1 OVERVIEW OF LOGISTICS FUNCTION Logistical History of India: India was a maritime power since about 300 BC, trading

with several countries of the world bringing prosperity home. Traders of Surat brought riches to the country by extensive maritime trade. Like many of our excellent practices, logistical efficiency also faded away over a period of time. Some important logistical feats in history: 1. Berlin Airlift 1945: A study in logistics. When the city of Berlin was blockaded by Soviets and all supply lines were cut off, Americans planned and executed a major logistics operation to feed the city from air. 2. Indians in the Gulf countries 1991: 1n 1991, when gulf war broke out, Indian Government evacuated thousands of Indians from the gulf countries and brought them home in a massive exercise employing Indian airlines planes. 3. Operation Overlord-1945: Allies invasion of Europe and subsequent victory In II World War. 4. 1962 war with China: Lost opportunity for Indians! We missed the opportunity to destroy the extended and weak supply lines of China. 5. American war of Independence Keeping 12,000 soldiers armed and fed from England was a big task, British lost the American war of independence due to bad logistics. What causes bad logistics? a. Infrastructure: Bad roads, inefficient railways, poor communication lines, and congestion in the ports. b. Taxation: e.g. Octroi c. Information: Inadequate information d. Management: Poor management decisions ELEMENTS OF LOGISTICS MANAGEMENT WHAT IS LOGISTICS? Mission of logistics is providing a means by which customer satisfaction is achieved. Art of moving, lodging and supplying troops, supplies and

2 equipment is logistics. Concept of logistics has moved into business to move, lodge and supply inputs and outputs. Logistics is practiced for ages since organized activity began. Without logistics support no activity can be performed to meet defined goal. The current challenge is to perform logistics scientifically in order to optimize benefits to the organization. Logistics is a planning function of management. Logistics function is concerned with taking products and services where they are needed and when they are needed. Logistics ensures that the required inputs [what] to a value adding process are made available, where they are needed, when they are needed and in the quantities [how much] they are needed. It also ensures that the outputs of the value adding process are made available where they are needed when they are needed and in the quantities [how much?] they are needed. Definition of logistics management is the process of planning, implementing and controlling the efficient and effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements GENESIS OF MODERN LOGISTICS Several Modern Management concepts are born or refined in the crucible of II World War. You may remember several OR techniques like Value Analysis & PERT/CPM have their origin in the II World War. Resources come under pressure in a war, like no other time and one is expected to deliver results in spite of all odds. These trying situations forced the military planners to evolve solutions to their problems. After the war these concepts traveled to business where resource crunch is usual. In business there is no enemy, but there are competitors who pose threat to the organizations survival. Field Marshall Rommels words that before they are fought, battles are won or lost by quartermasters speak about the importance of logistics. There are several examples where battles are lost due to long & ineffective supply lines.

3 Logistics received great importance in military planning and subsequently became a very important management function in the course of last 40 years. Logistical management includes the design and administration of systems to control the flow of material, work in process and finished inventory to support business unit strategy IMPORTANCE OF LOGISTICS.[you may also read Physical distribution Management: Logistical approach by K.K.Khanna page # 8] 1. Logistics is the bed rock of trade and business. Without selling and or buying there can be no trade and business Take away logistical support trade and business collapse 2. Leads to customer satisfaction through superior customer service. Organizational objectives of P[Productivity],Q [Quality],C [Cost],D [Delivery],E [Employee Morale],F [Flexibility],S [Safety],H [Health],E [Environment] are set to meet customer expectations of Q,C,D. Q, C, S, H, E are parts of must be quality that a customer expects. Logistics addresses D, F objectives which lead to customer satisfaction through superior customer service 3. Integrates logistical activities In conventional management environment, various activities of logistics work in isolation under different management functions. Each pocket trying to sub optimize its objectives at the cost of overall organizational objectives. Purchasing trying to purchase at minimum price at the cost of what is needed by operations. Operations produce large quantities at minimum production cost ignoring demand leading to doom inventory. Logistics function of management brings all such functions under one umbrella pulling down inter departmental barriers. 4. Competitive edge: In the fiercely competitive environment logistics provides the edge. Due to technological revolution most of the products are moving into commodity markets. In a commodity market where price is controlled by competition, where there is no product differentiation in terms of quality parameters like performance & reliability, where brands are almost

4 irrelevant, competitive edge is that of availability of product and service in terms of time, place and quantity. 5. Logistics wins or loses wars British lost American war of independence due to poor logistics Rommel was beaten in the desert by superior logistics of Allies 6. Supports critical functions like operations and marketing Strong logistics support enables a company to move towards JUST IN TIME production system for survival in a highly competitive market a) Interface with marketing These days marketing a product is increasingly on the strength of availability and flexibility as we discussed earlier. Stronger emphasis is on the last of four Ps of marketing [product, price, promotion and place]. Logistics provides the interface between production function and marketing function. Marketing is trying to sell the product in the market place. Logistics makes the product accessible to marketing by acting as interface between the function that produces it and the function that makes the consumer buy it. This interface is gaining importance due to following changes that are sweeping the market making many companies adopt JUST IN TIME production system. a. change in the customer: demanding, knowledgeable, conscious of rights, lacking in brand loyalty, changes preferences very fast, expects very high degree of service b. many products are moving towards commodities market: product differentiation in terms of quality of performance is vanishing and brands are losing their magic. As a result of above we find that availability is an important determinant of purchasing decision. 7. Logistical costs: For individual businesses logistics expenditures are 5% to 35% of sales depending on type of business, geographical areas of operation, weight/value ratios of products and materials. This is an expensive operation. Improvement in the efficiency of logistics function yields savings as well as customer satisfaction

5 WHY SHOULD WE LEARN LOGISTICS? HOW OR WHY DOES LOGISTICS BECOME IMPORTANT FOR MANAGEMENT STUDENTS? 1. Impact on cost of creating and delivering of product to the customer 2. provides competitive edge to business 3. crucial to survival and prosperity in global trade and business 4. many products have short life cycles 5. more & more logistics experts are going up the hierarchical ladder 6. leads to the concept of supply chain management 7. Logistics is important in the Indian market due to the sweeping changes, which are taking place. a. Competition: Internal as well as external b. Shift from sellers market to buyers market c. Changing customer d. Expanding business, growing exports e. Corporate mangements Shift towards modern management concepts like Lean management, Just In Time, Total Quality Management etc., IMPORTANCE OF LOGISTICS MANAGEMENT IN INDIA [Explain the growing importance of logistics management in India in todays contextQ4 2001] I. Liberalization and opening our door to competition II. Global business has long supply & distribution lines III. Changing Indian customer, aware, demanding and less brand loyal IV. Competition ensures that product differentiation in terms of quality is difficult V. Product life cycles are shrinking VI. Our markets are shifting from sellers to buyers VII. Many consumer products are moving into commodities market consumption centers. Essential commodities have to travel from Food Corporation warehouses to consumers through PDS. VIII. India is a large country. Large distances separate production and

6 IX. Logistics performance has not been impressive X. Fruits and vegetables are grown at various places but do not enjoy access to market WHAT ARE THE OPERATIONAL OBJECTIVES OF LOGISTICS? [sh. note Oct03] concept Oct03 1. Rapid response F-flexibility objective of an organization: Some companies measure this as response time to customers order. On an average how much time do we need to fulfill one particular type of customers order in a year? This is a measure of Rapid response Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response. Instead of stocking the goods and supplying on demand, orders are executed on shipment to shipment basis. Information Technology plays an important role here as an enabler. IT helps management in producing and delivering goods when the consumer needs them. This results into reduction of inventory and exposes all operational deficiencies. Now the management resolves these deficiencies and slashes down costs. [Concept of SMED and KANBAN as practiced by JIT companies in Japan or elsewhere] 2. Minimum variance D-delivery objective of an organization, this can be measured as On Time Delivery or OTD. If 100 deliveries are made in a month/quarter/year how many reached as per the commitment made to the customer? This percentage is OTD. Any event that disrupts a system is variance. Logistics operations are disrupted by events like delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches, damage in transit. Traditional approach is to keep safety stocks and transport the goods by high cost mode. The cost of this approach is huge. Logistics is expected to minimize these events, thereby minimize and improve on On Time Delivery.

7 3. Minimum inventory This is component of cost objective of a company. Inventory is associated with a huge baggage of costs. It is termed as a necessary evil. Objective of minimum inventory is measured as Inventory Turns or Inventory Turnover Ratio. Americans call this measure as turn velocity. Logistics management reduces these turns without sacrificing customer satisfaction. Lower turns ensure effective utilization of assets devoted to stock. [Concept of single piece flow as practiced by JIT companies in Japan or elsewhere]. Logistical management should keep the overall well being of a company in view and fix a minimum inventory level without trying to minimize the inventory level as an isolated objective 4. Movement consolidation Transportation is the biggest contributor to logistics cost. Transportation cost depends on product type, size, weight, distance to be transported etc. for transporting small shipments just in time [reduction in inventory costs] expensive transport modes are used which again tend to hike the costs. Movement consolidation is planning several such small shipments together [of different types of shipments] by integrating interests of several players in the supply chain. Generally, large shipment size and long distances reduce transportation cost per unit. Movement consolidation shall result into reduction in transportation costs. Quality If the quality of product fails logistics will have to ship the product out of customers premises and repeat the logistics operation again. This adds to costs and customer dissatisfaction. Hence logistics should contribute to TQM initiative of management. In fact, commitment to TQM has made the managements world over wake up to the significance of logistics function. Logistics can play a significant role in total quality improvement by improving the quality of logistics performance continuously and continually. 5. Life cycle support [cradle to cradle logistical support- produce, pack (cradle) and repack(cradle)]

8 Logistics function is expected to provide life cycle support to the product after sale. This includes a. After sales service: the service support needed by the product once it is sold during its life cycle b. Reverse logistics [concept Oct03] or Product recall as a result of rigid quality standards [critical in case of contaminated products which can cause environmental hazard] transit damage [leaking containers containing hazardous material] product expiration dating rigid laws prohibiting unscientific disposal of items associated with product [packaging] rigid laws making recycling mandatory erroneous order processing by supplier Reverse logistics is an important component of logistics planning LOGISTICAL FUNCTIONS [components of logistics or elements of logistics] [Functions of Logisticsshort notes 2001] Information management Management is appreciating importance of information as an element of logistics of late, now. The role of information is vital in order processing. Quality of information is critical as error in composition of information requirement creates potential disturbance in the supply chain. Incorrect order processing due to erroneous information will result into product recall and reshipment if the sales opportunity still exists. Faster and quality information flow from customer to processor results into cost effective logistics. Forecasting and order management are two areas of logistical work dependent on information. Forecasting is an effort to estimate future requirements to position inventory or assets devoted to inventory. As forecasting becomes unreliable in a fast changing environment, control strategies like JIT, Quick Response and Continuous Replenishment came into being. Now it is the task of the logistics

9 function to use information technology to strengthen operation control and forecasting to the best advantage of the organization. Leading firms typically have information systems capable of monitoring logistical performance on a real time basis giving them the capability to identify potential operational breakdowns and take corrective actions prior to customer service failure. In situations where timely corrective action is not possible, customers can be notified in advance and thereby taking the surprise out of forthcoming service failures 1. Inventory control Keeping the stock levels in such a position, so that neither stock out nor stock piling takes place is Inventory control. While formulating inventory policies find out 20% of the products marketed that account for 80% of the profit. 2. Transportation Transportation is the most visible of all elements of logistics and high contributor to logistics expenditure. Costs of transportation are mainly as follows a. Movement costs: money paid for moving material across geographical terrain b. Preservation costs: money spent on preserving the material during transit c. Cost of idle asset: inventory is unavailable for conversion during transit. This results into costs for organization d. Administration costs: money spent on administration Transportation is accomplished in three ways a. Ones own fleet private carriage b. Contract with specialists on long term basis contract carriage c. Contract on individual shipment basis common carriage Expectations from transporter [carrier] are a. minimum cost transportation costs are explained earlier b. Speed: speed of transport means the speed with which goods reach the destination.

10 c. Consistency: consistency in speed is achieving the same speed over a long period of time. Consistency reflects on the reliability of carrier. Any unexpected variance can play havoc with logistics. Modern information technology has made continuous tracking of consignments possible. This takes the element of surprise out. IT has helped logistics managers to seek out ways and means to improve speed and consistency. What is becoming important is a combination of speed and consistency. Requirement of speed depends on type of industry. In some situations speed may not be important. Then transportation service offering high speed increases cost. So logistics managers have to strike a balance between service and cost. Three important aspects of transportation are facility location, transportation cost and consistency. Design of logistics system should consider total costs rather than elemental cost of transportation 3. Warehousing Warehousing is holding material before dispatch after it is produced. Although warehousing is conventionally considered to be a storage facility, it plays a much higher role from logistics viewpoint. It is perceived to be a switching facility rather than a storage facility. Warehouse ownership can be private, public or third party contract. Warehouse provides economic and service benefits to the logistical system. Economic benefits are Movement Consolidation, Break-bulk, Cross-dock, Processing/Postponement & stock piling. Service benefits are spot stocking, assortment, mixing & production support 5. Material handling 5 Material handling covers receiving, moving, storing, dispatching activities. It has an impact on cost [capital as well as running], quality and safety. One of the principles of material handling is minimum movement. Commonly used material handling equipment are forklifts, EOT Cranes, hoists, pulley blocks, trolleys, railroad cars, conveyers, ropes and slings etc.

11 6 Carousels: several bins on an oval track keep rotating. The operator can choose required bin to pick from. The system saves space and reduces walking time and distances 7 Nowadays, material handling is being made automatic to combat cost and efficiency. Examples are 8 Automated guided vehicle systems, driverless vehicles that follow a magnetic path or photo path for the destination. They stop if they find any obstructions. 9 Sortations: labels are read and the packages are delivered to right docks for onward dispatch. 10 Robotics: programmed to break down a unit load for storing at different locations and also to make a unit load of items in different locations. Robots are useful in warehouses where extreme conditions of temperature and noise exist 11 Live racks: when a unit load is removed loads behind slide forward by gravity. Functions of warehouse [warehousing operations] [physical distribution management: logistical approach by K.K.Khanna page # 57] 1. receiving goods receive and accept responsibility 2. identifying goods place, label, color code 3. sorting goods- sort out the received goods for appropriate storage area 4. dispatching goods to storage- for temporary storage with easy accessibility 5. holding goods- security against pilferage and deterioration 6. selecting, retrieving, packing- items are retrieved and grouped according to customer order for dispatch 7. marshaling goods- check the items of a single order for completeness and order records are updated 8. dispatching goods- consolidated order is packaged and directed to right transport 9. preparing records and advices- of stocks and replenishment requirements 12 6. Packaging

12 Packaging is done to make handling and transporting cost effective. It protects the product in transit and handling. Packing is expected to facilitate lifting and moving by providing easy access to forks or hooks. Packing is also expected to display universal symbols and other instructions for handling. Eg. pallets and containers, wooden boxes, wrapping etc. Types of packaging: consumer packaging and industrial packaging Consumer packaging - There is no focus on logistics. Importance is given to marketing appeal and packaging the finished product. Industrial packaging importance is given to logistics considerations handling and moving. Individual parts are packed in cartons or bags and grouped together as master cartons. Master cartons are grouped into units for handling. This concept leads to unitization and subsequently to containerization. a. Packaging in unit loads: standardizes all equipment and operations b. Load securing: ropes, corner posts, anti skids, steel strapping c. unit load platforms: pallets Functions of packaging [how packaging helps reducing overall costs and value addition]

1. Protection: Protection from environment, pilferage, shocks of handling

and moving. Fried chips in tennis ball boxes

2. Cube minimization: The truck is cubed out, that means the truck is full
space wise, but not fully utilized weight wise. E.g.Round containers, round bottles. Cube minimization is reducing the space occupied by the product to cut the freight charge. Square shaped bottles and oval shaped containers

3. Weight minimization: The truck is full, weight wise, but not fully utilized
space wise. Liquids in glass bottles. Weight minimization is reducing the weight of the consignment to fully utilize the capacity of the truck. Liquids are packed in plastic bottles reducing the weight.

4. Facilitating handling & using: fruit juices in tetra packs, handling and
consumption by users

13

5. Facilitating storage & reuse: ink cartridges for printers, floppies, CDs,
reusable corrugated boxes, bottles and refill packs

6. Grouping goods into convenient unit for distribution: mangos in

boxes, milk bags in crates, cola bottles in crates.

7. Reducing pilfering opportunities: pilfer proof caps, pilfer proof seals

8. Communication: a] Content identification - what does this contain? Product, manufacturer, universal code etc. with high visibility b] Tracking: bar codes and scanners c] Handling instructions: fragile, which side up? Temperature restrictions, environment concerns, potential dangers etc 7. Net work design [Location analysis] Net work design is a primary responsibility of logistical function as the firms facility structure provides the products for the customer. Network or facility structure includes production facilities, warehouses, cross-dock operations, and retail stores. How many facilities are required, what work is to be performed [what is to be produced/what inventory is to be stocked and how much] in these facilities, where they are to be located [geographical locations], who [whether the operation in the facility is out sourced] will operate these facilities are some of the salient features of net work design. Logistics will also have to determine what customer orders are to be serviced from where. All the logistical operations are performed in the network of facilities. Network incorporates information and transportation capabilities. Cost of bringing in inputs and moving outputs to market depends on the location of the facilities. Inadequate location adds to logistics costs in addition to being counter productive for customer satisfaction. Logistics network, Ref. power point diagram

14 SOME IMPORTANT CONCEPTS Logistics Management and Supply Chain Management.Logistics and Supply Chain Management by G.Raghuram, N.Rangaraj. Page #15, The Management of Business Logistics by Coyle, Bardi, Langlely Page # 31 ] a. 1950 1960: Importance of examining costs and benefits in physically moving the goods to customers came into focus in post war1950s. We have seen earlier that concept of logistics was born in the crucible of warfare and came into business after the end of II world war. Idea of total system cost emerged during this period. Analyses of trade off situations between costs of several activities, selection of modes of transport keeping total system cost in mind are fallout of this concept. It can be understood that selection of water as a mode of transport gives low transportation cost that will result into high transit inventory adversely affecting total system cost. Initially outbound logistics was in focus as value of the finished goods inventory is high. A new management function called Distribution Management emerged integrating various activities on the outbound side like transportation, warehousing, packaging, customer service etc. Advent of electronic era of 1960s made information a strong component of physical distribution management. Inbound logistics was still considered to be a concern of vendors and did not receive the attention of management. b. In 1970s strengthened by IT, physical distribution management started looking into some aspects of financial management subsystems. Monitoring and planning for efficient completion of cash cycle became attached to physical distribution management. Around the same time importance of inbound logistics was appreciated. c. In 1980s physical distribution management function came to be called logistics management encompassing inbound and outbound logistics. During this time this function started looking closely into logistical operations adopting modern concepts like TQM & TPM to logistical operations. d. 1990: This concept expanded, all up stream and down stream organizations and activities were brought closer for mutual cooperation in

15 order to gain benefits of QCD. This idea of external integration is Supply Chain Management. Definition: the management of upstream and down stream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole. Supply Chain Management looks beyond the confines of organizations to deliver value to the end user at minimum cost. Supply chain is visualized as a pipeline through which products from raw materials stage to the end user. Supply Chain Management is ensuring that this flow is smooth and quick. Henry Ford visualized the importance of this flow in early 1990s [L/M, Bowersox page 88] and expanded his business to cover raw materials, their deposits, forests, plantations and even transportation activities like shipping lines. His business interests extended beyond the frontiers. This diverse expanse of business gave him final control on the supply chain but became nonviable due to labor problems and unwieldy bureaucracy. He realized that smaller independent organizations were more efficient and cost effective in delivering value and shifted his focus to a net work of competent dealers. Idea of supply chain management. Supply Chain Management aims at breaking down organizational barriers a] to share sales information on real time basis that reduces inventories and need for safety stocks. This is called supply chain compression resulting into inventory reduction and larger inventory turns. Dell Computers considered to be leaders in computers business have recorded 50 inventory turns in 1997, IV Q, whereas Compaq could manage only 10 turns. b] Smoothen the flow of information both ways [orders reaching the suppliers, and products reaching the that results into reduced delivery time or reduction of lead-time resulting into shortened cash-flow cycle Ref fig.6

particula rs Scope

Logistics management Inbound logistics, in

Supply chain management All players in the supply

16 process inventory [movement from one plant to another], outbound logistics chain from raw material source to finished product consumer, vendors, their vendors, supplier organization[shipper], Warehouses, service providers, customers, their How this is created in business? Main objective definition By internal integration of logistics functions handled by various management functions within organization Logistics cost reduction by integrating resources across the pipeline Logistics is the process of strategically managing procurement and storage of material , part and finished inventory [and related information flow] through organization and its marketing channels in such a way that current and future profits are maximized through cost effective fulfillment of Origin focus order A very old concept in military planning. L/M tries to take the product to the consumer at minimum logistical cost. As a logical extension of logistics management SCM focuses on value creation in the supply chain. Hence this is Supply chain profitability by value creation. Management of upstream and down stream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole. customers By external integration of roles of various players in the supply chain.

17 Hence it is supply driven. customer focused or demand driven. 2. Business functions of logistics management [physical distribution management: logistical approach by K.K.Khanna page # 13] As discussed earlier logistics is a concept of military planners. But now it has found its way into business. I] Business logistics is planning, implementing and controlling efficient & effective flow and storage of goods, efficient & effective flow services, and related information from point of origin to point of use or consumption in order to meet customer requirements. a. Food and agricultural products: We are familiar with warehouses owned by Food Corporation of India. The government in these warehouses stores huge quantities of procured food grains. These stocks are subsequently moved to outlets of Public Distribution System. This is a logistical operation by Govt. of India in Agricultural Products Sector b. Raw materials and finished engineering, chemical, pharmaceutical goods. c. Consumer durable goods: Logistical Management is receiving attention in industry as many consumer durable products are moving into commodities market. II] Business logistics plays the role of facilitator for trade and business. It makes business happen. 3. Logistical mission[Logistics and Supply Chain Management by Martin Christopher, Page # 13, Logistics Management by Bowersox Page #9] Mission of logistics is to achieve business objectives by delivering desired quality of service at the lowest total cost. This is nothing other than delivering QCD expectations of the customer by planning logistical operations at minimum cost. This can also be called creating customer value at minimum cost. The illustration below shows that logistical mission cuts across functional lines to achieve business objectives at minimum cost.

18 Logistical mission is a set of goals to be achieved at a particular type of market for a particular type of product. Naturally this is responsive to competition. Hence logistical mission is to achieve above goals at minimum system cost. Focus is on mission rather than on isolated functions. Mission of logistics is providing a means by which customer satisfaction is achieved. Ref Fig.7 4. Total cost analysis [Logistics and Supply Chain Management by Martin Christopher, Page # 72,73] Conventional approach to costing fails to provide information on the impact of cost of an individual function on the system. Logistics costs are traditionally apportioned to the function handling that particular logistics activity. As a result these costs get submerged and competitive edge is lost by the organization. Total cost analysis comprises of identifying such impact on system due to change in cost of individual function. If we add a warehouse to the network, certainly this cost will have an impact on transportation, inventory and so on. If we have the total cost of delivering the service to the customer with this warehouse and without this warehouse we shall know the impact of introducing the new warehouse on the system. Total cost analysis is measuring this incremental cost to the system on account of changes to the system. In the absence of this approach impact of decisions at various levels, on system is ignored which may lead to customer dissatisfaction. Traditional approach to costing [Physical distribution Management: Logistical approach by K.K.Khanna page # 48] Highly compartmentalized, impact of policy decisions of one function on other functions and on system out put is ignored. a. Cost information is biased, cost elements tend to get hidden out of fear that they expose functional weakness. b. Costs in no mans land are never owned c. Cost cutting is fragmented so doesnt reduce system cost d. Focus is on input function. Hence attempt is to reduce function cost in isolation.

19 Total cost approach a. Focus on output of the system. Hence attempt is to reduce cost of output of the system. b. Provides competitive edge to the company. c. Several trade off points in the system are established. Further areas of improvement can be identified from this approach even beyond trade off. 5. Mission based costing [or budgeting] in logistics[Logistics and Supply Chain Management by Martin Christopher, Page # 75,76] Traditionally managers have tried to minimize costs of individual logistical function inputs, believing that they are contributing to achieving the cost [QCD] objective of the company. But minimizing these costs in isolation has a negative impact on cost of the deliverable output. Hence a new approach to costing, namely, mission based costing is becoming popular. Logistical mission contains a set of well-defined objectives at the organizational level logistics management wants to fulfill. Fulfillment of these objectives incurs costs at various logistical management functions. Logistical functions required to perform the missions are integrated under individual logistical heads. The visual displayed below shows how the costs of individual logistical functions are to be budgeted to meet the objectives. Mission based costing is initially identifying the logistical costs to deliver the mission goals clearly and then working backwards to budget the logistical function costs to meet the overall mission costs. High cost of one functional area has to be compensated by another area keeping overall mission objectives in mind. Mission costing differs from traditional costing in its approach. Traditional costing approach is to work out cost of providing various functional inputs to the system and then determining the cost of out put. In the new approach mission goals are set before hand in terms of deliverables of the system and costs of functional inputs are worked out to meet the system deliverables. Ref Fig.8

20 6. Role of planning in logistics management Role of planning is central to logistics management Mission of logistics management is to plan and coordinate all those activities necessary to achieve desired levels of service and quality at lowest possible cost. Logistics is fundamentally a planning concept that seeks to create a frame work through which needs of the market place can be translated into a manufacturing strategy and plan Logistics makes one plan, integrating various resources of the organization that replaces traditional concept of planning in pockets 7. Logistics interface with marketing[Logistics and Supply Chain Management by Martin Christopher, Page # 37,] Interface is a common wall or surface between two objects, concepts or functions. It can also be common area/areas of performance or interest. Outbound logistics plays an important role in selling the product of the company as it moves the product through the distribution system to the customer. Hence it is called the other half of marketing. In several instances making the product available at the right time at the right place itself is the key to successful selling. A student of management very well knows four Ps of marketing. We have already seen the role of logistics as far as Place is concerned. It is quite interesting to see the interface between with respect to other Ps as well. Price: Logistics enables marketing to quote a competitive price by providing discount opportunities on account of Transportation cost savings. Logistics Manager can plan the size of the consignment confirming to the most economical schedules published by transportation service providers to save transportation costs. If order size matches with the favored size the benefits are substantial. Logistics Management has to balance inventories to tackle anticipated price-triggered sales. Product: Inputs of logistics manager are quite important as far as the size and shape of the product are concerned. Size and shape of the product can make

21 logistics nightmarish, thereby adding huge amount of costs. Weight/volume ratio plays very important role in deciding economics of logistics. The story of Gillette is well known logistical circle. The low weight, unwieldy floor display proved to be a very expensive logistical operation. While consumer packaging provides sales push in a retailers shop, it can make industrial packaging difficult due to its shape and ability to protect the contents. Product and its packaging is a common area from the point of view of logistics. Promotion: Logistics Management is required to manage inventory needed to match sales triggered by promotional activities in the market. Marketing Management & Logistics Management need to work closely in deciding promotional strategies for the product. Promotional strategies may be push or pull type. Logistical problems may be faced in either or both, but being aware takes the punch away from the blow! Place: Marketing decision to distribute the product directly to retailers or through wholesalers has a great impact on logistical operations. Demand placed by wholesalers is more streamlined as compared to retailers. Logistical management of retailers demand often requires time sensitive transportation methods which are expensive. In addition to the four Ps, customer service is another area where marketing & logistical mangements have to work closely to effectively beat the competition. Following visuals may be useful. Ref. Figs.9&10 8. Inbound & outbound logistics [What do you understand by inbound and outbound logistics? Explain with examplesQ5[a] May03] Inbound Logistics Creation of value in a conversion process heavily depends on availability of inputs on time. Making available these inputs on time at point of use at minimum cost is the essence of Inbound Logistics. All the activities of a procurement performance cycle come under the scope of Inbound Logistics. Scope of Inbound Logistics covers transportation during procurement operation, storage, handling if any and overall management of inventory of inputs. Several

22 activities or tasks are required to facilitate an orderly flow of materials, parts or finished inventory into a manufacturing complex. They are sourcing, order placement and expediting, transportation, receiving and storage. Overall, procurement operations are called inbound logistics. A procurement cycle is shown below. Inbound logistics have potential avenues for reducing systems costs. Delivery time, size of shipment, method of transport & value of products involved are different from those of physical distribution cycles. Normally delivery time is large as a low cost transportation mode is chosen. As the value of inventory is low size of shipment is large & transit inventory costs are low. As the price of products is lower, trade off between cost of maintaining inventory in transit and low cost transport exists to the benefit of the organization. Ref.Fig.11 Outbound Logistics Value added goods are to be made available in the market for customers to perceive value. Finished goods are to be distributed through the network of warehouses and supply lines to reach the consumer through retailers shops in the market. During conversion value is added to the raw materials and as a result value of the inventory in this case is very high unlike inputs. Now the size of shipment, modes of transport and delivery time are different as compared to inputs. Activities of distribution performance cycle come under the scope of Outbound Logistics. They are order management, transportation, warehousing, packaging, handling etc.

9. Importance of 3Cs competitive advantage by effective logistics management [Logistics and Supply Chain Management by Martin Christopher, Page # 5,]

23 The three Cs in business are Company, Customer and Competition. Buying decision is always triggered by a need a consumer is experiencing due to the stress he is under. Customer is attracted by value when he is about to make a buying decision. Competitors in business continuously add value to their products in order to be ahead in the competition. Any supplier organization or Company tries to be better than the Competition by utilizing their assets efficiently and effectively. Ref. Fig.12 The Supplier Company tries to differentiate her products in terms of functional quality and product cost. Competition has ensured that technology and human skills are almost same everywhere. Hence product differentiation in terms of functional quality and product cost is nearly impossible. But a great opportunity exists for the Supplier Company to differentiate her products by service and logistics cost by superior logistics. When this happens customer sees better value in the products of Supplier Company as compared to competition. Ref.Fig.13 10. Logistics overview and its implications a. Birth and development of logistics in post war business since 1950. [Refer our earlier notes] b. External integration of supply chain and concept of Supply Chain management 1990 c. Elements of Logistical Management function d. Scope of Logistical Management e. Significance of logistics in Business Management, the time and place e. Overall goal of Logistical Management function What does logistics mean? What is the position of Logistics Management in a Management Service Department? [physical distribution management: logistical approach by K.K.Khanna page # 57] One of the functions of Management Service department is to provide Information Service for decision making to Management. MIS [Management Information System] is a structure of machines and management technology that enables management to receive, collect, store, transmit and analyze information. Transmission of information involves its movement to and from processing

24 center. Order transmitted from customer to the order-processing unit in a firm is an example of transmission activities. Logistics management is concerned with the functions of storage, handling, moving of materials and information. So MIS performs logistics of information in an organization. Information related to Logistics Management is handled in an MIS by Logistical Information System. Primary activities of LIS a. data flow from external sources b. processing and storage of information within the firm c. communication to the decision maker in the form of reports d. communication to customers and suppliers and their feedback thus the position of Logistics Management is primary in Management Information System which is a function of Management Service Dept. 11. Different attributes of logistics management and need of coordination of different organizational departments with that of logistics [Logistics and Supply Chain Management by Martin Christopher, Page # 31, Logistics Management by Bowersox Page # 33] Attributes of Logistics Management [what makes Logistics Management distinct from other departments?] 1. Functions of logistics are spread across various stages of value chain. 2. Provides interface between marketing and customers, marketing and operations, operations and supplier 3. Provides competitive edge to business in the current environment 4. Handles flow of information and materials. 5. Large avenue for cost reduction. Need of coordination of different organizational departments with that of logistics The above features show the complexity and scope of logistics management. For such a management function to function effectively various pieces of jigsaw puzzle should fall at correct places which requires coordination of all functional departments. If we want to solve a jigsaw puzzle, we need to have the complete

25 picture on the box. In the absence of this picture solving the puzzle becomes impossible. Overall coordination of different organizational departments can provide the complete picture. This requires integration of all functions of logistics. If a firm does not consistently satisfy time and place requirement it has nothing to sell in the market, it is simply out of business. Good logistics alone can enable organizations to do business. To enjoy full benefits of logistics, full range of functional work must be performed on an integrated basis. Excellence in each aspect of functional work is relevant only when it is viewed in terms improving overall efficiency and effectiveness of integrated logistics. This requires that the functional work of logistics be integrated to achieve business unit goals. 12. Logistical competency. [Logistics Management by Bowersox Page # 7] What is logistical competency? Competency is the ability to perform a function. Logistical competency is the ability of the firm to perform logistical function effectively and efficiently. Definition: Logistical Competency is the relative assessment of a firms capability to provide competitively superior customer service at the lowest possible total cost. It is a strategy to provide a superior service at a total cost below industry average. Its aim is to view how logistics can be exploited as a core competency so that fits into a firms overall strategic positioning How can this be achieved? 1. Strategic positioning by the company - developing logistics as core competence of the company 2. Using logistics to gain competitive advantage in creating customer value [every companys business goal] Logistical competency can be achieved by performing logistical functions effectively. To understand logistical excellence in each aspect of functional work is relevant only when it is viewed in terms of improving overall efficiency and effectiveness of integrated logistics. In the above process of achieving logistical competency the firm should coordinate all functions well. Network design should integrate the need of

26 information, transportation & inventory. These elements play important roles in overall effectiveness of logistical function. A well designed Network keeping in view the objectives of the company is primary for logistical competency. 13. Concept of Integration in Logistics Operation.. [Logistics Management by Bowersox Page # 33] What is the concept of Integration in Logistics Operation? In order to perform various functions of logistics in coordinated fashion bringing all functions of logistics under one operational command is important. Performance of these functions in an isolated fashion is detrimental to the objectives organization. Performance in isolation loses sight of overall picture. It is like trying to solve a jigsaw puzzle without complete picture before you. What do we integrate? Information flow, inventory flow, procurement, operations support, physical distribution. Ref.Fig.14 14. Value added role of Logistics Different types of economic utilities like form utility, place and time utility and possession utility add value to a product. In other words make product attractive and trigger purchase.

a) Form Utility is given by Production to a product when conversion process

is held. Logistics also adds form utility when warehousing activities like mixing, assembling, processing postponement or unpacking take place.

b) Place and Time Utility is given by logistics functions when a product is

moved to a needed place on time to serve the customer

c) Possession Utility: Marketing creates Possession Utility by promoting

the product by advertising and or by any other means. But logistics finally possession by customer happen Ref.Fig.25 INVENTORY MANAGEMENT What is Inventory Inventory is an unused asset, which lies in stock without participating in value adding process. Unused equipment, raw material, WIP and Finished goods, consumables , spare parts, bought out parts, tools and tackles, gauge and fixtures etc.

27 In India 9 to 12 months of sales quantity lies in the form of Inventory [R/M, WIP, Bought out parts and Finished goods] as against a few days in Japan and a month in the US and Europe Huge amount of NPAs in our country, Banks, PSUs If look around in our facilities we find stocks lying unused for years catching dust and rust in the form of plant and equipment, raw material, WIP and Finished goods. In our country inventory is always viewed as asset [working capital], in fact, though it is called an asset, it is a big liability Reluctance to scrap useless inventory in time is one of the reasons why we carry huge stocks Inventory is biggest source of waste Japanese companies focused their attention on Inventory through now well known concept of 5S TYPES OF INVENTORY Manufacturing: R/M, components, WIP, F/G. manufacturers commitment to inventory is deep and duration is long. MRO: Maintenance, repairs and operating supplies. Location inventory: inventory at a fixed location In transit inventory also known as pipeline inventory: inventory in the process of transfer or under going transportation and waiting to be transported. Wholesale inventory: Wholesalers stock large quantities and sell in small quantities to retailers. Products with seasonal demand, products to satisfy assorted, small and urgent needs of retailers are stocked. As the product line expands risk of retailers increases and the risk becomes wider and deeper. Retail inventory: retailers stock variety of products to satisfy demand. But they push the volume backwards to wholesalers and reduce the depth of risk although the risk is wide Functions of inventory Inventory overcomes geographical separation to integrates components into assembly. Inventories also make market assortments possible when

28 manufacturing is separated by geography. geographical separation has made manufacturing economical. De coupling from uncertainties of market, poor infrastructure Balancing supply and demand: seasonal production and year round consumption [agricultural products], seasonal consumption non seasonal production [woolen garments]. Buffer uncertainties of lead time and demand Technical requirement of batch production Costs of carrying inventories Capital cost Taxes, insurance Obsolescence Storage: handling, space, maintenance, security Opportunity cost Cost of bad quality Economic order quantity Assumptions of Wilsons lot size formula or Classical EOQ model Demand is at a constant rate and continuous 1. Process is continuous 2. No constraints are imposed on quantities ordered, storage capacity, budget etc. 3. Replenishment is instantaneous 4. All costs are time invariant 5. No shortages are allowed 6. Quantity discounts are not considered Limitations of Classical EOQ model We have seen that Classical EOQ model made assumptions that are really not realistic. When the model is put to practical use we find that so many adjustments are needed to be made. Hence EOQ model is formulated under some limitations. If we are not conversant with these limitations, managerial application of this concept can be counter productive.

29 Major limitations are some of the assumptions made 1. the demand or usage is predictable 2. the demand or usage is constant 3. the price of the item remains constant through out the procurement cycle 4. materials in many processes are flow controlled ie, materials move in pipe lines starting and stopping depending on operational requirements If the concept of EOQ is applied without taking into account the limitations results can be disastrous. Adjustments to EOQ 1. Volume transportation rates: EOQ model does not consider cost of transportation of goods from vendors place to the purchaser. Transportation costs are sensitive to weight of consignment. If the quantity suggested by EOQ model does not get favorable transportation cost, summation of inventory cost and transportation cost may be detrimental to the interests of the organization. Hence we should always evaluate batch sizes from total cost perspective. In the traditional approach when inbound logistics are totally vendors responsibility, the company never used to worry about this aspect. But as the concept is now enlightened and minimization of the costs in the supply chain is the focus, this aspect is very significant

Annual demand Unit value Inventory charge Ordering cost EOQ Shipment rate R1 [applicable to EOQ quantity = 300 U] Shipment rate R2 [applicable to 480 U quantity]

2400 U $ 5.00 20% $19.00 per order 302 U $1.00 $.75

Alternative 1 Q [EOQ] = 300

Alternative 1 Q = 480

30 inventory carrying cost ordering cost Transportation cost @ $1 per U Total cost $150 $152 $2400 $2702 $240 $95 $1800 $2135

2. Quantity discount: Impact of quantity discounts is seen if we look at the costs by doing summation of inventory costs and relief derived out of quantity discounts. Quantity discounts can upset the benefit of EOQ if we dont evaluate the situation from total costs perspective. 3. Other EOQ adjustments: a. production lot size: buyers EOQ and suppliers EBQ some times do not match. Then some adjustment will have to be made to the EOQ to make it practicable. b. multiple item purchase: when a combination of several products are sourced from a supplier, the impact of quantity discounts and transportation costs will be different from that for individual product. So adjustment is required to EOQ from the angle of total cost for the combination of products c. Limited capital: budgetary allocations play a significant role in buying. The budget has to satisfy the requirement of entire product line. So the EOQ of various items requires adjustment d. Private trucking: if the company uses private transport for procurement, getting a full truck becomes significant from cost perspective e. Standard package: when a standard package is used for transportation, if EOQ suggests one and a half package then transporting half package becomes more expensive than transporting two packages with enhanced order quantity. Some Inventory related definitions 1. Inventory policy: Inventory policy enables inventory manager to take inventory related decisions a. answers to 5W-1H questions on inventory about buying and controlling inventory

31 b. positioning and placement of inventory when the inventory is to be placed at distribution centers? Or it should be held at plant? c. inventory management strategy: if the inventory should be controlled at various distribution centers independently or it should be controlled centrally 2. Service levels: Service levels are defined by management. They indicate the performance objectives the inventory functions is expected to achieve a. order cycle time: time between release of a purchase order by a customer and receipt of the shipment at his place b. case fill rate: percentage of cases deliverable to a customer from the stock against the number of cases he ordered. c. line fill rate: the customer orders several products [lines] in various quantities in his order. The percentage of product lines fully delivered to the product lines ordered is the line fill rate. d. order fill rate: percentage of orders completely fulfilled to orders received is order fill rate case: customer xyz placed an order for 75 units of product A and 25 units of product B. he received 75 units of product A and 20 units of product B from suppliers stock within 2days from placement of order. Calculate various service levels a. order cycle time: 2 days b. case fill rate: no. of units ordered = 100, no. of units received = 95, case fill rate = 95% c. line fill rate: no. of product lines ordered = 2, no. of product lines received = 1, line fill rate = 50% d. order fill rate: no. of orders placed = 1, no. of orders fulfilled = 0, Order fill rate = 0 Average inventory: It is the level of inventory on an average one finds in the organization. This concept includes cycle, safety stock and transit inventory components Cycle inventory: is that part of average inventory that results from replenishment cycle. This is also known as base stock or lot size stock. The

32 quantity ordered is known as order quantity or the base stock is of order quantity. Safety stock Inventory: this component of average inventory take care of short term fluctuations in lead time and consumption. Transit Inventory: Stock that is moving or awaiting movement in transportation vehicles. This is also known is Pipe Line Inventory. This inventory is necessary for order replenishment. There are two aspects important from logistics point of view. One is that the transit inventory is an asset which is paid for but not usable. The second aspect is that we do not know exactly where the transport vehicle is located and when it is likely to arrive. Under the conditions of transfer of ownership at origin, transit inventory is to be treated as part of average inventory. Comparison of Indian & Global industries Comparison factors 1.Cycle time from production to development 2. inventory level Japanese companies 0.5 to 2 years A few days of sales 3. output per employee 4. rejection rate 5. quality cost with Rs. 32 Lacs 3 to 4 PPM 3% TO 5% One month of sales Rs. 12 Lacs 30 to 40 9 t0 12 months of sales Rs. 2.5 Lacs 8 TO 20 RPH US/Europea n co. 1 to 2 years General Indian co. 3 to 6 years

PPM 5% TO 10% 35% TO 45%

respect to sale Selective Inventory control ABC Analysis, VED Analysis, FSN Analysis. ABC Analysis: What is 80 20 rule or Pareto Analysis based on value ref. KKK for example and make your own notes in the class. Inventory policies: Q System, P System, Single order system. Which policy is suitable for what inventory? Pl. make your own notes in the class.