. Table 13. so the targets are set on customer service metrics. which are filled immediately. Generally it is difficult to quantify the cost of stock outs or late deliveries. extensions of the customer order response time include the on-line service response time of a website as well as the response time required to complete delivery of the product or service. while the Order Fill Rate counts as a success only those customer orders in which all “lines” have been filled. These are time-tested measures. and Speed includes metrics which are time related. Duration Duration In the IT and especially Internet era. of late orders Aging of late orders Freq. Tracking this data and maintaining it in an accessible database enables its periodic recall. the build-to stock situation differs from the build-to-order situation. Assets involve anything with commercial value. Two metrics generally used for inventory are: 34 . capture and fulfill customer demand with personalized products and on-time delivery.3: Customer Service Metrics (Hausman 2000) Build to stock (BTS) Line item fill rate Complete order fill rate Delivery process on time $ Backordered/Lost sales No. B) Assets Metrics The major asset involved in supply chains is inventory throughout the chain. primarily inventory and cash.6 Dimension Based Measurement System This system suggests that any supply chain can be measured on three key dimensions (source: Hausman 2000) A) B) C) Service Assets Speed Service relates to the ability to anticipate. so related but different metrics are used in these environments. which continue to be valuable customer service metrics for supply chains. which is late. A) Service Metrics The basic premise for service metrics is to measure how well the company is serving (or not serving) its customers.

Euro. Dimension based measurement system tries to cover the different dimension of the supply chain and also provide the detailed measure for each dimension. (Pohlen and Lambert 2001) The framework consists of seven steps: · · Map the supply chain from point-of-origin to point-of-consumption to identify where key linkages exist.Accounts Payable Upside flexibility refers to requirements in high-tech industry. in order for the buyer to be protected when the buyer’s demand is higher than forecasted. with all quantities measured in days of supply: Cash Conversion Cycle = Inventory + Accounts Receivable . It is measured by adding up the longest (bottleneck) lead times at each stage in the supply chain. 35 .i.measures the total time it would take to fulfill a new order if all upstream and in-house inventory levels were zero. defined as Turns = (Cost of goods sold)/(Inventory Value) The Time Supply or Turns measures relate to inventory flows.4. the Value of inventory relates to inventory as an asset on the firm’s Balance Sheet. C) Speed Metrics There are a series of metrics related to timeliness. Inventory Turns are calculated in isolation. et cetera) Time Supply or Inventory Turns Cost Analyses and Measurement Inventory can be measured as a time supply. or as inventory turns.1) 2) Monetary Value ($. that a vendor be prepared to provide say 25% additional material above and beyond the committed order. The system has limitation to provide the strategic alignment of different dimension and to measure the effect of different trade off between the dimensions. Yen. Use the customer relationship management and supplier relationship management processes to analyze each link (customer supplier pair) and determine where additional value can be created for the supply chain. The Supply Chain Cycle Time . The link-by-link approach provides a means for aligning performance from point-of-origin to point-of-consumption with the overall objective of maximizing shareholder value for the total supply chain as well as for each company.7 Interface Based Measurement System This framework aligns performance at each link (supplier customer pair) within the supply chain. 13. lowering lead-time and WIP inventory levels. The framework begins with the linkages at the focal company and moves outward a link at a time.e. The Cash Conversion Cycle (or Cash to Cash cycle time) attempts to measure the time elapsed between paying the suppliers for material and getting paid by the customers. by accountants with access to financial and inventory data but without corresponding access to customer service data. responsiveness and flexibility · · · · Cycle (flow) Time at a Node Supply Chain Cycle Time Cash Conversion Cycle “Upside” Flexibility Cycle Time Reduction. It is estimated as follows. speed. for example a 3-week supply of inventory.

6 SELECTING MEASURES While the approaches described above provide guidance for supply chain measurement. 13. The system is easy to implement if the company strategy is well defined. at each hierarchical level we define the measure for each perspective. Compare shareholder value and market capitalization across firms with supply chain objectives and revise process and performance measures as necessary. Flexibility and Time). Establish non-financial performance measures that align individual behavior with supply chain process objectives and financial goals. Perspective based system also sees the measures in isolated manner but it covers some unique perspectives which are not covered in balance scorecard like system dynamics and operation research which provides a great help in measuring dynamic capability of supply chain. which seem to be difficult to implement. SCOR covers all relevant parameters required in the system and tries to cover the whole supply chain in standard set of processes. Companies. Supply chain strategy depends upon its current competencies and strategic direction. It is evident from the above explanations that supply chain balanced scorecard covers all the parameters. a key driving principle is that measures should be aligned to strategic objectives. The system gives more emphasis on strengthening the internal and external linkage to improve the overall supply chain. (4) Determinants (Quality. Realign supply chain processes and activities to achieve performance objectives. customer service. for example. which differs for every company.Cost and Performance Measurement in SCM · · · · · Develop customer and supplier profit and loss (P&L) statements to assess the effect of the relationship on profitability and shareholder value of the two firms.a stage in which a company needs to develop excellence within each of its operating units such as the manufacturing. (2) Results (Financial and Non-financial). The model applicability is easier where ERP and BPR practices are in progress and large set of data collection software’s are already in place. In this regard. Interface based measurement system doesn’t cover the non-financial measures and strategic links to different linkages is not possible. Interface based measurement system looks at the supply chain as a series of different links and to optimize the total supply chain a win-win approach is required at all linkages. Conceptually it looks good but in actual business setting it requires openness and total sharing of information at every link of the chain. These systems can be compared using five dimensions (1) Hierarchy (Strategic. 13. Tactical and Operational). and (5) Stability (Static and Dynamic).e. they provide less help in assessing specific metrics to be used. Replicate steps at each link in the supply chain.5 A COMPARISON OF MEASUREMENT SYSTEMS Different measurement systems described above have different views for integrating the supply chain performance measures. Hierarchical based measurement system encompasses all parameters but at one time it tries to cover only one perspective. (3) Linkages (Integrated and Isolated). In SMEs and especially in Indian context applicability is questionable due to extra cost of maintaining such an exhaustive system. so a hybrid model of balance score card and hierarchical can be an another alternative i. can generally fall into the following developmental stages that will dictate the types of measures and the degrees to which they will need to focus: · 36 Functional Excellence . It also covers the different dimensions at each level of the supply chain. or .

they should always be jointly set in the context of strategic objectives. · Enterprise-Wide Integration . performance targets need to be jointly.8 TOTAL COST OF OWNERSHIP The concepts of total cost. (2) External benchmarks. To achieve objectives some metrics may need to increase and others may need to decrease. Cost Analyses and Measurement · Most companies have focused their performance measurement on achieving functional excellence. not a short-term. Also. for the accurate valuation of buying situations. In order to achieve these types of objectives. Metrics for a company in this stage will focus on external and cross-enterprise metrics. initial-price perspective. to value a purchase situation accurately. a target for each measure needs to be established. many have objectives to increase their degree of enterprise-wide integration and extended enterprise integration.a stage in which a company needs to develop excellence in its cross-functional processes rather than within its individual functional departments. cost must be examined from a long-term perspective and should include elements other than initial purchase price. 13. (Ferrin and Plank 2002) 37 . Generally. life cycle costing. First. Third. which suggest that supply managers adopt a long-term perspective. (4) Theoretical targets. and measure. a supply manager must understand. 13.a stage in which a company needs to develop excellence in inter-enterprise processes. supply managers must consider the impact of other business functions on the valuation of a specific purchase. the cost impact of all the activities associated with the purchase. Extended Enterprise Integration . Each metric in the set has to be viewed in relation with the others to determine its proper target.logistics departments. There are three ideas that support all of these procurement valuation constructs. To do this effectively. while there a variety of ways in which performance targets can be set. there are four methods that can be used to set performance targets (1) Historically based targets. Hence. not individually. developed. Metrics for a company in this stage will need to focus on cross-functional processes. their performance measurement systems will need to align to them.7 METHODS FOR SETTING PERFORMANCE TARGETS An important issue in performance measurement is how a company can use measures to gauge its supply chain’s performance. providing the framework for determining the answer to three questions that arise when evaluating a performance metric: · · · Has the metric improved from the last time it was reviewed? By how much? How close is the metric to where it should be? In order to make this evaluation more meaningful the direction of improvement needs to be established. and total cost of ownership are all related constructs for procurement valuation. With the advent of Supply Chain Management (SCM) principles aimed at integrating their supply chains. Second. product life cycle costs. Metrics for a company in this stage will need to focus on individual functional departments. (3) Internal benchmarks.

operation. Table 13. 13.Cost and Performance Measurement in SCM Total cost of ownership (TCO) was originally developed in the late 1980s by the research firm Gartner to determine the cost of owning and deploying personal computers.8). A short comparison of various methods is also given along with a guideline to select measures and set performance targets.9 SUMMARY In this unit.000 per year. Their initial findings. TCO in Supply Chain Cavinato (1991. the performance measurement and evaluation of SCM has been discussed with special focus on various common SC measurement systems used in practice. Their methodology was carefully examined and has now been accepted as a standard method of evaluating costs. 1992) used the total cost concept to examine cost structures across the supply chain. The discussion brings out the need for SC performance measurement and shows that managers need to understand the SCM properly in order to choose and adapt a particular measurement system and the performance metrics. Finally the concept of TCO as applied to SC is discussed. Ferrin and Plank (2002) examined cost indicators and suggested 13 cost driver categories (shown in bold words in figure 13. support and retirement. incurred throughout the life cycle of an asset. TCO consists of the costs (direct as well as indirect). including acquisition. In simpler words. deployment.4: Categorization of identified TCO cost drivers (Ferrin and Plank 2002) Operations Cost Manufacturing Machine Efficiency Production to Schedule Labor savings Assembly Cost Operating Supplies Quality Durability Replacement Field Failure Logistics Freight Packaging Customer Service Technological advantage Design Obsolescence Suitability for intended use Flexibility for new use Technology Changing Technology Customer Downtime Availability Inspection Cost of Quality Handling Instability in freight rates Long term advantage Outbound Cost Tariffs Lead time On-Time Delivery Supplier managed inventory Inventory Time to Schedule Partnering Costs Team costs Supplier Ability to Change technology Long-Term Operating Calibration Cost Costs Capacity Utilization Rework Scrap Increase In Customer Returns Production Output Equipment Speed Cost In Use Line speed Rejection Cost Quality Improvement Unplanned Downtime Out-of-Service Costs Supplier Reliability and Capability 38 Warehousing Trust Duties Area of the country customer must order from Import fees Entry and harbor maintenance fees . that PCs cost an enterprise nearly $10. raised a serious concern in the technology community and among CFOs. Comparing supply chain entities based on these cost indicators can provide a basis for assigning specific supply chain processes and the firms can reduce their total supply chain costs by assigning specific supply chain processes to those firms in the supply chain whose cost structures are well suited to support the assigned processes.

Comment! What is the need for Supply Chain Performance Measures? What are the factors that contribute to management’s need for new types of measures for managing the supply chain? Discuss in detail about the supply chain performance measurement system. there is an emerging requirement to focus on the performance of the extended supply chain or network in which company is a partner”. Highlight the similarities/ dissimilarities in any two of these measures. 39 3) 4) .Maintenance Supplies Training Inventory cost Safety stock Life cycle Long term usage Initial price Unit cost Initial purchase price Cost Analyses and Measurement Design/procurement Projected life cycle for inventory reduction Storage Perishability Turnover Transaction cost Administration of post purchase agreements Ease of transaction Supplier conversion cost Small orders Procurement Life of product Life cycle stability Cost savings over life of product Useful life Redesign cost Downtime Costs Labor Parts Spare parts Long term price stability Initial capital expenditure Customer related User satisfaction Customer perceptions Long term maintenance costs Repair frequency Reliability Preventive maintenance schedule Life cycle obsolescence cost Customer specifications Opportunity cost Cost of money Overhead Transactional activity Long term savings Miscellaneous Taxes Value chain Warranty Product design Availability from supplier Disposal costs Salary. benefits Indirect labor Product use Depreciation Lease or buy Supplier cost drivers (from requisition to receipt) Safety Support costs Utility costs Installation Ease of operation Noise level Technical support Validation/registration cost Overall competition Total installed price Lease rate factors Flexibility of the supplier Tooling and fixtures Environmental issues Liability and indemnification Obsolescence cost Service cost Disposal value Currency exchange rates Direct labor 13.10 SELF-ASSESSMENT QUESTIONS 1) 2) Why is Supply Chain Performance required to be measured? “Today’s management can’t afford to focus only on company’s performance in a vacuum.

“The balanced scoreboard-measures that drives performance’’. 7) Cavinato J. P. NY. 2-3 October. Bruce G. 18-29. B.5. “Supply Chain Design and Analysis: Models and Methods”.M.M. No. “Total Cost of Ownership Models: An Exploratory Study”. W.281-294. and Plank. “Logistics and Supply Chain Management”. (2002). 2nd edition . p. “Identifying interfirm total cost advantages for supply chain competitiveness”. 71-9. (1992). (1994). 2. B. Volume 144. Lund University. “Does supply chain management really pay? Six perspectives to measure the performance of managing a supply chain”. Proceeding of the 1996 conference on agile and intelligent manufacturing systems. Issue 2. (1992). 9) Christopher M (1999). (2001). 10-15. 8) Christopher. P. January-February. 1. 27 (4). Vol 21.D. pp.21. 12) Gunasekaran A. Journal of Business Logistics. “Adapting the Balanced Scorecard to Supply Chain Management.” Supply Chain Management Review. Harvard Business Review. 13. M. New York. J. PP. 4) Brewer P. 6) Cavinato. International journal of operations and production management. Pages 306-320. Volume 38. 56. No. R. Vol. London. 2) Beamon. 13) Kaplan. pp. “Performance measures in supply chain management ”. “Logistics & supply chain management strategies for reducing cost and improving performance”.Cost and Performance Measurement in SCM 5) 6) What is the essence of the Balance Scorecard method of Performance Measurement? Compare different measurement systems described in the unit by using five dimensions discussed in Section 13. No.No 1/2.W. 55. C. 10) Ferrin. Pitman Publishing. “Industrial dynamics – a major breakthrough for decision makers”. Richard E. pp. (1958). Rensselaer Polytechnic Institute. (2002).. (1992).(1991). pp 37-66. (2001). 3) Beamon. July-August. “Performance measurement and metrics in a supply chain environment”. 5) Brewer. (1998). pp. (1996). “A total cost/value model for supply chain competitiveness” Journal of Business Logistics. Number 3. and Speh T. and Speh T. 14) Ljungberg A. Troy. 40 .1. International Journal of Production Economics. pp71-87. London. Pitman Publishing. “Measurement of Service and Quality in the Order Process thesis for the degree Licentiate in Engineering”. 285–301. “Using the Balanced Scorecard to Measure Supply Chain Performance”.11 REFERENCES AND SUGGESTED FURTHER READINGS 1) Andreas Otto and Herbert Kotzab (2002).S. and Norton. European Journal of Operational Research. Department of Engineering logistics. Harvard Business Review. 13. International Journal of Purchasing and Materials Management. Vol. C. The Journal of Supply Chain Management: A Global Review of Purchasing and Supply. pp. 75-93. 11) Forrester Jay W.

“Performance measurement system design”. http://www.. Dec.4. (1997). “Integrating the supply chain”. Torrence L. Douglas M. N. J. “Supply chain performance benchmarking study reveals keys to supply chain excellence”. 18) Slack. (1995). 23) “Supply Chain Operations Reference Mode (SCOR)”. Pitman Publishing. vol No. Harrison. 2. No. 8 No. 19) Stevens (1989). 17) Pohlen. R. S.1. 1020-33. (1995). 38-44. Supply Chain Council. A.. pp 80116. G. 21) Warren H. International Journal of Operations and Production Management. (1995). Chambers. “Supply chain metrics”. (8). pp3-8. London.. London. “Production and Operations Management”.15. 20) Stewart.D. pp. C. M. Cassell Educational Limited. 17 No. C. Vol.asp Cost Analyses and Measurement 41 .org/public/scorbasics. International Journal of Operations and Production Management. “Performance trade-offs in manufacturing plants”. (1995). International Journal of Logistics Management. Hausman (2000). International Journal of Physical Distribution and Materials Management. and Szwejczewski..supply-chain. Logistics Information Management. 22) Wild. No. and Lambert. (2001). Harland. Volume 12. Vol. New. “Supply chain performance metrics”. Vol 19. The Practice of Supply Chain Management. pp. R. No. 10. “Operations Management”. 16) Neely A.15) Mapes. and Johnston.

Indira Gandhi National Open University School of Management Studies MS-55 Logistics and Supply Chain Management Block 5 DISTRIBUTION NETWORK PLANNING Unit 14 Transportation Mix Unit 15 Locational Strategy Unit 16 Logistics and SCM Environment 5 22 34 .

Kharagpur Lt Col. Sanjay S. (Coordinator) School of Management Studies. New Delhi Tilak Raj. Sushil (Course Editor) Dept. . Kharagpur Dr. Mumbai Mr. Delhi Prof. IGNOU New Delhi Dr. Mumbai Course Preparation Team (2004) Prof. Mehta School of Management.Sahay. IGNOU.O. Sambandam NITIE.S. of Management Studies Indian Institute of Technology New Delhi Prof. New Delhi Paper Used : “Agrobased Environment Friendly”. IGNOU. Headquarter 4 Corps Mr. B.Logistics. Gaur Prof Sadananda Sahu Dept. S. of Management Studies Indian Institute of Technology.K. New Delhi Prof . by mimeograph or any other means. Mumbai Dr. Atanu Ghosh Shailesh J. New Delhi-110068. United Phosphorus Limited. Biplab Dutta Vinod Gupta School of Management IIT. IIT. IIT Bombay. Banwet Dept of Management studies. 2004 ISBN-81All rights reserved. New Delhi Laser Composed By : M/s. Krishi Bhawan.L. Printed and published on behalf of Indira Gandhi National Open University.Expert Committee (as on 24th March. New Delhi Prof. Sandeep Biswas Institute for Integrated Learning in Management (IILM). D. Mehta School of Management. Deepak Jakate General Manager . Amarlal H. United Phosphorus Limited. without permission in writing from the Indira Gandhi National Open University. B. B. No part of this work may be reproduced in any form. D N Srivastava Advisor ( Training & Safety) & Head of Distribution Deptt. Ravi Shankar (Course Editor) Dept. IGNOU Prof. Indian Institute of Technology Bombay. Deepak Jakate. of Industrial Engineering Shailesh J.(P). Bhubaneswar Prof N. Jharsuguda Mr. N. School of Management Studies. Narasimhan Director. Mehta School of Management. IGNOU Dr. ) (Retd. Indian Institute of Technology Bombay. Kaushik Sircar Assistant Quarter Master General Operations & Logistics. of Industrial Engineering and Management IIT. General Manager . Mumbai Dr. 2004 ã Indira Gandhi National Open University. New Delhi Print Production: December.) in Cement Group M/S Larsen & Toubro Ltd. Karol Bagh. Khanna Director.Logistics. Himanshu Kumar Shee. Cover Design by M/s. New Delhi Mr. Himanshu Kumar Shee (Course Co-ordinator)-On leave School of Management Studies. N. IGNOU. Mumbai Dr. IIT Bombay. Gurgaon Prof.Batra FORE School of Management New Delhi Prof. SOMS. Kharagpur Management. New Delhi Prof. IIT. 2000) Prof. V. Tessa Media & Computers. Satish Kumar Director (Movement). Ministry of Chemical & Fertilizers. J. Dept of Fertilizers. Management Development Institute. Anurag Saxena (Course Co-ordinator) School of Management Studies IGNOU.Karuna Jain Shailesh J. Kalro IIM Kozhikode Calicut Dr. Mumbai Prof. Sarai Jullena. Mehta School of & Management. SOMS. Sambandam NITIE. Kaushik Sahu Xavier Institute of Management. New Delhi by Director. Mumbai Mr. Mumbai Prof Sadananda Sahu Dept. Atanu Ghosh Shailesh J. Further information on the Indira Gandhi National Open University courses may be obtained from the University's Office at Maidan Garhi. King Kraft.

It illustrates warehouse operations and renders documentation procedures such as Insurance. It discusses the interdependence of location decision and distribution decision. It describes the sales laws in detail. It elucidates MTO (multi-modal transport operation) and describes methods of selection of carrier. Finally it describes various measures for warehouse location Unit 16: Logistics and SCM Environment thrashes out the commercial and legal issues concerning logistics. Octroi and Sales tax . scheduling & fleet sizing. It throws light on routing.BLOCK 5 DISTRIBUTION NETWORK PLANNING Units 14: Transportation Mix explains the tools. It also discuss about the futuristic trends & achieving transportation efficiency Unit 15: Location Strategy talks about the steps in location planning. techniques of cost reduction and depicts the modes of transportation.

Distribution Network Planning 4 .

with the principle. and in the best and cheapest mode available’.11 14. ration.15 Introduction An Illustration Transportation Briefly Warehousing Tools & Techniques of Reducing Costs Transportation Costs Method of Selection A Transportation Decision Number & Size of Depots Fleet Sizing & Configuration Routing and Scheduling Futuristic Direction in Transportation Summary Self Assessment Questions References and Suggested Further Readings 14. It uses the aerial.13 14. arms.14 14. animals. materials and services from one area to another. train.12 14. The average transport costs ranges from 5 to 6% of the recommended retail price of the product. clothing and personal loads over vast distances and over varied terrain and climatic conditions.3 14. and discuss the futuristic trends & achieving transportation efficiency.2 14. The logistics is enormous and the various modes of transport are. in time.6 14. describe methods of selection of carrier. fuel.7 14. It can also be said as movement from one node of the supply chain to the other. sea and rail routes to maintain its forces strewn all over the country and abroad. Transportation Mix Structure 14. elucidate MTO (multi-modal transport operation).4 14. and human beings. land. both inbound and outbound. scheduling & fleet sizing. Transportation is the movement of products. Indian Army is a typical example of ideal transportation mixes in our country.10 14.1 14. aircraft.5 14. depict the modes of transportation. techniques of cost reduction. It transports supplies. throw light on routing. ‘The ideal organization following the MTO is the Indian Army. 5 . trucks. oil lubricants.8 14. ammunition. Transport costs include all costs associated with movement of products from one location to another.UNIT 14 TRANSPORTATION MIX Objectives After reading this unit you would be able to: · · · · · · describe the tools.9 14.1 INTRODUCTION Transportation happens to be the most fundamental part of strategic logistic management (unit 4). wherever you are we reach you.

From there the bulk is transferred to BPL lorries and moved to the forward depots by road.2 AN ILLUSTRATION Assume the movement of kerosene oil from one of the central depots in Central India to the Northern sector. demand per se. to realize it too. cost and related factors of urgency is the ultimate aim of the supply chain manager. The initial movement is by rail to the nearest railhead and that is Jammu. Let us see this with the help of a figure 14. Depending upon where it has to go the same is further broken at the depots and distributed as per demand and requirement to the forward areas. Selecting the right transport for the right material. He has to deliver. human labor or by airdrops. transportation plays an important role in the logistics channel and will continue to do so. a versatile mix of transport system. EX CENTRAL DEPOTS FUEL. and how he does it within the constraints of environmental realities is his job too. HALF TRUCKS AERIAL DROPS END USER AIR LANDED WATERWAYS Figure 14. Therefore. but within the available resources and time constraints this the best that can be organized to maintain an even logistics chain down to the end user. Such a shift does take time.1. HUMAN. time factor. if you understand transportation in the SCM. As discussed in unit 4 and 5 earlier. Therefore. either by trucks or animal transport. Jammu and Kashmir at a place called Kupwara. say. before we start with the theoretical aspects of transportation and its nuances and applicability.1 : An Ideal Transportation Mix Network This can also be validated by an advertisement of Indian Oil. OIL & LUBRICANTS BY RAIL RAIL HEAD BY ROAD CONTAINERISATION BULK BREAKING INTERMEDIATE DEPOTS BY ROAD ANIMAL. since. which shows elephants carrying oil barrels to the consumers at unreachable areas. you as a supply chain manager must understand the practical side of it too.Distribution Network Planning 14. and experience it. 6 . It is a time-tested system in vogue since pre-world war days. One got to see it to believe it. which is unique in being. you have understood 75% of the system. let us see a rundown on the transportation in general even at the cost of repetition.

..........3 TRANSPORTATION BRIEFLY You have already studied in unit 4 that transportation is the most fundamental part of strategic logistic management. Transportation is the movement of products............................. Transportation system has a strategic bearing on a company’s operation efficiency......................... ............................ “ by providing for the swift and uninterrupted flow of products back and forth through the chain..... which will directly affect the customer satisfaction in a negative way........................ transportation provides a sort of lubrication to run the chain smoothly................. in order to effectively manage this transportation system the first step would be to establish a cost effective transportation mode..... materials and services from one area to another.. Since.. failure to identify the best transportation mode can directly affect the growth of a company. leads to company growth...... The three factors as mentioned by Gattoma & Walters required to consider are: · · · Customer Environment Product & company Organization... so as to minimize losses................ It also permits deeper penetration of newer markets far from the point of production.......................Transportation Mix 14... in order to identify the right transport system the following have to be considered: · · Impact of the transport system on the supply chain................... chapter 7.. Therefore... Like if coal or carbon has to be moved use the railways from the source to the production unit directly. both inbound and outbound. which involves physical movement of goods require transport services that varies from mode to mode......... It can also be said as movement from one node of the supply chain to the other.......................... 118-119....... Factors that determine the choice of transport mode............................... flexibility & integration of available resources in planning stage will be one of the crucial factors that will dictate the choice of transport. Therefore. higher transport costs will raise prices......”1 Therefore.... The best suitable mode is required to be identified depending upon the nature of product that has to be moved......... pp..... The average transport costs ranges from 5 to 6% of the recommended retail price of the product... Transport costs include all costs associated with movement of products from one location to another.......... 1 Mohanty & Deshmukh (2004) in Essentials of Supply chain Management......... In other words highest customer service in lowest price.. Your foresight.................. . time & cost factor.... and rectify in case you went wrong the first time. Activity 1 Visit a carrier company and document your understanding about the practicalities of employing these carriers.... ........... As Deshmukh & Mohanty (2004) says..... 7 ..... · · · · · · Who are the customers to your product per se? What are the environmental factors? What is the product? What is your company profile? Feedback and reporting both from within and the environment on the choice of transport..................

.. it is pertinent to overrule the cost factor while servicing the medical customers.. The product per se will influence the economics of the decision...e... Stage II: categorize the significant factors and identify the potential risks................. Deshmukh & Mohanty in Essentials of SCM........... near to the customer hub center...................................... the type of market will also dictate the decision and will vary considerably... Companies therefore have to consider a trade off between price and quality and the costs involved in delivering to the processing point... Customer service decisions: Both customer service policy and transportation decisions go hand in hand and hence one cannot be considered in isolation of the other. reliability and availability........................... IT & the Internet............. extraction based units are close to the source of raw materials and the products related to customer satisfaction are closer home.. The characteristics are: costs........... since speed is more important than cost in selecting the transport mode. An effective selection system Transporter selection can effectively be resolved by adhering to the five stages of selection framework:2 · · · 8 2 Stage I: identification of those factors affecting the choice of transport selection................. · · · · Activity 2 Correlate the practical problems and factors influencing transportation of a company or a carrier.......................................e...... i.. · Market coverage: Transportation costs influence the size of markets covered in a big way......... which means extended delivery distances and increase in delivery frequency.......... flexibility..... Pricing decision: Transportation happens to be the important component of product costs...... with more relevance to exports.. This will help in considerable reduction in time delays and ensure better cooperation between the chains.................. Sourcing decisions: The geographical dimension of the source markets can be influenced by low cost transportation system.. ‘reliable bulk freight services could extend the source markets............... That is why....... i.............................................. Moreover........................ Stage III: determination of the distribution network depending upon the number and size of the depots....Distribution Network Planning Considerations influencing transportation · Customer communications: In order to obviate delays in transportation and handling of logistics both the suppliers and distributors are relying more and more on electronic transfer systems.. Therefore............... pp130-131...............................’ says Mohanty & Deshmukh... Therefore.............. selection of the appropriate transportation mode will have a direct bearing on the product costs per se........... volume and cost of transportation....................... .. Increase in transportation costs increases the product pricing.................... ...............e............. A low volume and high value product will be able to support higher costs........... Manufacturing operations: Cost of transporting has a direct bearing on the location of the manufacturing market center.... i...... ............ ....... .....

Documentation of the storage facilities and put forth requirements over the planning horizon. The following functions are the domain of the logistics manger:3 3 Deshmukh & Mohanty. Storage: This maximizes customer services by improving product and location positioning. which will further aid in reducing costs and indirectly help in reducing the cost of the product to the end user. Transfer of information: This ensures timely and accurate information on inventory status. Factors influencing the warehousing decisions are: · · · · · · · · Type of distribution Value of the firm Quantity and potential for obsolescence Competitiveness Economic condition Warehousing performs a variety of roles as mentioned below: Material handling: It consists of receiving. Stage V: measure and monitor costs continuously. It is that segment of logistics function that deals with storage and handling of inventories starting from supplier receipt to consumption point. since logistics happens to be the key of SCM.· · Stage IV: application of matrix analysis for selecting the right transport. equipment and manpower availability and transport capacity. Update the warehouse strategic plan. pp.5 TOOLS & TECHNIQUES OF REDUCING COSTS As a logistics manager one has to dwell considerably on the correct selection of the fleet. The management of this includes the maintenance of accurate and timely information relating to inventory status. 14. Selection of the best recommendation. With that as a backdrop to our study let us see the design and management of Supply Chain Management. Alternate warehousing plans to meet contingencies in strategy.4 WAREHOUSING This happens to be another important facet of logistics chain and works side-by-side with transportation. Transportation Mix Before we move further. space utilization. let us see warehousing as a part of recapitulation what we have studied in Unit 4. 14. storing and shipping. location and disbursement. In order to develop an effective warehousing strategy the following has to be addressed: · · · · · · Documentation of existing warehouses operations. Identify the shortfalls within the warehouses that are available including the deficiencies. 124 in Essentials of SCM 9 .

the control required by the company and the competition intensity of the markets. with 7000 stations. transport costs include all costs directly associated with the movement of product from one location to the other.000 Kms. 10 . it is mandatory to determine the impact of transport upon the overall supply chain. of network. 1 million tonnages of freight/day 34. 3 gauges.000 Kms. The main attributes are (Deshmukh & Mohanty): · · · · · · Current performance as regards delivery accuracy and reliability Responsibility acceptance to guarantee the service product offered Offering flexibility so as to respond to criticalities and emergencies Information for purpose of controlling Financial stability to ensure continuity of service and for up gradation of equipment Integration to the maximum into customer business. Table 14. which can effectively be pressed into service in contingencies. 27.Distribution Network Planning · · · · · · · Negotiating routes and rates Selecting route and fleet Evaluation of the carrier performance Analyze transport costs and services Operating company owned means of freight and transportation Filing loss and damage claims Auditing freight bills The ultimate choice depends upon such factors as financial policy. 1.00. to identify the choice of transport mode. realization of the profit leverage effect and analysis of the impact of transport upon other elements of the distribution system. therefore. with 11 major and 139 minor ports handling 230 million tonnages of cargo/day A massive cargo service with 6 International airports and 86 domestic ones. problems and capabilities What is therefore the significance of this choice factor? Actually. sharing confidence. 12 million passengers. of primary roads (NH).1: Transport Infrastructure of India Transportation Types Railways Characteristics 62. Table 14. Road Water Air Actually the entire selection process is a very complex one and should aim at identifying the right attributes required to implement the company’s customer service policy. in addition there are a hoard of transport aircrafts of Indian air force catering to emergencies and natural calamities.000 Kms.1 gives the characteristics of transport infrastructure in India. customer service policy.28. of State Highways.000 Kms of miscellaneous roads and tracks and 30 million vehicles approximately. This could well be achieved by analyzing the existing transport cost. A coastline of 6000 Kms.

the TL (truckload carriers) subdivides the country into zones. pp 124-125 11 . lower Assam/Upper Assam. with price remaining constant. drivers cost. exception and commodity. be it road. the rates are classified under class. Massachusetts. hiring of transport in India is different to that of USA. Illinois. That is how it differs. The impact of reducing transport costs is as shown below: Assumption: that a company X has a 10 per cent profit margin on sales turnover and with fixed prices. 1. in that case a 1 per cent reduction in transport costs will correspondingly give a 2 per cent increase in profits. it is typically more expensive to ship a full loaded truck from Illinois to New York than from New York to Illinois. Transportation rates are almost linear with distances and not with volume. with every zone conforming to a state. the rates are fixed and are reviewed every 3 months depending upon the petrol and diesel prices prevailing in the country at that point in time. In India. that is. Similarly. With commodity rating or class and the rate basis number the specific rate per hundred pounds can be obtained from a carrier tariff table or freight tariff table. transport rates are governed by respective RTO (Road Transport Office) of every state and differ from state to state.000 is equivalent to increase in sales turnover of Rs. one needs to get the cost per mile for this pair and multiply it by distance from Chicago to Boston. depending upon the nature of the product range and its market. In the LTL (less than truck load) industry. However.00. 1. Essential of SCM.Transportation Mix 14. Transportation costs for company owned fleet is simple and is evolved by annual cots per truck.000.to 25000/. This is the approximate distance between the load’s origin and the destination. incorporating transportation cost for external fleet is complicated. We distinguish here the transportation costs associated with both an internal and external fleet.to 32/-. An important property of the TL cost structure is that it is not symmetric. it is necessary to identify the rate basis number. For example. annual mileage. transport represents a direct cost added to the price of the product and any reduction in transport costs would lead to an increase in profit. to Boston. spares. For example. If transport costs are estimated at 20% of total costs. to calculate TL cost from Chicago. the average transport costs is between 5 to 6 per cent of the recommended retail price of a product. In India.6 TRANSPORTATION COSTS Transport costs vary from less than 1 per cent (for machinery) to over 30 per cent (for food) of the recommended selling price of products. rail. with different rates for commercial and private vehicles. fuel & maintenance. The class rates are standard rates that can be found for almost all products or commodities shipped. since.depending upon the delivery point. amount delivered and trucks effective capacity. Whereas. They are found with the help of classification tariff that provides each shipment a rating or class. Similarly. water or air. hiring of a full truck from West Bengal to Assam could be ranging from 14000/. A truck moving from Meghalaya to Delhi will charge lesser than from Delhi to Meghalaya. why? The primary reasons could be: 4 Deshmukh & Mohanty 2004. All this information could be effectively utilized to calculate cost per mile per SKU.but at Ooty it would be anything between 8 to 10 owing to the type of terrain in that region. It ranges anything between Rs 5/.00. · · A cost reduction in transport expense of Rs. In USA.4 With inflation transport costs also rise because the major components are the workforce (labor). which are partitioned into two zones. Once the rating is established. Except for Florida or New York. hiring of a private taxi in Kolkata/Delhi could be Rs 6/.

financial institutions and relevant groups. we have seen this earlier on. The various characteristics of alternative transportation mode are:1 · · · · Useful load: physical capability and maximum load as a percentage of gross weight. and therefore. Each type of transport offers different characteristics and as a supply chain manager you have to understand the efficacy of these aspects: 12 1 Deshmukh & Mohanty. but also with the operating environment through which the product moves. Return load for the trucker ex Meghalaya is more difficult visa vie Delhi. which transports materials between 2 or more stations. Transport. The entire transportation process is to be monitored. is the process. so that suitability of matching these to the operating factors can be established. Therefore. In order to achieve the best. India is a very versatile country.e. It is very important to establish and determine the accurate operating characteristics of each available transport mode. an organization. Transport profile Operating characteristics dictate the transport requirements of an organization. One trucker could agree to take your load for 30 grand while the other for 45 at the same time. the form of transport to be used should not only be responsive and compatible to the terminal stations.2. consumer. it is therefore mandatory that sufficient information be made available to enable the movement to be monitored by the producer. Density: cargo density.Distribution Network Planning · · · · Assam is a troubled state and incoming traffic to the state faces problems in entering the state. which doesn’t have versatility and varieties in operating its transport for varied tasks. Supply chain systems Transport is vital to the overall gambit of SCM operation and therefore cannot be considered in isolation. Transportation. Such aspects and rules are pre-mentioned in the contract documents and the companies and the trucker based on environment factors sign up for a minimum term of one year extendable to 2 years or more. will operate much below the optimum level of efficiency. The transport requirement depends on the different and versatile nature of tasks that are to be performed. pp 117-127 . from and to the same place. Essentials of SCM. one has to cross Assam before entering Meghalaya. Certain parts of the state are hilly and rates are fluctuating. in order to gauge the exact location and state of the materials being transported. Productivity: calculated in tonne-miles per direct man-hour. Most of the truckers moving towards Northeastern areas of the country charge for the return trip ab-initio. to generalize. Many other factors like reliability and reputation aspects are to be considered before hiring. Operational factors Operational factors that determine the transport mode are: · · · Environmental factors Characteristics of alternate transport modes Combination approach We will see this with the help of a flow chart as shown in figure 14. agencies. Overheads: fixed costs as a percentage of total cost. weight per cubic unit. i.

Channelisation . and the operating environment through which the operation is carried out.g. If that were so. then what are the factors to be considered when analyzing the transport requirement of each sector? What should be the basic guidelines? They are (essentials of SCM. Freight trains have the highest overheads.3. material handling interfaces at each terminal facility and the documentation process to support the product. in coordination with customer characteristics. but between a system or a process of transportation. though ODC clearance have to taken from the railways if the goods are not of standard specifications and are being transported in open BOM’s/KF’s. e. volume. between production line to godowns/warehouses. It involves separate sectors i.Multi-modal Transport Operations The choice of transport mode is not only a choice between type of transport. Each of the sector would require separate transport mode. Each of these transport modes has their peculiar characteristics that affect the preparation of the product before movement. mainly in the international and intercontinental traffic utilizing multi modal transport.e. The cargo aircraft has the highest productivity. The cargo vessel offers the highest density. 2004) · · · · The 10-12 tonne truck (Punjab Body) offers the highest useful load. packaging. The complete market channel has to be defined and each sector demarcated and analyzed separately for transport requirements. and safety standards Market factors Labor 13 . movement by sea will require better packaging than those by air. between manufacturer or seller and customer or buyer.2: Operational Factors for Deciding the Transport Mode (Deshmukh and Mohanty. requirement of stocks at each levels. handling. finances.Transportation Mix OPERATIONAL FACTORS CUSTOMER CHARACTERISTICS ENVIRONMENTAL PRODUCT COMPANY CHARACTERISTICS OF TRANSPORT MODES ROAD RAIL AIR WATER CHOICE OF TRANSPORT MODE CUSTOMER SERVICE LEVEL COSTS Figure 14. security to include documentation and product and responsive information system Movement of product. ownership. Let us understand the type of channel with Figure 14. to be precise. Deshmukh & Mohanty): · · · · Control.

competitiveness. In case of revenue. The criteria for choice will then become the maximum discounted 14 . by which the transport mode could be chosen.Distribution Network Planning MANUFACTURERS CAPITAL GOODS EXPENDABLE/PERISHABLE GOODS CONSUMER DURABLES GENERATORS TRANSFORMERS HEAVY EQUIPMENTS FOOD PRODUCTS BREAD EATABLES CONFECTIONARIES TV FRIDGE MUSIC SYSTEM WASHING MACHINE HOUSEHOLD APPLIANCES COMMODITY MARKET CENTRAL WAREHOUSE WHOLESALER REGIONAL GODOWN RETAILER RETAILER CONSUMERS/END USERS Fig 14. which will then have a major influence on the choice of transport mode. which are incurred either before or after transportation. where the introduction of specialization reduces the mechanical handling costs. and profit potential Environmental realities. the transport companies should be able to match and synchronize the market requirements. In such cases. maximum tax return upon capital should be the objective. both revenue and capital expenditure will be included in the operation. The very objective. depends upon whether the company is using revenue or capital to buy the transport. in order to maximize the usage of transport being offered. Specialization is created by the impact of channel costs. since this give maximum return.3: Depicting the Types of Channel · · · · Training Turnover of both goods and manpower Risk factors. the combination of the minimum expenditure and maximum after tax revenue could be calculated by determining the net cash flow after tax for the life of the capital asset. Therefore. In certain case. packaging costs and related expenditures mainly during terminal activities. and in case of capital. minimum cost throughout the transport operation should be the objective.

in order to carry out a systematic selection of the transporter a framework consisting of the following stages is recommended: (Figure 14. weekly or monthly demands. Associated risks with any capital asset with a life of over 2 years. and the total cost of distribution system is optimized. Inspite of determining a method of assessment. calculated with a discount rate equivalent to the cost of capital.6 Transportation Mix · · · Revenue expenditures incurred during utilization of particular mode. This particular approach acknowledges the existence of trade-off within the numerous alternative approaches in an attempt to assess the situation to minimize total costs.7 METHOD OF SELECTION The selection procedure for the transport mode could vary from the simple decision either to identify one feasible method of distribution or to follow the competitor’s procedures. and the transport mode from a list of alternatives available. 14. Cost trade-off: It is where the impact of transport is calculated in relation to immediate terminal objectives and activities. once the degree to which the calculations are taken have been considered in detail. so that the important features of the transport requirements are met. The shortcomings are tremendous in such a process.4: The Selection System 6 7 Deshmukh & Mohanty in Essentials of SCM. Distribution models: This identifies and explains the interrelationships between the components of the distribution system at various levels of daily.return or minimum discounted cost in terms of net cash flow. · · Therefore. p 129 Deshmukh & Mohanty in Essentials of SCM. The three potential methods are:7 · Judgment: Identification of the important factors affecting the transport problem by the transport manager. transport is considered as a service rather than a distribution system. the correct decision can only be taken. pp 130 15 . to the complex decision that calculates the cost incurred and produces an optimum solution. These models could be built to examine the impact of alternative transport modes and methods. as either the demand changes or the components in the system change.4) SYSTEMATIC SELECTION STAGE 1 IDENTIFICATION OF FACTORS STAGE 2 CATEGORIZING & IDENTIFICATION OF POTENTIAL RISKS STAGE 3 DETERMINING DISTRIBUTION NETWORKS STAGE 5 MATRIX ANALYSIS TO SELECTION STAGE 4 MEASURE & MONITOR COSTS Figure 14. since. as in packaging and labour should be considered along with: Capital expenditure incurred in utilization of a particular mode as in mechanical equipment at the terminals. where the asset would require changes and modification.

The financial option that could be employed in terms of individual type of equipment. The choice of equipment in terms of type of transport for each requirement. their sizes including movement requirements of raw materials to manufacturing units and finished products to the warehouses and on to the consumers. The best choice of mode available depending on the distance involved. The operation needs in terms of usage of the equipment for maximum utilization and minimum operational costs. Product characteristics that will further dictate the type of transport mode to be employed. 14. and hence warehousing and depot locations are equally important to understand the choice of transport selection process.8 A TRANSPORTATION DECISION Determining an organization’s transport requirement will be based on the following underlying considerations.5) · · · · · · The available depots. 16 .Distribution Network Planning · · · · · Stage 1: identifying the factors affecting the choice of transport selection Stage 2: categorizing the significant factors and identifying the potential risks Stage 3: determining the distribution network in terms of number and size of depots Stage 4: applying the matrix analysis to select the most appropriate transport method Stage 5: measuring and monitoring cost factors.5 : Decision Framework We have to understand that transportation operations cannot be seen in isolation. (Figure 14. DECISION FRAMEWORK NUMBER & SIZE OF DEPOTS TO INCLUDE MOVEMENT OF RAW MATERIALS/FINISH ED PRODUCTS CHOICE OF TRANSPORT MODE COINCIDENTAL TO EACH POTENTIAL MOVEMENT IN DISTANCE TRAVELED CHOICE OF OPERATIONAL NEEDS AS REGARDS EQUIPMENTS TO MAX UTILISATION & MINIMISE COSTS THE CHOICE OF EQUIPMENT SPECIFICATIONS ON TYPE OF TRANSPORT DEFINED BY PRODUCT CHARACTERISTICS CHOICE OF FINANCIAL OPTIONS AVAILABLE Figure 14.

Determination of organization needs by analysis of the important factors generated to produce the matrix and use of the matrix to select the options required. (Deshmukh & Mohanty). size and location which. minimize the cost between ex-factory delivery and local distribution depot delivery for each order. choice of equipment specification.9 NUMBER & SIZE OF DEPOTS Depots/warehouses and storehouses define the distribution network of a manufacturing company. and to construct the matrix. as under: · · · · · · Management of raw materials of factories Inter-factory movements Delivery to warehouses Delivery to third-party transport facilities Delivery to satellite depots Delivery to consumers based on normal. The network of depots will be defined by the numbers. when combined. A decision matrix approach helps in identifying the most appropriate transport option from the substantial range available. imposed by the vertical and horizontal axes. More the numbers. Choice of mode One of the ways to identify the appropriate choice of transport mode is to select the most significant attributes affecting the decision. to determine the important factors to use for the vertical and horizontal axes on the matrix. analysis and categorization of important factors. Transportation Mix 14. This approach uses the following steps: · · · · · · Selection of initial decisions required based upon known alternatives. Let us see these in more details. priority or emergent. Once this is defined. Yet. Let us see this with an illustration. like. it is possible to classify the transport operational requirements into tasks. which identifies the transport tasks and appropriate resources for the tasks. This approach will require imagination to develop the selection of the initial decisions. the distribution depots provide the resources to balance the cost to achieve optimum ex-factory loads and optimum local delivery loads. To select two options (factors) so that a matrix can be formulated using one in vertical axis and the other on horizontal. which adequately cover the conditions. These could be the size of the order (cubic meters or weight) and the distance to be traveled in miles from the concerned supplying depots and related factors. which affect the choice of transport selection. The combination of the matrix solutions to provide an effective and efficient profile.The total number and sizes of depots and warehouses will also have a direct bearing on transport operations of all companies across the board. Selection of basic alternatives. choice of financial options and operational needs. Selection of the resources required by considering the results of the matrix analysis plus other factors of importance. Essentially. larger is the distribution networks. choice of transport mode. 17 . the majority of the question could be answered by a combination of brainstorming.

This form of analysis will help in identifying when each transport mode is appropriate. and w3 etc. customers and carriers. and X3 etc. x2. in order to test the efficacy of this selection process. In certain cases. unloading. Fleet sizing projections should be developed a few times during the year and at any time when a major shift in demand pattern occurs. lease and or rental the fewest possible trucks to manage the company’s load profile/shipping requirements. Utilizing alternative coverage means during super peak periods to avoid carrying the burden of an oversized fleet. Let the transport alternatives be denoted by X1. transit times and maintenance times. and at the same time monitor these aspects as part of effective decision making processes. The weight of these attributes be denoted by w1. Select that alternative which has got the maximum score (figure 14. at the macro level certain measures have to be instituted based on ratio including cost per ton or cost per cubic meter. Fleet size can be regulated and minimized by:8 · · · · · · Utilizing standard size pallets and transport containers. shorter customer cycle times. Choosing low-use periods to conduct routine maintenance. This decision is akin to the decision of how much inventory is to be made available to the consumers/customers. Vigorously monitoring fleet utilization levels annually. and x3 etc. 8 EH Frazelle. In fleet sizing. in Supply Chain Strategy. improved customer services but higher fleet costs. including loading times. with each of the alternatives scaled from 0 to 10 for each of the attributes. an elaborate framework such as Analytic Hierarchy Process (AHP) can be applied to rank the transport alternatives on a set of tangible/intangible attributes.10 FLEET SIZING & CONFIGURATION Fleet sizing objective is to employ through ownership. Actually a target has to be established to each transport activity in order to determine the actual area where the difference occur.Distribution Network Planning Let the attributes be x1. w2.6 : Decision Matrix A2 s21 s22 s23 s24 S2 A3 s31 s32 s33 s34 S3 Alternatively. X2. hire. the cost of vehicle shortages can be estimated and a cost of shortages versus cost of ownership analysis can be made to determine the optimal fleet size. Therefore.6). Compute the aggregate score for each of these alternatives (w1 s11 + w2 s12…etc). pp 210-211 18 . and cost per delivery. Monitoring and charging for demiurges for fleet detention by suppliers. Scores for alternatives Attributes x1 x2 x3 x4 Aggregate score weights w1 w2 w3 w4 A1 s11 s12 s13 s14 S1 Figure 14. increased availability yields fewer lost sales. Maintaining total fleet visibility. 14.

Therefore. Transportation Mix 14. Yes. Therefore.12 FUTURISTIC DIRECTION IN TRANSPORTATION One salient aspect that we all have to understand that with e-services our lead time to delivery has reduced considerably. damages to bridges and roads owing to natural calamities are the major reasons for such re-routing. Fleet maintenance is one means of reducing the ownership cost of the fleet by delaying potential replacements and improving customer service through improved reliability. 14. Roadblocks. rail wagon or a ship or the cargo aircraft has to move it from the place of origin to the consumer’s destination. Delay in delivery due to routing problems increase costs of goods manifold. and cannot actually be solved optimally. The objective should be to minimize: · · · · · · · · · · Total route costs Number of routes Distance traveled Route time The constraints are: Customer requirements and time available Balancing of the route for the driver. labor.11 ROUTING AND SCHEDULING India is one of the best examples of routing and re-scheduling. rail. it can be seen that whatever be the fleet size. Efficient versus inefficient routing can save tremendous amount of money in fuel. Companies have to gear itself to such changing scenarios and terrain since the very inception. to minimize overtaxing Maximum route time Vehicle capacity Start & stop points enroute Infrastructure constraints. wherein such activities are optioned in the shortest possible time. modes and schedules in case the movement of the shipment is emergent. the order can be placed through e-services in a faster mode and so can payment be but the products cannot be physically moved through the net. the company has to use it judiciously and constantly monitor its progress for optimum utilization of the available resources and at the same time cut down costs of maintenance and time lag. We can plan our travel plans well in advance but then criticalities are criticalities and one has to accept such contingencies. 19 . to tide over this the company has to plan these activities well in advance with detailed coordination and judicious and realistic planning. A truck. Routing problems are some of the most difficult criticalities encountered. but somehow the movement of the product and raw materials perforce cannot move through e-services and have to restrict movement to roads. and capital expenditures and significantly enhance customer satisfaction. Everything doesn’t happen as planned and therefore every company should gear for alternative arrangements involving alternate routes. India is a versatile country with equally versatile terrain and climatic condition. air and waterways.

It is evident that transportation is one of the important facets of logistics and equally important in the process of SCM. in Supply Chain Strategy. increased transport costs will have risen prices and vice versa. The traffic council sets corporate transportation policy and explores opportunities for leveraging transportation spending across the corporation. modes of transportation. appropriate selection of the right transport mode is necessary for optimum customer satisfaction and a balanced logistics system of the firm.e. For this everyone should be in one plane and therefore. At the heart of most carrier relationship management programs is a set of guidelines for selecting core carriers. They can be clubbed under as follows: · Carrier relationship management: Speedy movements across the globe have also given rise to lack of coordination and planning resulting in criticalities too. an understanding of costs and benefits of alternative transport modes. Training and certification: Corporations should aim at making and maintain transportation as a value added activity. Therefore. These programs are designed to formalize communication. 14. cube and shipments.14 SELF ASSESSMENT QUESTIONS 1) Explain transportation mix with relevant examples.9 Corporate traffic councils: These help in bringing together all personnel working in the area of transportation within an enterprise. 2) What are the various techniques of cost reduction? 9 20 EH Frazelle. Therefore. Certain programs and organizations help in coordinating transportation in a better way and as time passes they are bound to improve transportation in a big way. Driver quality: Improvements in drivers with better working environment and better wages will help in a big way to improve the driver’s capability and capacity in the long run.13 SUMMARY We have in this unit discussed on transportation mix. through carrier relationship management programs we can bind the transporters and those working with it under one roof/enterprise. because they impact the customer services and other areas of cost. i. techniques of cost reduction. carrier selection etc. together with an in-depth evaluation of overall corporate implications is mandatory. partnering. Logistics compliance & security officer: Forming the chief logistics security officer will enable a company to cope with global logistics law and to anticipate security lapses within the logistics network. negotiating. such training activities are carried out to get all under one platform. and performance monitoring aspects of carrier management. Joint Procurement: Significant cost reduction can be carried out if the purchase and negotiation of transportation services is consolidated across both inbound/outbound transportation activities within a business unit. However. across units and even with non-competitors. multimode transport operations. These decisions are prominent within the purview of company logistics decisions due to the factor of trade off potential that exists between alternative modes of transportation and other logistics functions within the firm. pp 220-222 . Transportation costs will always have a direct bearing on the product costs. the minority of carriers who carry a majority of the enterprise’s weight. · · · · · 14. has improved considerably with the advent of technology and mechanical developments within a short span.Distribution Network Planning Transportation too.

Mumbai. 4) Explain the procedure of transport and carrier selection.3) Explain MTO in detail with specific examples from those outside the unit. 6) What is routing and scheduling? Explain in the Indian context. R. Logistics: An Introduction to SCM. and Nichols. 2) Deshmukh & Mohanty (2004). E.. Palgrave McMillan (Indian Edition). Why is it carried out and what are the major characteristics? 5) Why is fleet sizing necessary? Elucidate with relevant examples. E. New Jersey. Essentials of SCM. 3) Handfield. 4) Waters Donald (2003). New York. Supply Chain Strategy. Transportation Mix 14. Prentice Hall. McGraw-Hill. 21 . 7) What are the different constraints of routing? 8) Suggest a futuristic transport profile for a growing company. L. NY.H. B.15 REFERENCES AND SUGGESTED FURTHER READINGS 1) Frazelle. (1999) Introduction to Supply Chain Management. Jaico Publishing House.

3 15. They involve long-term commitments. a bad location decision may call for excessive transportation costs. 22 . Facility location decisions are of major importance to a company’s ability to compete in the market. Let us look at the importance of location in the context of business logistics. represents an important strategic decision. supermarkets.1 presents the key elements of a logistics system or the production / distribution system. Firms may experience growth in business and wish to increase the plant capacities. warehouses. and describe various measure for warehouse location. Location decisions come under the category of long-term decisions.5 15. Organizations are involved in location decisions for a variety of reasons such as the followings: · · · Expansion of existing facilities Addition of new facilities Closing down the plant at one location and moving to another.7 15.Distribution Network Planning UNIT 15 LOCATION STRATEGY Objectives After reading this unit you would be able to · · · discuss the steps in location planning. Determining appropriate locations for facilities such as plants. A plant location decision cannot be reviewed until after quite sometime as they involve huge investments. Business logistics refers to the management of all move-store activities that facilitate product flow to the point of final consumption. For example. loss of competitive advantage. Addition of new plants to complement an existing system is often contemplated. hospitals etc. Structure 15. discuss the interdependence of location decision and distribution decision. retail stores consider location as a marketing strategy and look for locations that will help them in expanding their markets.6 15. inadequate supply of raw materials etc. Firms such as banks.1 15.2 15. shortage of skilled workforce. The choice of location for the place of business is one of the earliest problems facing management. retail stores.1 INTRODUCTION Facilities and their locations are major issues in an organization’s logistics system efficiency and its ability to successfully implement its competitive advantage.8 Introduction Plant Location Distribution Problem Warehouse Location Retail Facility Location Summary Self Assessment Questions References and Suggested Further Readings 15. Location decisions also have effect on the operating costs/revenues.4 15. Figure 15.

decisions that consider only production efficiencies may lead to high distribution costs and low customer service. Production management. The main objective of location decisions is to position each element of the production /distribution system with respect to the overall system. in the distribution system and the special cases of locating retail stores and emergency services. inventory and order processing. We shall discuss here the problems of plant location. business logistics coordinates the production and marketing efforts. they must position both plants and warehouse simultaneously with respect to suppliers. Finished goods are shifted to warehouse (also called distribution centers) and finally to retail stores from where they are made available to customers. Similarly. all these facilities are located simultaneously. retail outlets and each other. A product mix that seeks only to satisfy marketing goals may lead to inefficiencies in production. is concerned with maintaining high productivity at low cost. The typical case involves locating a new plant with respect to suppliers and a given number of warehouses or locating a set of warehouses with respect to manufacturing plants and markets. Raw materials are ordered from the suppliers.1: Production / Distribution System The key elements of the production/distribution system are: transportation. In order to have an effective production and distribution system. These are transported to the manufacturing plant for production into finished goods. 23 . Thus the decision of where a product is produced and stored is very important.Suppliers Flow of Goods Flow of Information Transportation Mix Manufacturing Plant Warehouse Retail Store Customers Figure 15. Rarely. on the other hand. One of the important goals of marketing management is to make the product available to customers at the right place and the right time. The location problem is more complex for large firms. A manufacturing plant must be strategically positioned between its supplies and customers. warehouse location.

community environment. Some factors may be more dominant than others. The presence of objective and subjective factors results in greater degree of complexity in the structure of the plant location problem as well as its solution. the plant location problem involves both qualitative and quantitative factors. such as service organizations tend to be located near consumers. local politics etc. On the other hand. on mineral production plants. The objective factors involve cost of land. Table 15. although the manufacturing and distribution costs may vary by over 10 percent simply by virtue of choice of location. Community. a plant may be located far from work but have lower utility bills related to the area closer to work. perhaps.1 presents a list of some of the important location factors.1 Steps in Location Planning Location planning involves the following steps: 1) Determine the criteria to evaluate location alternatives (for example: minimize costs) 2) Identify relevant location factors 3) Develop location alternatives a) Identify the general region b) Identify a small number of community site alternatives 4) Evaluate the alternatives and make a selection.1: Location Factors Determining Plant Location Transportation Utilities Factors Factors Labor Factors Climate. The subjective factors include labour availability. output oriented activities. Table 15.2. 15. A decision made on these factors is difficult as they are consistent over all locations. There are two types of factors (or criteria) on which location decisions are based: quantitative (or objective) factors and qualitative (or subjective) factors. quality of life. But location.2 PLANT LOCATION Choice of location for a plant is one of the earliest problems facing management. transportation costs. The Golden Rule of Business states that the ones with gold make the rules. The golden rule of business applies to location decisions as well.Distribution Network Planning 15.2 Evaluation of Location Alternatives As stated earlier. is one of the most neglected aspects of business. utilities rates etc. Finding the best location alternative considering all the above factors is not an 24 . For example. climate. For example. raw materials dominate the situations due to which processing is located near mines. Political Factors · · · · Proximity to raw material sources Closeness to markets Modes of transportation Transportation costs · Power · Water · Fuel · Waste disposal · · · · Labor supply Labor management relations Availability of skilled labor Labor costs · Climate and living conditions · Education · Community attitude · Religious factors · Taxation policies · Tax structure 15. States and Local Environment etc.2.

5 14 9 4 85. a large chain. Consider for example. Labor Costs 2. If the plant is located far from the group of retail stores. In the absence of any warehouse. which might have involved some amount of subjectivity. Climate 4. Warehouses and distribution centers play as important intermediaries between plants and retail stores. Attempts have been made to combine the qualitative and quantitative factors and score the alternatives.15 0. if the total score for location B were 70. They allow a company to store finished goods for efficient distribution to points of use. one need to go for further analysis before arriving at the final decision. For example. One of the scoring (or rating) models is outlined below (Table 15. thereby increasing the chances of material shortage for production.easy one.5 Transportation Mix From Table 15. then also transportation costs (i. Warehousing plays a crucial role in the total distribution system. which manufactures many products. Proximity to Raw Materials 5.10 0. Table 15. we see that location B that has a higher score is preferred. flow to warehouse and ultimately to outlets. The score for each alternative is found by multiplying each factor’s score by its weight and summing the results. Warehouses placed close to the market can provide quick and efficient delivery to retail stores.40 0.1). Table 15.3 DISTRIBUTION PROBLEM The distribution problem is concerned with the allocation of goods flow to minimize overall distribution cost. Most distribution systems are three-tired structures in which goods start from the plant.40=36 9 13. Transportation Costs 6. This may result in out-of-stock situations thereby reducing the level of customer service. The firm has control over the location of all intermediate members of the logistics system. outbound transportation costs) would be high and it takes longer to deliver orders to retail stores.2).2.20 0.e. Taxes 0. 25 . The procedure starts by listing the various factors and assigning weight to each factor to represent the relative importance of various factors.10 0. However one has to be careful in the use of the rating approach because of the assessment of scores. maintains regional distribution centers and owns a large number of retail store (Figure 15. The role of warehouses is illustrated in Figure 15.2.40=28 8 12 8 8 4 68 B 90 × 0. inbound transportation costs would be high and delivery times would be high. shipments of finished goods would have to be made directly from the plant to the retail stores. which is very close to that of A.2: Rating Approach Location factor Weight Score (out of 100) A 1. while still permitting the plants to be placed near raw material sources.2 gives the details of this rating approach for two locations A and B.05 70 80 80 40 80 80 Total Score B 90 90 90 70 90 80 Weighted Score A 70 × 0. If the plant is located far from the raw material sources. 15. Water supply 3.

e. 1. 11.Distribution Network Planning Plant 1 Plant 2 Plant 1 Plant 2 Warehouse 1 2 3 4 5 1 2 3 4 5 Retail Stores (a) Without Warehouse Figure 15.e. The location of aluminum reduction industry is energy-oriented. One of the principal disadvantages of computerized logistics modeling is the ability to easily modify data and perform “what if” analysis. 7. quality of life in a given location is an irrelevant factor. For facility location. 5. Logistics management refers to the management of transportation function. Scoring models are used exclusively in location decisions. 10. 8. The major criterion for location of a retail outlet is the volume of demand. The other decisions include the following: · · · · Which products should be stored in each warehouse? Should public or private warehouses be used? What type of material-handling equipment should be used? Which customers should be assigned to each warehouse? We shall discuss the warehouse location problem in the following section. there is a unique location that is superior to all others. 26 . There is no difference between location decisions for manufacturing and service organizations. manufacturing costs are more important than transportation cost. warehouse facilitates consolidation of orders. In the location of a gasoline station. For facility location. Business logistics and facility location are unrelated issues.2: Role of Warehouse Retail Stores (b) With Warehouse It can be seen from Figure 2 that the provision of intermediaries like warehouse reduces considerably the number of interactions from 10 (i. 2. 4. The facility location decision belongs to the tactical decision area. The presence of organized labor unions is irrelevant to the location decision. There are other benefits associated with the provision of warehouses since they support both manufacturing as well as retail stores. labor availability is one of the most important factors. For example. 12. Among the most important warehousing decisions are the determination of number and location of warehouses. 3. In all location problems. 2 x 5) to 7 (i. 6. A number of decisions should be made with regard to warehousing. 13. Activity 1 Write True or False against the following statements. since the latter are going to be incurred anyway. 2 + 5). 9.

y) be the location of the new facility. All these models focus on minimizing transportation costs.1 Measures of Distance Two measures of distance for movement of items are commonly used: Rectilinear distance and Euclidean (straight line) distance. retail stores. The problem of locating a simple new facility with respect to a number of existing problems is known as the single facility location problem whereas the problem of locating multiple new facilities is known as the multi-facility location problem. The rectilinear distance between (a. y) is |x – a | + | y – b|.2 Single Facility Location Problem In this section you would learn about Single Facility Rectilinear Distance Location Problem. Fortunately.y) Figure15.4. It is assumed that there are a number of existing facilities in place and we wish to find the optimum location of a new facility (or new facilities). material is transported along aisles arranged in rectilinear pattern. Squared Euclidean Distance Problem (known as the Gravity Problem) and the Straight-Line Distance Problem. The new facilities could be warehouse. 27 . b) and (x.4 WAREHOUSE LOCATION In this section we present method(s) for determining the location(s) for warehouse(s).3 : Rectilinear and Euclidean Distance Rectilinear distance is appropriate for many location problems such as in metropolitan areas. The rectilinear distance (also known as metropolitan distance) recognizes that streets usually run in a crisscross pattern. Let the existing facility be located at the point (a.Transportation Mix 15. (a. The approaches take into account the locations of plants and markets.3 illustrates the two distance measures. In many manufacturing situations. 15.4. 15. volume of goods moved and transportation costs. rectilinear distance problem is easier to solve than Euclidean distance problem.b) Rectilinear distance Euclidean distance (x. whereas The Euclidean distance is Ö(x–a)2 + (y–b)2 Figure 15. b) and let (x. The existing facilities could be plants.

y) = ∑ i =1 n wi ( ½x – ai½+ ½y – bi½) .(an. Thus the optimum solution is (x . which can be explained. Similarly g2 (y) is 20 for values of y between 10 and 30. the x coordinate of the new facility will be same as x coordinate of some existing facility. y) where 5 £ x £ 20 and 10 £ y £ 30 .4: Single Facility Rectilinear Location Problem . Any value of x outside the closed interval [5. Let us consider a case in which there are two existing facilities located at (5. ƒ(x.b2)………….bn).y) = g1(x) + g2(y). 30] gives larger values of g1 (x) and g2 (y). (a2.30) as shown in Figure 15. if x = 10 and y = 10 Then g1 (x) = ½ 5 – 10½+ ½20 – 10½ = 15 g2 (y) = ½10 – 10½ + ½30 – 10½ = 20 It can be seen that the optimum location for the new facility will be anywhere in the area bounded by the lines x = 5. The objective is to locate the new facility to minimize a weighted sum of the rectilinear distance from the new facility to existing facilities. 20] and any value of y outside the closed interval [10. (20. with the help of the following examples. Similarly y coordinate of new facility coincides with y coordinate of same existing facility.30) y (5.10) X Figure 15.10) and (20.b1). An example of the single facility location problem could be location of a new storage warehouse for a company with an existing network of production and distribution centers. y = 10 and y = 30. . The optimum values of x and y can be determined separately. x = 20. where g1 (x) = ∑ i =1 n wi ½x – ai½ and g2 (y) = ∑ w ½y – b ½ i =1 i i n As we shall see. For example. The goal is to find the values of x and y such that minimize ¦(x.4.Distribution Network Planning Single Facility Rectilinear Distance Location Problem Let there be “n” existing facilities located at points (a1. 28 The above analysis leads to the Simple Median model. where wi is the flow of material / goods between the new facility and ith existing facility.Two Existing Facilities The values of g1(x) is equal to 15 for values of x between 5 and 20. Assume that wi values are all equal to one.

8. four facilities at (6.10. 8.10). A quicker method of finding the optimum location of the new facility is to compute the accumulated weight and determine the location (s) corresponding to half of the accumulated weight as shown below.5.9]. 8) and (12 .10). 12. 12. 12. Rank the x coordinate in increasing order: 3. 3. 3. w3 = 3 and w1 = 1. 6. 6. A median value is such that half of values lie above it and half lie below it. 6. The optimum value of the objective function is 30 + 16 = 46. w2 = 4. 12 The median location is x = 6. ( 6 . Facility 1 2 3 4 X coordinate 3 6 12 12 Weight Cummulative Weight 2 4 3 1 2 6 Optimum X=6 9 10 Facility 1 3 2 4 X Weight coordinate 3 8 9 10 2 3 4 1 Cummulative 2 5 optimum Y is 9 between 8 and 9 10 (Half of total weight first exceeds at x = 6 Hence optimum x = 6) (Optimum y is between 8 and 9) 29 . (12. (6.3). 6. 12. 10) and the weights are all of value 1 ( w1 = w2 = w3 = w4 = 1).3). The problem is equivalent to one where there are two facilities at location (3. three facilities at (12. The ranked y values are: 3. 8) and one facility at (12. 9. 9). 9. The median location is any value of y in the interval [8. See Figure 15. 9.9). The ranked x value are 3. 8. 9). Any value of x between 6 to 12 is a median location and is optimum for this example problem.Suppose there are four existing facilities located at points ( 3 . 8. The optimum value of g1 (x) is 15. 9. The weightages are: w1 = 2.5: Optimum Locations y Let us take another example where there are four existing facilities located at (3. with weight equal to 1. 10 gives the median value as any value between 8 and 9 and the minimum value of g2 ( y) = 8. 9. 6.8) and (12. Similarly ranking the y values 3. ( 12 . 12. Transportation Mix g1(x) g2(y) x Figure 15. 3).

the partial derivatives of the objective function with respect to x and y are found and equated to zero. y) to minimize ¦ (x. Location of power generating facilities so as to minimize the total length of electric cable that must be laid out to connect the plant and customer is an example where the Euclidean distance measure is appropriate. We shall discuss here the squared Euclidean Distance Problem (known as the Gravity Problem) and the Euclidean Distance Location Problem. To find the optimum value of x and y. we get X = + ∑w a i =1 n n i i ∑w i =1 n i Y = + ∑w a i =1 n i i ∑w i =1 i Thus X+ and Y+ are the weighted averages of x and y coordinates and hence the name Gravity problem. y) = ∑ wi i =1 n Ö (x – ai)2 + (y – bi)2 30 .Distribution Network Planning Euclidean Distance Problems Although the rectilinear distance measure is applicable in many location problems. This measure is appropriate for location of emergency facilities. y ) = 2 w i (y − bi ) ∂y i =1 ∑ Setting these partial derivatives equal to zero and solving for x and y. The objective is to find (x. n ∂f ( x. there are situations in which the appropriate measure is the Euclidean or Straight-line distance. y) = 2 wi (x − ai ) ∂x i =1 We get ∑ We get n ∂f ( x . y) to minimize ¦ ( x. y) = å wi [ (x – ai )2 + ( y – bi )2] The solution to this problem is straight forward and is often used as an approximation to the more common straight-line distance problem. The Gravity Problem The Gravity problem corresponds to the case where the distance measure is square of the Euclidean distance. The objective is to find the value of (x. The Straight-Line Distance Problem The straight-line distance measure arises much more frequently than the Gravity problem.

Unfortunately, it is not easy to find the optimum solution mathematically. The partial derivatives become undefined when the location of the new facility coincides with that of an existing facility. There are no known simple algebraic solutions; all existing methods require an iterative procedure. The Gravity solution is usually selected as the starting solution for this iterative process.

Transportation Mix

15.4.3 Multi-facility Location Problem
The problem of locating multiple new facilities with respect to existing facilities is known as the Multi-facility Location Problem. For example, a countrywide consumer goods manufacturer might be considering where to locate four new regional warehouses. There is interaction among new facilities as well as between new and existing facilities. In some special situations, multi-facility location problem can be solved as a sequence of single facility location problems. Linear programming can be used to solve the multi-facility rectilinear distance location problem. Assume that there are “n” existing facilities located at points ( a1, b1), ( a2 , b2),……(an , bn). Suppose the new facilities are to be located at (x1 , y1), (x2 , y2), ……….., (xm , ym). The objective function to be minimized is written as minimize ¦1 (x) + ¦2 (y)
m n

Where ¦1 (x) = å
i£j£k£m

Vjk ½xj – xk½ + å
m

å
n

wji ½xj – ai½

j=1 i=1

and

¦2 (y) = å
i£j£k£m

Vjk ½yj – yk½ + å

å wji ½yj – bi½

j=1 i=1

Vjk represents the interaction between new facilities j and k and wji represents the interaction between new facility j and existing facility i. The optimum x and y values can be determined independently as in the case of single facility location problem. Multi-facility gravity problems require the solution of a system of linear equations, so that gravity problems involving large number of facilities are easily solved. Multifacility Euclidean distance location problems are solved by using multi dimensional version of the iteration solution procedure described in the previous section. Activity 2 Fill in the blanks 1) 2) 3) An approach to location analysis that includes both qualitative and quantitative considerations is …………………………………………… A major advantage of warehousing is that ………………………………………………………………….. The scoring model is both a ……………………………. and …………………………… model

15.4 RETAIL FACILITY LOCATION
The major criterion used for retail facility location is the volume of demand and hence estimates of demand must be known for potential locations. Statistical techniques such as regression analysis can be used to predict demand. For locating facilities that are oriented toward sales, the principal factors are market related and the important data are demographic in nature. Other intangible factors, which affect retail location, are competition, zoning laws, traffic patterns and accessibility etc. Like in plant location, scoring models may be used to rank potential sites.
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Distribution Network Planning

15.4

SUMMARY

As we have seen, the location decision and distribution decision are interdependent. By considering only one of these, we get poor solutions. Both the problems should be treated comprehensively. Comprehensive computerized logistics systems are available to assist management in achieving efficient solutions. Computerized systems help answering questions such as: how many warehouses are needed and where they should be located? How much of each product should be sent to each warehouse from each plant? How should customers be assigned to warehouse? What modes of transportation are most economical? For answering such questions, management needs large amounts of data regarding warehousing and inventory costs, transportation costs, production costs and so on.

15.5 SELF ASSESSMENT QUESTIONS
1) “The most common method for evaluating non-economic factors in a facility location study is to use a scoring model” Why? Justify your answer. 2) Is it true that subjective criteria in plant location models focus on long-run cost effects? If yes, Why? 3) Given the information below, which alternative would you recommend?
Factor Weight A Raw Materials Market Transportation Cost Labor Cost Construction Cost 0.40 0.20 0.10 0.20 0.10 50 40 90 40 10 Location B 70 40 70 40 60 C 60 80 50 30 30

4) Given the information below, which alternative has the lowest breakeven point?
Alternative A B C D E Fixed Cost 30000 40000 50000 60000 70000 Variable cost/unit 10 15 20 30 40 Revenue/ Unit 40 40 40 40 40

5) Given the following evaluation of subjective factors, find the total score for the location. Excellent = 8, Good = 6, Fair = 4, Poor = 3
Factor Labor Supply Community Attitude Government Regulations Rating Good Excellent Fair Good Weight 40% 30% 20% 10%

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Quality of life

6) Using the following scoring model, select the best location
Location Attribute Weight A B C 1 10 Good OK Good 2 25 Very Good OK Very Good 3 35 Bad Very Good OK 4 30 OK Good Good

Transportation Mix

Very Good = 5 points, Good = 4 points, OK = 2 points, Bad = 1 point

15.8 REFERENCES AND SUGGESTED FURTHER READINGS
1) Ballou R., (1985), Business Logistics Management, Prentice Hall. 2) Francis, R. L. & White J. A. (1974). Facility Layout and Location - An Analytical Approach, Prentice Hall.

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Distribution Network Planning

UNIT 16 LOGISTICS AND SCM ENVIRONMENT
Objectives

· · · ·

discuss the commercial and legal issues concerning logistics; describe Sales laws; illustrate Warehouse operations; and render Documentation procedures such as Insurance, Octroi and Sales tax.

Structure
16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 16.11 16.12 16.13 16.14 Introduction An Illustration Preventing Litigation Sales Law: An Overview Environmental Realities: Implications on Supply Chain Warehouse Operations Warehouse Jurisdiction Wages, Earnings and Hours of Work Documentation: Insurance & Sales Tax Introduction to Sales Tax A Case Study Summary Self Assessment Questions References and Suggested Further Readings

16.1

INTRODUCTION

We have learnt in detail that logistics forms a key to SCM, and happens to be the most important component in the entire channel. There are however, certain environmental realities that govern the smooth running of this SCM system and it’s imperative for every manager dealing with it to learn and know about it. Legal issues concerning the movement, storage and shipment of materials, insurance coverage, payment of taxes, Octroi and sales taxes are important part of documentation process. In the Indian context it is also referred as consignor note (Challan), delivery note, (delivery challan) etc. Legal issues play a very important role in SCM, though the best one can do is to avoid legal disputes at all costs, based on the adage, one ounce of prevention is worth a pound of cure. Though, supply management professionals deal with two major aspects of law; the law of agency and law of contracts, yet, they seldom get involved in litigation, provided they are fortunate. With this as a backdrop let us see an illustration, which will generally explain the entire process of SCM in which a supply manager is likely to get involved in law suits, legal hassles and how can he overcome or avoid it.

16.2 AN ILLUSTRATION
Let us take a company ‘A’, manufacturing soaps somewhere in outskirts of Mangalore. Whatever raw material it requires comes from areas around it, and its

34

main constituent Caustic (sodium hydro-oxide or potassium hydro-oxide) is being supplied by a chemical plant located in Kerala. The fat constituent is also available from a nearby unit. The main supplier of caustic is, say company ‘X’. So ‘X’ is the main supplier of the constituents to ‘A’ and is hence governed by some legal issues and laws of the SCM. ‘A’ can file a suit of litigation on ‘X’ for supplying lower graded materials, for delay in dispatch of material, or unable to supply the goods after initial payment has been done and the contract signed. The companies can also be in litigation with each other, in case there are disputes or complaints related to quality of the finished product from the consumers en-mass. At the same time any consumer can sue a company in the court of law or in consumer forum for necessary demurrages accrued on usage of a particular soap, on health related matters, or say in case if the quantity specified on the pack don’t match the actual weight, or even the advertisement theme and slogans don’t match the product quality. Actually, there are number of places where a company could falter and be charged by law. Companies generally avoid this aspect, and go in for an out of court settlement with such consumers. Similarly, there are other areas where legal aspects come into play like delayed payments or non-payments. Well, this is better sorted out during the signing of initial contracts and supplier selection processes. Next comes the transportation aspects, wherein insurance has to be catered to for the consignment against theft, loss, damages, fire etc. Sales tax for the goods and Octroi for utilizing the services and infrastructure, differs from state to state. There are also various weighbridges where the vehicles are checked for the load being carried, and in case of discrepancies the companies are charged penalty for non-payment of taxes/less payment/fraudulent. This illustration has purposely been included, just to make you understand, where and how we can go wrong and how best can we sort out these differences, either by law or through negotiation. We will see all this and many such related aspects as we go through the unit. The first step for all this is to prevent litigation, and how can we achieve this? Let us see.

Transportation Mix

16.3 PREVENTING LITIGATION
The basic relationship between the supply manager and the buyer is like an agent for his/her firm, and legally this is defined and governed by the law of agency.1 A purchase represent formation of a purchase contract between the buyer and the seller, and any dispute resulting from this the dispute may enter the realm of dispute resolution governed by the laws of contract, and can be categorized as under:

· · · ·

Negotiation Mediation Arbitration Litigation

The basic responsibility of a firm is to ensure smooth procurement based on business requirements and judgments, rather than on legal considerations. Getting into litigation not only alienates a good supplier but leaves a scar on the buyer firm too. As a matter of fact litigation is generally the last order of the day, since most of the outcome of court cases are uncertain and delays the complete process. The very purpose of this unit is to give you a brief insight into legal concepts, as they relate to supply chain professionals across the board in just a nutshell. You should acquire in-depth knowledge of the commercial laws, as applicable both in India and internationally.

35

Distribution Network Planning

Now let us see the four categories of dispute resolution as depicted in table 16.1: Dispute Resulution.
Category Negotiation Remarks Disputes can best be resolved through negotiation and compromise to avoid further confrontation, costs, complication, stress and damaging relationships This is the next step to negotiation, and mediation involves introducing a third party to resolve the issue. The mediator is expected to listen, sympathize, coax, cajole and persuade. He/she could also render suggestion or encourage suggested solutions. A mediator could do anything other than deciding, which is actually arbitration the next step to mediation. In this process the output of the dispute goes to the third party an arbitrator. Arbitration vests the decision-making authority with the arbitrator wherein he would hear the testimony and study the evidences from both sides, and then take a decision based on facts and law. This is the last stage of the process where the disputants have already lost the battle. In fact, wastages tend to be maximized in this stage relating to time, effort, money, stress and damages to relationship. Knowing and understanding fundamental legal principles better, could help in avoiding such a stage.

Mediation

Arbitration

Litigation

Let us now see how the development of commercial laws took place across the world with special reference to USA.

16.4 SALES LAW: AN OVERVIEW
Most of these are academic in nature and you, as a supply chain manager should know them thoroughly. But, in practicality one must understand these aspects before venturing to SCM. Historically, USA developed its own body of status and a common law for all states to deal with the problem of dispute resolution and prevail uniformity. The transactions for the sale (and leasing) of goods are governed mainly by sales laws of each state. Every state, with the exception of Louisiana, has adopted, Article Two of the Uniform Commercial Code (UCC) as the main body of law regulating transactions in goods. Goods are defined as all things movable and identified to the contract of the sale. It does not include secured transactions, leases, money exchanged as the price, or real property (land and property permanently attached to a piece of land). To be identified to the contract a good must exist and one of the objects will be exchanged. Transactions between merchants and consumers and those solely between merchants are regulated by Part Two. All transactions that are for more that $500 must be in writing. Article 2 regulates every phase of a transaction for the sale of goods and provides remedies for problems that may arise. It provides for implied warranties of merchantability and fitness. There is also a duty of good faith in the UCC that is applicable to all the sections. If a contract contains unconscionable provisions a court may discard the contract or the provisions. Leases were traditionally governed by Article 2 or Article 9 (secured transactions) of the UCC. This caused confusion and disparate application of the law to leases. In 1987 Article 2A was added to the UCC to regulate leases for goods. It has been adopted, or is being considered for adoption, in a number of states.

1

36

WCSCM by TMH, Relationship management, chapter VI, pp. 555-557

Federal law has a limited impact on transactions for the sale of goods. The Bankruptcy Code regulates claims arising from sales transactions in bankruptcy cases. The Magnuson-Moss Warranty, Act regulates explicit and implied warranties. The Consumer Credit Protection Act provides protection to consumers entering into leases. In 1988, the United States joined the United Nations Convention on Contracts for the International Sale of Goods.

Transportation Mix

16.5 ENVIRONMENTAL REALITIES: IMPLICATIONS ON SUPPLY CHAIN
The significant impact that members of the supply chain have on organizations’ environmental performance, either through their actions or the products they supply, is increasingly becoming recognized throughout business. Examples of organizations, which have faced legal action, financial loss, and damage to corporate image as a result of their supply chain partners’ activities, are numerous, and as environmental protection climbs the social and political agenda so the risks will increase. In many cases action has been driven in response to specific events or pressure from stakeholders (and commonly both) with the full value to the business of this action only being realised subsequently. To exert some influence over supply chain partners’ approaches to environmental issues, control the associated risks, and realise further potential benefits, companies have developed proactive environmental supply chain management (ESCM) programmes to complement existing supply chain and environmental management activity. However, it is not enough to blindly trust that general improvements in the environmental performance of supply chain partners will in turn improve the organization’s environmental performance. Furthermore, the methodology employed so far is diverse in design and application, and the focus of initiatives is sometimes open to question. The ESCM process must be structured, and concentrate on delivering benefit for the initiating organization, while a commonly demonstrated byproduct of this activity is the strengthening of supply chain partners, and the relationships with them.

16.5.1 Extent of Involvement
The extent of engagement in ESCM activity varies greatly across commercial organizations and industrial sectors. It would be fair to say that many organizations have demonstrated good ESCM practice within individual projects without recognizing it as such, while others have realised environmental benefits through general SCM initiatives. Business in the Environment (1999) have attempted to gauge environmental engagement among the top 100 quoted companies in the UK since 1996 (and including the mid 250 quoted UK companies since 1998), across a range of environmental management parameters. Supplier focused initiatives represent one of the parameters surveyed. The results of this survey have consistently shown supplier focused initiatives to be the weakest parameter, that is, the least adopted (see table 16.2).
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assuming that companies who have not responded are likely to be less environmentally engaged on the whole. Improving company image. Given some of the demands made by buying organizations on their suppliers to demonstrate environmental probity however.Distribution Network Planning Table 16. However. .2: Environmental Incentives Percentage of Respondent Companies Engaging in Supplier Focused Environmental Initiatives Year of Survey 1996 1997 1998 1998 Group of Companies FTSE 100 FTSE 100 FTSE 100* Mid 250** Percentage Involvement 37 42 57 30 * Response rate. Organizations tend to come under greater scrutiny the closer in the chain they are to the end user. the true percentage involvement is probably lower than that stated. Organizations can be categorized into five types when relating to ESCM involvement. both upstream and downstream. There is not as much evidence of organizations initiating dialogue with customers over the environmental probity of their products outside of a focused environmental marketing strategy.2 Trends Much of the work on ESCM conducted to date has concentrated on the upstream (supply side) relationships. * Adapted from Mackenzie 1999 Given the response rate to this survey. Environmental problems are best dealt with at source. larger organizations are beginning to respond to the need for ESCM programmes in increasing numbers and the standard is steadily shifting up the scale. Buying power has been seen as a tool for encouraging environmental activity among smaller enterprises by governments. a proactive approach could well be advantageous by: 38 · · Raising company profile. This is as a consequence of a number of factors. 19% (Source: BiE Index Report 1999). 77%. ** Response rate. 16. Larger organizations potentially face the greatest risks (particularly in terms of corporate image) but tend to posses the most influence over the supply chain. namely: · · · · · · Influence is commonly greatest from customer to supplier (as opposed to vice versa). namely: · · · · · The Blissfully Ignorant Going Through the Motions Control Management State of the Art Ground Breakers State of the art and groundbreaking organizations are few in number with the blissfully ignorant accounting for the majority.5.

The first stages of ESCM are typified by environmental surveys and questionnaires of varying sophistication and levels of required detail. Meetings and seminars can prove useful tools for developing the partnership approach and facilitating subsequent action.g. Prompting knowledge exchange. particularly in the most competitive markets. Creating new criteria and standards for the sector/competitors. Helping the customer to shape ESCM strategy. financial or moral pressures or crisis. Transportation Mix The techniques applied in ESCM vary greatly in their sophistication and resource requirement. The initiatives of such “ground breaking” organizations encompass social and ethical issues along with the environment. There is evidence however that the tendency to develop partnership approaches is beginning to revert to more adversarial ones. This could well set the tone for ESCM strategy also. albeit that the extent of this activity will be governed by the level of perceived risk. The thrust of these partnerships is to improve stability and understanding in the relationship linking to risk reduction and financial performance improvement. the motor industry) are still requesting (and starting to request) accreditation to a formal EMS standard. life cycle thinking.5.3 Future Developments ESCM has presented difficulties for many organizations with regard to finding a practical and cost effective way of managing out the environmental risks and improving performance.· · · · · Building relationships and possibly dependency. aspects or impacts. the shortcomings of this approach are becoming realised and ESCM systems are being developed to move away from ISO14001 or EMAS as an allencompassing measure. However. and the availability of resources and competencies. Audit and independent verification of supply chain partners is commonly applied to substantiate information gathered. The use of environmental performance indicators for 39 . It is worth noting that this change is only just beginning and some industry sectors (e. Potentially avoiding prescriptive requirements imposed by customers. 16. Beyond the techniques mentioned above some organizations are beginning to develop partnerships with key suppliers in line with the current supply chain management vogue. Some organizations have built this process into existing health safety and quality audit processes to reduce resources requirements with varying degrees of success. and design for the environment. At the most basic level organizations tend to initiate activity on a reactive basis dealing with a specific issue in response to legislative. In the majority of cases questionnaires concentrate almost exclusively on environmental management activity. While potentially useful for assessment purposes the questionnaire has limitations and requires careful design and evaluation. ignoring actual performance. The most advanced organizations have taken ESCM beyond addressing purely commercial drivers in favour of looking at sustainability issues as embodied through product stewardship. The use of ISO14001 accreditation as a proxy for environmental probity in supply has become popular due to its international recognition and independent verification. and support clearly defined corporate values relating to these issues. This approach is highly resource intensive and not always practical or judicious.

In view of this. quick response and just in time.6 WAREHOUSE OPERATIONS Warehousing is a very important operation of SCM system and without correct understanding of this you as a supply chain manager will often find it difficult to coordinate both ends. and analysis of the indicators which truly reflect performance though. The environment is changing rapidly and is almost difficult to keep pace with the changing scenario. as well as allowing for the measurement of tangible and significant aspects of environmental performance. In addition it is likely that the introduction of environmental performance indicators will encourage wider use and allow for the tailoring of indicator sets as appropriate to the supplier’s resources and capabilities. 16. arguably. skilled. 2 40 Warehousing Operations in Supply Chain Strategy by Edward H Frazelle pp 224 . but recent experiences with introducing quality issues has prompted many companies to resist this. The selection. and English speaking personnel Less warehouse management system (WMS) capability A warehouse manager today has to do more with a resource crunch. Social and ethical issues are commonly intertwined with environmental issues as demonstrated in sustainability thinking. always been present. In view of this there is a growing trend to incorporate ethical and environmental issues together in ESCM activity. supply chain collaborations. service or product evaluation has. With this as a backdrop let us see in nutshell the various warehouse fundamentals.Distribution Network Planning supplier. The publication ISO14031 (international standard for environmental performance evaluation) does provide a framework that could be applied to the selection of indicators by which to evaluate supplier environmental (and potentially ethical) probity. under the management of 14000 & ONE Solutions Ltd. warehouses today are being asked to2 · · · · · · · · · · Execute more. globalization. The use of performance indicators will provide a more cost effective supplier evaluation tool than has generally been applied. at a point or over time. a UK government sponsored ISO 14031-demonstration project is currently under way to assess the feasibility of this approach to ESCM. has been lacking and as such has left a hole in any risk assessment process. Health and safety issues are also being brought in. the warehouses today have Less time to process an order Less margin for error Lesser young. under the influence of e-commerce. by the assessor and the supplier. Indicators will also allow for benchmarking between suppliers and bolster overall company data availability. an issue currently overlooked by many ESCM initiatives. smaller transactions Handle and store more items Provide more product and service customization Offer more value added services Process more returns Receive and ship more international orders But. Today.

Fulfillment centers: receive. Packaging and pricing: this is done when it’s required.6. Put away: for placing the merchandise in storage. figure 16.2 Functions in Warehouses Let us see this with a block diagram. Prepackaging: to break bulk and pack for single unit delivery in merchandisable quantities with other parts to form assortments. Sortation and accumulation: this is carried out when the order is more than one item and accumulation is not done as the picks are made. containerization. Packing and shipping: the final stage before shipment of orders. Storage: physical containment of merchandise. 16. quality assurance and disbursing of materials to appropriate places.1 Warehouse Fundamentals The missions of warehouses are: Transportation Mix · · · · · · Component warehouses: hold raw materials at or near the manufacturing unit or the consumer markets. Finished goods warehouses: hold goods to balance the time variation between the production schedule and demand. documentation.1. which holds goods from one firm or many firms but for a common customer. 41 . Order picking: process of removing items from storage to meet specific demand. just before sale. Distribution warehouses: a centrally located point. accumulating orders for outbound carrier. pick and deliver small orders for individual consumers.16. RECEIVING PUT AWAY STORAGE CROSS-DOCK FLOWS SUPPORT FUNCTIONS SHIPPING SORT & ACCUMULATE ORDER PICKING Figure 16. and loading of trucks. Work in process: hold partially manufactured assemblies at various points or near the assembly lines. weighing. Local warehouses: to shorten the transportation distances and create rapid response to customer demands. which include checking for completeness.6.1: Ware housing Activities (Adapted from Frazelle EH (2004) In a nutshell the various functions are: · · · · · · · · Receiving: a collection of activities involving receipt of materials.

Some of these are as listed below. installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months. g) A warehouse in relation to a person providing storage facilities for others. i) An installation or structure used for the exploration of natural resources provided that the activities continue for more than 183 days. or for other activities which have a preparatory or auxiliary character. 42 . f) A mine. India and Netherlands Article 5 Permanent Establishment 1) For the purposes of this Convention.7 WAREHOUSE JURISDICTION The dictionary meaning of the word jurisdiction is ‘the area over which the legal authority of a court or other institution extends’. for scientific research. e) A workshop. d) The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information. an oil or gas well. for the enterprise. for the supply of information. 4) Notwithstanding the preceding provisions of this Article. e) The maintenance of a fixed place of business solely for the purpose of advertising. Be it warehouse or any immovable property they are governed by a set of taxable laws governed by the individual state and differs from one country to the other. the term “permanent establishment” shall be deemed not to include: a) The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise. the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. d) A factory. a quarry or any other place of extraction of natural resources. 2) The term “permanent establishment” includes especially: a) A place of management. for the enterprise. c) The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise. b) The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display. and as a supply manager you will have to be in the know of these aspects in order to avoid legal hassles at a later time.Distribution Network Planning 16. At times the countries get into a joint tie/ league with each other in order to facilitate easy import and export activities and warehouse activities. c) An office. 3) A building site or construction. b) A branch. These are once again very academic in nature. h) A premises used as a sales outlet.

or b) He has no such authority. a quarry or any other place of extraction of natural resources. the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. e) A workshop. but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. a construction.f) The maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e). 3) A building site. the term “permanent establishment” shall be deemed not to include. including an installation or structure used for the exploration or exploitation of natural resources. provided that such persons are acting in the ordinary course of their business.is acting in one of the States on behalf of an enterprise of the other State. and g) A warehouse. where a person . shall not of itself constitute either company a permanent establishment of the other.other than an agent of an independent status to whom paragraph 6 applies . in relation to a person providing storage facilities for others. - 43 . Transportation Mix 5) Notwithstanding the provisions of paragraphs 1 and 2. a) A place of management. With South Africa & India Article 5: Permanent establishment 1) For the purposes of this agreement. unless his activities are limited to the purchase of goods or merchandise for the enterprise. 2) The term “permanent establishment” includes especially. d) A factory. f) A mine. if a) He has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise. that enterprise shall be deemed to have a permanent establishment in the first-mentioned State. 4) Notwithstanding the preceding provisions of this Article. However. when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise. an oil or gas well. 7) The fact that a company which is a resident of one of the States controls or is controlled by a company which is a resident of the other State. 6) An enterprise of one of the States shall not be deemed to have a permanent establishment in the other State merely because it carries on business in that other State through a broker. c) An office. installation or assembly project or any supervisory activity in connection with such site or project constitutes a permanent establishment only if it lasts more than six months. general commission agent or any other agent of an independent status. b) A branch. he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm’s-length conditions. provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. or which carries on business in that other State (whether through a permanent establishment or otherwise).

b) The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage. e) The maintenance of a fixed place of business solely for the purposes of carrying on.Distribution Network Planning a) The use of facilities solely for the purpose of storage. provided that such persons are acting in the ordinary course of their business. Article 6: Income from immovable property 1) Income derived by a resident of a Contracting State from immovable property. 2) The term “immovable property” shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. 44 . rights to which the provisions of the general law respecting landed property apply. 3) The provisions of paragraphs 1 shall apply to income derived from the direct use. or which carries on business in that other State (whether through a permanent establishment or otherwise). Ships. in a Contracting State an authority to conclude contracts in the name of the enterprise. where a person other than an agent of an independent status to whom paragraph 6 applies is acting on behalf of an enterprise and has. 6) An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker. 5) Notwithstanding the provisions of paragraphs 1 and 2. The term shall in any case include property accessory to immovable property. that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise. if exercised through a fixed place of business. situated in the other Contracting State may be taxed in that other State. sources and other natural resources. boats and aircraft shall not be regarded as immovable property. display or delivery. for the enterprise. or the right to work. shall not of itself constitute either company a permanent establishment of the other. general commission agent or any other agent of an independent status. for the enterprise. provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 7) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State. livestock and equipment used in agriculture and forestry. and f) The maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e). display or delivery of goods or merchandise belonging to the enterprise. usufruct of immovable property and rights to variable or fixed payments as consideration for the working of. 4) The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services. including income from agriculture or forestry. or for collecting information. unless the activities of such person are limited to those mentioned in paragraph 4 which. d) The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise. c) The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise. mineral deposits. letting or use in any other form of immovable property. would not make this fixed place of business a permanent establishment under the provisions of that paragraph. and habitually exercises. any other activity of a preparatory or auxiliary character.

interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of ships or aircraft and the provisions of Article 11 shall not apply in relation to such interest. be such that the result shall be in accordance with the principles contained in this article. if such profits are incidental to the profits to which the provisions of paragraph 1 apply. whether in the Contracting State in which the permanent establishment is situated or elsewhere. there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3) For the purposes of this Article. nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary. the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. then the provisions of those Articles shall not be affected by the provisions of this Article.Article 7: Business profits 1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. including executive and general administrative expenses so incurred. profits from the operation of ships aircraft in international traffic shall include: a) Profits derived from the rental on a bare boat basis of ships or aircraft used in international traffic. b) Profits derived from the use or rental of containers. 3) In determining the profits of a permanent establishment. 6) For the purposes of the preceding paragraphs. however. Article 8: Shipping and air transport 1) Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein. 7) Where profits include items of income. 4) As it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts. 2) For the purposes of this Article. the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 5) No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. which are dealt with separately in other Articles of this Agreement. Transportation Mix 45 . 4) The provisions of paragraph 1 shall also apply to profits from the participation in a pool. in accordance with and subject to the limitations prescribed in the taxation laws in that Contracting State. If the enterprise carries on business as aforesaid. there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment. 2) Subject to the provisions of paragraph 3. a joint business or an international operating agency. The method of apportionment adopted shall.

Therefore. they are in need of protection. (including Bidi Making) manufacturing in the State Sphere. However. They notify the minimum wages for bidi workers within their jurisdiction. may be included in the profits of that enterprise and taxed accordingly. but for those conditions. Therefore. the rates of minimum wages for Bidi Rollers are fixed on a piece rate basis (number of bidis rolled).8 WAGES.Distribution Network Planning Article 9: Associated enterprises 1) Where. fixation and revision of minimum wages is of no consequence unless these are actually paid to them. Although the Act does not provide for registration of establishments. the traditional measure being per thousand bidis. This will help you in negotiating any kind of litigations at a later date. The Act empowers both the Central and the State Governments to fix and revise the minimum rates of wages in the Scheduled Employments falling under their respective jurisdictions. have not so accrued. yet it is applicable to employments where the workers are particularly vulnerable to exploitation. illiteracy and lack of bargaining power. fall under the Scheduled Employment “Tobacco”. or b) The same persons participate directly or indirectly in the management. then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits if that other State considers the adjustment justified. but. due regard shall be had to the other provisions of this Agreement and the competent authorities of the Contracting States shall if necessary consult each other. due to ignorance. In Madhya Pradesh. As a responsible supply chain manager you must be aware of the rules and regulations in handling the wages of workers and keep yourself updated on this count regularly. 1948 rests with the State Governments. control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State. control or capital of an enterprise of the other Contracting State.The problems of the bidi workers continue to be a 46 . the responsibility for implementation of the provisions of the Minimum Wages Act. by reason of those conditions. EARNINGS AND HOURS OF WORK A discussion on daily wagers is very important since such activities are very common in SCM and warehouse handling. In determining such adjustment. then any profits which would. The workers in bidi industry are scattered over large areas and do not have collective bargaining power. 1948 is both a protective and beneficial legislation guaranteeing the payment of minimum rates of wages to the workers in the various Scheduled Employments scattered over different parts of the country. The bidi making establishments. 2) Where a Contracting State includes in the profits of an enterprise of that State – and taxes accordingly – profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises. The Minimum Wages Act. a) An enterprise of a Contracting State participates directly or indirectly in the management. and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises. have accrued to one of the enterprises. poverty. 16.

01 per thousand bundles Rs.93 47 . 0.The Regional Labor Ministers Conference held during 199495 had endorsed the recommendations of the Ministry of Labor for the Constitution of a Tripartite Standardization and District Level Vigilance Committee and had made the following recommendations in respect of bidi workers:- Transportation Mix · · · · The minimum quantity of raw material to be issued should be 800 grams of tendu leaf of standard average quality and 300 grams of tobacco for 1000 bidis of standard size. 1. Government of India.5 percent bidis of sub-standard quality and ensure that employer/Contractor supplies tendu leaf of the optimum quality to the workers.76 per thousand bundles Rs. The wage loss due to rejection should not be more than 2. The minimum wages applicable to the bidi workers at the time of the Study were notified by the State Government of Madhya Pradesh as provided under Section 3(1)(b) and Section 5 of the Minimum Wages Act. 1/9/A/5/97/32759-33288 dated 12-102000. contractors and agents in matters of rejection of finished products.) as well as the violation of the provisions of the Bidi and Cigar Workers (Conditions of Employment) Act.5. Alternatively. which was in force at the time of the study. p. Puda Making etc. * Prescribed rates of Minimum Wages ‘Tobacco (including bidi making) Manufactories’ is a Scheduled Employment originally included in Part-I of the Schedule appended to the Act. Minimum Wages were fixed at Re.26 per thousand bundles Rs. the Minimum Wages Act. Ministry of Labour. 11. 1948.65 per thousand bundles Rs. 22. These wages were revised to Rs. 15. issue of inadequate quantity and poor quality of raw material (tendu leaves.37 per thousand bidis. 2000 vide notification No. Labeling on both sides of bundles Wrapping and Labeling Thin paper labeling Thin paper sticking Labeling Puda Making Rs. 2.5 percent instead of 5 percent.Since then they have been revised several times. had become effective from 1st October. pertaining to rejection of not more than 2.4.17(per thousand bidis) Source: Annual Report 1999-2000.00-2.85 per thousand bundles Rs.62 to Rs. thread.25 for the first time in 1966. 1966. The revised rates of minimum wages applicable during the period of study are given below: Table 16. The State Governments as well as Welfare Commissioners have been requested to give wide publicity to the statutory provisions of the Bidi and Cigar Workers (Conditions of Employment) Act.prior to 1953. 19.The minimum rates of wages for various categories of employees in Tobacco (including Bidi Making) Manufactories appearing in Part I of the Schedule were linked to the Consumer Price Index Numbers (Industrial Workers). tobacco.cause of concern for the labor administrators and enforcement authorities as the workers often complain of the unfair treatment at the hands of manufacturers. etc. 1966. The latest wage revision.00 per thousand bundles Minimum Wages ( in Rs. 1948 and the Equal Remuneration Act. the rejected bidis should be returned to workers after deducting proportionate cost of tendu leaf and tobacco issued to them at the rates to be fixed by the State Governments from time to time alongwith wages.) 36. 1976.3: Prescribed Minimum Rates of Wages for Piece Rated Employees Class of Employees 1) 2) a) i) ii) b) i) ii) iii) iv) Bidi Rolling Wrapping/Packing/Labeling Pasting of Slips on Bidi bundles Labeling.

Accountant. Semi-Skilled 3... an employee shall not be entitled to the guaranteed wages. Billman. Clerk Loader. 2.178. Typist. Puda Maker and Chowkidar. 81.95 N. Store Keeper. Semi-skilled and Unskilled workers. Wherever the prevailing wages are higher. Unskilled Driver (Heavy Vehicle). The occupations’. 1. Cashier. The revised rates of minimum wages are subject to the following conditions:- · · · · · · The variable dearness allowances shall be calculated on 1st October of every year on the basis of the average indices for twelve months i.) for time rated employees were as below: Sl. An employee shall be entitled to a guaranteed minimum wage of Rs.05 per lakh bidis Rs. Head Clerk. epidemic etc. which are not under his control. 48 .) 76.e.2001.4): Table 16.09.Distribution Network Planning c) i) ii) iii) Wrapping on 1000 bundle (each bundle of 25 bidis) Wrapping of Horizontal & Vertical Strips Wrapping/Pasting of paper Wrapping and Pasting of Trade Mark Rs. Monthly Wages (Rs. 68.75 70. In case an employer fails to supply raw material due to certain conditions like fire. 81.32 63. Godown keeper Sorter/Checker.80 Daily Wages (Rs.D. July to June of the preceding year.4 : Workers in BidiMaking Industry.The wages includes the variable dearness allowance. The revised rates of daily wages are to be worked out by dividing the monthly rates by 26 days.) 1995. Skill Category Skilled Semi-Skilled Unskilled. Bhattiwala.30 1662. Un-loader. Munim.35 per lakh bidis Rs. 3. the revised wages will not have adverse effect on any employee in any case and the higher rates shall continue to be paid. These wages have been linked to 1206 points of the Labour Bureau Series of AllIndia Consumer Price Index Numbers for Industrial Workers (Base 1960=100). distress. 1. Driver (Light Vehicle).. An employee shall not be entitled to the guaranteed wages if he fails to make full use of the raw material supplied to him while the raw material so supplied is sufficient for rolling 5600 bidis per week.00 in case the employer fails to supply sufficient quantity of raw material for rolling 5600 bidis per week. which comprise these three skill categories.B. No.44 1828.The Variable Dearness Allowance (VDA) is payable at the rate of 1 paisa per point for an increase of 930 points over 1206 points upto 30.05 per lakh bidis In Bidi making industry all the time-rated (monthly/daily paid) workers other than the above-mentioned piece rated categories have been classified into three broad categories as Skilled. Prescribed rates of Minimum Wages (including V. Skilled 2. The guaranteed wage will include the actual number of bidis made by an employee during a week from the raw material supplied to him. are as under (Table 16.A.

‘penny wise and poundfoolish’. some of the most important ones are as follows: Appointed day means the date on which the Authority is established under the act. Authority means the established under this Act. Let us see them as we progress through the unit. either during storage or transit. thanks to the various insurance companies that have reached out to the environment in a big way. The Authority shall be a 49 . to regulate. the Insurance Regulatory and Develop is to be constituted. The act extends to the whole of India and will come into force on such date as the Central Government may. ‘a stitch in time saves nine’ is very important for us to follow in letter and spirit. 1999 is an act to provide for the establishment of an Authority to protect the interests of holders of insurance policies. by notification in the Official Gazette specify. Words and expressions used and not defined in this Act but defined in the Insurance Act. 1938. because a material/product that is insured comes under the purview of Insurance act of 1938 (we will see later) and that enables the consignor to claim the cost of the product in the event of any damage to the product. 1972 shall have the meanings respectively assigned to them in those Acts. the risk covered and the benefits accrued of insurance. independent and autonomous Insurance Regulatory Authority was felt. Why should we insure? Very simple indeed. unless you believe in. 1938 or the Life Insurance Corporation Act. Insurance Regulatory Authority Establishment and incorporation of Authority With effect from such date as the Central Government may. 1938 had provided for setting up of the Controller of Insurance to act as a strong and powerful supervisory and regulatory authority for insurance. the then Government constituted through a Government resolution an Interim Insurance Regulatory Authority pending the enactment of a comprehensive legislation. Different dates may be appointed for different provisions of this Act. the role of Controller of Insurance diminished considerably in significance since the Government owned the insurance companies. The Insurance Act. Interim Insurance Regulatory Authority means the Insurance Regulatory Authority set up by the Central Government through Resolution No. by notification. promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act. The age-old adage. With the opening up of the insurance industry to the private sector. Post nationalization. the need for a strong. The Insurance Regulatory and Development Authority Act. 17(2)/ 94-lns-V dated the 23rd January. 1956 or the General Insurance Business (Nationalization) Act. 1972 to end the monopoly of the Life Insurance Corporation of India (for life insurance business) and General Insurance Corporation and its subsidiaries (for general insurance business). 1996. which may occur. The Act has defined certain terms. 1956 and the General insurance Business (Nationalization) Act. As the enacting of legislation would have taken time.9 DOCUMENTATION: INSURANCE & SALES TAX Everything under the sun can be insured today. the Life Insurance Corporation Act. appoint. Every supply chain manager should therefore understand the nuances of insurance.Transportation Mix 16. Risk factor has enhanced tremendously with the turn of the century and therefore remains covered under the protected wings of insurance and achieve the maximum benefit that is available to you and your company.

c) not more than four part-time members. The head office of the Authority shall be at such place as the Central Government may decide from time to time and it may establish offices at other places in India. general insurance or actuarial science respectively. e) has so abused his position as to render his continuation in office detrimental to the public interest. b) has become physically or mentally incapable of acting as a member. namely a) A Chairperson. or at any time has been. No vehicle can be used without insurance cover. general insurance. administration or any other discipline which would. no person shall hold office as such Chairperson after he has attained the age of sixty-five years and no person shall hold office as such whole-time member after he has attained the age of sixty-two years. d) has acquired such financial or other interest as is likely to affect prejudicially his functions as a member. and to contract and can be sue or be sued in its own name. be useful to the Authority: The Central Government while appointing the Chairperson and the whole-time members must ensure that at least one person each is a person having knowledge or experience in life insurance. having perpetual succession and a common seal with power. Composition of Authority The Authority shall consist of the following members. economics. A part-time member shall hold office for a term not exceeding five years from the date on which he enters upon his office. b) not more than five whole-time members. Removal from Office The Central Government may remove from office any member who: a) is. law. c) has been convicted of any offence which. integrity and standing who have knowledge or experience in life insurance. to be appointed by the Central Government from amongst persons of ability. However. adjudged as insolvent. A member may: a) Relinquish his office by giving in writing to the Central Government notice of not less than three months. in the opinion of the Central Government. Tenure of office of Chairperson and other members The Chairperson and every other whole-time member shall hold office for a term of five years from the date on which he enters upon his office and shall be eligible for reappointment. No such member shall be removed under clause (d) or clause (e) unless he has been given a reasonable opportunity of being heard in the matter. 50 . Use of the vehicle without insurance cover is a penal offence. actuarial science. involves moral turpitude.Distribution Network Planning body corporate. hold and dispose of property. to acquire. accountancy. Comprehensive Policy This insurance policy also known as a Comprehensive policy covers all the liabilities of the insured vehicle under the Motor Insurance Act. or be removed from his office in accordance with the following provisions. subject to the provisions of this Act. finance. in the opinion of the Central Government.

The limits for various classes of vehicles are as follows: · · · Motor cycles/Scooters: Rs. i. Compensation Offered This insurance policy would provide compensation for the motor vehicle owners from these liabilities unlimited liability towards bodily · · · · Injury to any third party. Burglary. For motorcycles and commercial vehicles. 51 . This insurance policy also known as the Act Only policy covers the act liability of the insured vehicle that forms a compulsory requirement of the Motor Insurance Act. Riot. malicious and terrorism damage. rail. Liability towards employees of the owner of the insured vehicle while travelling or using it. the insurance company is also not liable for damages to the towed vehicle or any property being conveyed thereby. strike.000/. This section covers third party liabilities that the insured vehicle or the one being towed may incur as a result of an accident. Accidental External Means. Housebreaking and Theft. lift. Flood. against bodily injury to the extent required by the Workmen’s Compensation Act. This is provided the towed vehicle is not towed for reward/ remuneration. inland waterway.6. limited to Rs. the risks of riot. cover is also available for protection. however. in respect of any one accident.This insurance policy protects the motor vehicle owners from these liabilities: Transportation Mix · · · · · · · · Fire. earthquake. Explosion. In addition to these. flood and storm can be opted out of with a consequent discount in premium. Earthquake.only. for all classes of vehicles. Section II covers the liabilities towards third parties. Further. the risk of Frost Damage is also covered. Cyclone. Liability towards third party property damage.2500 Motor Vehicle Insurance Act This insurance policy is essential for all motor vehicle owners since it protects them from legal liabilities that might arise during their vehicle operation. Malicious and Terrorism Damage. Hurricane. If a motor vehicle is disabled as a result of loss or damage due to the perils mentioned above. For commercial vehicles. Storm. Typhoon. Self-Ignition and Lightning. No vehicle can be used without this insurance cover and use of the vehicle without this insurance cover is a penal offence. elevator or air. liabilities of bodily injuries and property damage. Unlimited liability towards bodily injury to passengers of the vehicle.300 Private Car & Taxies: Rs. Transit by road. Inundation. removal costs and authorization of repairs. Strike.e. Tempest. the insurance company bears the reasonable cost of protection and removal to the nearest repairer and the cost of redelivery to the owner/insured subject to a maximum limit. an additional Section III covers the vehicle while it is being used for the purpose of towing disabled vehicles. Hailstorm. From the above coverage.1500 Other Commercial Vehicles: Rs.

This section covers third party liabilities that the insured vehicle or the one being towed may incur as a result of an accident. Further. the insurance company bears the reasonable cost of protection and removal to the nearest repairer and the cost of redelivery to the owner/insured subject to a maximum limit. Unlimited liability towards bodily injury to passengers of the vehicle.only.000/. Typhoon. earthquake. rail. flood and storm can be opted out of with a consequent discount in premium. From the above coverage. malicious and terrorism damage. elevator or air. Flood. Liability towards third party property damage. the insurance company is also not liable for damages to the towed vehicle or any property being conveyed thereby.10 INTRODUCTION TO SALES TAX Sales tax is a tax on sale of goods.Distribution Network Planning Risks Covered This insurance policy protects the motor vehicle owners from the risks of: · · · · · · · · Fire.300 Private Car & Taxies: Rs.1500 Other Commercial Vehicles: Rs. Riot. inland waterway. For motorcycles and commercial vehicles.6. Inundation. i. Storm. The limits for various classes of vehicles are as follows: · · · Motor cycles/Scooters: Rs.2500 16. If a motor vehicle is disabled as a result of loss or damage due to the perils mentioned above. Strike. Housebreaking and Theft. This is provided the towed vehicle is not towed for reward/ remuneration. Accidental External Means. The liability to pay sales tax arises on making sales of goods. Transit by road. Earthquake. Tempest. Self-Ignition and Lightning. in respect of any one accident. removal costs and authorization of repairs.e. liabilities of bodily injuries and property damage. against bodily injury to the extent required by the Workmen’s Compensation Act. the risks of riot. Compensation Offered This insurance policy would provide compensation for the motor vehicle owners from these liabilities Unlimited liability towards bodily · · · · Injury to any third party. cover is also available for protection. In addition to these. Cyclone. For commercial vehicles. Burglary. for all classes of vehicles. an additional Section III covers the vehicle while it is being used for the purpose of towing disabled vehicles. however. Section II covers the liabilities towards third parties. the law for levying sales tax is provided in the Central Sales 52 . limited to Rs. Liability towards employees of the owner of the insured vehicle while travelling or using it. In India. Malicious and Terrorism Damage. Explosion. Hailstorm. lift. strike. the risk of Frost Damage is also covered. Hurricane.

being a Central Act passed by the Parliament regulates and provides for levy of sales tax on the sale and purchase of goods made in the course of interstate trade or commerce.. Definitions It is essential to understand the meaning of certain terms used in the CST Act. adventure or concern. co-operative society or other society. However. This act was passed by the Parliament and applies to the entire country. remuneration or for other valuable consideration and includes: - · 3 A local authority. whether or not such trade. 1966. manufacture.g. commerce. sales within the state Sales during import and export Inter-state sales The provisions of the CST Act apply only in respect of inter-state sales and not intrastate sales or import or export sales. manufacture. manufacture. pulses. collection and distribution of taxes on sales of goods in the course of inter-state trade or commerce. 4) To specify the restrictions and conditions in respect of State laws which impose taxes on the sale or purchase of such goods of special importance. The CST Act. etc. club. Similarly. Sales can broadly be classified into 3 categories Transportation Mix · · · Intra-state sales i. crude oil. firm. Accordingly.Tax Act. e. Hindu Undivided Family (HUF) or other Association of Persons (AOP) which carries on such business. in the State of Maharashtra. Business includes · Any trade. manufacture or any adventure or concern in the nature of trade. certain terms have been defined in the Act itself and the meaning of these terms will be as per the definition only and not as per the ordinary meaning of the term. commerce. 3) To declare certain goods to be of special importance in interstate trade or commerce. where a particular term has not been defined. 1959 provides for the levy of sales tax on sales made within the State of Maharashtra. commerce or manufacture. The main objects of this act are: -3 1) To formulate the principles for determining as to when sale or purchase of goods takes place (i) in the course of inter-state trade or commerce or (ii) outside a state or (iii) in the course of import into or export from India. · Dealer means any person who carries on. adventure or concern. company.salestax. 2) To provide for the levy. adventure or concern is carried out with the motive to make gain or profit and whether or not. Any transaction in connection with or incidental or ancillary to such trade. commerce. The sales tax law of each individual State regulates sales and purchases made within a State. However.e. Generally the CST Act does not deal with sales made intra-state. the business of buying. 53 Shilpa Pandey in Indian sales tax site downloaded from the website www. for cash or for deferred payment or for commission. body corporate. sugar. whether regularly or otherwise. the Bombay Sales Tax Act. other States will also have their own sales tax laws for levying sales tax on intra-state sales or purchases of goods. For the purposes of the Act. any gain or profit accrues from such trade.com . in respect of certain declared goods oil seeds. commerce. selling. the CST Act imposes restrictions on the powers of State Governments to levy sales tax even in respect of intra-state sales. directly or indirectly. supplying or distributing goods. it will have the same meaning as ordinarily understood.

commission agent or any other mercantile agent. whether or not in the course of business buys. supplying or distributing goods belonging to any principal. who carries on the business of buying. · Sale means any transfer of any property or goods from one person to another for cash or for deferred payment or for any other valuable consideration and includes the transfer of goods on hire purchase or other system of payment by installments but does not include a mortgage or hypothecation or charge or pledge on goods. Accordingly. which are often called. 54 . whether disclosed or not. An auctioneer who carries on the business of selling or auctioning goods belonging to any principal.Distribution Network Planning · A broker. it does not include freight or delivery cost or cost of installation where such cost is separately charged. selling. by whatever name called and whether of the same description as herein before mentioned or not. However. The important ones among them are: Cereals Coal in all forms excluding charcoal Cotton in un-manufactured form Cotton fabrics and cotton yarn Crude oil Hides and skin Iron and steel Jute Oil seeds Pulses Man made fabrics Sugar Un-manufactured tobacco Woven fabrics of wool. for cash or for deferred payment or for commission. A government. directly or otherwise. sells or supplies or distributes goods. Declared Goods means goods declared under section 14 to be of special importance in inter-state trade or commerce. whether disclosed or not and whether offers of the intending purchaser is accepted by him or by the principal or by the nominee of the principal. Sale Price means an amount payable to a dealer as consideration for the sale of any good less any sum allowed as cash discount according to the practices normally prevailing in the trade but inclusive of any sum charged for anything done by the dealer in respect of goods at the time of or before the delivery thereof. etc. remuneration or other valuable consideration shall except in relation to any sale. declared goods. consignments to agents or transfers of goods to branch or other offices do not amount to sale for the purposes of the CST Act. supply or distribution of surplus. In section 14 there is a list of goods of special importance. unserviceable or old stores or materials or waste products or absolute or discarded machinery or parts or accessories thereof is deemed to be a dealer for the purposes of this Act. The CST Act has imposed certain restrictions on the powers of state government to impose tax on declared goods inside the state.

Y sells the goods to Z of Mumbai and transfers the document of title (railway receipt) during their movement from Delhi to the state of Maharashtra. it shall not be deemed to be a movement of goods from one state to another by reason merely of the fact that in the course of such movements. This is inter state sales since documents of title are transferred while the goods are being moved from one state to another. Explanation 2 Where that movement of goods commences and terminates in the same state. Transportation Mix · · In case of specific or ascertained goods. tax is leviable only on sales in the course of inter-state trade or commerce. will be treated as taking place outside the state. It is necessary to determine the state in which the sale or purchase of goods takes place since that becomes the appropriate state for the purpose of levying and collecting central sales tax. or 55 . The purpose of determining whether the sales have taken place within the state or outside the state is very important for levying central sales tax since under the CST Act. X of Mumbai sells and dispatches goods to Y of Calcutta. at the time the contract of sale is made (Specific or ascertained goods means goods which are identified and agreed upon at the time when contract of (sale is made) and In case of unascertained or future goods. An Illustration X of Ambala sells goods to Y of Bangalore in Ambala. goods pass through the territory of any other state. whether the ascent of the other party is prior or subsequent to such appropriation. Explanation 1 Where the goods are delivered to a carrier or other bailer for transmission. X of Delhi sends goods by railways to Y of Mumbai.(eg agreement to buy mangoes which are still growing on the trees at a future date ) Explanation: Where there is a single contract of sale or purchase of goods situated at one or more places the provisions of this subsection shall apply as if there were separate contracts in respect of the goods at each of such places.Sale or purchase in the course of inter-state trade or commerce A sale or purchase of goods shall be deemed to take place in the course on interstate trade or commerce if the sale or purchase occasion’s movement of goods from one state to another or is effected by the transfer of documents of title to the goods during their movement from one state to another. Such sale is not an inter-state sale since the goods do not move from one state to another. the movement of goods shall. for the purpose of clause 2 above. Inter-state sales involve two or more states. which is not within the state as per the above provisions. be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailer. A sale or purchase of goods. Sale or purchase inside the state A sale or purchase of goods shall be deemed to take place inside the state if the goods are within the state. This is inter state sales of goods since goods move from one state to another under the contract of sales. at the time of appropriation of contract of sale by the seller or by the buyer. Sale or purchase of goods in the course of import or export A sale or purchase of goods shall be deemed to take place in the course of exports of goods out of the territory of India only if:1) The sale or purchase results in such exports.

which are levied: Basic duty: This is the basic duty levied under the Central Excise Act. wherein excisable goods other than salt are manufactured or wherein any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on. If the bill is not passed within six months of introduction in Parliament. the following are the various types of duties.Distribution Network Planning 2) Is effected by the transfer of documents of title after the goods have crossed the customs of India. Therefore an exemption from basic duty does not mean that exemption from special duty or additional duty has also been granted unless there is an express provision to that effect regarding the exemption in the notification. the notification ceases to have force but the action already undertaken under the notification remains valid. Such duty may be cancelled or varied by notification. The basic conditions to be satisfied by any goods to be called excisable goods are:· · The goods must be movable.e. Such notification must also be placed before Parliament for approval as above. The notification for levy of such duties must be introduced in the Parliament in the next session by way of a bill or in the same session. Manufacture includes any process: · 56 Incidental or ancillary to the completion of a manufactured product. Additional Duty in lieu of Sales Tax: It can be charged on all goods by the central government to counter balance exemptions from sales tax granted by various State Governments to the detriment of industries in other States. Important definitions Excisable Goods means goods specified in the schedule to the Central Tariff Act. The goods must be marketable i. 1985 as being subject to a duty of excise. In other words. Additional Duty on specified items under the Act: If the Tariff Commission set up by law recommends that in order to protect the interests of industry. Types of excise duties Under the excise laws. or 2) Is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India. saleable in the market as such goods. if the Parliament is in session. Such duty will be payable upto the date specified in the notification. Actual sale of goods in the market is not necessary because excise duty is chargeable on manufacture and not on sales. the Central Government may levy additional duties at the rate recommended on specified goods. location of goods when contract of sales is made is very important for determining where the sale took place. It is noteworthy that “basic excise duty” is different from “special excise duty” or “additional duty of excise”. The goods must be specified in the Central Excise Tariff Act · Factory means any premises including the precincts thereof. and . A sale or purchase of goods shall be deemed to take place in the course of import of goods into the territory of India only if:1) The sale or purchase either results into such imports. Special excise duty: This special duty is levied under special circumstances where the levy of such additional duty is justifiable or found necessary to protect other industries.

it is collected only on removable of goods from the factory. for next 1. it is necessary to find out.000 kg it is Rs750 and for production in excess. for example Rs10 per unit manufactured. 000. it is necessary to quantify the amount of excise duty payable. 1985 as amounting to manufacture and the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labor in the production of manufacture of excisable goods but also any person who engages in their production and manufacture on his own account such as on contract basis or job work basis.000 kg manufactured. For example excise duty could be 10 per cent of the cost of goods. Each section is divided into chapters and each chapter is sub-divided into groups and sub-groups of excisable goods.000 ton. Basis of charge and classification Excise Duty is a tax on manufacture of goods but for the sake of administrative convenience. Compounded Duty: Under this system. it is Rs1. benefit of exemptions or concessions may be claimed under various notifications if the conditions specified in the notification are satisfied. This tariff schedule is based on the internationally followed product coding system “Harmonised System of Nonclementure” (HSN) Excise Duty is payable at the rate specified in CETA against the sub-group heading under which the product falls. 1985 (CETA) classifies all the goods under 20 sections and 96 chapters. Transportation Mix Once manufacture of goods is complete. whatever be the number of units produced. 57 .· Which is specified in relation to any goods in the section or Chapter note of the Schedule to the Central Excise Tariff Act. However. Each of these sections is related to a particular class of goods. section 2 on vegetable products. Thus for the first 1. The Central Excise Tariff Act. Most of the excise duty is levied on ad-valorem basis. Duty is levied on productive capacity irrespective of the actual production. a particular process may not actually amount to manufacture but if it has been specified that it amount to manufacture in the Schedule to the CETA. excise duty is Rs50. Like repackaging of goods from bulk packing to small packing units does not normally amount to manufacture. Since the rates of duty for each subgroup are given in CETA the categorization of goods into sub-group headings is known as classification of goods. For this purpose. For example if a unit has installed capacity to manufacture 10. whether the goods are sold or self-consumed. Specific Duty Under this system. Excise duty may be levied in any of the following manner:Ad-valorem Duty: is levied as a percentage of value of the commodity manufactured. However. so on and so forth. Excise duty does not depend on the end use of the goods. Sometimes. excise duty is payable. repackaging from bulk packing to retail pack of pan masala will amount to manufacture on which excise duty has to be paid. Thus section 1 is on animal products. excise duty is Rs500. a specific rate of duty is fixed per unit rate or per quantity item of the product manufactured. Slab System: Under this system.000 kg. duty varies with the change of the value from one slab to another. under which particular sub-group heading of CETA do the goods in question actually fall. Once the liability to pay excise duty has been established on manufacture of excisable goods. it will be deemed to be manufacture and all the provisions applicable to manufacture will apply to such process. 000 for every 1.

such fixed price is taken as the assessable value. Section 4 of the Central Excise Act.e. packing for making the product actually saleable in the market are part of the assessable value. suitable adjustments must be done in order to arrive at the assessable value. suitable adjustments for other expenses such as freight and insurance of goods while in transit from the place of removal to the place of sale must be made. is not to be included in the value of the goods for the purpose of calculation of excise duty. directly or indirectly in the business of each other and includes a holding company. the nearest equivalent price will be determined in the manner provided in the Central Excise Valuation Rules. If goods are sold at different wholesale prices to different classes of buyer (not being related persons). The following are the provisions in this connection:- · The value of excisable goods is the normal price of goods. at a percentage of value of goods. If the normal price of goods is not ascertainable because such goods are not sold or for any other reason. If the buyer is a related person and this relationship has affected the price for sale. industrial consumers.Distribution Network Planning Valuation Since most of the excise duty is levied on ad-valorem basis i. the value of goods must be determined. 1944 provides for the determination of the value of goods for excise purposes.e. If the assessee arranges that he does not generally sell goods in the course of wholesale trade except to or through a related person. However the packing expense on secondary or special packing or on durable packs. Expenses incurred on primary packing i. 1975. the price at which such related person sells the goods is taken as assessable value. The price is the sole consideration for the sale. Therefore excisable goods can have more than one assessable value. such price less cost of transportation from the place of removal to the place of delivery will be take to be the assessable value. which are returnable by the buyer. if the sale is not for delivery at the time and place of removal of goods. care should be taken that the buyer is not a related person and the sale is for delivery at the time and place of removal. · · · · · · · · · 58 . each such wholesale price is deemed to be assessable value. subsidiary company a relative and a distributor of the assessee and any sub-distributor of such distributor. The normal price of goods means the price of goods at which the goods are normally sold in the course of wholesale trade. In determining the wholesale price. Local Authorities and other buyers who purchase their requirements in bulk and not on retail basis. suitable adjustments are to be made in arriving at the fair price. Governments. If excisable goods are consumed within the factory. the value of comparable goods produced by another person or the normal wholesale price of such goods will be treated as assessable value. However recent provisions have been introduced in the Central Excise Act wherein certain specified articles are to be taxed on the basis of the maximum retail price and not the wholesale price. If there are other considerations for the sale. Similarly. Related persons means a person who is so associated with the assessee that they have interest. If the price at the time of removal of goods from the factory is not known but it is dependent on the time and place of delivery. If goods are sold in the course of wholesale trade at prices fixed by law or at prices being the maximum chargeable under any law. Wholesale trade means sales to dealer.

The retail sale price includes all taxes.deduction 50% Chocolates . In this situation. The following excisable goods have been covered under this scheme: · · · · · · · · · · · · · Cosmetics and toilet preparations .000. For example ABC Ltd manufactures toys which are chargeable to excise @ 10 percent.000. In case law has specified a tariff rate. Transportation Mix · · · Valuation on retail price basis The Central Government may notify goods by publication in the OFFICIAL Gazette on which duty will be payable on the basis of the retail selling price. freight. payable on such goods and subject to rules made in this behalf.deduction . Excise duty is paid on the basis of normal price even if free samples are given. the assessable value must be calculated on the basis of such tariff rate. the maximum of such retail price will be considered.deduction 40% Footwear and parts .deduction 50% Paints & Varnishes . shaving preparations deduction 50% Glazed Tiles . beauty preparations.deduction 30% Detergents. delivery. sales tax and other taxes. Sales tax is included for the purpose of excise duty. etc.· The assessable value does not include the amount of excise duty. 2) The Central Government may permit reasonable deductions from the “retail sale price”. sales tax and other taxes payable on the goods for allowing such reductions. Soaps etc .deduction 35% Chocolates . if any.deduction 50% 59 .deduction 35% Perfumes and toilet waters. 18/97-CE(NT) and 19/97-CE(NT) both dt.deduction 50% Colour television sets . transport charges. 19-6-97 state that excise duty on “cosmetics and toilet preparations” will be payable on the basis of Maximum Retail Price printed on retail carton after allowing a deduction of 50%. 4) The “retail sale price” must be the maximum price at which excisable goods in packaged forms are sold to the ultimate consumer. Cereals. the trade discount allowed under normal wholesale business practices at the time of removal. excise duty is Rs1.deduction 30% Tooth powder & tooth paste . forwarding charges.100 ie 10 percent of Rs11.g. Sales tax is five percent. packing.deduction 40% Aerated waters . commission payable to dealers and all charges towards advertisement.35% Preparation of Malt. Flour. Notification Nos. The Central Government takes into account excise duty. 3) If more than one “retail sale price” is printed on the same packing. Starch or milk . 000 and profit margin is Rs1. Cost of production is Rs10. The following are the provisions in this connection: 1) The goods should be covered by the provisions of Standard of Weights and Measures Act. e.deduction 35% Pan masala in retail packs of 10 gms and more . 5) The price is the sole consideration for the sale.

High Speed Diesel In case of final products Tobacco and Manufactured Tobacco Products Matches other than pyrotechnics articles of heading number 36. When the scheme was first introduced. Special Boiling Spirits. Accordingly. For example. POR Ltd would have paid excise duty on components manufactured by it and it would have recovered that excise duty in its sales price from ABC Ltd. It is a scheme for allowing relief to final manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by them.54 & 55 of CETA other than cotton fabrics.04 of CETA Cinematograph Films Woven fabrics classified under chapter 52.deduction 40% Modvat Modvat stands for “Modified Value Added Tax”.deduction 40% Radio and transistors set . This amounts to multiple taxation. shavers. all excisable goods can take the benefit of the scheme except those mentioned below:In case of inputs · · · · · · · · · Tobacco and Manufactured Tobacco Products Matches other than pyrotechnics articles of heading number 36. man made fibre fabrics and filament yarn fabrics Advantages of Modvat 60 · · · It reduces the effects of taxation at multiple stages of manufacture. it is called value-added-tax (VAT) The modvat credit can be utilized towards payment of excise duty on the final product.deduction 40% Razor and Razor Blades . Now. The scheme was first introduced with effect from 1 March 1986.Distribution Network Planning · · · · · · Cooking appliances and plate warmers . ABC Ltd has to pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier. every intermediate manufacturer can take credit for the excise element on raw materials and components used by him in his manufacture. it covered only some excisable goods.deduction 40% Electric filament or discharge lamps . . Modvat is a scheme where ABC Ltd can take credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd. the scope of the modvat scheme has been enlarged from time to time under various notifications. Since it amounts to excise duty only on additions in value by each manufacturer at each stage. PQR Ltd. hair clippers with self contained electric motor . ABC Ltd is a manufacturer and it purchases certain components from PQR Ltd for use in manufacture. Under this scheme. It increases the tax base.deduction 40% Primary cells and primary batteries . From 16 March 1995. It facilitates duty free exports. Gradually. a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacture.04 of CETA Cinematograph Films Motor Spirits.deduction 40% Electromechanical domestic appliances.

equipments. The manufacturer can avail of the benefit of modvat credit on the final product to the extent of specified duties paid on the inputs. 61 . The modvat scheme may be made applicable in respect of certain goods or classes of goods with restrictions and conditions. No modvat is available in respect of capital goods not used within the factory of production. For the purposes of the modvat scheme. For example ABC Ltd purchased raw materials of Rs9. the benefit of modvat has been extended to excise duty paid on several capital goods like plant. apparatus. machinery. equipments. Modvat credit will not be available if the final good is not an excisable goods or is exempt from duty or is chargeable at nil rate of duty. used within the factory of production for manufacturing of final products or for any other purpose. plant. benefit of modvat will be available to the final goods manufactured by a unit in a Free Trade Zone or in an 100 percent EOU where no excise duty is payable on final goods which are exported. input includes:- · · · · Inputs which are manufactured and used within the factory of production in or in relation to the manufacture of the final product. However. Paints and packing material Inputs used as fuel Inputs used for the generation of electricity. As long as the capital goods are used in the factory of production. tools or appliances which are used for production or processing of any goods or for bringing about any change in any substance in or in relation to the manufacture of the final products. The modvat scheme applies to all finished excisable goods which have been notified by the Central Government in the Official Gazette for this purpose. Rule 57A This rule specifies the scope and applicability of the modvat. However. The benefit of modvat will be available only if the final product is an excisable goods.000 out of which excise duty will be Rs743 ie 9000/109*9) Rule 57D Modvat credit will not be denied or varied just because some of the raw materials and other inputs in respect of which excise has been paid become waste or scrap in the course of the manufacturing process. Packing materials of the cost of which is not included or had not been included during the preceding financial year in the assessable value of the final products.Disadvantages of Modvat Transportation Mix · · · It increases paper work and leads to multiplicity of records. · · · Packing Material in respect of which any exemption to the extent of excise duty payable on the value of packing material is being availed of for packaging of final products. credit of modvat will be allowed. on and from 1994-95. machinery. It leads to corruption. etc which are used for the manufacture of the finished product.900 inclusive of excise duty @ nine per cent and sales tax @ 10 percent. but does not include:- Machines. The modvat scheme is regulated by Rules 57A and 57U of the Central Excise Rules and the notifications issued thereunder. Modvat credit available will be Rs743 (Cost excluding sales tax will be Rs9. It leads to litigation.

the inputs are returned to the factory to be further used in the manufacture of final product. For manufacture of intermediate products necessary for the manufacture of final products provided that after such manufacture. The product may be intermediate so far as a particular process of manufacturing is concerned but may be a final product for another manufacturing process. The main manufacturer as well as job worker are required to maintain register giving details of materials sent. he with the excise authorities or in cash shall recover it from the manufacturer either from the balance maintained. For home consumption of inputs on payment of excise duty. Whether a product is an intermediate product or a final product depends on the facts and circumstances of each case. an intermediate product which is non-excisable or which is chargeable to excise at nil rate of duty or which is exempt from excise duty is created. Where the inputs are removed for home consumption. e. first molasses are produced from which alcohol is produced. the intermediate product is brought back to the factory to be further used in the manufacture of final product. in the manufacture of alcohol from sugarcane. the modvat claimed on the basis of those inputs will also be increased or reduced. Rule 57E If the excise duty paid on modvatable inputs is subsequently increased or refunded. challan number. modvat credit will not be denied or varied just because in the course of the manufacturing process of an excisable final product. excise duty must be paid. For home consumption of the intermediate products on payment of excise duty. For export of inputs under bond without payment of excise duty. molasses are an intermediate product.Distribution Network Planning Similarly. In such a situation. etc. the inputs may be removed from the factory for home consumption or for export under bond but only after intimating the Assistant Collector having jurisdiction over the factory and obtaining a dated acknowledgement of the same. The benefit of modvat will not be withdrawn if the intermediate product created is non-excisable or is chargeable to excise at nil rate of duty or is exempt from excise duty. If any amount is found due as a result of such increase. waste is not required to be returned in case appropriate excise duty is paid on the waste. However. For export of the intermediate products under bond without payment of excise duty. reconditioning or carrying out any other operation required for the manufacture of final product provided that after such work. as such or after they have been partially processed in the course of manufacture but only after intimating the Assistant Collector having jurisdiction over the factory and obtaining a dated acknowledgement of the same for any of the following purposes:- · For testing. which are charged to excise duty. · · · · · However. The waste generated in such operation must also be returned to the factory. Intermediate products are those products which get produced in the course of manufacture of the final product. repairs. Rule 57F The modvatable inputs must be used in or in relation to the manufacture of final products for which they have been brought into the factory. The modvatable inputs can also be removed from the factory to a place outside either. similar to a stock register showing 62 . as the case may be. refining. at least of an amount equal to the modvat credit claimed in respect of such inputs. The waste generated in such operation must also be returned to the factory.g.

etc. the goods must be accompanied with proof that duty has been paid on them. Modvat credit can be utilized for the following purposes: Transportation Mix · · · · Towards payment of excise duty on the final product. If the manufacturer does not have any excise liability. Modvat credit in respect of finished products exported without payment of duty (like goods manufactured by units in a Free Trade Zone or by 100 percent EOUs or by units in an Electronic Hardware Technology Park or by units in a Software Technology Park) may be utilized for discharging duty liability on similar final products cleared for home consumption. In other words. Be destroyed in the presence of a proper officer on application made by the manufacturer and if found unfit for further use or not worth the duty payable thereon provided the manufacturer informs the appropriate authorities at least 7 days in advance in writing as regards the quantity of waste and the date on which it is supposed to be destroyed and after complying with all the conditions as may be prescribed by the Collector of Central Excise in this behalf. There must not be complete manufacturing outside the factory by the job worker. If the job is not completed within 60 days. The Central Government has the power to direct that modvat credit on specified inputs may be allowed at such rate and subject to such conditions as it may direct without production of documents evidencing the payment of duty. He must file a declaration with the Assistant Collector of Central Excise having jurisdiction over his factory indicating the description of final product manufactured in the factory giving details of the inputs used for such purpose in each of the said products. Towards payment of excise duty on waste arising in the course of manufacture of final product. Rule 57G For availing the benefit of modvat. Any waste arising from processing of modvatable inputs in respect of which credit has been availed may:- · · · Be removed by payment of duty if such waste is produced in the factory. However. The manufacturer may avail of modvat credit only after he files the above declaration. goods returned by the job worker. Generally. The manufacturer may transfer or utilize modvat credit from one of his factories to another with approval from the Collector of Central Excise provided application is made by him in this behalf and all conditions imposed by the Collector are satisfied. the goods sent must be returned to the main manufacturer within 60 days.goods lying with the job worker. the modvat credit may be refunded to him provided he has not availed claimed drawback of duty under the Central Excise Rules. Form AR-1. He must also give detailed information required by the Assistant Collector of Central Excise and must obtain dated acknowledgement for such declaration. The benefit of this rule is available only if the main manufacturer does a certain amount of processing or value addition to make the final product. Towards payment of excise duty on inputs themselves where they are cleared for home consumption. In case of imported goods it must be accompanied with triplicate copy of Bill of Entry or Certificate of Appraisal by Custom posted in a foreign post office. the manufacturer must carry out certain procedures. the period may be extended for another 60 days. he cannot take credit unless the inputs are accompanied with an invoice prepared as per Central Excise Rules. Be removed without payment of duty where permitted by order of the government. 63 .

the Assistant Collector may allow the manufacture to take credit of duty paid on inputs. The Assistant Collector must see that the following conditions are satisfied before giving allowing such modvat credit: - · · · · Input in respect of which credit of duty is allowed are received in the factory not before six months from the date of filing declaration and not before date of eligibility for modvat credit. He must maintain stock account in the RG 23D. the Superintendent shall deface the documents and return them to the manufacturer.Distribution Network Planning Where copy of invoice meant for the purpose of claiming modvat is lost or misplaced. account or register open for inspection by the concerned authorities and allow such inspection Allow the concerned officer to take copies or extracts or send the records to the concerned officer. A manufacturer of final products shall maintain:- · An account in form of RG 23A . having regard to the nature. Part I is a record of inputs and subsequent utilization in the manufacturing process.Part I and Part II in respect of duty payable on final product. A manufacturer of final products must submit within five days after the close of each month to the Superintendent of Central Excise. the following documents:- · · · · Original documents evidencing payment of duty Extract of RG 23A Part I and Part II After verifying their genuineness. In case the manufacturer is not in a position to file the aforesaid return on time for sufficient cause. The Collector may. the manufacturer can claim modvat credit on the basis of or misplaced. The persons issuing invoices for modvatable inputs must follow certain procedures and must get registered with the Central Excise authorities. obliterate or alter any entry therein except for correction of errors Keep such book. Part II is a record of modvat credit pertaining to such inputs. Amount of duty for which credit is sought has been actually paid on these inputs. He may also permit filing of the aforesaid return by an assessee within a period not exceeding 21 days after the close of each month. the manufacturer may claim modvat credit on the basis of the original invoice subject to the satisfaction of central excise authorities. condoning the delay and giving reasons in writing for such condonation. He shall make entries in RG 23D at the end of the day of receipt and issue of excisable good and:- · · · · · 64 Shall enter the date of entry Correctly keep such book. Inputs have actually been used or are to be used in manufacture of final products. He may also permit filing of the aforesaid return by an assessee within a period not exceeding 21 days after the close of each quarter where the assessee is availing of an exemption based on the quantity of clearances during a financial year. variety and extent of production or frequency of removal provide for a period shorter than 1 month for submission of such return in respect of any assessee or class of assessees. An account current to cover the excise duty payable on the final product cleared at any time. account or register in the manner required Shall not cancel. .

mode of transport. date and number of such entry. Each invoice shall bear a printed serial number running for the whole financial year beginning on the 1st. before being brought into use by the registered person. The period of stay by court order will not be considered while determining the aforesaid period. total duty paid. a revised intimation must be send. rate of duty. motor vehicles registration number and certificate duly signed by authorized person stating that what is stated above is true. date and time of removal of goods. where modvat credit has already been utilized. The serial number of the invoice before being brought into use shall be intimated to the Assistant Collector of Central Excise and the registered person shall retain dated acknowledgement of receipt of such intimation. range and division of the excise officer under which the manufacturer falls. Third copy is for the excise department. show cause notice must state the utlized amount must not be recovered from the assessee. duty debit entry in the PLA. A working partner or managing director or secretary must authenticate each invoice book. notices may be sent for a period within 5 years from date of availment of modvat credit. The invoice contains the following details: Evidence showing proof of payment of excise duty. In case such wrong modvat credit is on account of willful mis-statement. number of packages.Such person shall issue serial-wise invoice containing details as prescribed by the Central Board of Excise and Customs or by the Collector of Central Excise in quadruplicate as follows:- Transportation Mix · · · · · · · Original copy is for the buyer. · · · Rule 57I The excise authority may disallow modvat credit. Second copy is for the transporter. April each year. In such cases. When the invoice is generated through computer. instead of the aforesaid period of 6 months. description and certification of goods. total quantity of goods. serial number of debit entry in the personal ledger account. The registered person for removal of excisable goods at any one time shall use only one invoice book of each type unless otherwise specially permitted by the collector in writing. serial number likely to be used in the forth-coming quarter shall be intimated to the Assistant Collector of Central Excise and as soon as the same is exhausted. total price of goods. the proper officer may send notice to the manufacturer within 6 months from the date of filing of return to show cause why such modvat credit should not be disallowed. Postal address. The owner or the working partner or the managing director or the company secretary shall authenticate each foil of the invoice book. as the case may be. Records and invoices generated through computer are also recognized. which has been wrongly availed or incorrectly utilized. Such registered dealer shall send details in software used including the format for information to the Assistant Collector of Central Excise. Rate of duty paid. name and address and code number. In case modvat credit has been taken on account of error or misconstruction. Fourth copy is to be retained by the issuer. 65 . collusion or suppression of facts on the part of manufacturer. total assessable value. amount of duty. excise registration number of the factory and also the name and address of the consignee.

The Cenvat Credit can be claimed again when the goods are received back.Distribution Network Planning The proper officer must consider the representation of the manufacture with regard to the show cause notice and thereafter to determine the amount of disallowance. coolants are now covered in the definition of inputs.2000. The balance credit can be availed in any subsequent financial year.2000 and remaining unutilized on 1. thereby giving assessees administrative convenience. The procedure for maintaining RG-23A Part-I Register has been dispensed with. The procedure for defacing of the duty paying documents by the Central Excise officers has been dispensed with.2000 can be carried forward as Cenvat Credit. provided the capital goods are still in the possession and use of the manufacturer. It is not necessary to avail Cenvat Credit only after installation of the capital goods. In case of capital goods which have been received prior to 1.Diesel has been specifically kept outside the purview of the Cenvat Scheme. Such goods must however.4.4. provided the assessee maintains all the required records as part of his normal accounting system in a manner in which he finds suitable and all the relevant information is contained in the records. the procedure for authentication of the invoices by Central Excise Officers in case of importers has been dispensed with. has now become the Cenvat Credit Scheme and the Modvat Rules have been replaced with a new set of Cenvat Rules. Cenvat Credit on capital goods received after 1. However.2000 will be allowed only to the extent of 50% of the duty paid. Introduction of the Cenvat Scheme The Modvat system. The Modvat Credit on inputs or capital goods accrued prior to 1. Cenvat credit on items such as lubricating oils / grease.2000. However. the onus of proving admissibility of Cenvat Credit is now on the assessee. Cenvat credit on capital goods imported under Project Imports are now allowed @ 100 % full instead of 75%. provided the capital goods are still in the possession and use of the manufacturer.4. Cenvat Credit @ 50% can be claimed in the financial year 2000-2001 and balance in subsequent financial years. A major disappointment of industry is that H.S. The scope of definition of inputs/capital goods has been widened. this credit can be claimed in a phased manner of more than 1 year. the entire Cenvat Credit claimed will have to be reversed.4. which has been operating in the country.2000 but have not been installed prior to 1. However. combined for inputs and capital goods effective from 1. if any. Inputs and semi-finished goods can be removed from the factory for further processing or sub-contracting without debiting duty @ 10% of value of the inputs. The scheme for issue of invoices by registered dealers upto second stage dealers has been continued. The procedure of authentication of invoices issued by the second stage dealer or an by first stage dealer in respect of the imported materials has also been continued. Otherwise.4. The procedure for filing Modvat Declaration under rule 57G and rule 57T(1) has been dispensed with. 66 .4. be received back within 180 days.

Special Custom Duty of 10% of basic Custom Duty is being continued with and it is applicable to the peak rate of 35% also. A Manufacturer of the goods failing under Ch. thus making only one set of rules for inputs as well as for capital goods. consumption and inventory of inputs used in the manufacture of exempted goods and exempted goods and take credit only for those inputs used in the manufacture of dutiable goods . Hence the entire onus it is on the assessee. According to me this will lead to a very strict audit by the department and there are 67 .T.) dated 1. bill of entry or any other prescribed document indicating payment of duty. Service Tax The major change as far as service tax is concerned is that the Supreme Court Judgement has now been over ruled by amending the law with retrospective effect.T. the assessee need not file any declaration to department and he can now avail credit under Rule 57AB for the goods ie. regarding correct documentation. firstly calling it “Cenvat” (Central Value Added Taxes). Moreover there are no prescribed documents and records to be maintained.The procedure for movement of the inputs under the existing rule 57 f(4) and for movement of capital goods under rule 57S has been dispensed with. Inputs and capital goods as mentioned in the list. The Central Excise Department can now recover service-tax collected by the users of the services. It is rather unfortunate that this notification was released just one day before the rules become applicable due to which many of the assessees were not even aware of such amendments. and these new set of Rule 57A to 57I were introduced in Budget 2000 vide Notification 11/2000 (N. This was a welcome scenario but soon it is realised that this is a rather dangerous situation as each one will have different types of records and each one will call it with a different name. Under this new Cenvat Scheme. These new set of rules are welcome to the industry as they are based on the various representations to remove the lacunas in the earlier rules but unfortunately still some of the major procedures present under the Modvat Scheme were missing in these new set of rules.3.) dated 31. The assessee can now use his own challans.2000.3.2000.or To debit 8% of the value of exempted goods at the time of clearance of such exempted goods.39 of Central Excise Tariff Act and manufacturing the dutiable goods as well as exempted goods will now be required to: i) Either maintain separate accounts for receipt. Even now. With the result no refund of service-tax paid on the services of goods transport operators and clearing and forwarding agent would be granted. memos or any other document evidencing that the goods sent to job-workers have been received back. the industries are so confused that they are yet to get the hang of all the procedures and documentations to actually say the procedures are easy. which now are suddenly replaced vide an entirely new set of Rule from 57AA to 57AK vide Notification No. Customs Duty The peak rate of Customs Duty has been reduced from 40% to 35%. Transportation Mix ii) Cenvat Credit may be claimed on the basis of invoice. In this year’s Budget the Finance Minister has attempted to make several changes in the Modvat Scheme. SAD @ 4 % is now being made applicable to imports of goods by traders also. 27/2000 (N.

as these audits (Canadian Audit/EA-2000) are not only restricted to Excise but also all the related areas. However. there is no provision provided for direct delivery of inputs to the job worker as earlier 57J. it was a pity that industries started following the scheme. or in respect of waste and scrap arising during jobwork. where if the differential duty is paid. without being aware of the revised Cenvat rules. And I hope that the Central Board of Excise and Customs provides instructions for not taking any actions for not following the new Cenvat Rules with immediate effect. or even in case of sending material from one job worker to another. and if is availing credit of duty paid on inputs before such option is exercised. this is bound to create a scope for unnecessary litigation. Excise and Service tax Consultant . there is no mention of the words waste and scrap. The new Cenvat rules have been amended such that the earlier crucial rules. it is mentioned that when the manufacturer upto for exemption from whole of the duty in respect of goods manufactured under any notification based on value or quantity of clearances in a financial year. even when it arises during the course if manufacture of the final products.3. still there remain some gray areas which are not yet covered under the revised Cenvat rules like. whether the assessee is allowed to avail Cenvat or not is not clear. Though under the new Cenvat Rule 57AG(2).4 4 68 Shilpa Pandey.00.Distribution Network Planning more chances of flaws now than earlier. no provision is made to take credit when the manufacturer opts for Cenvat Scheme for the first time or at any time during the financial year in respect of inputs lying in stock on the date he opts to avail Cenvat. which were not included. are included now. After all the hue and cry re-drafting of the new set of rules and bringing in Notification 11/2000 dated 1. There is no mention of intermediate product as the earlier Modvat Rule 57D. he has to pay an amount equivalent to credit allowed to him in respect of inputs lying in stock or used in any excisable goods lying in stock on the date of such option and excess credit if any shall lapse. Even adjustment of credit under Rule 57E is not provided. But. There is no provision to store inputs outside the factory. Moreover.

Most of the states do not accept the 10% CST as a criteria to allow entry of shipments in their states without the local sale tax numbers. Photocopies are not acceptable.Appendix ‘A’ State Wise Document Required for Goods Transports States Andhra Pradesh Assam Bihar Chandigarh Delhi Gujarat Goa Haryana Karnataka Kerala Madhya Pradesh Maharashtra Orissa Pondicherry Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal Chattisgarh Jharkhand Uttaranchal Sales Tax Form Local Sales Tax No. Octroi: An entry For Assam form 22/24 is required Kerala: Only an original copy or a carbon copy of the invoice is acceptable. Form 27 A is no longer required for a non-registered party. but the party should give a declaration in duplicate the reason for the purchase of the goods outside Kerala.32 Not required Not required Form 18A Not required Form 31/32 Note Form 59 A Note Note Consignee GST / CST Mandatory Required Required Required Required Consignee GST / CST Mandatory Required Required Consignee KST/CST Mandatory Consignee KGST / CST Mandatory Required Required Required Required Required Required Consignee GST / CST Mandatory Required Required Required Required Required Octroi No No No No No Yes No No No No No Yes No Yes Yes No No No No No No Remarks Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Transportation Mix General Requirements · Invoices: Minimums of four copies are required. The consignee’s KGST3 (Kerala Government Sales Tax) and CST number must appear on the invoice. Permit No. The declaration should be on its letterhead and should accompany the shipment into Kerala. If the items categorized below are sent to the Consignee without a KGST3 number. Not Required Note 28B (R Permit) Not required Not required Not required Not required Not required Not required Note Note Not required Waybill No. an entry tax would be applicable: Product Tax(%) 69 . · · · · Central Sales Tax (CST) / Local Sales Tax (LST) Numbers: All invoices must have both the sender’s as well as the recipient’s Central Sales Tax (CST)/Local Sales Tax (LST) numbers printed.

.. .....11 A CASE STUDY India..............................................................Distribution Network Planning Air Conditioner/Refrigerator/Washing Machine 12% Iron and Steel 4% Granite 8% Marble 10% Furnace Oil 10% Generator/Inverter 12% Photocopier/Fax Machine/Scanner 8% Entry Tax is not applicable to: Computers....................... Significantly..... Switzerland and the United States: How Countries Avoid Liability after Disaster (Bhopal gas Tragedy) (Downloaded from the Internet site Disaster management By Karyn Keenan) Mass disaster.......................................... and involves several legal jurisdictions.. in part................. Railways/Postal/All Defense Services/Telecom/CBI/Account General Offices......... illustrated by the tragic Bhopal accident. IMPORTING COUNTRIES On December 2. responsible for the accident. India. 16................... To resolve such a legal conundrum........................... often affects multiple parties.... 1984... forty tons of methyl isocyanate (MIC) leaked from the Union Carbide India Limited (UCIL) plant in Bhopal.. These numbers should be printed on the invoice.. ... components and spares/Other machinery Computation of Tax: Tax is computed on: .................... This paper explores how both importers and exporters of dangerous technology avoid accountability................... .......... in several of the worst international accidents involving hazardous technologies and activities.....total invoice value + freight + handling and clearing charges..................... at least in part.................. These should be shown on the invoice... ........................................ Government regulation of 70 ................... The Consignee is a Central Government body i..................... ... Critically examine these laws in the present scenario. it is instructive to examine which parties escape liability as well as those who fall prey...... Entry Tax is exempted if: The Consignee is a registered dealer having KGST (Kerala Government Sales Tax) numbers...................... escaped liability................. sales tax as applicable to India and neighboring countries............. Considerable evidence indicates that India was at least.... and whether or not the legal apparatus exists for their prosecution............ Any shipment traveling out of Kerala has to be accompanied by Form 26 in the absence of a regular commercial invoice................. Activity1 As supply chain managers please read the laws......................... rules and regulations governing insurance.... The rest of the Central and State Government bodies are subject to applicable taxes.............. nations that were arguably responsible for the damage sustained..e................................................................................................ both individuals and nation states.....................

Muchlinski (1987) reports that originally. Implementing procedures for requirements had not yet developed. In addition. 1985). Furthermore. 1991). it’s questionable whether it would be possible for India to sue itself! This unprecedented act did not pass unnoticed. Indian financial institutions owned approximately twenty per cent of UCIL stock (Cassels. allowing it to appropriate the exclusive right to act on behalf of any person who wished to make a claim with respect to the accident (Abraham et al. but rather. the constitutionality of the Act was challenged. those agents who are employed are poorly trained. explaining that the Government’s use of the parens patriae power was justified. would prevent a successful claim of the parens patriae doctrine (Cassels. Others argued that because India was potentially liable both as a shareholder in UCIL. to import pesticides manufactured in the United States. 1991). its interest as a minority owner in UCIL. its poor performance in anticipating and planning for potential accidents. UCC preferred not to construct a plant in India. point to certain liability in connection with the Bhopal disaster. its failure to respond to obvious signs of impending crisis. one involving the death of an employee. and enforce effective regulatory legislation. Inspection departments are understaffed. which are actively enforced. (Castleman et al. India’s liability toward disaster victims was never considered in the litigation. Neither warning nor emergency procedures had been established (Cassels. American courts hearing the case or enforcing an Indian decision were likely to question the legality of the Bhopal Act. It is suggested that the Act both infringes upon individual rights and fails to meet acceptable standards of due process. This Act gave the Indian federal government parens patriae control of the case. 1991). India’s failure to draft. India’s failure to adequately plan for the plant’s associated risk became obvious in the aftermath of the accident. as the representative plaintiff. 1991). preceded the December 1984 accident. there is a deficiency of meaningful health and safety regulations. opposed UCC’s proposal. Medical facilities were unprepared for the disaster. and funds are scarce. In response to the extraordinary circumstances of the situation. Violations of what little law does exist are met with paltry fines and take years to prosecute (Abraham et al. Bhopal victims claimed that the statute unfairly denied them of control over the proceedings. and accordingly. UCC gave in to India’s requests and agreed to construct the Bhopal plant. Moreover. their inability to effectively seek relief. Similarly. A series of leaks. considering the imbalance in available Transportation Mix 71 .industrial hazards is generally ineffective in this country. In December 1989 the Supreme Court of India upheld the statute. conflict of interest barred it from acting as the victim representative. Moreover. The Bhopal Gas Leak Disaster Act (Bhopal Act) was passed. and the local community had been given no information regarding the risk inherent in plant operations. and finally. its neglect for government inspection departments. India desired self-sufficiency in pesticide production and accordingly. Americans initiated suits in their domestic courts on behalf of thousands of Indian litigants. Despite compelling evidence of culpability. and with respect to its regulatory duties. Post settlement. the Act jeopardized all future judicial decisions. Moreover. the Water Act of 1974 and the Air Act of 1981 both designed to control pollution. are neither implemented nor enforced effectively. the Indian Government failed to respond when the risk of serious incident became known. Following the accident. its responsibility for the establishment of the plant. Absolute control over the litigation allowed India to ignore any claim brought against itself. and the international character of the incident. In addition. Significantly. set out under the Factories Act of 1948. 1991). including the enormous number of litigants. regulatory legislation is largely ineffective. implement.

It is conceivable that Sandoz received some form of compensation for its compliance. either by the foreign governments. The most important claims from foreign litigants were those made by the Governments of the Netherlands. and the accident caused trans-boundary damage. D’Oliveira (1991) suggests that the Netherlands. these countries wished to maintain friendly relations at the ICPR. fire broke out in the warehouse of the Swiss pesticide manufacturer. Sandoz. Switzerland breached its obligations under the Berne Convention on the Protection of the Rhine against Chemical Pollution. 1991). The Indian and Swiss governments adopted different. Switzerland failed to satisfy its obligations under Articles 7 and 11 of the Rhine Chemicals Convention. By ignoring Swiss liability. France and Germany. The claim channeling strategy was extremely efficient and by mid-1988. UCC counter-sued the governments of both Indian and Madhya Pradesh in the Southern District Court of New York. both cases involve international claims. In contrast to the Bhopal disaster. the corporation utilizing hazardous technology in this case was domestic. it is probable that they anticipated comparable future treatment. on the shoulders of Sandoz. and the nation that was home to the dangerous activity avoided liability. Germany and France were aware of the significant possibility that any one of them could find itself in Switzerland’s position in the future. In both situations. Exclusive legislative power and unacceptable high probability of future European accidents were the tools handily wielded by India and Switzerland. The suit was maintained following relocation to India. Instead. Through inadequate supervision over both the development and implementation of Sandoz’s emergency plans. which were affected. settlement between India and UCC prevented the resolution of this counter-claim (Koh. The Indian Government’s ability to pass legislation granting it exclusive. and the notification of the International Commission for the Protection of the Rhine (ICPR) (D’Oliveira. fireextinguishing efforts washed thirty tons of the chemicals into the Rhine. who transferred them to Sandoz. These countries channeled all claims from their nations directly to the Swiss Government. would have deterred litigation if the injured parties were determined to sue. regarding the storage of chemicals. the plaintiffs privatized their claims. Due to the absence of an established catchments area. but equally effective strategies for avoiding liability. all responsibility was placed. regardless of its efficiency in concluding settlement. The Swiss strategy was to create an efficient government-clearing house for claims. parens patriae power to control the Bhopal litigation precluded any inquiry into its culpability. no strategy. which dealt preferentially with foreign claims. However. Furthermore. However. no claims were brought against Switzerland. 1991). On October 31. The Swiss Prime Minister personally pledged the support of Swiss offices for the purpose of reaching settlement. 1986. 72 . or by private citizens who sustained damage. However.Distribution Network Planning resources between UCC and the victims. in order to avoid litigation that could easily have involved the Swiss. The Court also stated that the interests of the victims were sufficiently protected by the Act (Cassels. The majority of unsettled claims were Swiss. This strategy likely included Government pressure on Sandoz to quickly resolve the claims through settlement. Furthermore. 1989). containment of spills. The ruling of the nation’s most exalted judiciary fortified this position. as well as its storage methods. in accordance with the polluter pays principle. Despite these breaches of both its international legal obligations and domestic responsibilities to regulate industry. over ninety percent of claims had been processed. Although successful. India could not legislate away the counter-claim of its defendant.

Generally. West Virginia.EXPORTING COUNTRIES Great discrepancy existed between the standards of operation. In the absence of international law. Still other manufacturers choose not to use MIC. control can be defined expansively. A May. Based on the few examples listed above. which were enforced at the UCIL plant in Bhopal and those at the UCC plant in Institute. By characterizing itself as an injured state to which UCC owed liability. The Bhopal plant was designed less safely than the corresponding facility in Institute. Applying this principle to MNCs in place of ships.A. Handl (1985) looks to the criterion of control over the technology to determine responsibility. Moreover. 1985). standards of industry regulation on UNIL. Handl (1985) supports Scovazzi’s assertion. it is clear that UCC took advantage of the foreign locale of its subsidiary and failed to enforce U. controlled the plant design and construction. Standard. Considering that the U. or store it in small amounts only. Maritime law illustrates the principle. which would have merited immediate corrective action in the U. The American company owned the ship. or to seek a bilateral agreement for reparation. no claims were made against the United States for its failure to regulate the extraterritorial operations of Standard. 1982 safety audit of the Bhopal plant by the Union Carbide headquarters engineering group revealed dangerous operating conditions. Furthermore. its subsidiaries. Transportation Mix 73 . India avoided vulnerability to counter-suits in international law. initiated litigation in the American court system. the host country exercises this control. and Astilleres Espanoles were found liable for negligent design. Standard Oil. converting it to product as quickly as possible (Castleman et al. which revealed this information. vessels are deemed to be in the control of their states of origin (Flag State). rather than as an international plaintiff. other industries manufacture MIC using a far less toxic process than UCIL. However. This uncertainty in the law may have discouraged France from bringing an action. is the failure of the United States to enforce the implementation of those standards on UCC. despite the fact that they may be found in the territory of another. as well as the technology utilized in the plant. In contrast. However. designed and constructed the ship. India failed to bring a claim for American breach of international law. was the only one of its kind for Bhopal in seven years of operation. a country which authorizes the export of a hazardous technology is not liable for accidental damage occurring in the use of said technology. spilling dangerous quantities of crude oil. such as construction of the ship and the operation of its equipment. This is especially true with respect of those areas of operation over which the host country exercises no control. What is at least as significant. American plants were audited every two years. Scovazzi (1991) argues that it is doubtful that a principle of customary international law has been established which requires states to regulate the activities of their MNCs abroad. Despite arguable liability on the part of the United States for the unsafe operation of UNIL. France may have feared exposing itself to possible counter-suit as the host country within whose jurisdiction the accident occurred. The Government of France joined by other injured parties.S. India instead privatized its claim. Astilleres Espanoles. like India.A. The corporate safety and health audit. The Spanish company. He argues that practically. the United States would be held responsible for damage occurring as result of inadequate safety measures regarding those aspects of operation over which it had greater control than India. its prescriptive jurisdiction over UNIL operations is a convincing reason for holding the United States liable.S. Nothing was done in India. and states that under customary international law. The Amoco Cadiz supertanker grounded in the territorial waters of France in March 1978. through various subsidiaries.S. however. construction and maintenance of the ship.

Smith (1988) argues that the appropriate standard is due diligence. . Francioni (1991) contends that the argument used by home countries that they lack the jurisdiction to enforce domestic safety and environmental standards on MNCs located abroad is hypocritical. International organs are increasingly involved in the drafting of MNC codes of conduct. Principle 21 of the Stockholm Declaration on the Human Environment states that nations are responsible to ensure that activities.12 SUMMARY Legal issues play a very important role in SCM. exporter liability remains undeveloped. despite the possible legal foundations described above. If the export of a hazardous technology jeopardizes the health of the host country’s environment. environmental realities and their implications on supply chain. the United States are held responsible for their reprehensible behaviour. developments in the regulation of MNCs do not support this contention. nor other similar instruments provide exporting state responsibility for noncompliance of parent companies (Handl. This weakness must be addressed in order that countries such as India. among others. fiscal and currency regulations. The unit covers an overview of the sales laws. which are within their jurisdiction or control. the International Law Commission argues that an exporting state should be subject to strict liability for damage arising out of accidents concerning an area over which it has prescriptive jurisdiction. do not cause environmental damage. Several international instruments proclaim the right of individuals to a healthy environment. Until the ability of government to legislate absolute control over MNC accident litigation is challenged and potential plaintiffs overlook their self-interest as future polluters. Similarly. . legal hassles and how can he overcome or avoid these. Switzerland. warehouse operations and jurisdiction. Supply management professionals deal with two major aspects of law: . 16. Exporting countries have successfully applied their antitrust laws. He also looks to international human rights law.the law of agency and law of contracts. but that if an exporting country is aware that the host lacks the technical and administrative capabilities necessary to prevent the dangers associated with the technology. This unit has attempted to explain the entire process of SCM in which a supply manager is likely to get involved in lawsuits. Liability for Injurious Consequences Arising Out of Acts Not Prohibited by International Law. An important could know fact and figures from Labour Bureau has been included based on bidi workers in India as per minimum wages act of 1948. Although several convincing arguments exist for holding exporting nations liable. It has discussed the rules and regulations in handling the wages of workers Issues pertaining to documentation: Insurance and Sales tax were also discussed. Neither the U. due diligence may require prohibiting exportation.13 SELF ASSESSMENT QUESTIONS 74 1) As a supply chain manager critically evaluate the laws and regulations of both India and EU countries.N. 1985). the exporter could accordingly be found liable in international law. 16.Distribution Network Planning In its document. and trade union laws. importer liability will be avoided. to MNCs. Francioni (1991) argues that the concept of control includes the type of power exerted by parent corporations over their subsidiaries. This author further argues that international law provides a basis for home country liability. Draft Code of Conduct on TNCs.

www.2) How will you arrange for Insurance cover in case your vehicle meets with an accident and causes extensive damage to the goods. in the State of Assam? 3) What are the relaxations of Sales tax on goods across the various states in our country and can we overcome this by a single document procedure? 4) As a warehouse manager list out your duties from receiving the goods to its delivery to the manufacturer or to the end consumer. Books on commercial laws Case studies on Litigations and company legal proceedings.com 75 . Transportation Mix 16.comerciallaws.salestax.com . Internet sites www.14 1) 2) 3) 4) REFERENCES AND SUGGESTED FURTHER READINGS Central excise and Sales Tax laws books.

Indira Gandhi National Open University School of Management Studies MS-55 Logistics & Supply Chain Management Block 6 EMERGING TRENDS Unit 17 Future Trends and Issues Unit 18 Design for SCM and Greening the Supply Chain Unit 19 SCM in Service Organization/Non-Manufacturing Sector 5 20 36 .

Kalro IIM Kozhikode Calicut Dr. New Delhi Paper Used : “Agrobased Environment Friendly”. Sushil (Course Editor) Dept. Kharagpur Lt Col. D. Ravi Shankar (Course Editor) Dept.Expert Committee (as on 24th March. N. 2004 ISBN-81All rights reserved. Sandeep Biswas Institute for Integrated Learning in Management (IILM). Khanna Director.) in Cement Group M/S Larsen & Toubro Ltd. Himanshu Kumar Shee. New Delhi Tilak Raj. N. Mumbai Course Preparation Team (2004) Prof. Sambandam NITIE. Mumbai Mr. Kaushik Sircar Assistant Quarter Master General Operations & Logistics.Sahay. .Karuna Jain Shailesh J. Gaur Prof Sadananda Sahu Dept. Indian Institute of Technology Bombay. IIT. IIT. V. Mumbai Dr. Mumbai Mr. Sanjay S. SOMS. Anurag Saxena (Course Co-ordinator) School of Management Studies IGNOU. Himanshu Kumar Shee (Course Co-ordinator)-On leave School of Management Studies. King Kraft. IIT Bombay. IGNOU New Delhi Dr. of Management Studies Indian Institute of Technology New Delhi Prof.L. New Delhi Print Production: December. Further information on the Indira Gandhi National Open University courses may be obtained from the University's Office at Maidan Garhi. Deepak Jakate General Manager . Kharagpur Management. SOMS. United Phosphorus Limited. IGNOU Dr. Banwet Dept of Management studies. Mehta School of Management. Mehta School of Management. D N Srivastava Advisor ( Training & Safety) & Head of Distribution Deptt. (Coordinator) School of Management Studies. New Delhi Mr. Indian Institute of Technology Bombay. Sarai Jullena. 2000) Prof. Kharagpur Dr. School of Management Studies. Dept of Fertilizers. Satish Kumar Director (Movement). J. Ministry of Chemical & Fertilizers. Biplab Dutta Vinod Gupta School of Management IIT. B. of Industrial Engineering Shailesh J. Tessa Media & Computers. New Delhi Laser Composed By : M/s. New Delhi-110068.O.K. United Phosphorus Limited. Gurgaon Prof. Narasimhan Director. New Delhi Prof. IGNOU.Logistics.Batra FORE School of Management New Delhi Prof. Mehta School of & Management. of Industrial Engineering and Management IIT.S. without permission in writing from the Indira Gandhi National Open University. Mumbai Prof. General Manager . B. IIT Bombay. Mumbai Dr. Krishi Bhawan. Cover Design by M/s. IGNOU. S. Jharsuguda Mr. by mimeograph or any other means. Atanu Ghosh Shailesh J. Delhi Prof. Atanu Ghosh Shailesh J. ) (Retd. Amarlal H. Karol Bagh. No part of this work may be reproduced in any form. New Delhi Prof. Management Development Institute. Headquarter 4 Corps Mr. Sambandam NITIE. Printed and published on behalf of Indira Gandhi National Open University. Deepak Jakate. B. IGNOU.Logistics. Bhubaneswar Prof N. New Delhi by Director. Mumbai Prof Sadananda Sahu Dept. Mehta School of Management. 2004 ã Indira Gandhi National Open University. New Delhi Prof . Kaushik Sahu Xavier Institute of Management.(P). of Management Studies Indian Institute of Technology. IGNOU Prof. Mumbai Dr.

Unit 18: Design for SCM and greening the Supply chain discusses various key elements to be considered for designing of supply chain management.BLOCK 6 EMERGING TRENDS Unit 17: Future trends and Issues chats about trends and issues in the management of supply chains in the future. Green supply chain strategies like reverse logistics are dealt in detail. It also discusses the emerging trends in the field of supply chain management. Unit 19: SCM in service organization/ non-manufacturing sector describes the Supply Chain Management of Products vs. Finally it portrays a vision of deploying world-class supply chains in the future. . It reveals factors influencing supply chain design decisions. It discusses collaborative strategic alliances for enhancing supply chain effectiveness and talk about outsourcing services like third and fourth party logistics. It further discusses the application of Supply Chain Management principles to a few broad industries in the service sector. Services. It also describes integrating supply chain logistics through the use of IT and the Internet.

Emerging Trends 4 .

8 17. remanufacturing and recycling etc. However. you would be able to: SCM in Service Organization/NonManufacturing Sector · discuss the trends and issues in the management of supply chains in the future. · discuss collaborative strategic alliances for enhancing supply chain effectiveness. · discuss about importance of outsourcing services like third and fourth party logistics. the focus of companies has been on the intra-organizational flows over which the organization had some control. supplier collaboration and customer services using cutting-edge information technology. This 5 .14 Introduction Collaborative Strategies Vendor Managed Inventory Third Party Logistics Fourth Party Logistics Enterprise Resource Planning Internet and E-commerce Supply Chain Agents Green Supply Chain Reverse Logistics World Class Supply Chain Summary Self Assessment Exercises References & Suggested Further Readings 17.4 17. companies are increasingly recognizing that supply chain management involves the management of the complete chain starting from inbound logistics. · discuss green supply chain strategies like reverse logistics. Managing uncertainty and understanding customers in the global market is the challenge that current supply chain systems are facing the world over.6 17. and · portray a vision of deploying world-class supply chains in the future.13 17. Traditionally.10 17. Structure 17.3 17.1 INTRODUCTION Management of the supply chain has evolved over the last two decades from an emphasis on integrating logistics and lowering cost to providing better products and services that provide value to ultimate customers.12 17.UNIT 17 FUTURE TRENDS AND ISSUES Objectives After reading this unit.11 17.1 17.2 17. · describe integrating supply chain logistics through the use of IT and the Internet. marketing and sales. Efforts are being made to manage demand flow.7 17.9 17.5 17. processing. outbound logistics. customer service and also reverse flow of unused materials and waste for successful value reclaimation through reuse.

The following sections are devoted to a discussion of the issues and trends that supply chains are likely to adopt in times to come. distributors and customers. synchronized production scheduling. Successful supply chain flow requires synchronization of operations through effective collaboration among the various channel players. It can also contribute to synchronization of production and delivery schedules and smoothen the material flow process obviating inventory management problems. Increasing technological strength and flexibility Enhancing strategic growth by pooling the combined expertise of partners Enhancing organizational competencies through mutual learning. However. One of the crucial objectives of manufacturers is to meet in orders to reduce losses on account of inventory excesses or shortages. manufacturers. wholesalers and retailers can result in real-time flow of point-of-sales (POS) data across the supply chain. This can help in jointly formulating effective forecasting and replenishment schemes and smoothen demand variations along the supply chain. Retailer-Supplier Partnerships (RSP). collaborative demand planning and logistic solutions. Strengthening operations by lowering costs and cycle times. Building financial strength by sharing costs and eliminating non-value added activities among partners.2 COLLABORATIVE STRATEGIES In the future. Each partner in the supply chain should be able to plan demand based on a single. This can contribute to faster product development through shared design development and modification documents. Collaborative forecasting strategy involving all channel partners can contribute to effective demand planning. Reducing channel inventory pileups by reducing demand irregularities in the supply chain is an issue of primary concern as it can lead to improved efficiencies and lower cost. Vendor Managed Inventory (VMI) and Distributor Integration (DI) are examples of strategic alliances that can prosper through collaborative efforts. This can result in better capacity utilization. Effective collaboration among channel partners can help in aligning them to enhance the value of the integrated activities in the supply chain. This can be tackled through collaborative efforts made through strategic partnerships (SP) or strategic alliances (SA). Down-stream collaboration with distributors. Collaboration enables channel partners to jointly gain a better understanding of product demand flow and implement effective programs to satisfy customers through collaborative product development. reliable source of demand data. Improving market access. Organizations must provide world-class services to remain profitable and continue serving the society in an effective manner in the ever-changing and turbulent market space. 17. order fulfillment and customer satisfaction.Emerging Trends involves a large and complex network of suppliers. 6 . transporters. this can be possible through seamless data interchange among channel partners. Such strategic alliances can help both partners by: · · · · · · · Adding value to products through collaborative efforts. supply chains must embark upon a collaborative strategy to manage demand flow and customer satisfaction through technology integration.

a company manufacturing automotive lubricants etc. the inventory can be reduced to a bare minimum. the initial implementation cost is well offset by recurring savings in inventory carrying costs and gains through 7 . Shell does not need to pad its own inventory in anticipation of varying demands from its customers. The buyers’ role becomes one of assessing the recommendations made by the supplier and providing adequate aggregate data and insightful information while collaborating on sales/demand forecasts. Moreover. The buyers’ role of creating purchase orders from sales and supply forecasts is eliminated as the vendor does handle this on behalf of the wholesaler/retailer. SCM in Service Organization/NonManufacturing Sector 17. suppliers like Shell. besides managing the inventory. Sustainable supply chain configurations can be established by trading off cost. enough trust must be built to enable vendors and buyers to share inventory related information. they can handle the replenishment needs of the retailer who has to otherwise keep track of numerous products. Collaboration with third party (3PL) and fourth party (4PL) logistics organizations can also enhance supply chain effectiveness. When the supplier plays the role of a vendor. This eliminates the wholesaler’s/retailer’s need for dual buffering against customer demands on one hand and supply disruptions on the other. Similarly. This way. the vendor plays an intermediate role between the manufacturer and the wholesaler/retailer. integrate customer’s forecast. Transporters can better organize inbound. Vendors are in an excellent position to manage inventory for the wholesaler/retailer because they are a middle link in the supply chain and can track the needs both from the supplier’s and the customer’s ends. This is an offshoot of the Retailer-Supplier Partnership (RSP) that can be used to synergise the flow inventory between the retailer and the supplier.3 VENDOR MANAGED INVENTORY (VMI) VMI has been recognized as an effective strategy for combating irregularities in the supply chain caused due to demand variability. The vendor collects point-of-sales (POS) data from the wholesaler/retailer and accordingly plans their demand from manufacturers in order to manage the wholesaler’s inventory. customers can benefit from 30 to 40 per cent reductions in inventory and 75 percent forecast accuracy. profits. Once VMI has been implemented. In fact.Collaboration can also enhance the logistics function in the supply chain. consumption data and inventory information to its own production and shipping capabilities for creating rolling production schedules. plant managers may be forced to stop production if they stock out and suppliers are not able to replenish them just in time. Since buyers are often trained not to disclose information related to their inventory. thereby lowering both risks and costs. Shell’s customers can now emulate the strategy and reap benefits accruing out of reduced inventory in the supply chain. market share and adaptability to new products and technologies through a collaborative approach. this strategy is called Supplier Managed Inventory (SMI). This technique can in-turn be carried upstream to Shell’s suppliers. if it is a crucial business secret. Accordingly. revenues. Implementing VMI or SMI can be difficult when the supplier starts accounting for the time and cost involved in managing the inventory. inter-facility and outbound transportation to optimize capacity utilization.. However. Since the supplier/vendor understands his/her own product better than anyone else. these problems can be overcome with some patience in understanding customer’s and supplier’s inventory movement trends and building mutual trust. In this system. Some customers may not be using computers and may be reluctant to allow suppliers to manage their inventory. by adopting a process of just-in-time or continuous replenishment. This reduces inventory-carrying costs in the supply chain. Once inventory flows are understood.

it is necessary to use computers if this strategy has to be successfully implemented. The competitive advantage for any company is to focus on their core competencies. 3PLs can provide technological and other flexibility to client companies. capital utilization and cost control. Similarly. all channel partners are able to reap rich dividends and extend the strategy to other parts of the supply chain. Third party and fourth partly logistics form some of the other collaborative efforts being evolved towards effective management of supply chains. It is obvious that companies can parcel out numerous supply chain processes to entities that specialize in the efficient performance of those processes. 17. Once this cost-effective strategy is in place. 3PL companies must provide reliable services and solve channel problems so that smooth flow of goods and information can take place.Emerging Trends optimum capacity utilization. Customers of 3PL companies look for four dimensions of value to be derived from outsourcing a process to a 3PL firm. This leads to better utilization and financial returns on both working and . or 3PLs. For instance. labeling. 3PLs can create value for their customers in the accuracy. such as buildings and equipment. they may have changing needs for warehousing and transportation facilities. Such changing demands can be easily taken care of by third-party logistics companies. enhanced service levels and lower costs. Shell has reported returns of 10:1 on its investment on SMIs. then the entire supply chain can benefit from improved capacity utilization. 3PL firms must interact with customers to understand their needs and then adjust their offerings to meet them. wholesalers or retailers. In order to provide truly value-added services. 8 3PLs can help customers reduce inventory and fixed assets.4 THIRD PARTY LOGISTICS Third-party logistics (3 PLs) is the use of an outside company to perform all or part of the company’s materials management and product distribution functions. asset ownership status and the price at which the service is offered form some of the main issues that a client will consider while selecting an appropriate service provider. that would not be available to manufacturers. Outsourcing a wide array of supply chain processes can generate greater value across the entire supply chain because specialized firms performing the selected processes enjoy a level of expertise and leverage. If these firms are efficient and effective. Transportation. The 3PL’s customer orientation. quality and timeliness of the information that they provide their clients. level of specialization. and bill payment are some of the key processes that can be outsourced to specialist firms called third-party logistics firms. Since data must be available on-line and is difficult to process manually. channel partners may need to change their technology for implementing quicker systems. and let the 3PL firm handle those supply chain functions in which they specialize. This information can be electronically integrated into the customer’s MIS for direct access. Often. packaging. VMI or SMI can also be offered to customers as a value added service and can help in locking-in customers. order processing and fulfillment. warehousing. For instance. suppliers can provide customers with computer hardware and easy-to-use software in order to obtain real-time customer’s inventory status that is crucial for preparing rolling production forecasts and schedules. These values include trust. information. different channel partners and to ultimate customers. This helps customers to trust 3PL companies.

................................................. by becoming more integrated into its customer’s operations........................................ can signify close integration between the client and the 3PL service provider.............................................................. ........ An important contribution of the 3PL is providing the leverage that its customers cannot generate by themselves via the provision of information.................................... Activity 1 Explain how a company can select a third party logistics (3PL) firm on the basis of 1) Customer orientation 2) Level of specialization 3) Asset ownership status 4) Price of the service ................... or better asset utilization.............. the 3PL will be able to recognize and understand changes in the logistic needs of the customers................. .............................................................. Painting clients’ logos on transport vehicles etc......................... ................ 3PL companies can assure their clients of their reliability by integrating their activities seamlessly with latter’s operations... ..... This requires open communication and collaboration............. Firms using 3PL services are seeking performance levels where the overall net benefits exceed the amount paid to the 3PL....... In addition............................................... If any element in this supply chain relationship is neglected.................. ............ Engaging reliable 3PL service providers can offset this problem................ cost reduction activities................. All channel partners must be successful if meaningful and lasting value is to be achieved........................................................................................................................................... reduction of supply chain costs and sharing the savings with customers is probably the most visible (though not the most important) value.................................................................................... the chain is broken and the value is lost.......... Many CEOs now see this value as critical to business survival.................................................................. Moreover...................................................... ............................................................................. .................................................................... Each supply chain will have firms with different levels of expertise and 3PL must customize their services according to their clients’ expectations.... ................................................. Although capital utilization is important to 3PL customers.fixed capital......... SCM in Service Organization/NonManufacturing Sector 9 ....................................................................... particularly when combined with the reduction of logistics costs................................................... Activity 2 Which of the above criteria is most important for a company manufacturing fast moving consumer goods (FMCG)? Why? .... Improving service-related benefits also produces value....................... service enhancements..................................................................................... An important disadvantage of third party logistics for companies is the loss of control faced by the company due to out sourcing a particular function...............

Technology is proactively used to manage order and inventory movement throughout the pipeline. thereby minimizing the amount of inventory required. It refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated and value added solution. and fixed capital reduction while traditional approaches tend to focus only on operating cost reduction and asset transfer. and improved planning and execution of supply chain activities. · Process redesign.5 FOURTH PARTY LOGISTICS The term “fourth-party logistics provider” is a trademarked term owned by Andersen Consulting. This is done by: · Leveraging strategic thinking and analysis. organizational change management. procurement strategy. and increases item 10 . Dramatic customer service improvements can be attained as the 4PL focuses on the entire supply chain and is not limited to increasing efficiencies associated with warehousing and lowest-cost transportation. Reinvention implies synchronization of supply chain planning and execution activities across all supply chain participants. Transformation efforts focus on specific supply chain functions including sales and operations planning. fourth-party logistics providers include supply chain management and solutions. and execution. This is achieved by: · Leveraging traditional supply chain management skills. call centers. and · Technology to integrate the client’s supply chain activities and processes. and supply chain technology. Savings are achieved through the complete outsourcing of the supply chain function instead of only a few components as in the case of a 3PL solution. etc. A 4PL company delivers a comprehensive supply chain solution and adds value by influencing the entire supply chain. and value added services as part of their offering. working capital reduction. Revenue growth and customer satisfaction are driven by enhanced product quality and product availability due to the elimination of stock-outs and ‘ship-complete’. distribution management. IT providers. due to integration of processes. Execution of the supply chain integration strategy leads to increased revenue. Synchronization of supply chain activities by channel partners leads to operating-cost reductions and a lower cost of goods sold. and · Creatively redesigning and integrating the supply chains of the participants. Savings are also achieved due to the economies of scale that accrue due to the large size of the operations involved in the entire service chain. change management capabilities.Emerging Trends 17.) along with the capabilities of the client and its supply chain partners. transformation. process enhancements and procurement savings. through reinvention. · Aligning business strategy with supply chain strategy. contract logistics providers. The 4PL acts as a single point of interface with the client organization and provides the management of multiple service providers through a teaming partnership or an alliance. operating cost reduction. customer support. Operating-cost reductions are driven through operational efficiencies. Among other services. A 4PL leverages a full range of service providers (3PLs. A 4PL adds value to the entire supply chain.

.... however. The 4PL provides a broad range of services to the 3PL including technology....... 1) A partnership can be forged between the 4PL organization and a third-party service provider to market supply-chain solutions that capitalize on the capabilities and market reach of both organizations.. The 4PL service provider needs to possess a comprehensive set of skills to effectively deliver an integrated supply-chain solution... technology and e-enabled capabilities are racing ahead..................... ...availability to reduce cycle times.......... thus freeing up assets held by various companies that form part of the supply chain..... working-capital reductions can be realized through inventory reductions and reduced “order to cash” cycle times..... and program management expertise.................... product development.... reach and resources.... global capabilities.... · Strength in integrating supply chain technologies and outsourcing capabilities............ 3) As a supply chain innovator.... · Understanding of organizational change issues.. the three models that a 4PL company can adopt to deliver supply chain services................... · Strong relationship and teaming skills............ To enable a firm to capture all the benefits of supply chain collaboration and synchronization........ These include: SCM in Service Organization/NonManufacturing Sector · Availability of a large body of trained supply chain professionals............. 4PL’s can undertake the ownership of physical assets. marketing and sales..... a new generation of integration must be deployed..... etc....... · Delivery of world-class supply chain strategy formulation and business process redesign...................... and technology of the 4PL and complementary service providers to provide a comprehensive integrated supply chain solution that delivers value throughout a single client organization’s supply chain components. · Ability to manage multiple service providers........ supply chain strategy skills........ 2) The 4PL can operate and manage a comprehensive supply chain solution for a single client........... .......... a 4PL organization can develop and run a supply chain solution for multiple industry players with a focus on synchronization and collaboration........................... Fourth Party Logistics is the next generation of supply chain outsourcing.............. this model is complex and can challenge even the most competent organizations........... Fixed-capital reductions result from capital asset transfer and enhanced asset utilization...... · Ability to transition clients’ employees and other assets smoothly to the new 4PL environment.... 11 ................ This arrangement encompasses the resources.............. This allows the client organization to invest in its core competencies like research and design. Thus.. The formation of industry solutions provides the greatest benefits.. which is currently beyond the capabilities of traditional outsourcing methods........ capability to go to market... capabilities...................... Activity 3 Illustrate with examples............... complex and increasingly global... At the same time. ............ A 4PL can use any of the three operating models to deliver supply chain solutions....................... Supply chain activities are information-rich..

warehouse and invoice files. 2) Software that can translate company specific database information into EDI standard format for transmission. Modi Xerox uses IT to reduce their cash-to-cash cycle time through fast flow of order/demand data and their execution through shipment and delivery/installation confirmation. The contribution of IT has become imperative for capturing point-of-sales (POS) data and calculating near-accurate demand forecasts. Some of these tools are discussed in the following sections. Various solutions are available ranging from enterprise resource planning (ERP) tools to Internet based e-commerce opportunities. 3) A mail service responsible for the transmission of the document usually through its own network or a third party value-added network (VAN). The information is simultaneously transmitted to accounts payable.Emerging Trends 17. For instance. Enterprise resource planning (ERP) tools are capable of capturing data and automating financial. Hence. The basic components of an EDI system includes: 1) A standard set of rules for formatting and syntax agreed upon by the user in the network like the American National Standards Institute (ANSI) standards. the receiver creates an electronic receipt notice that is sent to accounts payable and the supplier. Although this is possible within an organization. ERP systems utilize a single data model and have an established set of rules for accessing data. EDI consists of a communications standard that supports inter-organizational electronic exchange of common business documents and information. 3) 4) 12 . The supplier’s computer translates the purchase order into its own format and automatically sends an acknowledgement to the customer. Upon receipt of the consignment. They can become more competitive by streamlining the communication process through the elimination of many steps involved in traditional information flows.6 ENTERPRISE RESOURCE PLANNING Information technology (IT) has an ever-increasing role to play in providing fully integrated supply chain management solutions that incorporate supply chain configuration. the EDI involves three basic processes: 1) Collecting and receiving data from application programs in different computers. It generates and delivers a predetermined purchase order to the supplier when the inventory is reduced to the re-order level. demand planning. A shipping note is electronically created with the fulfilled order and is sent to the customer. and 3) Transmission of data between clients on the network. 2) Converting data from application program formats to standard format for transmission over the network and reversing the same at the user end. For instance. more complex systems like electronic data interchange (EDI) are required for accessing data from various databases strewn along the entire supply chain. logistics and warehouse management. It represents a cooperative effort between buyer and seller. inventory and customer order tracking tasks. a typical EDI inventory replenishment process could consist of the following steps: 1) 2) The buyer’s (customer’s) computer maintains a real-time inventory of each product using automated technologies like bar-code readers.

..... 6) Enables shipment tracking and tracing facilities thereby reducing uncertainties and ensuring better customer support... 2) Help channel partners to log into each other’s ERP systems and data warehouses for receiving real-time transaction processing data.............. thereby increasing the efficiency of the supply chain.......5) An invoice is then generated at the supplier’s end and sent to the customer where the purchase order............... .. rapid adoption................ Due to excessive automation..... the Internet............... ............. In order to overcome the difficulties that arose due to the use of EDI... 3) Reduce the time and cost of communicating................ logistics and marketing..... On receipt of this authorization............. have started using the Internet for integrating and exchanging information across the supply chain.................... Activity 4 Illustrate how EDI can help information flow for replenishing the inventory held by a wholesaler stocking consumer durables........ An electronic remittance advice is sent to the supplier and upon receipt.. thereby alienating business processes from the EDI process.............. The Internet can be used for communicating information.................... 17........ 5) Purchase orders and shipping notices etc............................................ payment is transmitted electronically from the customer’s bank to the supplier’s bank.... World Wide Web and electronic commerce (e-commerce) have grown extensively due to their open standards............................ . more recently.................... companies..... However....................... 4) Increase the capability of reaching out to new customer segments and markets.... collaboration is usually not possible........ thereby enhancing customer service quality and customer relationships..... ....................................... a significant investment has to be made by companies to implement EDI and use VAN services..... It can enable online and real-time receipt of downstream demand signals for accurate forecasting....................................... receipt notice and invoice are automatically reconciled and a payment authorization is created and sent to accounts payable............................ this information is translated into accounts receivable and the buyer is given credit for payment....... This can enhance capacity utilization and reduce channel blockages...7 INTERNET AND E-COMMERCE In the concluding years of the last decade...... 13 ...... Companies like FedEx.. The Internet can benefit a supply chain in the following ways: 1) Enhance collaboration among partners for quick product development..... inventory management and synchronizing production schedules.......... can be received using the Internet..... accessing databases and automating transaction processing............ SCM in Service Organization/NonManufacturing Sector 6) 7) This process requires manual data entry at only three instances and reduces paperwork drastically............... low cost and graphical user interface........ and Cisco have used the Internet to communicate with channel partners and maintain customer relationships....... Also helps in receiving valuable customer feedback for measuring supply chain effectiveness.......

This requires clear vision. contain contact information and allow users to provide feedback for improvement and customization. In this way. The Internet is being increasingly used in order to bring the supplier and customers closer using the electronic media. like product rates. the supplier and customer’s data are integrated to assist the customer in taking decisions regarding the supply chain. channel efficiencies and process innovations. and generating re-order alerts based on the information of inventory on-line from various sources. feedback and complaints. It should also allow them to provide suggestions. Data delivery implies updating and delivery of information related to the customer on the latter’s computer. E trading involves using the company’s web site on which product features are displayed. track their delivery and make payments. be easy to use. etc. This includes updating customer’s inventory data. company and product related information the web site should be good in appearance. Channel partners can use the Internet to create a customer-centric supply chain. allow search facilities within the web site. This form of business over the electronic medium is popularly known as e-commerce. and 4) Automation Web presence involves uploading relevant information on a server hooked on to the world-wide-web that allows browsing and downloading information anywhere and from any computer. Vendors. strong planning and technical insight into the Internet’s capabilities. 9) Increases the visibility of the supply chain and enhances operational transparency. is available on the customer’s computer enabling it to support complex decisions like vendor selection. This stage is known as the e-commerce stage. and lowering costs through synchronized production. Payment can be routed via the Internet in the form of secure money transfers. The web site should have features that allow customers to compare and see product previews. All processes related to order placement and fulfillment between the supplier and customer are tightly integrated at this stage. suppliers and manufacturers can be alerted about received orders. All partners are able to conduct business on a level playing field and are not at a loss due to lack of information. 10) Enhance organizational competitiveness through quick product development and marketing. E-commerce proceeds through the following four stages: 1) Web presence 2) E-trading 3) Data delivery. enhanced responsiveness to customer requirements leading to customer satisfaction. It should allow them to ask for after sales service and facilitate return of goods if desired. calculate lead times and shipment dates. 8) Duplication and paper use can be minimized and limited to legal requirements. Besides. It should also contain necessary links to useful information both related to the company and outside it. Vital real-time information. place orders.Emerging Trends 7) Smoothen and speed up order processing by integrating order requests and availability modules thereby helping to send order confirmation. 14 .

goals or desires. Process wastage decreases efficiency and lowers productivity. accounting. sellers and prices. etc. eAgents can help channel partners collaborate and manage the supply chain to enhance customer satisfaction and reduce operational costs. It has been widely felt that human negotiation performance falls significantly short of optimal performance in real life while e-agent driven negotiations can offer significant benefits. · Managing Customer Relationships: e-Agents can facilitate on-line search and customer query handling. · Brokering: e-Agents can find information about products. billing. service providers to customers and back while protecting and conserving the natural environment. e-agents can act as smart assistants performing complex and collaborative tasks. Java.8 SUPPLY CHAIN AGENTS Software agents are being developed to be deployed by companies on the World Wide Web to gather necessary information and initiate action by themselves. and eliminates non-value added activities involved in filing. with some degree of independence or autonomy while using some knowledge or representation of the user’s behavior. maintaining and retrieving documents.9 GREEN SUPPLY CHAIN Green supply chain involves the management of materials and resources from suppliers to manufacturers. 17. define their jobs and establish coordination protocols for communication and collaboration among multiple agents. They reduce the amount of human-computer interaction. · Coordination: e-Agents can contact supply chain partners and conduct teleconferences etc. Some of the supply chain activities that e-Agents can take up include: SCM in Service Organization/NonManufacturing Sector · Trading: e-Agents can collect required information on behalf of the supplier/ customer by contacting them and conducting a variety of online business transactions and functions including negotiations. Another important green strategy is to automate processes by using the electronic media as far as possible. · Auction: e-Agents can help potential bidders search for specific auction items on the internet. Waste minimization and elimination of inessential non-value added activities is one of the most important strategies towards a green supply chain. 15 . Such business processes ultimately end up firing fuel and energy without delivering value to the society. In a nutshell. A green supply chain involves the implementation of appropriate strategies to reconcile the supply chain to environmental protection and conservation on a sustainable basis. They can be instrumental in validating purchasers’ credit.17. This reduces paper work. Intelligent agents are software entities that can carry out operations on behalf of a user or another program. storing. Telescript and Tcl (Tool Control Language) are some of the computer languages being used to create agents. Reduced output and blocked inventory decreases profitability and growth thereby making the business process unsustainable in the end. automatically update the latest item bid prices and notifying users when an auctions closes. COOL (COOrdination Language). while providing privacy and protection. KQML (Knowledge Query & Manipulation Language). This can lead to considerable saving in time and cost for every partner in the supply chain.

16 . some waste is inevitable at the customer’s end in the form of used containers. packaging etc. While preventing and eliminating waste would be the best policy. Often the extra cost incurred in reverse logistics is added to the products when they are first sold new. collectively termed as reverse logistics. 17. recycle. Wastage can take place when materials or goods are unnecessarily stored before they can be used.1. Recycling these materials helps to use them once again thereby reducing their role in environmental pollution. The reverse logistics parts of the supply chain starts with collection of returned goods or refuse which then pass through sorters to reprocessing (reuse. The process of recycling. Accordingly. or disposing them properly. remanufacturing and refurbishing products Disposing obsolete equipment Reuse or disposal of hazardous materials Asset recovery Reverse logistics is a part of the closed-loop supply chain as depicted in Figure 17. renovating and reusing materials can be undertaken through a separate supply-chain channel. Goods returned to the supplier may be in the form of: · Manufacturing returns from the production floor consisting of products having unsatisfactory quality or left over materials · Commercial returns arising out of contracts for taking back obsolete stocks of short-life products · Product recalls arising out of the detection that defective products have been released in the supply chain · Warranty returns of defective products under warranty · Service returns of products for servicing · End-of-use returns for re-manufacturing or re-cycling · End-of-life returns for appropriate disposal Reverse Logistics activities include the following activities: · · · · · · Processing returned products Recycling packaging materials and reusing containers Reconditioning. remanufacture. One of the main objectives of reverse logistics is to keep the cost of reprocessing returned/refused materials lower than that of new products in order to keep the venture profitable. refurbishing and asset recovery) or to disposal. Excessive trimming and disposal of partially filled containers of materials is both wasteful and environmentally harmful. for extracting value that is otherwise unavailable. Moreover.10 REVERSE LOGISTICS Reverse Logistics is the process of moving goods from the ultimate customer to another point. transportation and handling costs have to be kept to a minimum. Just-in-time delivery and usage of materials can reduce the wastage that can occur during multiple storage and handling.Emerging Trends Usage of materials must be limited to the extent required. recycling and disposal procedures must incorporate applicable government and environment protection laws. recondition.

They would be differentiated by the excellent quality of service that they provide to the customers. and control over. repair or refurbishing. both companies and customers have limited visibility into the returns process. Delays and lack of visibility into the reverse logistics process can result in lost sales. 17 . As a result. returns are primarily managed through a series of disconnected and paper-intensive processes. including return transportation. manufacturers.At most companies. Moreover. In fact.1: Closed Loop Supply Chain Web-based applications are being developed that focus on automating and streamlining the process and information flows associated with returns management. and redistribution to the customer or market. Internet-based sales have increased the incidence of returns to around 60%. they would be responsive to customers and continuous learning. SCM in Service Organization/NonManufacturing Sector Warehousing Distribution Manufacturing Re-Manufacturing CLOSED LOOP SUPPLY CHAIN Consumption Returns/Refuse Sorting Disposal Fig. it takes the average company between 30 and 70 days to get a returned product back into the market. a manufacturer frequently finds out about a return only after it lands on the receiving dock. This can help suppliers maintain customer satisfaction levels. customer dissatisfaction and inventory carrying costs. 17. Their activities would be value driven. Moreover. the returns process.11 WORLD CLASS SUPPLY CHAIN World-class supply chains are capable of providing better value to customers than the competition while remaining financially healthy and environment friendly. Long reverse logistics cycles are harmful for products that have short lifecycles such as high-tech products that can lose up to half their value in a single business quarter. These application connect customers. collectors. improvement and innovation would be their hallmark. 17. and carriers while providing much needed visibility into.

management support and training to ensure excellent performance. Their management would be based on facts and analyzed data. Honda (Purchasing). The leadership would establish unity of purpose and provide direction to the organization. Activities and processes across the supply chain would be seamlessly integrated with the help of IT. They would collaborate and maintain strategic alliances with suppliers based on ethics. Companies can outsource supply chain services to third party and fourth party logistics companies in order to focus on their core-competencies.” Explain this statement with examples. Examples of some companies providing world-class services in the supply chain are Federal Express (Inventory Control).13 SELF ASSESSMENT EXERCISES 1) What are the advantages of collaboration among members in the supply chain? 2) How can vendor managed inventory contribute to supply chain effectiveness? 3) “In this era of outsourcing. Managers and researchers agree that providing world-class services can prove to be a sustainable strategy in the long run. which would also be employed to assist decision-making. Collaborative strategies like VMI. third party logistics can add value to existing supply chains. 4) What are advantages of fourth party logistics over third party logistics? 18 . Caterpillar (Information Systems). Wall-Mart (Logistics). Information technology and the Internet have become indispensable for adding value to traditional supply chain services. are gaining momentum. World-class supply chain service providers would have a proactive management that is balanced and consistent. Nations around the world are working towards the implementation of environment friendly supply chain activities. Supply chains having smooth product and information flow can continue to compete and grow in the market space. 3M (Supplier Management) and L. 17.12 SUMMARY Effective management of large and complex supply chains necessitates the implementation of new strategies in the ever-changing market space in the future. They would be provided with the right environment. Strategic alliances among channel partners can be one way of enhancing supply chain effectiveness. professionalism and a win-win philosophy that can lead towards combined growth of all the players involved in the supply chain. reducing waste and remaining flexible. Reverse logistics closes the supply chain and can contribute to environmental protection and conservation. RSP etc. honesty. Keeping customers satisfied and happy by delivering greater value than the competitor would be the prime concern of organizations in the coming years. They would undertake a systems approach to management. Xerox (Customer Service). British Telecom (Billing and Collection). 17. They would create an environment that provides continuous challenge and rewards tied to performance and fair opportunities for growth. Bean (Warehousing and Distribution).Emerging Trends Their employees would be empowered to think and act like owners and would go to any extent to keep their customers delighted. They would be fully involved and happy to meet organizational objectives.

D. and Starling. New Delhi.) (2000) Supply Chain Management in the Twenty-first Century. Thomson. P. Reverse Logistics Executive Council. and Hanna. New Jersey. Prentice Hall. and Simchi-Levi.. and Tibben-lembke. Macmillan. R. S. S. S. W. USA. E. G.5) What is the skill set required by 4PL companies to be able to effectively integrate the supply chain for their client company? 6) Describe the role of the Internet in managing supply chains in the future. D. J. 2nd edition. Phoenix Publishing House. Trent. (2001) Essentials of Supply Chain Management. S. N. B. J. and Deshmukh. (Ed. and Case Studies. R. (1999) Going Backwards: Reverse Logistics Trends and Practices. Lemay. 7) What activities can be performed by e-Agents? How can e-agents help to enhance collaboration among channel partners? 8) How can reverse logistics cater to a green supply chain strategy in the future? 9) What do you understand by the term “world-class supply chain”? SCM in Service Organization/NonManufacturing Sector 17. (2002) World Class Supply Management: The Key to Supply Chain Management. Singapore. 19 . R.14 REFERENCES AND SUGGESTED FURTHER READINGS 1) Bloomberg. L. 2) Burt. S. D. New Delhi. Irwin McGraw-Hill. D. Singapore 3) Mohanty. 4) Monczka. R. Kaminsky. 5) Rogers. Strategies. B. (2002) Logistics. (2002) Purchasing and Supply Chain Management. Irwin McGraw-Hill. P. 6) Sahay. R. Singapore.. and Handfield. (2000) Designing and Managing the Supply Chain: Concepts. Dobler. D. 7) Simchi-Levi. S..

17 18.2 18. sudden changes in the environment that often spell a major crisis for the firms.5 18. have become widely available.4 18. new forms of competition.15 18. Product life cycles are being compressed.3 18.8 18. and new avenues to add customer value have begun to redefine the basis of supply chain designs and strategies.12 18.16 18.1 18. 20 . · portray factors influencing supply chain design decisions.13 18. once protected by layers of patents and enshrouded in corporate secrecy. in his popular book “Only the Paranoid Survive” uses the term ‘inflection point’ to characterize the nature of the profound.1 INTRODUCTION The rise of new technologies.11 18. Building and sustaining competitive advantage requires firms to learn and adapt at an ever-faster rate in order to distinguish themselves from competitors.14 18.18 Introduction Factors Influencing Supply Chain Design Decisions Sustaining Competitive Advantage Good Business Model / Strategy Demand Driven Supply Networks Secret to Supply Chain Excellence is Balance Supply Chain Design Supply Chain Strategies Hau Lee’s Uncertainty Framework Aligning Strategies.7 18.9 18.Emerging Trends UNIT 18 DESIGN FOR SUPPLY CHAIN MANAGEMENT AND GREENING THE SUPPLY CHAIN Objectives After reading this unit you will be able to: · discuss various key elements to be considered for designing of supply chain management.10 18. Intellectual capital and proprietary technologies. Structure 18. the chairman of Intel. Services are becoming commodities in ever-shorter time spans. Andy Grove. and · discuss the emerging trends in the field of supply chain management.6 18. Efficiency and Cost Savings in Supply Chain Product and Process Design for Supply Chain Management Design for Manufacturing Design for Logistics SCM –Trade off Curves Greening the Supply Chain Summary Self Assessment Questions References and Suggested Further Readings 18.

the challenges cannot be effectively met by isolated change to specific organizational units. 21 . high-value-adding manufacturing niches. in turn. and reduce production costs and lead times. For example. Increasingly.. The innovation of substitute products creates opportunities for new entrants and innovators to change the way firms must compete. to remain competitive. and from companies in other industries as well. This growing flow of people promotes rapid flow of ideas. the rise of Internet based telephony. but instead depend critically on the relationships and interdependencies among different organizations (or organizational units). The costs of creating and transmitting information on wider scale. Rising Information Intensity The growing information intensive nature of many industries means that the costs of creating and disseminating information are steadily declining over time. To remain competitive. The costs of transmitting and delivering E-mail to the wider population is declining as new networking technology substantially lower the cost of each message. appears to be declining as the information content becomes richer. This. Impact of the Shifting Landscape As companies deal with the numerous changes and challenges posed by epicenters of massive change. In view of above. the recruitment. it is important that managers broaden the scope of their skills to accommodate and learn new insights that will help them become more effective. training and development of knowledge workers shape a firm’s basis for future technologies and product ideas. SCM in Service Organization/NonManufacturing Sector 18. The shift towards knowledge work places a greater emphasis on how well managers can attract and retain talent. Some of them are discussed in this section Rising Importance of Knowledge Work In many industries knowledge work has become the primary condition that defines how well firms innovate and compete with one another. With the movement toward a global market economy. improve product quality. increasingly transforms the above challenges into problems of establishing and maintaining efficient material flows along product supply chains. the growth of video on demand threatens the infrastructure of many entertainment and network-based firms. and recognition of this fact is leading to considerable change in the way organizations interact with their supply chain partners. For example. industrial organizations are continually faced with challenges to reduce product development time. the value of E –mail as a service to the users grows as it becomes more pervasive and easier to use. and application of these tools to understand critical tradeoffs is very important for designing supply chain management. Often firms attempt to recruit technical talent from their competitors. insights and innovation. companies are increasingly inclined toward specific. Growth of Substitute Products and Services Firms in related or neighboring industries often produce substitutes. threatens traditional phone companies such as AT&T corp. In places such as the Silicon Valley and other hot beds of innovation. effective and robust designing of supply chain management gains tremendous importance.2 FACTORS INFLUENCING SUPPLY CHAIN DESIGN DECISIONS There are many factors that influence the design of supply chain.Inflection points signify the potential for a radical transformation of an industries structure. The development of techniques and tools to enable modeling and analysis of emerging supply chain management strategies and practices. The ongoing competitiveness of an organization is tied to the dynamics of the supply chain(s) in which it participates.

This shared network brings together not only different parts of the firm. · They need to recognize that their customers are able to dictate prices and offerings. 18. their products and services have already become commodities · Companies are able to generate high profitability to the extent that they are able to differentiate themselves in a significant way from their competitor. It is important for firms to continue monitoring how their products and services are likely to evolve over time. 22 . As information. With the advent of digital media formats and new technical standards. experimentation and thinking that will encourage self-renewal and reinvention. innovation and marketing all converge together along a shared network. managed their own CD’s and controlled marketing programs to ensure steady sales. any firm operating within the virtual organization is a potential source for future innovation. knowledge and value flow across many firms. Core competencies built and refined from an earlier time become shackles and blinders that constraint learning. · They must balance their organizations designs to promote the kind of innovation. Often established firms become wedded to ingrained patterns of behavior. From Physical To Virtual Value Chains The perspective can be illustrated by the revolutions shaking the music recording and distribution industry. Sony etc. by forming an array of alliances with Internet service providers and Internet portals to reach preferred customers. These networks evolve and complete on the basis of fast innovation.3 SUSTAINING COMPETITIVE ADVANTAGE Companies can only survive and prosper to the extent that they are able to change as fast or faster that the rate at which their industry is changing. sharing of ideas and rapid product development. For example. digital retailers etc. The rise of the so-called Virtual Organisation is just one manifestation of this broader trend. Rise Of Virtual Organizations Emerging organizational designs will increasingly be based on new configurations where information. who signed long term royalty contracts with artists and entertainers. the industry has been dominated by AOL TIME WARNER. and in several cases for free. but also different firms that may be from different industries as well. Today’s innovations are becoming commodity like products. new technology products like virus-scanning software and fast modems to connect with Internet are rapidly becoming standard features in many of today’s computer and electronics products. knowledge. learning and inflection point that can dramatically change the skills and competencies needed to compete effectively. music firms must reconfirm their value chain approaches. a) Commoditisation of new technologies: One major trend reshaping a variety of industries is the growing availability of state of the art technology to any one who wants it. b) Rapidly declining unit costs: Even some of the most sophisticated forms of knowledge are becoming widely available on the Internet for a very low cost. Traditionally..Emerging Trends We should expect to see the impact of frequent and massive change on an industry in three ways. c) Burden of strategic commitment: Change often requires new managerial mindsets and a willingness to challenge assumptions about how to add value to emerging customer needs.

Fargo’s business model changed the rules of the game. There is powerful and significant correlation between perfect order performance return on assets earnings / shares and perfect margins. transportation and material handling) for best performers. It may offer more value to a discrete group of customers. Rather than the upstream supply constraints of factories and distribution system. Dealing with that reality is strategy’s job. But business model is not the same thing as a strategy. pioneers have been doing it this way for a decade or more & in the process redefining what is possible in the 21st century supply chain practice. The success of Wall Mart Stores and the success of Dell Computers are examples of superior strategies and timely changes in strategies to deal with new competitive realities. Traveler’s cheques remained the preferred methods for taking money abroad for decades until a new technology—the automated teller machine—granted travelers even greater convenience. Sooner or later every enterprise runs into competitors. It also positions winners to grow with dramatically faster response to business opportunities – at the level of lower stock outs for current products and as much as 70% faster 23 . 18.5 DEMAND DRIVEN SUPPLY NETWORKS (DDSN) Demand driven supply networks are supply chains driven by the voice of the customers. Business models. DDSN is a shorthand term for the next generation supply chain that has been taking shape for sometime. the underlying business model remaining the same. Profitability and Valuation Early adopters are already saving 5% of top live revenue compared to laggards. 3) Learn from new entrants. DDSN Matters to Growth. the economics of travel. 1) Pursue self-cannibalization opportunities. infrastructure and information flow to serve the down stream – source of demandwhether a consumer is in the super market or the department of defence. SCM in Service Organization/NonManufacturing Sector 18. A successful business model represents a better way than the existing alternatives. The takeaway! Higher levels of supply chain service (on time delivery order occurrence and in stock performance) correspond with lower level of supply chain cost (inventory. holding half the inventory and delivering 92% perfect order verses the laggards average 91%. however. 2) Buy out the threat or new entrants. It simply means building all supply chain processes.Companies from variety of industries have implemented some new strategies to embrace change in order to learn and craft new sources of competitive advantage. 4) Manage parallel product teams. DDSN give companies cost time and efficiency advantages that boost profits. The saving can be seen in more granular matrices as well like getting paid by customer 70 days sooner. do not factor in one critical dimension of business—competition.4 GOOD BUSINESS MODEL / STRATEGY Every viable organization is built on a sound business model. even though many people use the term interchangeably. Or it may completely replace the old way of doing things and become the standard for the next generation of entrepreneurs to beat. A competitive strategy explains how you will do better than your rivals by being different. in this case.

The essential fact is that output per unit input of labor and capital is growing three times faster than population & at least twice as fast as it did through the entire twentieth century. This number averages 4. including collaborative planning. Supply chain professionals better have a far more decisive basis for prioritizing the ‘to do’ list. These will not be factory jobs. will be acquired or closed and those. coordinators. this trend still looks robust. The right basis combines strategic direction. which do not keep the pace. marketers. DDSN Matters to the Decisions Made About Technology 1) Is radio frequency identification (RFID) just a costly tax dropped on manufacturers by their mega customers or it is a unique opportunity to extend visibility into consumer demand? 2) Is enterprise resource planning (ERP) consolidation & upgrade an expensive IT projects with little clear benefit or is it a business backbone vital to supporting future growth? 3) Is product life-cycle management (PLM) an engineering jargon or is the critical infrastructure for accelerating product innovation? Tackling such sweeping IT challenges without some guiding strategic principle is playing professional Russian roulette. war and peace & every other upheaval we have seen the past 10 years. DDSN Matters to the Global Economy and the Employment Base The critical measure of supply chain’s importance to business is the impact on overall productivity – not simply labor productivity. but multifactor productivity. these are the kind of jobs behind the curtain of the new demand driven supply network. which do so. rather than just lower cost? 2) Best practices: What role do lean or demand pull management principles play? What role does supply chain collaboration play. The steady march of supply chain efficiency from Ford’s River Rouge mega factory to today’s network of contract manufacturers. For most of us this translates into more & better stuff with minimal or no inflation & high paying jobs. These jobs are about translating customer needs into supply chain execution. More innovations with better perfect product launch performance means more business opportunities seized as customer or market demand evolves. Simple minded truisms like “ business needs determine IT priorities “ does not help at all. Through boom and bust. 24 . distribution centers & field service operations that can be nervous system for the demand driven future? What information they do not provide? Approaching technology choices with answers to these three sets of questions in hand we make the business case & roll out plan a lot easier. Designers. best practices & technology 1) Strategic direction: What is the long-term basis of competition for our business? Where will new growth come from. problem solvers. nor will they be white-collar back office functions all of which can be outsourced or automated with capital. third party logistics services and outsource expertise is at an inflection point. Those.2% per year from 1995 to 2000 for durable manufacturing. forecasting & replenishment (CPFR) or sales & operational planning (S&OP)? What about product platform strategies or stage gate product development? 3) Technology: What existing supply chain execution (SCE) systems run in the warehouses.Emerging Trends time to market for new products. will consolidate their industries & built great corporate legacies.

promotions management tools supporting these processes deepen the ability to manage the supply / demand balance by tapping into demand variability as a resource. Such tools are also essential to weather the storm of data from unit level demand. 80% of supply chain costs are set during early design phase of new product development. PLM focuses on getting this right. warehouse management and the like. For some. & Procter & Gamble are doing it now Under the most impossible supply chain conditions imaginable –super short product life cycles (consumers pc’s) and long lead time components (semiconductors including processors) –Dell managed to build the first true demand driven supply networks. provided the visibility on demand is clear enough to quote accurate requirements backwards into the network. · Product Lifecycle Management: Design for X means. measurement is the ultimate expression of business judgment driving supply chain decisions. The tradeoff shows up most clearly in two key matrices. price. Proctor and Gamble’s “moments of truth” and Wall-mart’s “everyday low prices” provide powerful strategic principles to set a course for long-term supply chain excellence. reuse and compliance. 25 . this may be no different than bar fleeting spikes in demand. on time. Their financial performance shows that it works. This network embraces demand variability (35% of home and small business. Wall-Mart.DDSN Matters Because Dell. customers cancel in the first 24 hours) like no push supply chain ever conceives. and in perfect condition) Supply chain cost.6 THE SECRET TO SUPPLY CHAIN EXCELLENCE IS BALANCE Most companies either keep costs down at the expense of service or keep service levels up at the expense of costs. accurate. · Executive Dashboards: Bench marking and balance performance. and revenue optimization. prepare positions on the four emerging corner stones of technology that support DDSN: SCM in Service Organization/NonManufacturing Sector · Unit Level Demand Visibility: RFID. Recommendations Start with demand and work backwards to define supply chain strategy.commerce. The top companies keep their balance in the details. And it keeps getting better. Companies don’t have to trade cost for service or vice –versa. The notion of a “moment of truth” helps many companies to define exactly what matters at instant where supply needs demand. What data populates the dashboards and how it differs by role is a deceptively thorny and potentially political issue. B2C. 1) 2) Perfect order performance. all represent demand at its most granular and therefore most precise. POS. catapulting them to best overall. · Demand Management: Forecasting. Also. While looking to capitalize on existing supply chain applications in order management. (The percentage of orders that are complete. E. Constraints are more fluid than ever. 18. defining the product and its supply and service network for speed.

increasing demand forecast accurately yields significant improvements in perfect order fulfillment. Improvement means attacking the problem at three levels. fashion. Planning for future demand especially as it relates to manufacturers with long lead-time component 2) 3) 26 . Future Demand: Strategic planning for future products and their effect on buying behavior is another important aspect to ponder upon. network effects.(S & OP )process to connect demand with production internally . and enterprise resource planning (ERP) vendors like SAP. For FMCG. · Using a sales and operations planning. 1) Replenishment Based Demand: The predictable demand that forms the base line for forecasting and planning. 2) Surge demand. PEOPLESOFT and ORACLE. 1) Replenishment based demand. Visibility can be system to system or supported with manual planning and replenishment processes.Emerging Trends Top performers do three things differently than every one else. To increase demand visibility. Surge Demand: Sensing and managing events that change demand is more a matter of sophisticated demand modeling and forecasting and requires combining POS or other actual historical demand data with intelligence about customer behavior unique to events like weather. · Sharing it with your suppliers and logistics providers as early as possible. ( DDSN’s). Demand visibility is the ability to see undistorted and accurate demand within the time frame necessary to react to it. but are consistently good enough at each sub component to add up to the best in total. but make sure you don’t just move costs around. Vendors with applications targeting this problem include specialists like DEMANTRA. The role of technology is in the use of algorithm-based tools to model and prepare for such surge demand. replenishment level visibility is a definite technology issue that leaders are tackling with demand data hubs to consolidate and manage point of sale (POS) data. and LOGILITY as well as larger supply chain suite vendors like i2 Technologies and MANUGISTICS. technology and investments there. and promotions (yours and competitors). target the following best practices that connect you with your trading partners and connect supply and demand internally. 1) Aim for Balance: The best performers in costs and service are not best at each of the sub components of costs or service. 2) Increase Demand Visibility: Across industries. · Getting the demand information possible from your key customers.Use application technology to reduce your high cost areas . TERRA TECHNOLOGY. Demand Visibility is Everyone’s Top Concern in Moving Supply Chains Towards DDSN’s. the first step is improving this demand visibility. 3) Future demand In perusing this DDSN model. 3) Isolate High Costs: Top performers know where they hold their cost and focus their best practice. Demand visibility is a major barrier in developing demand driven supply networks. Above three types of demand visibility must be conquered to achieve DDSN. This may be electronic data interchange (EDI) orders or some other form of pull replenishment on steady run products.

There are three basic steps to achieve this. SCM in Service Organization/NonManufacturing Sector 4) Learn: to manage the sourcing and information technology functions with in the global supply chain. 27 . product and funds. The supply chain strategy includes supplier’s strategy. · Understanding the supply chain. operating facilities and information flows in supply chain are all parts of supply chain strategy. 1) Supply Chain Strategy or Design: A company’s competitive strategy defines the set of customer needs that it seeks to satisfy through its products and services. transportation. and · Achieving the strategic fit.7 SUPPLY CHAIN DESIGN Successful supply chain design requires several decisions relating to the flow of information. 5) Understand: the importance of managing relationships with suppliers and customers to create differential advantage. demand planning depends mostly on working ways lead time realities against marketing intent and attempting to build a supply chain that is ready once orders starts rolling in. Supply chain design decisions are typically made for long term and are very expensive to alter on short notice. During the supply chain strategy design phase a company decides on how to structure the supply chain. operations strategy. DDSN starts with getting a handle on demand visibility. With future products. modes of transportation and types of information systems to be utilized. Key Skills Following should fit into the skill set of modern supply chain design manager. · Understanding the customer. and logistics strategy. These decisions fall into three categories or phases depending on the frequency of each decision and time frame over which a decision phase has an impact. It decides what the chains configuration will be and what processes each stage will perform. Achieving a strategic fit between a company’s competitive strategy and supply chain strategy is a key consideration. Decisions regarding inventory. 18. They must fit and support each other if a company is to succeed. 3) Define Value: from the perspective of customers and learn how to manage the supply chain to deliver that value.and processes is really a matter for Product Portfolio Management (PPM). PPM applications are available from specialist like IDC or SOPHEON as well as with in the suits of most product life cycles management (PLM) and ERP vendors. Various functional strategies cannot be formulated in isolation. Supply chain professionals need to clearly define what demand visibility means to their organization on at least these three levels before buying tools to help improve forecast accuracy. products to be manufactured or stored at various locations. 2) Understand: the impact of demand on the supply chain and the considerable competitive advantages that can result from managing demand across companies. 1) Define: integrated supply chain management. its components and how they are integrated. These decisions include the location and capacities of production and ware housing facilities.

there are also innovative products with a stable supply process. but the supply (both quality and quantity) of the products depends on yearly weather conditions. with a reliable supply base and a mature manufacturing process technology. 3) Supply Chain Operations: The goal is to implement the operating policies in the best possible manner. an evolving supply process is where the manufacturing process and the underline technology are still under early development and are rapidly changing.Emerging Trends 2) Supply Chain Planning: This starts with a forecast for the coming year of demand in different markets – with all the details of markets. Similarly. 1 2 3 4 5 6 7 8 9 10 Functional Low demand uncertainty More predictable demand Stable demand Long product life Low inventory cost Low profit margin Low product variety Higher volume Low stock out cost Low obsolescence Innovative High demand uncertainty Difficult to forecast Variable demand Short selling season High inventory cost High profit margin High product variety Low volume High stock out cost High obsolescence 28 . For example. In contrast. No.8 SUPPLY CHAIN STRATEGIES Let us see some supply chain characteristics and strategies Demand and supply uncertainty characteristics Hau Lee points out that in addition to important demand characteristics. In a stable supply process. but the supply of hydroelectric power. As a result the supply base may be limited in both size and experience. Lee defines a stable supply process as one where the manufacturing process and the underline technology are mature and the supply base is well established. Some food products also have a very stable demand. and long-term supply contracts are prevalent. Lee argues that while functional products tend to have a more mature and stable supply process. can be erratic year by year. supply locations. which relies on rainfall in a region. Stable manufacturing processes tend to be highly automated. sub contracting of manufacturing etc. manufacturing complexity tends to be low or manageable. inventories. as the suppliers themselves are going through process innovations. but that is not always the case. The supply base may not be reliable. Table 18. the supply process is very stable. Fashion apparel products have a short selling season and their demand is highly unpredictable.1: Demand Uncertainty Characteristics Sl. there are uncertainties revolving around the supply side that are equally important drivers for the right supply chain strategy. the manufacturing process requires a lot of fine-tuning and is often subject to breakdowns and uncertain yields. Following exhibit summarizes some of the differences between stable and evolving supply processes. However. In an evolving supply process. 18. the annual demand for electricity and other utility products in a locality tend to be stable and predictable.

companies’ use build to order and mass customization processes as a means to meet the specific requirements of customers. non value added activities should be eliminated.No. accurate.9 HAU LEE’S UNCERTAINTY FRAMEWORK Let us consider some examples and types of supply chain needed. scale economies should be pursued. it is more challenging to operate a supply chain that is in the right column of the table 18. and cost effective transmission of information across the supply chain. optimization techniques should be deployed to get the best capacity utilization in production and distribution. 2) Risk Hedging Supply Chains: These are supply chains that utilize the strategies aimed at pooling and sharing resources in a supply chain so that the risks in supply disruption can be shared. 1 2 3 4 5 6 7 8 9 10 Stable Less breakdowns Stable and higher yields Less quality problems More supply sources Reliable suppliers Less process changes Less Capacity constraints Easier to change over Flexible Dependable lead times Evolving Vulnerable to breakdowns Variable and lower yields Potential quality Problems Limited supply sources Unreliable Suppliers More process changes Potential capacity constraints Difficult to change over Inflexible Variable lead times SCM in Service Organization/NonManufacturing Sector Types of Supply Chain Strategies Lee characterizes four types of supply chain strategies as shown in the exhibit below. These supply chains have strategies in place that combine the strengths of “hedged” and “responsive” supply chains. it is necessary to understand the sources of the underlying 29 .3 than in the left column. then the risk of disruption is reduced. Before setting up a supply chain strategy. while the risk of supply shortages or disruptions are hedged by pooling inventory and other capacity resources. A single entity in a supply chain can be vulnerable to supply disruptions. but if there is more than one supply source or if alternative supply resources are available. 1) Efficient Supply Chains: These are supply chains that utilize strategies aimed at creating the highest cost efficiency. and unpredictable demands of customers on the front end. and information linkages should be established to ensure the most efficient. and similarly. Information technologies play an important role in shaping such strategies. it is more challenging to operate a supply chain that is in the lower row of the exhibit than in the upper row.2: Supply Uncertainty Characteristics Sl. They are Agile because they have the ability to be responsive to the changing. while minimizing the back end risks of supply disruptions. diverse. 18. 4) Agile Supply Chains: These are supply chains that utilize strategies aimed at being responsive and flexible to customer needs. For such efficiencies to be achieved. 3) Responsive Supply Chains: These are supply chains that utilize strategies aimed at being responsive and flexible to the changing and diverse needs of the customers. According to Lee. To be responsive.Table 18.

efficiency and cost savings. having a complete understanding of a wide range of strategies is just as important. We will then learn strategies to improve efficiency and reduce costs. Finally. responsiveness is more important than efficiency and we have to understand the ways to improve supply chain responsiveness. a critical first step in any supply chain initiative because putting teams to work on wrong initiatives can cause us valuable time and money. Aligning strategies. stock outs. We will play a version of classic Bear Game simulation used by business schools and executive training programs. use active demand management methods to minimize the impact of shortages and discover new types of supplier arrangements that share this among supply chain partners while providing benefit to all players. we will see which of the strategies we’ve learnt are not software intensive and understand how we should go about evaluating software for those cases where it is a critical part of the improvement strategy. 30 . EFFICIENCY AND COST SAVINGS IN SUPPLY CHAIN Companies today are often presented with a myriad of supply chain strategies. Through simulation we will see first hand the causes of Bullwhip effect. semiconductors Agile supply chain Supply Uncertainty Low (Stable Process) High (Evolving Process) Hydroelectric power.Emerging Trends uncertainties and explore ways to reduce these uncertainties.10 ALLIGNING STRATEGIES. which leads to major supply chain inefficiencies. Once we have covered the causes of these problems we will learn the best strategies to mitigate or remove them. Computers. How can we learn more about these strategies and decide which one will help us the most? Are we operating the most appropriate type of supply chain? Are we spending time and money on strategies that are not providing maximum benefits? We will begin with looking at products and supply chain characteristics and learning a frame work for aligning the right strategies for your needs. We will learn a powerful tool for hedging demand uncertainty so that we minimize total cost by taking into account both the opportunity / cost of stock outs and costs of access inventory then we will learn several advanced emerging strategies that apply to a wide range of supply chain. high end computers. This can prevent costly mistakes that don’t move the company forward. If it is possible to move the uncertainty characteristics of the product from the right column to the left or from the lower row to the upper. Popular music Responsive Supply Chain Telecom. food Oil and gas Efficient Supply Chain High (Innovative Products) Fashion Apparel. Then in some cases. Table 18. Some Food produce Risk Hedging Supply Chain 18. we will explore set of concepts that will help improve customer responsiveness and deal with highly uncertain demand. including unpredictable lead times. several different types of supply chains may be called for.3: Type of Supply Chain Needed Demand Uncertainty Low (Functional Products) Grocery basic apparel. miss trust between supply chain partners and higher manufacturing and transportation costs. We will see how to understand and cope with supply chain uncertainty to make our product process more reliable. Then we have to understand what type of supply chain we should be targeting. then the supply chain performance will improve. However even with in a company.

2) Modularity versus integral design. or even something as simple as administrative postponement can all provide significant benefits. designing products to take advantage of and strengthen our supply chain can provide extra ordinary benefits. Designing products so that certain manufacturing steps can be completed in parallel to cut down to manufacturing leadtime. 3) Universality. which is fundamental to customer satisfaction. consider various designs for logistics concepts. shifting the push pull points. Mass Customization is often a hybrid of product and process design finding ways to offer unique items with little or no additional lead-time can increase market share and breathe new life in our products. We will see an excellent example of postponement. Resequencing production operations. We will also learn how to quickly estimate the positive impact of a postponement strategy in the company with out analyzing sales data or using complex calculations. Finally. Simply ‘giving customers what they want’. The production process itself is often overlooked as an incredible opportunity for enhancement.11 PRODUCT AND PROCESS DESIGN FOR SUPPLY CHAIN MANAGEMENT Product design for supply chain management means building products that thrive in and enhance our supply chain architecture. This approach helps to provide firms SCM in Service Organization/NonManufacturing Sector 31 . Secondly. in which product design is used to lower the cost of logistics. Three fundamental concepts are to be explored. Focus on Various Ways that Product Design Interacts with Supply Chain Management Firstly. postponing product differentiations enables risk pooling across products leading to lower inventories and allows firms to use the information contained in aggregate forecasts more effectively. manufacturing and post sales support networks are being stressed to the breaking point. Product designs for efficient packaging and storage obviously costs less to transport and store. if our products require excessive inventories to maintain service levels. If our supplier. We will see examples of how postponement can be implemented through software applied to product packaging and even how it can help during a new product launch. if our offerings are not attracting new buyers in a saturated market or if our need to reduce cost and complexity throughout the supply chain. is rarely enough. Mass customization involves the delivery of a wide variety of customized goods or services quickly and efficiently at low costs. Companies must be able to give customers the right products in the most resource effective manner with out sacrificing quality or service.18. a strategy that can enhance service levels with lower inventories. There are different ways in which the suppliers can be integrated into the development process and considered keys to managing this integration effectively. A framework for costs and benefits will help understand the value of these ideas and what to expect as we integrate them into our product design plans. leading to a reduction in safety stocks and increased responsiveness to market changes. Another critical design /supply chain interaction involves integrating suppliers into the product design and development process. 1) Component commonality. Product design is not the only place we can make improvements. advanced supply chain management helps to facilitate mass customization.

They are important tools for coping with demand and supply uncertainty. we identify the key drivers of supply chain performance i. we assumed that product design decisions were already made and designed supply chain design and operation based on this assumption. means designing your production operation to allow for customer orders to be manufactured quickly. Mass customization or BTO (Built to order). Now. Earlier. Because of shorter and shorter product life cycles.12 DESIGN FOR MANUFACTURING Earlier. the pressure for dynamically adjusting and adopting a company’s supply chain strategy is great.e. we realize that a much more efficient effective supply chain is possible to operate if we take logistics and supply chain management concerns into account in the product and process design phase itself.Emerging Trends important competitive advantages and effective supply chain management is critical if mass customization is to be success full. How supply chain should be structured to meet the needs of different products and customer groups. mass customization and postponement should be explored fully. a good supply chain design for one company may not work for another. Innovative products with unpredictable demand and an evolving supply process face a major challenge. global sourcing. 32 . · · · · Inventory Transportation. Therefore. We also assumed that the supply chain involves determining the best way to supply existing products using existing manufacturing processes. the concepts of outsourcing. Information. they worked on how to make this design efficient. However. Weaknesses in supply chain design can affect the performance of a firm. Keeping the above in mind. Following are the important tools for coping with demand and supply uncertainty. This is a means of eliminating demand uncertainty entirely. is what supply chain design is all about. strategic framework for supply chain management is developed. A good supply chain design helps a firm to have competitive advantage. 18. Then these drivers are used on a conceptual level during supply chain design and different supply chain Methodologies are used along with analytical tools and techniques to design and improve supply chain performance. 1) Outsourcing 2) Global sourcing 3) Mass customization 4) Postponement Demand and supply uncertainty is a good framework for understanding Supply Chain Strategy. Within the strategic framework. Then a stage came when management’s realized that product and process designs were key product cost drivers and manufacturing process should be taken into account early in the design process to make it more efficient. Then. design engineers worked on developing a product that worked and product that used materials as inexpensive as possible. and Facilities.

Product packaging and transportation requirements need to be incorporated into the design process . supply chain strategies can shift the entire curve. SCM in Service Organization/NonManufacturing Sector 18. This concept involves consideration of material procurement and distribution costs during the product design phase. without costly swings from one place on the curve to another as different functional groups “fight” for either lower inventories or higher service. This would shift the curve to the right. speeding up customer response times without raising inventories.14 SUPPLY CHAIN MANAGEMENT: TRADE OFF CURVES One of the fundamental tradeoffs in supply chain management is that between inventory levels and customer service. One of the first steps in improving a supply chain is making sure that organizational responsibility for inventory levels and customer service are appropriately managed. These two responsibilities should not be separated . improving customer service levels with no increase in inventory). However. or risk pooling that can lower the curve allowing you to maintain (or enhance) service levels with less finished-goods inventory.18. For any given supply chain. In efficient supply chain design. increasing the level of service (product/spare part availability) typically means higher levels of inventory. Doing so enables a company to set expectations and properly manage this tradeoff.1: Lowering the inventory/service trade-off curve provides better customer response with lower inventories This tradeoff curve provides a perfect example of how silo behavior (in which functional areas lose sight of cross-functional optimizations) can cause problems in supply chains.in fact. Most companies have discovered their “best place” on the curve. 33 . heavy emphasis is given on minimizing inventory and handling costs. depending on what their customers require and what their competition offers.13 DESIGN FOR LOGISTICS Design for logistics concepts suggest product and process design approaches that help control logistics costs and increased service levels this concept should be incorporated into early phases of product development.How a product is designed and the design of the components and materials themselves can have a significant impact on the cost to deliver the product. they should report to the same desk. How might this work? Through effective supply chain management you may be able to reduce lead times. lowering your inventory levels without adversely affecting your customers (or the reverse. High High Inventory Goal Low Low Inventory Goal Poor Service Good Poor Service Good Figure 18. Supply Chain reviews a strategy called postponement.

17 SELF-ASSESSMENT QUESTIONS 1) Identify and describe factors influencing supply chain network design decisions. and new avenues to add customer value. Working with them on environmental issues not only generates significant environmental benefits.Emerging Trends 18.15 GREENING THE SUPPLY CHAIN Greening the supply chain involves incorporation of environmental protection and conservation initiatives into existing supply chain management activities and design. This is important as companies can only survive and prosper to the extent that they are able to change as fast or faster than the rate at which their industry is changing. 3) Identify and describe the major drivers of supply chain performance. This involves · Screening suppliers for environmental performance. but also opportunities for cost containment. Therefore. · Providing training and information to build suppliers environmental capacity. Involvement of suppliers in environmental initiatives and need to look beyond their own facilities is being realized by growing number of companies to achieve their environmental goals and satisfies stakeholders’ expectations. You have studied Demand Driven Supply Networks (DDSN) that are supply chains driven by the voice of the customers. many companies are working to streamline their supply base and develop more cooperative long-term relationships with key suppliers to achieve the green design initiatives. constant. product and funds. 2) Describe how a company achieves strategic fit between its supply chain strategy and its competitive strategy. · Working with them on green design initiatives. It simply means building all supply chain processes. infrastructure & information flow to serve the down stream – source of demand. improved risk management and enhanced quality and brand image. You further studied about balance in Supply Chains as most companies either keep costs down at the expense of service or keep service levels up at the expense of costs. Successful supply chain design requires several decisions relating to the flow of information’s. Customer and stakeholders do not always differentiate between a company and its suppliers and hold the company accountable for suppliers environmental and labor practices. 18. frequent two-way communication with them about environmental issues and performance expectations. Finally you learnt about various ways that product design interacts with supply chain management and supply chain management trade off curves. new forms of competition. Why would a firm want to outsource? . procurement and distribution processes. 34 4) Describe how outsourcing works. You have studied many factors that influence the design of supply chain. DDSN is a shorthand term for the next generation supply chain that has been taking shape for sometime. hence we have covered effective supply chain strategies and Hau Lee’s uncertainty framework.whether a consumer is in the super market or the department of defence. 18. This involves clear.16 SUMMARY Redefining the basis of supply chain designs and strategies is prevalent now because of rise of new technologies.

35 . Ltd. Irwin McGraw-Hill. D. Robert Jacobs .Aquilano. Tata Mc GrawHill Publishing Company Ltd.Pearson Education (Singapore) Pte . Supply chain management: Strategy. Singapore. (2000) Designing and Managing the Supply Chain: Concepts.Hedging and Agile? Why or Why not? 8) What are the basic building blocks of an effective mass customization program? 9) What kind of company wide cooperation is required for a successful mass customization program? SCM in Service Organization/NonManufacturing Sector 18. F. Risk Hedging and Agile Supply Chains? 7) Can a supply chain be both efficient and responsive? Risk . Peter Meindl .18 REFERENCES AND SUGGESTED FURTHER READINGS 1) Simchi-Levi.5) What are the advantages of using the Postponement Strategy? 6) What are the characteristics of Efficient. Chase . Planning and Operations. Nicholas J . 3) Richard B. 2) Chopra Sunil. Strategies. Kaminsky. E. and Simchi-Levi. and Case Studies. Operations Management for Competitive Advantage . Responsive. P.

3 19. you should be able to: · discuss supply chain management of products vs.4 19. Services Financial Services Sector Hospitality Transportation Software Communication Healthcare Consultancy Education Government Retailing Summary Self Assessment Questions References and Suggested Further Reading 19. 36 .9 19.1 INTRODUCTION Though traditionally Supply Chain Management has been applied only for products and hence in the manufacturing sector. With the tertiary sector growing at a faster rate than the other two and occupying a dominant share of GDP even in developing economies.8 19.15 Introduction Supply Chain Management of Products vs. services.6 19.5 19. it is increasingly being recognized that the basic principles of Supply Chain Management are equally applicable in the service/ non-manufacturing sector also.12 19.10 19.13 19. Hence.7 19. it is critical that Supply Chain Management professionals develop an expertise in application of Supply Chain Management principles to this sector in order to enable their organizations to develop a sustainable competitive advantage and contribute to the economy by enhancing shareholder value. · discuss the application of supply chain management principles to arange broad industries in different sectors. before beginning a discussion on the application of Supply Chain Management principles to services.11 19.1 19. Structure 19.2 19.14 19. as some traditional Supply Chain Management strategies are infeasible in case of services. the very nature of services makes it necessary to modify or adopt the same. it is important to understand the basic differences in the nature of products and services. Though the basic principles of Supply Chain Management remain the same.Emerging Trends UNIT 19 SUPPLY CHAIN MANAGEMENT IN SERVICE ORGANIZATIONS / NON MANUFACTURING SECTOR Objectives After reading this unit.

nursing etc. movie prints.g.) can be applied with suitable modifications to the service sector. which may gradually loose value over a time. 1) Financial services . 2) Hospitality . FOREX trading etc. etc. · Rapid/low Cost Distribution: Similarly. This leads to the second major difference i. · “Instantaneous/Rapid” Production: In case of products/services. banking. rail. in case of some services. · Absence of “Inventory” Concept: As stated above it is not possible to “store” a number of services in order to do a capacity matching between demand and supply. once an aircraft takes off. photograph copies etc. 5) Communication . travel and tourism comprising road. · Instantaneous Value Destruction: Unlike physical goods. this needs to be done by building up resources rather than the services to do demand – supply matching. · “Impossible” Distribution: On the other hand. forecasting. mobile and satellite services etc. Apart from these and such related other differences. restaurants. as is possible in case of products.). we will look at the software development and distribution process from a service prospective. telecasting and publishing industries. insurance.g. “distribution” is not possible as consumption has to happen at the spot of “production”. DRP etc. We will be discussing the application of Supply Chain Management principles to the following broad industries in the service sector.this will include the Telco providing POTS as well as ISP’s. optimization.consists of goods transport by road. SCM in Service Organization/NonManufacturing Sector · Simultaneous Production/Consumption: A large number of services can only be rendered when actually demanded e.including hotels. · Low/no Cost of Inventory/Production: In a number of services/products (typically software).g.19. pharmacies and allied services. the value of the unoccupied seats drops to zero. shipping and aviation industries pertaining to passenger transport. restaurants. Hence. as they comprise a major part of the value generated by the sector.2 SUPPLY CHAIN MANAGEMENT OF PRODUCTS VS. rail air or water including courier and post. and allied services. 3) Transportation . the cost of distribution is very low and speed extremely rapid. SERVICES The essential differences in the supply chain management of products vs. 6) Healthcare . in case of electronic digital distribution over channels such as Internet. queuing theory. 37 .e. most other Supply Chain Management principles and models (e. absence of “inventory” concept.including banking. stock trading. services may incur sudden time related value destruction for e. (E.includes hospitals. services are discussed below. hotels.g. the incremental cost of either production or holding “inventory” is very low (or nil) in comparison to the value of product.g. 4) Software . it is possible to “produce” virtually instantaneously at a very low cost e. which can be digitally duplicated/copied. as well as broadcasting.though software may be considered a product also.

......................................3 FINANCIAL SERVICES SECTOR In this section we will discuss about banking..... click and borrow.... However.................... 19....... But today. online mortgages. Once you have decided.................both classroom and distance............... judicial etc..................................Emerging Trends 7) Consultancy ............... The best part about e-banking is that.... ............................................ 8) Education ..simultaneously by changing their supply chains from brick and mortar branches to ATM’s and phone and net banking Electronic banking emerged in prototype form in 1975 and was introduced by some major banks as early as circa 1985...... ........... We will now look in detail at the emerging trends in the supply chain of the abovementioned industries using a few examples from each sector.... 10) Retailing ....... administrative..................... Activity 1 Can you list some further differences in the supply chain characteristics of products and services? ............................. An online questionnaire then helps you choose from an array of loan alternatives..... credit cards and brokerages..... no branches and lower costs ............. First you input data about your finances and your dream house.............. . 9) Government ..... Online mortgages No brokers... defence.............................. it cuts costs too (the estimated per transaction cost using an ATM is estimated at just 10% of that using a manual teller and net banking cuts that down further by about 90%!)....this would include municipal........................ 38 .... Home banking software has come a long way too..................................... you are qualified for a loan and offered a choice of mortgages........ the absence of a critical mass of PCs and a PC friendly population stunted its growth................... services............ Banking How banks are cutting costs and improving customer service . The winners will be those who use technology to make it continually easier for customers to manage their money anywhere anytime at lower transaction costs....... It aims to deliver a totally new experience to mortgage shoppers – the ability to finance a new house without setting foot outside the old one! It’s as easy as point... The key now is to understand that banking is a value added information business.......... there are 35 million plus PCs in US homes alone and the consumers there are now spending more on buying PCs than TV sets..this would include knowledge management activities as well......AFI shows the way American Finance and Investment (AFI) is a new breed of lender with no branches and brokers.......................includes trading and value added reselling........ police.............. The banks have been distributing their services using the conventional supply chain for a long time.

............................................. looks up your current credit balances.... This is an enormous advantage as consumers who may have hesitated to borrow from a low –price..................... The salaried call center agents can process four times as many loans as commissioned agents in the field..... addresses (office and residence).......................... The typical AFI consumer saves about $1500 in upfront fees....... an application for a NextCard Visa Credit Card can be made on-line in 30 seconds........................................... NextCard has figured out how to integrate its website with the databases of the major credit bureaus.....Credit cards on top from NextCard NextCard is an excellent example of using e-service to streamline the supply chain of a financial product.... The application gets approved (or rejected) in just 30 seconds! Brokerage Charles Schwab shows the route to e-biz Schwab is the supreme e-broker with 67% of its customers’ trades going over the web................ address. The potential exists for Schwab to go to the public and say....As AFI sells mortgages directly to consumers... SCM in Service Organization/NonManufacturing Sector 19. noname may be more willing to do so now............................ income etc.......... given the huge cost advantage – a direct result of the reengineered supply chain...... 39 ......................How WorldRes adopted a business model that took it on the net startup’s fast track and attracted $30 million from investors Rather than just struggling to build a brand in a small niche....... annual income and a few minor details......................... so that in just seconds... Resorts and Airlines Hotels and Resorts WorldRes .. inns and resorts that don’t have enough business guests to justify a terminal and the costly links to global reservation systems like Sabre or Apollo... It boasts $263 billion in online revenue.... ...... ...... Now.............. “why do you need a bank?” – on the strength of its unique supply chain. it identifies who you are........... no waiting . Earlier for applying for a credit card. social security number............. you had to fill out double sided forms with lots of tiny boxes supposed to encompass your financial history including account numbers............. WorldRes raised and spent more than $10 million to build a reservation booking engine targeted at small hotels... buy insurance and pay bills electronically....... ........................................ Credit Cards No forms................................ ........... Schwab...4 HOSPITALITY In this section we will discuss about Hotels... does a calculation based on that information and actually suggests which balances to transfer in order to get the lowest rate on NextCard.....com now provides a place not just to trade stocks but also to write cheques.. All you provide is your name................... via the Internet and two call centers........... it has none of the overheads of physical branches..... Activity 2 Give an example of innovation in supply chain management for FOREX trading.................................... in the US............

................. .....Their site is so easy to use that web travelers don’t just research flights ................ the room and facilities of their choice and its availability at a particular time and make the reservation on-line................................. Activity 3 What can the aircraft charter services do in terms of supply chain activities to effectively compete with scheduled airlines? ....................................8% of visitors to Southwest’s site book a ticket – a “look-to-book” ratio twice that of the nearest ticket booking rival and higher than that of any traditional retailer on the web... Instead of the infinity of choices offered by other dotcoms............. to drive traffic to the hotels............ WorldRes was there ready with its booking engine.............. .................................. This key to success in turning eyeballs into buyers is simple...... which serve such niches....... had developed enough traffic that they were ready to move to transactions.................................. This unique supply chain advantage has led to high investor valuation of WorldRes’ stock..Emerging Trends Then........................................ all carry the burden of being older businesses that have migrated to the web while it is in the enviable position of being the only pure Internet play in leisure lodging............... there are other booking engines available for the content sites to link up with WorldRes’ competitors................................................................................................. .... Southwest delivers a page where a transaction takes just 10 quick clicks to complete using a popup giving fares and options to help users get a better flight or better price............................................. but lucrative back-end for thousands of resorts and small hotels that can’t justify paying for a terminal and link to the global reservation systems................................. This segment accounts for 85% of all hotels and WorldRes has exploited the weakness in the existing distribution system for small hotels......................................................................... ................. when the content sites..... 40 ............................. being the unseen........................................ Though........................ Airlines Southwest Airlines ................................ WorldRes is an example of a company that is changing the way business is done in the hospitality sector to become a leading player in its chosen segment................ They have handled the complexity of a booking engine and hidden it from small hotels that are not technically sophisticated..........they buy tickets 13............ With a mix of competitive supply chain technology that can turn content into commerce and high stock valuation to fuel acquisitions................ It hopes to make most of its money on its booking engine.... ............................ It functions as a virtual cash register that lets people check in real-time... They have also made smart distribution deals with the portals like Expedia............ to use web design....

The worldwide supply chain consists of over 1. In 30 days.000 workers.000 people. unloading and reloading 130 Jumbo Jets using 171 miles of conveyer belts.000 people and the year-end target is to breach the one million mark. cargo tags and forklifts exploiting robotic sorters. hits matter more than profits and distribution alone creates wealth.800 people in 46 countries had downloaded the software. FedEx operates a super hub at the Memphis.00. to read parcel bar codes. Productivity applications help field-station managers in weekly forecasting. A time variance of even 30 minutes can wreck the schedule. workers manually sort by region a minimum of 38 pieces per minute.00. Smarter sorting capabilities like automated overhead laser scanners are constantly being invested in to augment package-handling processes. Package Delivery Services Federal Express (FedEx) Logistics processes deliver over 99% of packages accurately and on time everyday. countless trucks. uses “viral marketing” to distribute his software “Roger Wilco” that transmits voice over the Internet and lets users link up in virtual conference calls. SCM in Service Organization/NonManufacturing Sector 19.6 SOFTWARE How Resounding Technology is using a low cost approach to achieve wide global distribution Resounding Technology founder. it had spread to 1.000 trucks. Adam Frankl. Within 24 hours.5 TRANSPORTATION In this section we will discuss about Package Delivery Services. 500 jet aircrafts and 35. A product movement planner (a client/server system for planning air and truck schedules) employs a built-in algorithm that finds the least costly way to get a package to its destination.19. local courier scheduling and city route planning. in spite of handling more than a million packages daily In a highly competitive market. It launched its FedEx ship customer premises tracking software in 1994 itself. The renowned COSMOS package scanning/tracking system uses PC attached scanning gun along with older more sophisticated handheld Super Trackers. This help make light duty days more cost efficient by enabling appropriate staffing levels. He posted a copy on a “freeware” website inviting anyone to give it a try and forward the web address to a dozen friends (who in turn would Zap it to dozen more – triggering a chain reaction). Though this does not result in profits. There are relentless cost cutting efforts such as additional package sorting hubs to create less circuitous air routes. on the Internet. as large companies are willing to buy reach at a 41 . Using the “document sort”. FedEx is the leader with 48% share. Tennessee airport on a 240-acre site with 8. Such continuous improvements in the widely acknowledged best practices keep FedEx at the leading edge of excellence in Supply Chain Management. 2.

while charges for others are nominal. This innovative approach to Supply Chain Management has led to the company taking a lead in the highly competitive market space. A server at the destination reconverts the data back to voice and directs the call over local lines. After the emergence of super-simple networking kits and servers.7 COMMUNICATION In this section we will discuss about Internet. Fax. Voice Calls. Using the net to make phone calls is another way to reduce costs. it’s time for highspeed Internet access. 19. 18. Broadcasting and Publishing Internet. call tracking. These services are very handy for so-called broadcast faxing – sending one document to multiple fax machines all over the world. He can dial up any of several on-line fax services from his laptop to send his document.5% of all domestic phone traffic in the US will be carried over data lines up from just 0.2% in 1999. They save long distance charges needed to fax lengthy documents and are also a boon to the business traveler. To accelerate the effort. You pay only for the local connections on either end of the servers. You get an automated voice prompt and punch in the long distance number you want to reach. cheaper The convergence of digital technologies. Some of these services are free. Voice Calls. Internet fax services too are mushrooming. Faxes can also be received this way through your e-mail inbox. A new technology DSL or Digital Subscriber Line service provides an inexpensive easy way for small businesses and home users to get fast access to the Internet at speeds.easier.Emerging Trends premium. It is more than 50 times faster than an ordinary 56 KBPS modem and there is no waiting – the connection is always on. It is estimated that by 2002. A new piece of hardware called a gateway server is the technology. Fax New technologies to deliver communication services . 42 . The server converts your voice signal into packet data and routes your call over the Internet. the company is now bundling its software with popular computer games giving it major distribution reach through retail outlets. faxing and paging. multiple voice mailboxes. Some software’s even combine voicemail. Hence what matters is reaching the maximum number of users in the minimum amount of time. faster. networks and telephones is delivering highend capabilities with simplicity and prices that are affordable to even small business and home users. approaching those previously affordable only 10 large corporations using costly dedicated leased lines. How it works is simple – First you dial the local or toll free number of the closest gateway server. bringing about the transition of moving long distance phone calls from traditional circuit switched networks to packet-switched networks like the Internet.

Instead of relying on inefficient direct mail campaigns. sports you want to follow and companies you want to track. SCM in Service Organization/NonManufacturing Sector 19. First you download the software from the company’s website. Like all great software. Whenever the machine is idle for a few minutes. The ads are always visible in one corner of the PointCast screen. Click on a headline and up pops the full story. Publishing How a fashion magazine launches its premier issue with 30. PointCast hides its technological complexity. Click on a stock price to get the current share price.700. Thus. On some days. reeling off sports scores and the current prices of stocks – customized for individual interest. It gathers up the kinds of stories requested from various news services. updated news to the PC on your desktop . They are animated.Broadcasting to “Narrow casting” The news you want.50. 95% of medical 43 . colorful and impossible to ignore completely – advertising at its best. so that the news you want will be instantly available on your screen when you want it. daily subscriptions top 1. Selling medical equipments on the net and digital medical information Electronic transactions and on-line health related information Using the power of computing and the Internet to revolutionize the healthcare industry The healthcare industry in US is the stingiest spenders on I. a startup. Then you set your preferences by selecting categories of news you like. You can even set PointCast to supply lottery numbers and your horoscope. the software connects via.8 HEALTHCARE In this section we will discuss about Electronic transactions and on-line health related information. a chart of the stocks rise and fall over the past month and a dozen or so stories about the company. PointCast is personalized news – retrieval service that takes advantage of the fact that many offices PCs are always turned on and connected to the network. healthcare averages just 2. Click on the weather summary and you get a variety of weather maps and forecasts of specific cities of interest. Thus an innovative supply chain used to reach potential subscribers helped make success of an idea that had failed six years ago when its launch was attempted the traditional way. Every hour or so. by innovating the news supply chain today delivers the kind of personalized news broadcast that big media companies have been trying to for years. A green ticker scrolls across the bottom.5%. These messages direct users to wink’s website where they can sign up for a year’s free subscription.000 by its first anniversary using innovative distribution While other big publishers spend $30 for every new subscriber. the Internet to a PointCast server. Ralph Clermont’s “wink” averages just $2. weather reports and small-animated advertisements. The stories are automatically stored on the PC hard-drive. on your PC A new piece of software brings personalized. Marketing healthcare – on-line. While most industries spend 5-10% of operating budgets. Mass e-mails are sent and staffers make strategic postings in chatrooms operated by women oriented sites.and as advertisers pay – it’s free. Click on an ad and you will be connected to the company’s website. PointCast commandeers the screen and starts flashing headlines.T. he uses the Internet.000 subscribers and expects to cross the circulation mark of 1.

g. the benefits are enormous.Emerging Trends records are on paper.) are staggering. doctors. provider selection and other front-end services. the trend is changing. founder of Silicon graphics and netscape. a year ago 34 employees.000 claims coming in each month. notably power retailers who will use the Internet to create vast amazon. which clears insurance claims for more than 2. the health-care providers will have the chance to integrate functions that can lower the costs and risks of developing new sales channels and customer friendly servicing. In addition. Healthcare business-to-business e-commerce is expected to jump from $6 billion in 1999 to $178 billion in 2003.com style health care superstores. high quality data etc. a third of its claims arrive on Healtheon / webMD’s network. 44 . The legendary Jim Clark.500 claims in 45 minutes. Huge manuals guided the employees through the clearing or denying of the claim. $18 billion of current spending can potentially be saved ($5 billion that the health plans spend on sales and marketing. After implementing Healtheon’s on-line system. It is estimated that the overall waste in the industry is $300 billion that can be saved simply by using the Internet to cut paper jams and seamlessly link patients. family structure complexities. at a seven doctor office. With more than 2. Though the information requirements to provide an open and rational market place for health-care benefits (e. hospitals. a referral now takes about 30 seconds to complete and send over the webMD portal.00. $3 billion paid to benefit consultants for design. the place was buried in paper. pharmacies and insurance companies (for e. The claims processing staff has been cut to 25. The on-line stores would take care of enrollment. a Microsoft funded on-line health startup.) However. risks and pricing that best meet the employee’s needs.500 doctors. provider panels.g. which can process 3. The process would work as follows: An employee armed with an annual defined contribution from his employer will access an on-line retailer of health benefits and make a plan selection based on the features. selection and other services and the $10 billion employers spend on internal administrative costs – a hidden often overlooked burden that adds roughly 10% to the $100 billion paid annually in employee premiums and claims – a direct cost of current supply chain inefficiencies). the conventional cost of verifying a patient’s insurance eligibility is $10 against that of on the Internet – 40 cents. After its merger with webMD. Marketing healthcare – on-line HealthCare’s power Retailers The supply side of the health-care industry is likely to see the emergence of new business models. card issuance.g. The supply chain benefits to its customers have been impressive for e. 48% of adult Internet users search of health information on-line. coverage. At an independent practice association. Today. staffers had formerly worked overtime to write as many as 50 physician referrals a day. each entered about 150 paper insurance claims a day into computer databases. It is estimated that in US alone. founded healthcare in 1995. it has emerged as a leader in areas as diverse as consumer health information on the web and electronic transactions between doctors and health insurers.

pictures and prices from multiple suppliers along with links to their websites.Selling medical equipments on the net A site where hospitals can click to shop Hospital purchasing agents spend up to 15% of a hospital’s total budget on equipments and furnishings. selling most of the $1. which may be described as create-clarify-classify-communicate-comprehend-create. It aims to be a fully functioning exchange. The site thus acts to connect suppliers to customers. Thus the web has allowed Medicalogic to eliminate a major obstacle in the healthcare documentation supply chain. Locating and purchasing the items for a new room can take six months. It has thus become a vital link in the supply chain of this crucial sector. The entire exercise also involved training 45 . they did not even know existed. it costs only $199 a month which includes use of a new computer.000 rooms at one of the country’s leading hospitals. They can see floor plans for more than 1. diary and scheduling). Neoforma has 60 odd workers in Bangalore. The challenge was to get all the best practices from each of the local offices into one system when each of the offices were used to managing their own systems. Hospital buyers can search the site by product or by the type of room that are outfitting. can generate an enormous competitive advantage for such firms. who will digitize their catalogs for them. While doctors pay an average of $25. much of them in paper form. doctor’s offices and hospitals. To help suppliers. Digital medical information Medicalogic. a dominant supplier of conventional systems for electronic medical records is testing a system that enables physicians to record and review patient information over the web from any computer wherever they happen to be. Offline mail access helps with 70% of staff having portable equipment and able to access their mail from clients’ sites. KPMG International uses a global knowledge-sharing platform.5 million products in this category. The new product is not only better.000 a piece for the company’s present non-internet medical records system. Also under development is a website that provides patients with free access to their own records once again from any computer anywhere – records that are currently spread across dozens of pharmacies. The sites search engine is equipped with the world’s most comprehensive taxonomy for medical products. This project involved international standardization of IT (software and hardware platforms). The benefits were improved (productivity due to standardized interfaces and integration of e-mail with calendar. whose product information exists only in paper form. Click on a product and up pop descriptions. a list of all the items that belong in that room – from life saving medical equipment to trash cans – appears. On clicking on a room.9 CONSULTANCY Managing Knowledge – The Consultants way Consultancy firms can essentially be defined to be in the “Knowledge Management” business using the latest IT tools to improve and optimize the knowledge supply chain. Its website is an online catalog for the $150 billion-a-year clinical products industry. Neoforma hopes to cut that time by two-third. home or even airport lounges. KWORLD and invests 1% of its US $10 billion revenue on Knowledge Management. SCM in Service Organization/NonManufacturing Sector 19.

The US alone spends $1 trillion on education and training. This entails a design intensive process in which software writers develop custom ‘recognition frameworks’ i. improving the productivity of education enormously. The software. Such innovative net filters are helping to unclog the knowledge supply chain making it faster and more efficient.triggered by the Internet.10 EDUCATION Delivering education through unconventional channels . the competitive theories and ‘hot’ topics in which information takes shape.Emerging Trends thousands of people. Their practice areas are defined by area experts who determine the context. but in continuing adult education – triggered by a supply chain revolution – online delivery. automatically tags continuing streams of on-line documents every night. colleges and universities 4%). This opportunity has opened up. This new channel of distribution will complement the traditional media creating a new and distinct educational realm. it gives a one-to-one teacher-student ratio. context media. More than 50% of users are covered by Internet browsing and all users can browse the Intranets. as knowledge is mobile. once. continuing adult education could become a great growth industry Education is already grabbing a major chunk of GNP in developed economies. This number will increase rapidly but the major growth is expected not in traditional schools (which currently accounts for 10% of GNP – up to high school 6%. Online teaching is not just time-efficient and costefficient. The Boston based knowledge management firm. This has resulted in an efficient. Effectively. Thus there is a complete linkage to the centralized Knowledge Management content and a fully integrated practice management system – Nexus. 46 . deployed. transferable and highly marketable. E-mail usage grew exponentially before plateauing out at 1. language rules for each topic. It’s flexibility and interactivity allows the student to control the content and pace and its ability to blend graphics and pictures with the spoken word and text gives it an advantage over the traditional classroom.000 per week. the conventional supply chain using traditional institutions no longer suffices. 19. with a potential market for continuing adult education embracing at least 40% of the typical developed country’s workforce. but also learning-efficient. scam-less knowledge supply chain. This is the future of education and a global market potentially worth hundreds of billions of dollars – all created and accessible through the new education supply chain. which are deeply concerned with the management of research time. has a distinctive technology that relies on ‘semantic tagging’. Major consulting firms. It is too expensive and insufficiently accessible in a physical sense. are also the lead users of a new technology-software that allows Internet users to filter out extraneous information and zero in on the data they really need.00. The tagging software embeds invisible hooks into every article that downloads and a custom interface allows users in a particular working group to pull up selected articles instantaneously with a click. which was entirely handled internally (including writing the course). They need a technology that brings the highest quality content for each topic – technology that is now beginning to become available. The results were spectacular. However. This enables consultants to get documents that link to other documents on the same topic without having to waste time going back up some search hierarchy.e.

....................S......... This has re-defined the fundamentals and has the potential to change the institutions as well as mechanisms of delivery of public services forever..........................How web auctions ......................... There should be a single web based front end for all government services to the public...... Information kiosks in public places can enhance accessibility to public........................................................A) and a developing country (say India)? ............. a majority of the transactional services will be provided by way of Internet... communications and access to information by different ministries and department...... The public servants too need to be trained to bring about a change in mindset as well as in basic computer usage..... .................. Within 5 years............................. Transactions between various departments of the government and other government organizations..... It has lead to the rise of the 47 ......................11 GOVERNMENT Electronic ........................... ..19......................The Information Age Government The advent of information technology as a highly leveraged enabling tool for delivery of services has by now been universally recognized......Governance ... ...........................are revolutionizing the multi trillion-dollar market for industrial parts Freemarkets Inc.................................. the Internet auction company founded in 1994 for $50 million was worth $7 billion in market capitalization within five years................. ................. Effective implementation of such steps will revolutionize the supply chain of government services.......a new B2B supply chain tool ............... It means to fundamentally change as to how the government operates and this implies a new set of responsibilities for the executive............................................................. The objective of achieving E-Governance (EG) goes far beyond mere computerization of stand alone back office operations.... Activity 4 What will be the differences in the supply chain of services provided by the government in a developed country (say the U................................. with all departments and agencies operating websites that provide up to date information....... . can replace a substantial part of transfer of files and papers....12 RETAILING/TRADING Freemarkets Inc............... .... Effective cyber laws are needed to validate and enforce such transactions................ Appropriate investment in IT infrastructure need to be made................................................ Use of local language for access will go a long way in spreading the use of such services.................................................. if networked............................ The manual office procedures also need to be redesigned... legislature and the citizenry..................................... SCM in Service Organization/NonManufacturing Sector 19........... A government Intranet can ensure smoother flow of data................................................ E-mail should be incorporated into the normal range of contact methods and arrangements implemented for rapid response to e-mail queries.

Healthcare. The basic principles of Supply Chain Management are equally applicable in the service/non-manufacturing sector also. Education. Transportation. For manufacturers. how to spell out every possible requirement in their RFQ’s.g. the bids typically also differ in the terms offered. Thus a revolution in the procurement end of the supply chain is cutting millions off the purchase bills of big buyers while at the same time offering a new business opportunity to intermediaries like Freemarkets. Quaker oats who thought that they were already getting rock bottom prices. delivery schedule. This unit has taken up discussions on the application of Supply Chain Management principles to the broad industries in the service sector viz. 19. the manufacturer typically sends out “requests for quotations” (RFQ’s). but the billions of dollars of transaction costs incurred by companies as blizzards of faxes. payments and products information by such electronic catalogs. constituting the largest part of cost of goods sold. Government and Retailing. the sellers don’t have to guess at their competitors’ bids as they can see exactly what the opposition is bidding. Raytheon. Freemarkets used its insight to take the Internet into a much bigger far more complex kind of corporate purchase – that for manufactured components. invoices etc. in real time. These are called “buyer’s” or “reverse” auctions as the buyer quotes the initial starting price and the bids move downwards. best done through an auction. have saved more than 15% on average buying parts. Though. United Technologies. unlike other auction sites holding sellers auctions’ (where buyers enter their bids and the highest price wins) for standard processed materials. they had to take a blind guess at how low they must go to win. Also. Freemarkets unshackled the power of the purchaser by turning the once secretive RFQ into an open bidding war. As these terms (e. However. Freemarkets not only conducts the auction but also acts as a consultant showing new clients. Software. Traditionally. a few months before the existing contract expires. Hence it’s extremely difficult to pick the best deal. 48 . Communication.Emerging Trends auction economy by implementing a break through idea that is having a seismic impact on 21st century industry.13 SUMMARY Traditionally when we talk about Supply Chain Management we think for products and manufacturing. problem was that these could be sent only to a limited number of candidates and often did not spell out a lot of other important terms apart from the specifications. Financial services. The auction itself is a tense 20 – 30 minute sweepstakes climax. materials and services. as the bids were sealed. turning industrial parts into commodities. supplier inventory etc) can have an enormous impact on the total acquisition cost. The buyers can then shortlist the field to those it wants to invite as bidders. the most inefficient to buy. These industries comprise a major part of the value generated by the sector. Hospitality. Hence. the suppliers have no idea what prices their competitors are offering. does this. they were also traditionally. 35% of sales (or 5 trillion dollars worldwide!) go towards purchasing industrial parts. Standardizing absolutely every item in the RFQ. Using it big. Hence. shrewd buyers like General Motors. largely most manufacturers choose the path of least resistance by keeping the current supplier as long as he is willing to keep the price more or less flat. Not only the prices. All that remains is to find the lowest price. Consultancy. can be eliminated by automating orders. Linked over the Internet. It is also an expert at finding and screening suppliers.

19. Suggest some supply chain strategies for treasury management. 21) What are the essential differences in a B2C and a B2B supply chain. What supply chain strategies can rail companies use to stop the erosion of market share to air travel in case of passengers and road in case of freight? How can telephone companies protect their markets from competition from ISP’s using supply chain strategies? Which players in the healthcare sector are likely to die out as a result of changing supply chain scenario? What are the peculiar characteristics of “knowledge” as a product relevant to its supply chain management? SCM in Service Organization/NonManufacturing Sector 10) What is the future of brick and mortar educational institutions given the revolution in the educational supply chain? 11) How can government overcome infrastructure bottlenecks to streamline its supply chain? 12) Comment on the prospects of retailing of services as a future growth industry. music. television and film industry react to new distribution technologies to enhance customer value delivery? 19) With more medical information available online than a human mind can assimilate.13 SELF ASSESSMENT QUESTIONS 1) 2) 3) 4) 5) 6) 7) 8) 9) What strategies can be used to desynchronize production and consumption in case of services? How can one compensate for the absence of inventory to meet demand fluctuations in case of services? Suggest some ways to make distribution possible in case of the “impossible distribution” examples. branches are a liability – comment. List the supply chain principles embodied in a “debit card”. 15) How can bulk freight carriers take advantage of technological innovations to streamline their supply chain? 16) Why is software more a service than a product given its supply chain characteristics? 17) What impact will m-commerce (mobile commerce) and d-commerce (digital commerce) have on traditional e-commerce (electronic commerce)? 18) How can traditional book. 14) Outline a supply chain strategy for timeshare resorts to enable them to get a competitive advantage over traditional hotels. List the respective characteristics that necessitate such differences? 49 . how will the role of doctors change in delivery healthcare services? 20) With information freely available on the Internet. 13) In the new banking scenario. the demand for consultants will reduce – comment.

Forbes Global (05-15-2000). THE COMPETITION HEATS UP IN ONLINE BANKING”. On The Cover </ forbes/Section/OnTheCov. 2000 16) Nicole Ridgway </forbes/by/NRidgway.htm>.” Chicago Tribune. Peter Drucker Is High On Webucation “Putting More Now Into The Internet”.htm>. 2000 19) Peter J. 22) Robyn Meredith </forbes/by/RMeredit. Fourth Quarter 1998 15) John McCarron. 2000 Issue </Forbes/00/0529/> 17) “NEWS TRENDS.htm>. FORTUNE. Washington. Drucker. FORTUNE. “HMOs ‘R’ Us: A Prescription for the Future. 06/26/1995 18) 18. Banking in the New Millennium. Baltimore.” Strategy+Business. From May 29.org Bill Gates. “Drucker’s Disciple”. Robert E. Poirier.: www. 2000 Issue </Forbes/00/0529/> 50 . “Stand By for the Next ‘Worst Leg’ of Our Health Insurance Trip. Minneapolis. Krasner and Michael Soignet. Spring 1998 Supply Chain Management Review eBenX.hcfa.Peter F. May 16.: www. Frentzel. May 16. “On A Wink And A Prayer”. “The Path to Supply Chain Leadership”. Going.com/ ideaexchange/ 10) “Going. “Plowing The Web”. “Go for Growth! Supply Chain Management’s Role in Growing Revenues”. J. Forbes Global (05-15-2000).gov 12) James D. February 14. Michaels. “Exploiting the Virtual Value Chain” Harvard Business Review.ebenx. Metz.aahp. D. “Digital Drive”. Sabath and David G. Warner Books. 2000 14) J. 06/07/1999 American Association of Health Plans. Minn. FORTUNE. Md. Carlebach. 1999 “Bringing Banks Online”. Summer 1997 Supply Chain Management Review 21) Rayport. Business @ the Speed of Thought.Emerging Trends 19. Fall 1998 Supply Chain Management Review Christopher Helman </forbes/by/CHelmanx. 03/20/2000 11) Health Care Financing Association. November/December 1995. from May 29. Winter 1998 Supply Chain Management Review 20) Robert E. 2000 Issue </Forbes/00/0529/> David Bovet and Yossi Sheffi. Gone!” FORTUNE. From May 29.com For more discussion on health care’s new electronic marketplace. visit the Strategy + Business Idea Exchange at www.C.Philip Lathrop and David C. J. “Demystifying Supply Chain Management”.13 REFERENCES AND SUGGESTED FURTHER READING 1) 2) 3) 4) 5) 6) 7) 8) 9) Above The Crowd.htm>.: www. CASE STUDY – “Strategic Vision Drives Domino’s Pizza Distribution”. Fall 1997 Supply Chain Management Review 13) James W.strategy-business. Frentzel is a consultant to Mercer and principal of Northeast Logistics. David G. and Sviokla. Sabath is vice president of Mercer Management Consulting Inc. 01/24/2000 Charles C. “The Brave New World of Supply Chain Management”.

” The Wall Street Journal. “Companies Consider Letting Employees Handle Their Health-Benefits Decision. January 18.htm>. “Word-of-modem”. 04/12/1999 27) “The New Online Mortgages”.htm>. 2000 24) Silvia Sansoni </forbes/by/SSansoni.23) Ron Winslow and Carol Gentry. FORTUNE.htm>. 1999 25) Shailagh Murray. SCM in Service Organization/NonManufacturing Sector 51 . Internet </forbes/SubSect/Internet. 2000 26) “The Trouble With Web Advertising”. 04/13/1998 28) Walter J.ibm. Doherty and Ahrvind J. Issue </Forbes/99/0705/>.com/devpages/JELLIOTT/evrrt. FORTUNE. “The Economic Value of Rapid Response Time” <http://vmdev. February 8.gpl. 1982 and 1997. July 5. Thadani.” The Wall Street Journal. “Why Health Insurance That Works Still Fails to Catch on Broadly.html>. Technology </forbes/Section/ Technolo.

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