Chapter

15
Market Logistics & Supply Chain
Management

SDM – Ch 15 Tata McGraw Hill Publishing 1

 Logistics Defined
• Logistics means having the right thing, at
the right place, at the right time
• The science of planning, organizing and
managing activities that provide goods or
services – Logistics World, 1997

SDM – Ch 15 Tata McGraw Hill Publishing 2

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

SDM – Ch 15 Tata McGraw Hill Publishing 3

 Scope of Logistics
• Choice of markets
• Procurement
• Plant location and layout
• Inventory management
• Location and management of warehouses
• Choices of carriers, mode of transport
• Packaging decisions
• Relevant to all enterprises: manufacturing,
Government, Institutions, service
organisations
SDM – Ch 15 Tata McGraw Hill Publishing 4
 Logistics Activities
Input Output
Customer service
Demand forecasting
Distribution •Marketing
•Natural
Communications Orientation
Resources Inventory control (competitive
(land, facilities Materials handling
Advantage)
Equipment) Order processing
Parts and service support •Time and
•HR
Plants and warehouse selection Place utility
•Finance Procurement •Efficient move
•Information Packaging
Return goods handling to customer
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage

SDM – Ch 15 Tata McGraw Hill Publishing 5

 Logistics and SCM
• Logistics tends to focus on transportation and
distribution, SCM focuses on purchasing and
procurement, production planning, demand
management, from popint of origin to point of
consumption
• Supply chain management also logistics functions
plus purchasing,sourcing, procurement,
manufacturing operations, location planning,
• All activities and flows from point of origin to point of
comsumption of a materials

SDM – Ch 15 Tata McGraw Hill Publishing 6

 Links and Flows
General material flow/ service flow

Information flow

Information flow

Customer’s Supplier’s
Customer Lead Firm Supplier
customer supplier

General cash flow

Outbound / Downstream logistics Inbound / Upstream logistics

SDM – Ch 15 Tata McGraw Hill Publishing Source: ICFAI 7

 Source: Michael Porter

The Value Chain

S Company Infrastructure
U
P Organisation, people, methods
margin
P
Systems & technology
P
O
R Procurement
T

Inbound Outbound Marketing Service

Operations
logistics logistics & sales

margin

SDM – Ch 15 Tata McGraw Hill Publishing 8

Primary activities
 Inbound and outbound
logistics
• Inbound logistics
• Receiving storing issuing inputs and
taking care of materials handling,
inventory control, scheduling for
production,
• Interface with company’s suppliers,
vendors and other service providers

SDM – Ch 15 Tata McGraw Hill Publishing 9

• Outbound logistics
• Distributing finished goods to dealers/
stockists/customers
• Interface with copmay’s customers

SDM – Ch 15 Tata McGraw Hill Publishing 10

 Logistics Focus Areas

Customer service related Operations related

Packaging
Order processing
Spare parts and service support
After sales Customer service
support
Demand forecasting
Distribution communications
Return goods handling
Plant and warehouse site
location
Procurement
Inventory control
Materials handling
Salvage and scrap disposal
Traffic and transportation
Warehousing and storage

Logistics may be confined to the company whereas SCM extends beyond

SDM – Ch 15 Tata McGraw Hill Publishing 11

 Supply Chain Management
• Business context:
– Globalization of the market place
– Advances in technology
– Increasingly demanding, informed customer base
– Purchase decisions on dimensions of quality, price
and time
• Innovative supply chain:
– To meet customer driven challenges
– To reduce costs
– Improve service levels
– Enhance speed to market

SDM – Ch 15 Tata McGraw Hill Publishing 12

 Supply Chain Integration
Customer Analysis
Order Fulfillment
Purchasing/Supplier
Partnering

Integrated Inventory Management and

control
Storage & Supply Chain
Transportation Management

Manufacturing/ Demand & Lead

Re-manufacturing/ Time Management
Assembly

Materials
Inventory management…
SDM – Ch 15 Management
Tata McGraw Hill Publishing 13
• Inventory Management

SDM – Ch 15 Tata McGraw Hill Publishing 14

 Why Carry Inventory?
• Support production requirements
• Support operational requirements
• Maximize customer service – ensure
availability when needed – protect
against uncertainty
• Hedge against marketplace uncertainty
• Take advantage of order quantity
discounts
SDM – Ch 15 Tata McGraw Hill Publishing 15
Factors Which Drive Inventory
• Target service level parameters
• Lot sizing practices
• Safety stock and safety time
conventions
• Volume discounts and purchase
arrangements
• Seasonal build up needs
SDM – Ch 15 Tata McGraw Hill Publishing 16
 Categories of Inventory
• Anticipation – built in anticipation of future
demand – peak season, strike, promotion
• Fluctuation (safety) – to cover random,
unpredictable fluctuations in supply and
demand and lead time – to prevent disruption
in operations, deliveries etc
• Lot-size – to take advantage of quantity
discounts, reduce shipping, set up and
clerical costs – also called cycle stock
SDM – Ch 15 Tata McGraw Hill Publishing 17
 Categories of Inventory
• Transportation – pipeline or movement
inventories – to cover the time needed to
move from one point to another – factory to
distribution point for example
• Hedge – for materials where prices are
volatile
• Maintenance, repair and operating supplies
(MRO) – to support M and O – spare parts,
lubricants, consumables etc
SDM – Ch 15 Tata McGraw Hill Publishing 18
 Performance Measures
• Inventory turns = Annual cost of goods
sold /average inventory in value
• Days of sales = inventory on hand /
average daily sales

SDM – Ch 15 Tata McGraw Hill Publishing 19

 Types of Classification
• ABC category – most common for all
• HML - high, medium, low - similar
• FSND – fast moving, slow moving, non-
moving, dead – spare parts / FG

SDM – Ch 15 Tata McGraw Hill Publishing 20

 ABC Inventory Analysis
• Based on Pareto’s law:
– A – 20% items worth 80% of value
– B – 30% items worth 15% of value
– C – about 50% items account for 5% of the usage
• Classify items based on the above criteria
• Apply degree of control in proportion to the
importance of the group

SDM – Ch 15 Tata McGraw Hill Publishing 21

 Inventory Related Costs
• Unit costs – basic value of the item carried
• Ordering costs – generating and sending a
material release, transport, any other
acquisition costs
• Carrying costs – capital, storage,
obsolescence
• Stock-out costs
• Quality costs – non-conforming goods
• Other costs – duties, tooling, exchange rate
differences etc
SDM – Ch 15 Tata McGraw Hill Publishing 22
 Approaches for Controlling
Inventory
• Continuous review:
– Safety stocks and forecasting methods
– Excess and obsolete inventory
• Part simplification and re-design
• On-site supplier managed inventory
• Use of supply chain inventory management
systems, Materials Requirement Planning,
Distribution Requirement Planning etc
• Automated inventory tracking systems
• Supplier – buyer cycle-time reduction
Warehouse management…
SDM – Ch 15 Tata McGraw Hill Publishing 23
 Functions
Warehouses

Material Customer Information Storage

handling service transfer function

Receive goods
Identify goods Temporary Permanent
Sort goods
Despatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Despatch the shipment
Prepare records and
advices
SDM – Ch 15 Tata McGraw Hill Publishing 24
 Purpose of Warehousing
• To provide desired level of customer
service at the lowest possible total cost
• It is that part of the firm’s logistics system that
stores products (RM, Packing Materials, WIP,
FG) at and between point of origin and point
of consumption and provides info to
management on the status, condition and
disposition of items being stored
• Distribution warehousing relates mainly to FG
SDM – Ch 15 Tata McGraw Hill Publishing 25
 Warehouses
• Support manufacturing
• Mix products from multiple facilities for
shipment to a single customer
• Break-bulk
• Aggregate
• Used more as a ‘flow-thru’ point than as
a ‘hoarding’ point
SDM – Ch 15 Tata McGraw Hill Publishing 26
 Distribution Warehousing
• The objective is to set up a network of
warehouses closest to the customer
locations to service markets better and
minimise cost
• Could be C&FA s, depots or distribution
centers
• Macro location strategies:
– Market positioned
– Production positioned
– Intermediately positioned
SDM – Ch 15 Tata McGraw Hill Publishing 27
 Transportation
• Very important in the Logistics function:
– Movement across space or distance adds value to
products
– Transportation provides time and place utility
• Role of transportation includes:
– Provides opportunity for growth under competitive
conditions
– Deeper penetration into markets
– Wider distribution means greater demand
– Can influence product prices favourably

Principles….
SDM – Ch 15 Tata McGraw Hill Publishing 28
 Transportation Principles
• Continuous flow
• Optimise unit of cargo - stackability
• Maximum vehicle unit – capacity utilization
• Adaptation of vehicle unit to volume and
nature of traffic
• Standardisation
• Compatibility of unit load equipment
• Minimum of dead weight to total weight
• Maximum utilization of capital, equipment and
personnel
SDM – Ch 15 Tata McGraw Hill Publishing 29
Process….
 Comparison of modes……

Reverse Logistics
• Movement of goods from the market or
customer back to the company
• The need:
– Increased awareness of the environment
– Stringent legislation
– For some it is part of the business
– Profitability of dealing with scrap, surplus
• Surplus, obsolescence can result due to:
– Over optimistic sales forecasts, change in product
specs, errors in estimating material usage, losses
in processing or overbuying based on incentives
SDM – Ch 15 Tata McGraw Hill Publishing 30
 Advantages of Rail
• Economy – more so for goods over
long distances
• Efficiency of energy
• Reliability – not affected by weather
conditions

SDM – Ch 15 Tata McGraw Hill Publishing 31

 Disadvantages
• Uneconomical for small shipments and
short distances
• Not suitable for remote stations
• Costly terminal handling facilities
• Inflexible time schedules

Road transport…..

SDM – Ch 15 Tata McGraw Hill Publishing 32

 Road Freight Advantages
• Through movement – direct from consignor to
consignee, no transshipment
• Flexibility – routes and loading routines can
be easily altered, operate day and night
• Less capital costs – for own fleet + immunity
from industrial action
• Fast turn-around – if articulated units like
tractors and trailers are used
• Minimum delays

SDM – Ch 15 Tata McGraw Hill Publishing 33

 Disadvantages
• Susceptibility to weather and road conditions
– in spite of the best protection
• Unsuitability for heavy loads – rail transport
more economical for bulk loads
• Unsuitability for long distances – again the
rail telescopic rates are more favourable

Air transport….

SDM – Ch 15 Tata McGraw Hill Publishing 34

 Air Transport Advantages
• Faster mode
• Reduction in cost particularly inventory
• Broad service range
• Increasing capabilities
• Disadvantages:
– High cost
– Weather affects flight conditions
– Limitations on heavy consignments
SDM – Ch 15 Tata McGraw Hill Publishing Water transport……35
 Water Transport
• Advantages:
– Mass movement of bulk
– Lowest freight cost
– Preferred for long haul of low value commodities
• Disadvantages:
– Not for quick transit
– Suitable for certain types on commodities only

Pipeline….
SDM – Ch 15 Tata McGraw Hill Publishing 36