Logistics Fundamental and Processes - Sem 3 - MBA LSCM-compressed

MBAP921D
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Course Design
Advisory Council
Chairman
Mr. Sharad Mehra
Members
Dr. S J Chopra Dr. Veena Dutta

Chancellor Registrar
Dr. Kamal Bansal Mr. Ashok Sahu

Dean-Academics Head-Online Business
SLM Development Team

Dr. Raju Ganesh Sunder Dr. Rajesh Gupta
Professor & Head-Academic Unit Sr. Associate Professor
Mr. Tarun Batra Mr. Rahul Sharma Mr. Shantanu Trivedi

Asst. Director-Product Development Lecturer Lecturer
Author
Mr. Shantanu
Course Code: MBAP921D

Course Name: Logistics Fundamental and Processes
Version: July 2019

Contents
Unit 1 Logistics and Supply Chain Management...................................................... 01

Unit 2 Quantitative Methods and IT in Supply Chain Management....................... 10
Unit 3 Logistics and Supply Chain Management in India........................................ 17
Unit 4 Issues and Challenges in Logistics Management........................................... 30
Unit 5 Case Study ....................................................................................................... 37
Unit 6 Logistics and Supply Chain Measures............................................................ 39
Unit 7 Inventory Planning and Management............................................................ 46
Unit 8 Inventory Management Strategy.................................................................... 57
Unit 9 Transportation.................................................................................................. 63
Unit 10 Case Study ....................................................................................................... 74
Unit 11 Road and Rail Transportation......................................................................... 77
Unit 12 Maritime Transportation................................................................................. 81
Unit 13 Air Transport.................................................................................................... 89
Unit 14 Intermodal and Multimodal Transportation.................................................. 95
Unit 15 Case Study...................................................................................................... 101
Unit 16 Warehousing................................................................................................... 103
Unit 17 3PL and 4PL................................................................................................... 115
Unit 18 Logistics Planning and Strategy................................................................... 128
Unit 19 Packaging and Material Handling................................................................ 136
Unit 20 Case study...................................................................................................... 146
Unit 21 Order Processing............................................................................................ 148
Unit 22 Order Picking and Dispatch.......................................................................... 153
Unit 23 Warehouse Location and Design................................................................... 163
Unit 24 Organizational Structure for Global Logistics............................................. 172
Unit 25 Case Study...................................................................................................... 180
1
Unit 1 Notes
Logistics and Supply Chain

Management
Objectives
After the end of this unit, the students will be aware of the
following topics:
\\ Logistics Management
\\ Supply Chain Management
\\ Issues in supply chain management
\\ Value Chain Management
Introduction
Supply Chain Management, being the utmost important
way of linking major business processes within and across
companies with an aim to upgrade them into much high-
performing business models, has the force that drives
competitive advantage. On the other hand, the movement,
storage and the flow of goods, services and information is
referred to as Logistics. This process works both inside and
outside the organisation. Logistics management is that part
of Supply Chain Management that plans and implements the
flow of goods, services and information between the point of
origin and the point of consumption in order to meet customer
requirements.
The Great Logistics and Supply Chain History

Logistics and supply chain have been playing an important
role in development worldwide for almost 5,000 years now.
From the time when the pyramids in ancient Egypt were being
constructed, logistics and supply chain has made significant
progress. Time and again, brilliant logistics solutions have
formed the basis for the transition to a new historical and
economic era. Examples of this fundamental progress include
the invention of the sea-cargo container and the creation
2
of novel service systems during the 20th century. Both are
Notes integral parts of globalisation today.
Around 2700 BC
Material handling technology in pyramid construction:
Blocks of stone weighing several tons were transported and
assembled at the construction site to build the Great Pyramid
of Giza, which is 146 metre high and weighs 6 million ton, the
Egyptians needed sophisticated material transport equipment
capable of moving the massive building blocks and putting
them into place. Even today, we still cannot fully explain
how this level of precision was achieved using the hoisting
equipment and means of transport available around 2700 BC
It is only in the recent past that business organisations have
come to recognise the vital impact that logistics management
can have in the achievement of competitive advantage.
Around 300 BC
Revolutionary Greek rowing vessels: These vessels laid
the new foundation of intercontinental trade.
The revolutionary invention of rowing vessels created the

basis for rapid travel across the high seas. This invention
formed the foundation for the creation of enormous logistics
supply systems required by mobile army camps. Using these
logistics capacities, Alexander the Great undertook campaigns
with his troops, their families and their weapons of war that
extended all the way to India.
Around 700 AD
Procurement logistics in the construction of the
Mezquita Mosque: Construction of the famous Mezquita
Mosque in Cordoba, Spain, began in 756 under the Caliph of
Cordoba in the Umayyad dynasty. It is considered to be the
largest mosque in Europe. Pillars, for the construction of this
mosque, came to Spain from all parts of the Islamic empire,
extraordinary procurement logistics was required to transport
them.
Around 1200 AD
The international network known as the Hanseatic
League: It gave cooperation for transport bundling and
international sea transport. In 1188, the city of Hamburg, 3
Germany, was founded as a base on the North Sea for the Notes
Hanseatic League to make travel on the sea more secure and
to represent business interests abroad. Upto 200,000 fur pelts
were transported by a single Hanseatic cog ship. Hanseatic
trade extended from the Black Sea to Reval. From a modern-
day vantage point, the league’s cross-border trade bears strong
similarities to the European Union.
Around 1500 AD
Progressive postal service in Europe: This was the first
time-definite mail shipping service.
Under an agreement with Philipp of Burgundy, Franz von

Taxis organised the first postal service with strictly defined
transit times. Letters were delivered to places such as Paris,
Ghent, Spain and the imperial court of Vienna. In view of the
infrastructure of the times and the political fragmentation
created by the array of small principalities, the mail reached
its destination with very little delay.
Around 1800 AD
Discovery of new road conveyances and the railroad:
This could be done due to the expansion of logistics tasks
through new technologies and means of transport. The
practical use of the steam engine, the invention of vehicles,
railroads and ships as well as the discovery of crude oil
ushered in a new economic era that generated new missions,
tools and opportunities for logistics.
Around 1940
Military logistics during the world wars: There was a
transfer of military logistics concepts to the business world.
During World War I, military logistics was the vital link in
the network that supplied troops with rations, weapons and
equipment. With the onset of World War II, logistics was
further refined. As a result, logistics gained an important
place in the business world as well.
Around 1956
Invention of the sea container: The sea container was
the structural evolution of world trade and the boom of
4
international flows of goods. This invention by the American
Notes Malcom P. McLean changed production conditions for nearly
all industries around the world and, as a result, altered
people’s consumption habits. Even today, the sea container
continues to ensure that harbors gain major contracts, new
countries and regions experience commercial booms, markets
arise and products from all parts of the world can be bought
and sold at reasonable prices. In this way, the container has
significantly contributed to globalisation.
Around 1970 – 1980
Kanban and Just-in-Time (JIT): These were the logistics
concepts with a special emphasis on procurement. The
Kanban and Just-in-Time (JIT) concepts were developed and
introduced at Japan’s Toyota Motor Co. by TaiichiOhno; with
the objective of effectively linking logistics to other operational
functions. Special emphasis was placed on procurement.
Around 1990
QR and ECR technologies: These were the logistics concepts
with a special emphasis on distribution.
The quick response and Efficient Consumer Response (ECR)

technologies were developed during the 1990s and applied
by many retail and wholesale companies. These technologies
had a major impact on logistics. As a result of this technology,
distribution centers are given the task of moving goods instead
of storing them. This allows companies to accelerate reaction
times to market developments and to set up efficient goods-
supply systems.
Modern Supply Chain

Supply Chain Management
It is a look at the entire logistics chain from the vendor’s
supplier to the end customer. Supply Chain Management is a
term that has grown enormously in use and significance since
the late 1980s. Today, supply chain management is viewed as
a holistic consideration of key business processes that extend
from the vendor’s supplier to the end user. Accordingly, supply
chain management is an extremely interactive, complex
system requiring simultaneous monitoring of many conflicting 5
objectives. Notes
Globalisation is still moving forward today. Efficient logistics

creates a crucial competitive edge for companies that are
expanding in global markets. Successful logistics efforts in
international supply chains can fuel the development of global
markets.
Based on the Product Relationship Matrix
Cooper and Slagmulder (1999) distinguished four key
decisions and activity areas in the integrated supply chains,
such as:
yy Configuration of product and network, which covers the

decisions concerning the main rules of cooperation
yy Formation of the production network, mainly the choice of
production facility and warehousing locations as well as
their capabilities
yy Designing product with involvement the research and
development abilities of suppliers,
yy Process optimisation in order to reduce cycle times and
inventory level in the cost-effective way
yy Limiting the role and place of small firms within integrated
supply chains, Delivering raw-materials, parts or modules
for the final goods producers
yy Delivering customer goods to wholesalers or selling small
quantities of this goods to the final customers
yy Providing transportation and forwarding services
yy Manufacturing goods and providing other services for
market niches which are considered as not enough
profitable for big companies (also as a subcontractor)
yy Trading under well-known brand name of large
distribution networks (franchising)
Issues in Supply Chain Management (SCM)
A supply chain network incorporates all activities, capacities
and offices engaged with creating and conveying an item as
well as administration, from providers (and their providers) to
6 the clients. The supply chain network worldview is outfitted
Notes towards improving every part of production, operations
(like generation, warehousing, stock, transportation and
conveyance and so on) and the between connections between
these segments synergistically. In the 70’s and the 80’s,
different models for creation and activities control and the
board were grown: Just-in-Time (JIT) Inventory the board
model, Vendor Managed Inventory (VMI) model, Zero
Inventory (ZI) model, Total Quality Management (TQM) and
so forth. These models focus on the different segments of the
production network in disconnection, this suggests these
models were situated towards the streamlining of a sub-some
portion of the framework while the SCM worldview goes for
the improvement of the full chain. This prompts exchange
offers among the various parts of the inventory network. For
model, JIT would require a production line to keep inventories
low and produce and convey items in an opportune way,
anyway JIT disregards numerous different perspectives which
can’t be seen freely. This can be understood by an example
on the off chance that the accessibility of the information
and materials is unsure and sporadic; the plant may need
to guarantee smooth and nonstop creation. So also, local
stocking may allow decreases in transportation costs through
expanded shipment union, as well as extended deals through
better conveyance execution. These enhancements might
be cultivated with just moderate increments in stock and
warehousing cost(s). In any case, in a domain where diverse
useful units deal with the different coordination exercises
freely, an association is more averse to appropriately examine
such significant trade-offs.
Moreover, firms now accept that efficient consumer response

(ECR) can bring incompetitive advantage. SCM is identical
to coordinating all the operations of an organisation with
the operations of the suppliers and customers. Effective
SCM strategies are crucial for successful implementation of
ECR programmes. Thus, a production planning and control
model that focuses on all the facets of the operations and
distribution activities and links with other functional domains
such as finance and marketing is required. The supply chain
management model should also perform the task of managing
and coordinating activities upstream and downstream in the
supply chain. Of course, such a model in its totality becomes 7
complex and cannot be used without adequate computational Notes

infrastructure.
Value Chain Management
A value chain is the full range of activities which include
design, production, marketing and distribution that
businesses conduct to bring a product or service from
conception to delivery. For companies that produce goods, the
value chain starts with the raw materials used to make their
products and consists of everything added before the product
is sold to consumers.
Value chain management is the process of organising these

activities in order to properly analyse them. The goal is to
establish communication between the leaders of each stage
to ensure the product is placed in the customers’ hands, as
seamlessly as possible.
Porter’s Value Chain
Harvard Business School’s Michael E. Porter was the
first to introduce the concept of a value chain. Porter, who
also developed the Five Forces Model to show businesses
where they rank in competition in the current marketplace,
discussed the value chain concept in his book ‘Competitive
Advantage: Creating and Sustaining Superior Performance”
(Free Press, 1998).” Competitive advantage cannot be
understood by looking at a firm as a whole,’ Porter wrote, “It
stems from the many discrete activities a firm performs in
designing, producing, marketing, delivering and supporting
its product. Each of these activities can contribute to a firm’s
relative cost position and create a basis for differentiation.”
In his book, Porter splits a business’s activities into two

categories; primary and support.
Primary activities include the following:
yy Inbound logistics refers to receiving, storing and

distributing of raw materials used in the production
process.
yy Operations management is the point at which the raw
materials are turned into the final product.
8 yy Outbound logistics refers to the distribution of the final
Notes product to consumers.
yy Marketing and sales involve advertising, promotions,
sales-force organisation, distribution channels, pricing and
managing the final product to ensure it is targeted to the
appropriate consumer groups.
yy Service refers to the activities needed to maintain the
product’s performance after it has been produced, including
installation, training, maintenance, repair, warranty and
after-sale services.
The support activities help the primary functions and
comprise the following:
yy Procurement is how the raw materials for the product are

obtained.
yy Technology development can be used in the research and
development stage, in how new products are developed and
designed, and in process automation.
yy Human resource management includes the activities
involved in hiring and retaining the proper employees to
help design, build and market the product.
yy Firm infrastructure refers to an organisation’s structure
and its management, planning, accounting, finance and
quality-control mechanisms.
Check your Progress
1. ______________________ was the first time-definite

mail shipping service.
2. ____________________was the vital link in the
network that supplied troops with rations, weapons
and equipment during wars.
3. ______________________ is identical to coordinating
all the operations of an organisation with the
operations of the suppliers and customers.
4. ____________________ logistics were concepts with a
special emphasis on procurement.
9
Summary
Notes
Logistics and supply chain has been playing an important role
in development worldwide. The revolutionary invention of
rowing vessels, the international network and the progressive
postal service paved way for global development. The practical
use of the steam engine, the invention of vehicles, railroads
and ships as well as the discovery of crude oil ushered in a
new economic era that generated new missions, tools and
opportunities for logistics. Kanban and Just-in-Time (JIT)
logistics concepts which laid special emphasis on procurement,
added to the upliftment of the management. The entire
logistics chain from the vendor’s supplier to the end customer
was introduced under Supply Chain Management. A value
chain is the full range of activities which includes design,
production, marketing and distribution that businesses
conduct to bring a product or service from conception to
delivery.
Questions for Discussion

1. The use of the steam engine, the invention of vehicles,
railroads and ships as well as the discovery of crude oil
ushered in a new economic era generated opportunities
for logistics. Discuss.
2. In what ways has the sea container significantly
contributed to globalisation?
3. How are the issues in Supply Chain Management (SCM)
taken care of?
4. What is Value Chain Management? Discuss Porter ‘s
splits.
10
Notes
Unit 2
Quantitative Methods and IT in
Supply Chain Management
Objectives
After completion of this unit, the students will be aware of the
following topics:
\\ Quantitative Methods and SCM
\\ Information Technology in Supply Chain Management
\\ Supply Chain Management in Public Sector
Introduction
The supply chain in both manufacturing and marketing
enterprises is a very complex process. Since the supply
chain affects the customer satisfaction, inventory and
distribution costs, directly, its role becomes more crucial. So,
for coordinating the multitude of processes, computational
intelligence offers effective techniques. Quantitative methods
in supply chain is a broad perspective that makes the most
of the human intelligence, augmented with the capabilities of
modern computing resources.
Various analytical and quantitative methods form the core

of these decision support system(s). The quantitative models
used in SCM are in general large linear programming
models viz. model(s) for job scheduling, transportation and
distribution, warehouse/facility
location etc. All these models have one intrinsic limitation.

They are mostly single objective/criteria optimisation
methods. But it is very rare in real life, that one encounters
single criterion problems. By default all real-life problems are
multiple criteria decision making (MCDM) problems.
The MCDM solution methodologies address the multiple

objective programming problems, viz.
max {fi((x) = zi}, 1…..i = k 11
Notes
such that x € S
where k (>1) the number of criterions to be optimised, z’s are

the criterion functions and S is the constraint set. Without
the knowledge of the decision maker’s utility function, the
methods search the ‘space of trade-offs’ among the criterion
to arrive at a pareto optimal solution to the problem using
only the implicit information present. In practice, interactive
procedures have proven to be the most effective in searching
the trade-off space for the final solution. MCDM has two
distinct halves. One half is multiple-attribute decision
analysis and the other half is multiple-objective mathematical
programming. Multiple-attribute decision analysis is
most often applicable to problems with a small number of
alternatives in an environment of uncertainty. Multiple-
objective mathematical programming is most often applied
to deterministic problems in which the number of feasible
alternatives is large. MCDM techniques have not yet become
widespread in managerial decision making (except maybe, the
use of goal programming techniques).
Other techniques that can be used are:
yy Neural network-based techniques for the evaluation

of alternatives in conjunction with MCDM solution
generators (using neural networks to model the decision
makers utility function)
yy using neural networks for demand forecasting (it has been
experimentally demonstrated that neural network-based
forecasting techniques are better and more robust than
forecasting methods based on econometric modelling and/
or statistical time series forecasting techniquesthe use of
fuzzy-neural network or genetic algorithms-based methods
to incorporate uncertainty in the decision-making process.
These models can be incorporated in the standard two
layered architecture for the development of interactive
decision support system(s). Where the database refers to a
repository of relevant data for the solution of the problem
and the model base refers to the database of relevant
analytical, fuzzy, neural network or genetic algorithm-
12 based models’ parameters that the user can choose from to
Notes solve the problem. It’s the opinion of many that interactive
methodologies are the best for the solution of multiple
criteria decision problems.
Information Technology and SCM

In the age of shopping alternatives through e-Commerce and
m-Commerce supply chain network, the board has become
an imperative zone of concern for some organisations. It
is especially basic for assembling organisations, which are
intensely reliant on the store network accomplices to convey
their items.
OEMs, Suppliers, Manufacturers, retailers, shippers and

merchants are the key partners in the supply chain of
manufacturing organisations, which completes with item
delivery to the end consumer. With an expanding accentuation
on innovative progressions, just as the adjustments in
customer requirements, the requirement for incorporated
supply, the board has turned out to be progressively
significant.
For manufacturing firms and original equipment

manufacturers to build considerable customer foundations,
digitisation of business processes has become more of an
obligation than a value-add proposition. This has increased
the requirement for creating a digital environment that
seamlessly integrates the operations carried out by various
entities in the supply chain. Technological advancements
now enable businesses to construct end-to-end supply chain
solutions that speed up processes and avoid bottlenecks in the
supply chain.
Some of the technologies are as under:

1. Electronic Data Interchange
Electronic Data Interchange (EDI) involves the swapping of
business documents in a standard format from computer-to-
computer. It presents the capability as well as the practice of
exchanging information between two companies electronically
rather than the traditional form of mail, courier, and fax.
The major advantages of EDI are as follows: 13
Notes
yy Instant processing of information
yy Improvised customer service
yy Limited paper work
yy High productivity
yy Advanced tracing and expediting
yy Cost efficiency
yy Competitive benefit
yy Advanced billing
The application of EDI supply chain partners can overcome
the deformity and falsehood in supply and demand
information by remodeling technologies to support real time
sharing of actual demand and supply information.
2. Barcode Scanning
We can see the application of barcode scanners in the checkout
counters of super market. This code states the name of product
along with its manufacturer. Some other practical applications
of barcode scanners are tracking the moving items like
elements in PC assembly operations and automobiles in
assembly plants.
3. Point of Sale Device
A Point of Sale (POS), a critical piece of a point of purchase,
is the place where a customer executes the payment for goods
or services, and where sales taxes may become payable. It can
be in a physical store, where POS terminals and systems are
used to process card payments or a virtual sales point such as
a computer or mobile electronic device.
Electronic POS software systems streamline retail operations

by automating the transaction process and tracking
important sales data. Basic systems include an electronic cash
register and software to coordinate data collected from daily
purchases. Retailers can increase functionality by installing
a network of data-capture devices, including card readers and
barcode scanners.
14 Depending on the software features, retailers can track
Notes pricing accuracy, inventory changes, gross revenue, and sales
patterns. Using integrated technology to track data helps
retailers catch discrepancies in pricing or cash flow that could
lead to profit loss or interrupt sales. POS systems that monitor
inventory and buying trends can help retailers avoid customer
service issues, such as out-of-stock sales, and tailor purchasing
and marketing to consumer behavior.
4. RFID
In RFID technology, the reader or scanner does not need
to see the actual tag to read it. The scanner sends out
electromagnetic waves and the tag receives from a small
antenna. The, the tag sends back its waves. The scanner
receives and converts these waves to digital data. The specifics
of the process depend on whether the tag is passive or active.
An active tag uses an internal battery source, whereas a
passive tag relies on energy transferred from the reader.
Since the tags store data digitally, they open up a whole

new world of opportunity. Companies can to scan more
items, speed up the shipping process, and gain more detailed
processing info.
The benefits of RFID in logistics go well beyond that to control

the movement and storage of materials throughout the supply
chain. If well applied, RFID technology can change the way
they do business, contribute to the improvement of services,
better serve customers, improve product quality, reduce time,
cost distribution and materials handling.
5. Enterprise Resource Planning (ERP) Tools
The ERP system has now become the base of many IT
infrastructures. Some of the ERP tools are Baan, SAP, People
Soft. ERP system has now become the processing tool of many
companies. They grab the data and minimise the manual
activities and tasks related to processing financial, inventory
and customer order information.
ERP system holds a high level of integration that is achieved

through the proper application of a single data model,
improving mutual understanding of what the shared data 15
represents and constructing a set of rules for accessing data. Notes
With the advancement of technology, we can say that world is

shrinking day by day. Similarly, customers’ expectations are
increasing. Also, companies are being more prone to uncertain
environment. In this running market, a company can only
sustain if it accepts the fact that their conventional supply chain
integration needs to be expanded beyond their peripheries.
Check your Progress
1. Retailers can increase functionality by installing a

network of _____________devices.
2. In ________ technology, the reader or scanner does
not need to see the actual tag to read it.
3. Some of the ERP tools are _______, _________and
__________.
4. ___________________ involves the swapping of
business documents in a standard format from
computer-to-computer.
Summary
The quantitative models used in SCM are in general large
linear programming models viz. model(s) for job scheduling,
transportation and distribution, warehouse/facility location
etc. MCDM has two distinct halves. One half is multiple-
attribute decision analysis and the other half is multiple-
objective mathematical programming. Although its techniques
have not yet become widespread in managerial decision
making except the use of goal programming techniques.
Informative technology is especially the basic for assembling
organisations, which are intensely reliant on the store
network accomplices to convey their items. Some of the
technologies being used are; Electronic Data Interchange,
Barcode Scanning, Point of Sale Device, RFID and the
ERP tools. With the advancement of technology, customers’
expectations are increasing and companies are being more
prone to uncertain environment.
16
Notes
1. What are the techniques used in managerial decision
making?
2. Discuss the major advantages of EDI.
3. What are ERP tools?
4. Explain the benefits of using the Point of Sale Device?
17
Unit 3 Notes

Management in India
Objectives
following topics:
\\
Key Enablers and Growth drivers of India’s Logistics
Industry
\\ Agribusiness, Retail and Automotive Sectors
Introduction
The presence of a robust logistics-related infrastructure
and an effective logistics management system facilitates
seamless movement of goods from the point of origin to
that of consumption, and aids an economy’s movement to
prosperity. The progress of logistics sector holds an immense
value for Indian economy as well; as such advancement would
increase exports, generate employment and give the country a
significant place in the global supply chain.
Indian Logistics Sector

As per the Economic Survey 2017-18, the Indian logistics sector
provides livelihood to 22 million-plus people and improving the
sector would facilitate a 10% decrease in indirect logistics cost,
leading to a growth of 5-8% in exports. Further, the Survey
estimates that the worth of Indian logistics market would be
around US$215 billion in next two years compared to about
US$160 billion currently. The boom in couple of years is
largely due to the implementation of Goods and Service Tax
(GST).
Today, the Indian logistics sector is a sunshine industry and

is going through a phase of transformation. Due to the initial
efforts of Government of India (GoI), such as Make in India
programme and improvements in infrastructure along with
18 the emergence of skilled professionals, the country’s position
Notes bettered from 54 in 2014 to 44 in 2018 in the World Bank
(WB)’s Logistics Performance Index (LPI), in terms of overall
logistics performance. In fact, India improved its tally in all
the six components of LPI. India also registered an overall 30
points rise in 2017 and stood at 100th position compared to
2016, in the WB’s Ease of Doing Business Index (EoDBI). A
sharp rise to 63rd position by India was recorded according to
a report.
There exists a tremendous scope for further jump in

India’s rankings if the existing infrastructural and cost
inefficiencies are addressed. The survey goes on to identify
the challenges that beset the Indian logistics industry, the
foremost of which is it being largely in the unorganised
realm. The other challenges hindering its growth include
high cost, underdeveloped material handling infrastructure,
fragmented warehousing, presence of multiple regulatory and
policy making entities, lack of seamless movement of goods
across modes and poor integration with modern information
technology. These challenges, particularly the ones pertaining
to procedural complexities, redundant documentations and
involvement of several agencies at our ports and borders,
severely dent our performance in international trade,
resulting into about 70% of the delays.
To ensure ease of trading in the international and domestic

arena it is important that steps are taken to build the Indian
logistics sector in an integrated manner. The survey suggests
to achieve the same by harnessing the potential of emerging
technologies, bringing in investment, creating human capital,
removing bottlenecks, improving intermodal transport mix,
automation, single window clearance system, and simplifying
procedures.
The need of the hour is to formulate an integrated logistics

policy. Today the stakeholders have to deal with multiple
government agencies at the union, state and local levels,
which result into avoidable delays. The integrated logistics
policy could go a long way in streamlining and consolidating
multidepartment requirements, besides facilitating corrective
action, effective monitoring and prompt grievance redressal.
Along with it, a mechanism needs to be created to measure 19
the sector’s performance at regular intervals against the set Notes

benchmarks, thus, providing evidences to the policymakers so
that a favourable policy environment is created.
To alter the country’s logistics landscape, GoI has taken a

number of decisions. The GST regime is certain to expedite
faster conversion of informal logistics setups to formal ones
and speed up freight movement at interstate borders due
to dismantling of check posts. There is a target to reduce
the logistics cost in India from the present 14% of GDP to
less than 10% of it, by 2022. A national committee headed
by Cabinet Secretary is in place to develop the pan-India
roadmap for trade facilitation.
A new Logistics Division in the Department of Commerce

has been established to coordinate integrated development of
the sector by way of policy changes, improvement in existing
procedures, identification of bottlenecks and gaps and
introduction of technology-based interventions. A concerted
effort in collaboration with central line ministries and state
governments is on to simplify the regulatory processes
in domestic and export-import logistics. The Ministry of
Commerce and Industry (MoCI) is developing an integrated
logistics portal which would serve as a transactional
e-marketace by connecting buyers, logistics service providers
and the relevant government agencies such as customs, port
community systems, port terminals, shipping lines, railways,
etc. Once functional, it would reduce delays and facilitate
a transparent, informative and convenient trading system.
Recently, the Ministry also launched a new Logistics Ease
Across Different States Index to rank states for the support
they provide to improve logistics infrastructure within their
respective jurisdictions.
The logistics sector now finds a place in the harmonised

master list of infrastructure subsector. This inclusion is set
to benefit the logistics industry as it will now have an access
to cheaper and long-term credit. Such a move will also lead to
simplification of the approval process for the construction of
multimodal logistics parks. Lastly, it will encourage market
accountability through regulation and will attract investments
from debt and pension funds into recognised projects.
20 The commitment of GoI towards an integrated development
Notes of logistics sector through policy amendments, infrastructural
development, tax reforms and technology adoption will
certainly deliver desirable results. It will enhance our trade
competitiveness, create jobs, shoot up country’s performance
in global rankings and pave the way for India to become a
logistics hub. Such measures will also contribute to creation of
a New India by 2022, as envisioned by the Prime Minister of
India (Goyal & Singh, 2018).
The central idea of supply chain mgmt. is to apply a total

system approach to managing the flows of information,
materials and services from raw material suppliers through
factories and warehouses to the end customer. Recent trends
such as outsourcing and mass customisation are forcing
companies to find flexible ways to meet customer demand. The
focus is on optimising core activities to maximise the speed of
response to changes in customer expectations.
Virtually every industry is broadening its product lines to

provide the variety of choices that customers want. The
challenge is not only to produce so many different products but
also to distribute the products to a global customer base.
Global Economic Scenario

The Economies of the Asian region are growing at fast pace
in the global economies. Asia is a host to three economies
viz. China, Japan and India and accounting for more than
35% of world GDP. Today Asia’s share in the world GDP
exceeds that of Europian Union and the US. Being the
fastest growing economies of the world, over past 2 years,
China and India contributed 73% to the Asian growth and
38% to the World GDP growth. Asian region has increasingly
become a major centre of World Trade, Global capital flows
and other Macro-Economic parameters. One of the major
strengths of Indian Economy is that India will remain one of
the youngest Country in the world in the next few decades.
This demographic dividend is seen as inevitable advantage
provided prerequisites such as skill upgradation and sound
governance to realise it is put in place. In terms of business
environment, the impressive growth coupled with market
orientation of the economy has being a bottom – up – exercised
with a very broad based growing entrepreneurial class. These 21
tendencies are perhaps reflection of a penchant for innovation Notes

among growing entrepreneurial class in India, imbued with
professionalism and seeking to be globally competitive.
Supply chain management is important in business today. The

term supply chain comes from a picture of how organisations
are linked together as viewed from a particular company.
Many companies have enjoyed significant success due to
unique ways in which they have organised their supply chain.
For example, Dell Computers, skips the distribution and retail
steps typical of a manufacturing supply chain. However, a
good supply chain design for one company may not work for
another. The supply chain should be structured to meet the
needs of different products and customer groups.
Measures of supply chain efficiency are inventory turnover

and weeks of supply. Efficient process should be used for
functional products and responsive processes for innovative
products. This alignment of supply chain strategy and
products characteristics are extremely important to the
operation success of a company.
Companies that face diverse sourcing, production and

distribution, decisions needs to weigh the cost associated
with materials, transportation, productions, warehousing and
distribution to developed a comprehensive network design to
minimise cost.(Narayan, 2018)
Key Drivers
Indian logistics industry is a sunshine sector and there are
multiple factors that are driving this sector towards growth
and boom.
The growth of logistics is two sided, led by demand and supply.

The demand led growth is strengthened with the economic
recovery and benefits from implementation of GST. According
to the rating agency ICRA, post GST implementation
the savings in terms of truck turnaround time has been
approximately 18-20 per cent.
Also, the outsourcing of non-core activities like warehousing

and associated activities to integrated players is leading to
22 strengthen the organised players, which in turn is good for the
Notes industry in long-term. The picking of industrial consumption
is another driver on the demand led growth of the logistics
industry in India.
The supply led growth drivers include improvement in

logistics infrastructure, integrated logistics and birth of
numerous logistics start-ups, especially tech led start-ups.
According to an industry expert, ‘Tech-enabled startups have
a huge scope to grow as well drive the growth of the sector.
Not only they are attracting heavy investments, they have the
potential to make export procedures hassle-free by reducing
unnecessary paperwork, in turn reducing delays in delivery.’
Trends
According to the real estate consultancy CBRE’s report titled
‘2018 Asia Pacific Real Estate Market Outlook’ Delhi-NCR,
Mumbai and Bangalore dominated the warehousing space
demand with 50 per cent share. Although, the smaller cities
have been on growth spurt too with the share of Hyderabad,
Chennai, Kolkata and Pune in overall transacted space went
up to 49 per cent in 2017 as against 25 per cent in 2016.
Another key trend is the preference for large warehouses

that allows better automation process. According to the
CBRE report, the Indian market for warehouse automation is
estimated to grow by 10-12 per cent to US$3.49 billion by the
year 2020.
Warehousing, emerging as an attractive investment is another

dominant trend in the Indian logistics sector. Some of key
investors include Ascendas-Singbridge, Morgan Stanley,
and Warburg Pincus, beside others. The investment burst
in the sector is leading to development of new and better
warehousing facilities.
Way Forward
According to CRISIL the future for the Indian logistics
industry is going to shine even brighter. The research firm
suggests the logistics industry of India which stood at Rs 6.4
trillion in FY17 will grow at a CAGR of 13 per cent and will be
at Rs 9.2 trillion by FY20.
The government of India is also taking significant steps to 23
support the sector and boost its growth in the times to come. Notes
The Commerce and Industry Ministry has decided to give
a one-time funding of Rs 8 million to the sector for building
up initial infrastructure and a phase-wise support of Rs 33.9
million for four years.
The government’s focus going forward is to bring down the

cost of logistics which is at 14.4 per cent of India’s GDP at
present. The aim is to bring it down to 10 per cent level in the
next four years. This is a very significant move and will boost
the competitiveness of the sector and will be significant for its
further growth.
Going forward, strategic investment and government

initiatives to support the sector are going to be crucial for the
logistics industry in India. If the cards are played right, the
sector has the potential to create huge number of jobs for the
countrymen and play a key role in driving the economy on a
high wave.(Knowledge Centre IBEF, 2018)
Sectoral Overview
The agriculture sector in India has undergone significant
structural changes indicating a shift from the traditional
subsistence towards a market oriented one. The rural economy
has moved from exclusive reliance on agriculture to a service
dominated one that has a stabilising influence on rural
incomes. The decrease in agriculture’s contribution to GDP
has not been accompanied by a matching reduction in the
share of agriculture in employment.
However, within the rural economy, the share of income from

non-farm activities has increased. Since agriculture forms
the resource base for a number of agro-based industries and
agro-services, it would be more meaningful to view agriculture
not as farming alone but as a holistic value chain, which
includes farming, aggregating, processing, warehousing
(including logistics) and retailing. The term value chain
describes the full range of activities that are required to bring
a product or service from conception, through the different
phases of production (involving a combination of physical
24 transformation and the input of various producer services),
Notes delivery to final consumers, and final disposal after use.
In agriculture, value chains have always been in existence

in the sense that farms carried out production and the final
consumer accessed the produce, with the produce itself
traversing through several channels and players. The degree
of organisation and governance of the value chain while
improving continues to be a challenge. The existence of several
middlemen, absence of information about other links in the
chain and inability to invest in improving the performance
in almost every part of the chain led to inefficiencies and
lower incomes especially in the lower end of the chain. The
recent initiatives have focused on improving technology of
production, processing, quality control, creating processing
facilities that add value to raw produce and aggregation
near farms to ensure higher share of consumer prices for the
producer. Commodity exchange for price through technology
and investments in marketing infrastructure like warehouse,
cold stores has been created.
Trade finance products such as collateralised ware house

receipts are launched. Along with this, institutional
interventions such as farmer collectives have changed
the quality of value chains. Agricultural value chains are
difficult to organise and stabilise in countries like India with
a large number of small farm holdings. The production and
aggregation parts of value chains have to be made efficient in
order for the small farms to realise higher returns. Building
the confidence of farmers to move away from subsistence
farming to market-oriented farming, and increasing their
awareness on application of improved inputs and adoption of
higher technology of cultivation are important interventions
in creating a sustainable value chain. Aggregation of several
small farms pose challenges in terms of highly dispersed
collection of produce, transport arrangements, and quality
assurance mechanisms at every level. These not only entail
costs but also time outlays in the aggregation process. The
production effort has to be organised in clusters so that the
distances and time are kept within manageable levels.
The focus on developing the startup ecosystem and creation

of digital agriculture is likely to continue. We expect to see
more incubation happening for developmental and early stage 25
startups while more funding is likely to continue in mid stage Notes

startups. It will be interesting to see the success rate of the
innovation in the sector. Most Farmer Produce Organisations
have not yet attained the desired results. Efforts need to be
a streamlined process and market dealing of the FPO’s.
Further, there is a huge potential to monetise the number of
farmers getting connected through initiatives such as FPO’s.
There could be better insurance terms, transit insurance for
farm produce, quality assessment infrastructure, precision
agriculture solutions for better crop management etc.
Automobile Sector
The Indian auto industry became the 4th largest in the world
with sales increasing 9.5 per cent year-on-year to 4.02 million
units (excluding two wheelers) in 2017. It was the 7th largest
manufacturer of commercial vehicles in 2017.
The two wheelers segment dominates the market in terms

of volume owing to a growing middle class and a young
population. Moreover, the growing interest of the companies
in exploring the rural markets further aided the growth of the
sector.
India is also a prominent auto exporter and has strong export

growth expectations for the near future. Automobile exports
grew 15.54 per cent during April 2018-February 2019. It is
expected to grow at a CAGR of 3.05 per cent during 2016-2026.
In addition, several initiatives by the Government of India
and the major automobile players in the Indian market are
expected to make India a leader in the two-wheeler and four-
wheeler market in the world by 2020.
Market Size
Domestic automobile production increased at 7.08 per
cent CAGR between FY13-18 with 29.07 million vehicles
manufactured in the country in FY18. During April
2018-January 2019, automobile production increased 9.84 per
cent year-on-year to reach 26.26 million vehicle units.
Overall domestic automobiles sales increased at 7.01 per cent

CAGR between FY13-18 with 24.97 million vehicles getting
26 sold in FY18. During April 2018-January 2019, highest year-
Notes on-year growth in domestic sales among all the categories was
recorded in commercial vehicles at 22.79 per cent followed
by 14.79 per cent year-on-year growth in the sales of three-
wheelers.
Driven by increases in both domestic demand and

technological sophistication, India has become a major
manufacturing hub for autos. But the industry still faces
many complex logistics challenges.
A study carried out by the Malaysia Institute for Supply Chain

Innovation (MISI) and the Indian Institute of Management
suggests that expanding the industry’s use of water
transportation would make the India’s auto supply chains
more efficient.
Untapped Potential
Around 4.6 million passenger and commercial automobiles
were produced in India in 2017, out of which 3.7 million were
sold domestically. The auto industry has three main clusters
of activity: one near the capital city of Delhi, another in the
southern city of Chennai, and a third cluster in the western
states of Maharashtra and Gujarat.
Moving autos across this vast country presents some difficult

logistical hurdles. In addition, there is increasing demand for
more environmentally sustainable modes of transportation.
About 95% of the autos produced in India are delivered
via the country’s roadways on specially designed trucks.
The remaining units are mostly delivered by rail as long-
distance cargo. But trucking has a poor environmental record,
especially when compared to water transportation.
Yet waterway-based logistics solutions are comparatively

rare in India. Some deliveries have been made recently on
specialised roll-on/roll-off ships (ro/ro), mainly from the
southern automotive hub of Chennai to a few ports in the
Western extreme of Gujarat. But these shipments are not
enough to promote the greater use of water modes.
Retail
The Indian retail industry has emerged as one of the most
dynamic and fast-paced industries due to the entry of several 27
new players. Total consumption expenditure is expected to Notes

reach nearly US$3,600 billion by 2020 from US$1,824 billion
in 2017. It accounts for over 10 per cent of the country’s
Gross Domestic Product (GDP) and around 8 per cent of
the employment. India is the world’s fifth-largest global
destination in the retail space.
Market Size
India’s retail market is expected to increase by 60 per cent to
reach US$1.1 trillion by 2020, on the back of factors like rising
incomes and lifestyle changes by middle class and increased
digital connectivity. Online retail sales are forecasted to grow
at the rate of 31 per cent year-on-year to reach US$32.70
billion in 2018.
India is expected to become the world’s fastest growing

e-commerce market, driven by robust investment in the sector
and rapid increase in the number of internet users. Various
agencies have high expectations about growth of Indian
e-commerce markets.
Luxury market of India is expected to grow to US$ 30 billion

by the end of 2018 from US$ 23.8 billion 2017 supported by
growing exposure of international brands amongst Indian
youth and higher purchasing power of the upper class in tier 2
and 3 cities, according to Assocham.
With the growing prevalence of Omnichannel retail, the

retailer today faces a challenging task of customer expectation
fulfillment 24×7. Not only is the customer looking at an
enhanced customer service but a seamless experience across
channels. Coupled with this, the retailer needs to ensure
that his operational costs are under check and the business
is strong enough to take care of any unforeseen volatility. A
strong supply chain forms the key to taking care of most of
the business nuances and the world is today moving over to
robotics and automation to take care of this, though trained
manpower still remains imperative to successful supply chain
operation.
The Government of India’s strong emphasis on manufacturing

and initiatives such as Make in India is boosting domestic
28 production, which is bolstering the logistics industry. Logistics
Notes companies are making concerted efforts to keep pace with this
growth in demand by digitising their solutions and offering
online freight services. These services will provide visibility
across the supply chain and transform it into an organised
industry. Some of the advanced technologies adopted include
Automated Storage and Retrieval Systems (ASRS) in
warehouse and transportation, Radio Frequency Identification
(RFID) in place of bar codes, and Global Positioning System
(GPS) for Real-time Tracking.
Scope of Logistics and Supply Chain Management

According to a Fortune report, the logistics industry is worth
1$.3trillion. However, it is still facing a dearth in terms
of recruitment and requires 1.4 million new supply chain
workers by 2018. This offers a wide range of job opportunities
for students pursuing this programme. In fact, the demand for
supply chain managers is such that many universities around
the world organise supply chain only fairs which attract
hundreds of companies looking to recruit logistics students
for either internships or full-time positions. Interestingly, the
last few years has seen many startups engage in inventory
movement like Flipkart and Snapdeal. Such companies are
looking to expand their supply networks to various corners
of the country which requires the expertise of supply chain
managers.
Check your Progress
1. ______________ are difficult to organise and stabilise

in countries like India with a large number of small
farm holdings.
2. ____________ is emerging as an attractive investment
and is another dominant trend in the Indian logistics
sector.
3. The growth of logistics is two sided, led by __________
and _____________.
4. Moving autos across this vast country presents some
difficult _____________hurdles.
29
Summary
Notes
The degree of organisation and governance of the value chain
while improving continues to be a challenge. A new Logistics
Division in the Department of Commerce has been established
to coordinate integrated development of the sector. India
is a prominent auto exporter and has strong export growth
expectations for the near future. The Indian retail industry
has emerged as one of the most dynamic and fast-paced
industries due to the entry of several new players. India is
expected to become the world’s fastest growing e-commerce
market. The Government of India’s strong emphasis on
manufacturing and initiatives such as Make in India is
boosting domestic production. Indian logistics industry is a
sunshine sector and there are multiple factors that are driving
this sector towards growth and boom. Warehousing emerging
as an attractive investment is another dominant trend in the
Indian logistics sector. The rural economy has moved from
exclusive reliance on agriculture to a service dominated one
that has a stabilising influence on rural incomes. India is
also a prominent auto exporter and has strong export growth
expectations for the near future.

1. Discuss the Global Economic Scenario.
2. What are the challenges that hinder the growth of Indian
Logistics Sector?
3. How has the rural economy moved from exclusive reliance
on agriculture to a service dominated economy?
4. Explain the scope of logistics and supply chain management
in the context of Indian economy?
30
Notes
Unit 4
Issues and Challenges in Logistics
Management
Objectives
following topics:
\\ Issues, Trends and Challenges in Logistics Management in
India
\\ Logistics Revolution in India
Introduction
India’s logistics industry is projected to be worth $215 billion
by 2020-21, recording a 10 per cent compounded annual
growth rate (CAGR) over its approximate size of $60 billion in
2016-17.
The industry’s growth will be fueled by the strides in

manufacturing, retail, fast-moving consumer goods and
e-commerce sectors. Development of logistics related
infrastructure, like dedicated freight corridors, logistics parks,
free trade warehousing zones and container freight stations,
are expected to improve efficiency, a report by CARE Ratings
observed.
The Logistics Sector: Its Support System

At present, the logistics sector is dominated by transportation,
which has over 85 per cent share in value terms. Its share
is set to remain high for the next few years. The remaining
15 per cent share is accounted for by storage. The sector is
employment intensive, absorbing 22 million people.
Logistics costs have a significant bearing on exports. It is

estimated that slashing logistics costs by 10 per cent could
widen exports by five to eight per cent.
Steep logistics costs in India vis-a-vis other nations have been 31
a vexing issue. Logistics costs as a percentage of the country’s Notes

gross domestic product (GDP) is 13-14 per cent. The figure
is higher compared to 10-11 per cent for BRIC countries and
eight to nine per cent for developing nations. USA spends 9.5
per cent of the GDP on logistics, while Germany is even more
competitive with a share of 8 per cent. Higher logistics costs in
India could be ascribed to the lack of efficient inter-modal and
multi-modal traditional systems, the ratings agency said in its
report.
Going ahead, the logistics costs as a share of the GDP is

expected to decline, led by initiatives like the implementation
of Goods and Services Tax (GST), investments in road
infrastructure, development of inland waterways and coastal
shipping, and the thrust on dedicated freight corridors.
At present, the Indian logistics industry is highly fragmented

and unorganised. Owing to the presence of numerous
unorganised players in the industry, it remains fragmented,
with the organised players accounting for approximately
10 per cent of the total market share. With the consumer
base of the sector encompassing a wide range of industries,
including retail, automobile, telecom, pharmaceuticals and
heavy industries, the logistics industry has been increasingly
attracting investments in the last decade.
Further, the logistics industry faces challenges such as under-

developed material handling infrastructure, fragmented
warehousing, multiple regulatory and policy-making bodies,
lack of seamless movement of goods across modes, and
minimal integrated IT infrastructure. In order to develop this
sector, focus on new technology, improved investment, skilling,
removing bottlenecks, improving intermodal transportation,
automation, a single-window system for giving clearances, and
simplifying processes would be required.
A largely ignored and conventionally-run industry dominated

by a number of small players and inefficient operations,
logistics has turned a digital leaf, considerably boosting India’s
prospects when it comes to building a sustainable supply
chain.
32
E-commerce: Driving the Change
Notes
The growth story of Indian e-commerce during the last five
years is nothing short of a fairy tale. Along with its sprawling
success, e-commerce has also immensely boosted the prospects
of logistics sector. This is further complemented by the
implementation of GST, which streamlined the state-wise tax
structure and ensured seamless movement of goods. According
to Economic Survey 2017-18, the Indian logistics market is
expected to reach about $215 billion in 2020, growing at a
CAGR of 10.5 percent.
The growth is driven by emerging e-commerce retailers

from Tier II and III markets, a corresponding increase in
demand and the entry of more foreign corporates in the
FMCG segment, propelled by India’s upward movement in
Ease of Doing Business Index. With a favourable regulatory
environment highlighted by the grant of infrastructure status,
Indian logistics enterprises can now have easier access to
funding opportunities to drive technology driven operational
transformation.
Developing an Integrated Framework

However, cohesion is still lacking in Indian logistical growth.
Smaller, unorganised players still eat up a large segment of
the customer base, setting a lower benchmark for operations
while influencing pricing as well. The inefficiency of these
players has even encouraged e-commerce players such as
Amazon to develop their own cutting-edge logistical fleet,
equipped with drones and RFID/sensor-based technologies
that optimise the entire process. Such a trend enhances
competition for the dedicated logistics players, and only those
which are able to incorporate digitised processes driven by
Artificial Intelligence (AI) will be able to thrive through this
onslaught.
Existing infrastructural and cost inefficiencies need to be

addressed as well. This includes a fragmented warehousing
and inadequate material handling infrastructure and a still
poor integration with modern information technology. One of
the main points of focus, however, is the improvement of last-
mile delivery framework.
According to industry experts, a significant part of the 33
inefficiency creeping in today in the logistics segment is due to Notes

a faulty last-mile connectivity framework.
However, few players have managed to develop a robust last-

mile delivery structure, through a strong franchise-based
model that involves constant engagement with the franchise
owners to offer a unified consumer engagement experience.
Logistics Forming the Backbone of Indian

Economy
The Indian logistics sector provides a livelihood to over 22
million people, which in the next couple of years is expected to
grow significantly. Equipping the sector with the latest digital
technologies and automation in operations would lead to a 10
percent decrease in indirect logistics costs. This would lead to
the growth 5-8 per cent in exports placing India in good stead
with countries like the US, China and Japan when it comes to
both domestic as well as international trade.
The recent opening of ports such as Chabahar further promise

a growing international trade setup for India, particularly
with high potential markets such as Iran and Afghanistan
and other middle-eastern countries. An integrated logistics
policy that removes hierarchies and interactions with
multiple agencies, effective monitoring and a complete tech-
driven approach can help India’s logistics sector leapfrog into
becoming one of the most promising sectors of the Indian
economy.
The government has already formed a national committee

headed by the Cabinet Secretary to reduce the logistics
cost from 14 percent currently to 10 percent by 2022.
Such constructive steps, if taken frequently and with solid
intention, leveraging the best of technology, can surely develop
a strong, efficient logistics sector, empowering the Indian
economy to achieve the goals it has set for itself.
Trend in Logistics Sector in India

Improving efficiency of the logistics sector is of high
importance for the country’s economy as it boosts economic
34 growth, grows exports through global supply chains and
Notes generates employment. While India’s passenger and freight
mobility sectors are becoming more efficient and the logistics
is sector is growing at CAGR of 10.5% and expected to reach
about US$215 billion in 2020, there are a set of interconnected
problems in the system, which need to be addressed to further
enhance efficiency. Logistical inefficiencies lead to reduced
employment opportunities, perpetuate a poverty cycle for rural
populations, make roads and highways unsafe, and contribute
to pollution. Conversely, enhancing the efficiency of logistics
can create high quality economic growth and employment
opportunities, improve safety and public health, and support
India’s successful fulfilment of international commitments
towards climate change.
India is currently the fastest growing major economy globally,

with GDP growing by 6.6% in 2017–2018 and expected to
accelerate to 7.3% in 2018 and 2019. As a result of this rapid
growth, India is poised to become the third largest economy
in the world by 2030 as per the report by World Economic
Forum and the second largest, after only China, in terms of
Purchasing Power Parity (PPP) by 2040. In order to realise
these projections, the Government of India (GoI) has launched
the Make in India initiative with an aim to support the
manufacturing sector of the Indian economy and elevate its
contribution to GDP from the current 17% up to 25%. Efficient
logistics are a cornerstone for the continuation of India’s
economic development over the coming decades. The robust
growth in manufacturing envisioned through the Make in
India initiative will demand high levels of logistical efficiency,
which means that goods must not only be produced, they must
also be efficiently transported to markets at reasonable prices.
While the growth in GDP created by logistics improvements is
important, even more important is the quality of that growth
and the employment and income it creates, especially for the
most economically vulnerable segments of the population.
World Bank research in Latin America showed that reducing
the share of logistics costs in the final price of goods by 14%
can increase demand for those goods by 8–18% and increase
employment in that sector by 2.5%–16%. Such an impact
is particularly important for micro small and medium
enterprises, which employ over 110 million Indian citizens. 35
Specifically, for agricultural products, another critical sector Notes

of the Indian economy, the same reduction in logistics costs
to 14% of final prices increased demand by 12% and increased
agricultural employment by 6%, boosting both rural incomes
and nutrition and food security for the entire country.
Logistics efficiency can also benefit farmers through reduction
in loss and wastage of produce during transportation to
markets.
Check your Progress
1. The logistics sector is dominated by _______________.

2. The government has formed a national committee
headed by the Cabinet Secretary to reduce the
______________.
3. The logistics costs as a share of the GDP is expected
to decline, led by initiatives like the implementation
of ________________________.
4. Logistical inefficiencies lead to reduced employment
__________________.
Summary
The logistics industry faces challenges such as under-
developed material handling infrastructure, fragmented
warehousing, multiple regulatory and policy-making
bodies, lack of seamless movement of goods across modes,
and minimal integrated IT infrastructure. Enhancing the
efficiency of logistics can create high quality economic
growth and employment opportunities. The robust growth
in manufacturing envisioned through the Make in India
initiative will demand high levels of logistical efficiency, which
means that goods must not only be produced, they must also
be efficiently transported to markets at reasonable prices.
An integrated logistics policy that removes hierarchies and
interactions with multiple agencies. Logistics efficiency can
also benefit farmers through reduction in loss and wastage of
produce during transportation to markets.
36
Notes
1. Discuss the trends in Logistic Sector in India.
2. While the growth in GDP created by logistics
improvements is important, even more important is the
quality of that growth and the employment and income it
creates. Analyse.
3. Logistics forms the backbone of Indian Economy. Explain.
4. Discuss the impact of Make in India initiative?
37
Unit 5 Notes
Case Study
Dilkhush Products Ltd.

Dilkhush Products Ltd is a typical FMCG company with an
annual turnover of nearly 700 crores. It has six factories, 30
depots and 3500 distributors spread over the entire country.
Its product profile comprises of ten categories such as branded
coconut oil, jam, cooking oil and special flavors. At one time,
Dilkush was faced with considerable difficulties in terms
of forecasting. At the depot or the godown level, variations
on some SKUs were in the range of as much as 100%. There
were also complexities in distribution on account of the large
number (3,500) of distributors across the country. This would
invariably lead to a pile up of inventories at certain places
and stock-outs in others. Visibility of stocks at the distributor
level was low, because after invoicing, it was impossible to
determine the level of stock that distributors were holding.
The only source for this was the secondary sales figure. These
figures were collated manually once a month, and their
accuracy was always questionable (in the FMCG industry,
secondary sales calculation is the bigger challenge; primary
sales are always easier to collate). Because planning cycles
were fixed, decisions could not be taken online. Processes were
highly individual or employee-dependent and in the absence of
an integrated approach, there was little or no communication.
The planning cycle was only 15-20 days; hardly enough to

allow corrective action. Apart from the annual budget, the
firm operated on a fixed 3-month cycle. Thus, once the output
at the end of these 3 months was decided, nothing could be
done in the interim. The result was that if the output for the
first month were in excess, the next 2 months’ stock would
simply pile up. Invisibly therefore, there were skews towards
the ends of quarters. The firm had fixed dispatch plans for
the quarter; these were followed even if sales were low.
38
There were coordination difficulties between the sales and
Notes manufacturing department, as managers were not using the
same data.
Typically, sales staff would complain the lost sales because

of stock-outs, while the back room would say that there
were excess supply lines somewhere in the system about
which they were unaware. The planning cycles for sales
and manufacturing did not match. There was no system for
distribution planning; one would wait for the sales person
or distributor to call up and place the order. Some means of
replenishment order generation was tried. However, they
were on stand-alone systems and did not succeed. There were
several islands of information, inconsistencies in the MIS and
no data visibility across the system. The firm had to do a lot of
cleaning up before new technology could be brought in.
Mr. Kelkar, the Sales and Distribution manager recently

attended a seminar on supply chain management organised by
an Institute of Management. He realised that Integrated SCM
approach is the only way to get out of all the present ills of
the company. He also saw a huge opportunity for cost savings
with such an approach. However, he was confused as to how to
proceed since any wrong move or faulty implementation will
have serious consequences to the company.
Questions
1. Summarise Dilkhush’s present problems in Sales and
Distribution.
2. Identify the potential areas for cost savings with an
integrated SCM.
3. Identify specific action plans for implementing integrated
SCM including the role of IT.
4. Indicate appropriate performance metrics to measure the
various aspects of Supply Chain performance in FMCG
business such as Dilkhush Products Ltd.
39
Unit 6 Notes

Measures
Objectives
following topics:
\\ Supply Chain Measures
\\ Framework for Measuring Supply Chain Performance
Introduction
Supply chain performance measures seek to provide a concrete
basis, for understanding whether supply chain of a company
is functioning. Supply Chain Management (SCM) has been
a major component of competitive strategy to enhance
organisational productivity and profitability. To manage
any activity the three guiding principles to be adopted are
planning, implementing, and controlling but until and unless
one cannot measure quantitatively, controlling function
cannot be initiated.
Supply Chain Measures

In an attempt to streamline their supply chain, many
companies are trying out measures such as Enterprise
Resource Planning (ERP) and Supply Chain optimisation
(Kevin, 2001). The role of these measures and metrics in the
success of an organisation cannot be overstated because they
affect strategic, tactical and operational planning and control.
Performance measurement and metric have an important
role to play in setting objectives, evaluating performance
and determining future courses of action. The million-dollar
question is, how can a company tell whether the significant
investments of company resources spent have made an impact
sizeable enough to justify their implementation? To make the
best of their investment and ensure the continued reliability
of their supply chain sourcing solutions, companies need a
40
practical means of measuring effectiveness. The measurement
Notes system should facilitate the assignment of metrics, to where
they are appropriate.
For effective performance measurement metric selected should

reflect a balance between financial and nonfinancial measures
that can be related to strategic, tactical, and operational levels
of decision making and control (Gunasekaran et al., 2004). A
supply chain consists of interconnected components required
to transform ideas into delivered products and services, i.e.
design in to delivery. Therefore, the ultimate objective of an
organisation is to be able to deliver the product/service that
the customer wants, whenever and wherever they want it at
an optimised cost. Relentless focus on time, cost, and quality
has sharpened the need to coordinate and cooperate with
business partners around the world in order to meet and exceed
customer’s needs and wants. There is a tough competition in
the market not just between products or services but of one
supply chain with another and hence ‘survival of the fittest’.
Thus, the question arises that who can sustain the competitive
advantage. A firm is said to have a Sustained Competitive
Advantage (SCA) when it is implementing a value creating
strategy not simultaneously being implemented by any
current or potential competitors and when these other firms
are unable to duplicate the benefits of this strategy (Barney,
1991). Competitive advantage is an outcome, sustainability is
an ongoing state of existence after the efforts to duplicate the
advantage has ceased.
Supply chain performance measures can be defined as an

approach to judge the performance of supply chain system.
Supply chain performance measures can broadly be classified
into two categories:
yy Qualitative measures: For example, customer

satisfaction and product quality.
yy Quantitative measures: For example, order-to-delivery
lead time, supply chain response time, flexibility, resource
utilisation, delivery performance.
Here, we will be considering the quantitative performance
measures only. The performance of a supply chain can be
improvised by using a multi-dimensional strategy, which 41
addresses how the company needs to provide services to Notes

diverse customer demands.
Quantitative Measures
Mostly the measures taken for measuring the performance
may be somewhat similar to each other, but the objective
behind each segment is very different from the other.
Quantitative measures are the assessments used to measure

the performance, and compare or track the performance or
products. We can further divide the quantitative measures of
supply chain performance into two types. They are −
yy Non-financial measures
yy Financial measures
Non - Financials Measures
The metric of non-financial measures comprise cycle time,
customer service level, inventory levels, resource utilisation
ability to perform, flexibility and quality. In this section, we
will discuss the first four dimensions of the metrics:
1. Cycle Time
Cycle time is often called the lead time. It can be simply
defined as the end-to-end delay in a business process. For
supply chains, cycle time can be defined as the business
processes of interest, supply chain process and the order-to-
delivery process. In the cycle time, we should learn about two
types of lead times. They are as follows −
yy Supply chain lead time

yy Order-to-delivery lead time
The order-to-delivery lead time can be defined as the time of
delay in the middle of the placement of order by a customer
and the delivery of products to the customer. In case the item
is in stock, it would be similar to the distribution lead time
and order management time. If the ordered item needs to be
produced, it would be the summation of supplier lead time,
manufacturing lead time, distribution lead time and order
management time.
42 The supply chain process lead time can be defined as the time
Notes taken by the supply chain to transform the raw materials
into final products along with the time required to reach the
products to the customer’s destination address.
Hence it comprises supplier lead time, manufacturing lead

time, distribution lead time and the logistics lead time for
transport of raw materials from suppliers to plants and for
shipment of semi-finished/finished products in and out of
intermediate storage points.
Lead time in supply chains is governed by the halts in the

interface because of the interfaces between suppliers and
manufacturing plants, between plants and warehouses,
between distributors and retailers and many more.
Lead time compression is a crucial topic to discuss due to the

time-based competition and the collaboration of lead time with
inventory levels, costs, and customer service levels.
2. Customer Service Level
The customer service level in a supply chain is marked as an
operation of multiple unique performance indices. Here we have
three measures to gauge performance. They are as follows:
yy Order fill rate: The order fill rate is the portion of

customer demands that can be easily satisfied from the
stock available. For this portion of customer demands,
there is no need to consider the supplier lead time and the
manufacturing lead time. The order fill rate could be with
respect to a central warehouse or a field warehouse or stock
at any level in the system.
yy Stockout rate: It is the reverse of order fill rate and
marks the portion of orders lost because of a stockout.
yy Backorder level: This is yet another measure, which is
the gauge of total number of orders waiting to be filled.
yy Probability of on-time delivery: It is the portion of
customer orders that are completed on-time, i.e., within the
agreed-upon due date.
In order to maximise the customer service level, it is
important to maximise order fill rate, minimise stockout rate,
and minimise backorder levels.
3. Inventory Levels 43
Notes
As the inventory-carrying costs increase the total costs
significantly, it is essential to carry sufficient inventory
to meet the customer demands. In a supply chain system,
inventories can be further divided into four categories:
i. Raw materials
ii. Work-in-process, i.e., unfinished and semi-finished
sections
iii. Finished goods inventory
iv. Spare parts
Every inventory is held for a different reason. It’s a must to
maintain optimal levels of each type of inventory. Hence
gauging the actual inventory levels will supply a better
scenario of system efficiency.
In a supply chain network, huge variety of resources is used.

These different types of resources available for different
applications are mentioned below:
yy Manufacturing resources: Include the machines,

material handlers, tools, etc.
yy Storage resources: Comprise warehouses, automated
storage and retrieval systems.
yy Logistics resources: Engage trucks, rail transport, air-
cargo carriers, etc.
yy Human resources: Consist of labour, scientific and
technical personnel.
yy Financial resources: Include working capital, stocks, etc.
In the resource utilisation paradigm, the main motto is
to utilise all the assets or resources efficiently in order to
maximise customer service levels, reduce lead times and
optimise inventory levels.
Financial Measures
The measures taken for gauging different fixed and
operational costs related to a supply chain are considered the
financial measures. Finally, the key objective to be achieved
44 is to maximise the revenue by maintaining low supply chain
Notes costs.
There is a hike in prices because of the inventories,

transportation, facilities, operations, technology, materials,
and labor. Generally, the financial performance of a supply
chain is assessed by considering the following items:
yy Cost of raw materials

yy Revenue from goods sold
yy Activity-based costs like the material handling,
manufacturing, assembling rates etc
yy Inventory holding costs
yy Transportation costs
yy Cost of expired perishable goods
yy Penalties for incorrectly filled or late orders delivered to
customers
yy Credits for incorrectly filled or late deliveries from
suppliers
yy Cost of goods returned by customers
yy Credits for goods returned to suppliers
Check your Progress
1. ________________ has been a major component of

competitive strategy to enhance organisational
productivity and profitability.
2. Supply chain performance measures can broadly be
classified into two categories: ______________ and
_______________
3. It’s a must to maintain optimal levels of each type of
____________ .
4. Quantitative measures is the assessments used to
measure the _____________.
45
Summary
Notes
Supply Chain Management (SCM) has been a major
component of competitive strategy to enhance organisational
productivity and profitability. Performance measurement and
metrics have an important role to play in setting objectives,
evaluating performance, and determining future courses of
action. A supply chain consists of interconnected components
required to transform ideas into delivered products and
services. Supply chain performance can broadly be classified
into two categories: Qualitative and Quantitative measures.
The metric of non-financial measures comprise cycle time,
customer service level, inventory levels, resource utilisation
ability to perform, flexibility and quality. The customer service
level in a supply chain is marked as an operation of multiple
unique performance indices. As the inventory-carrying costs
increase the total costs significantly, it is essential to carry
sufficient inventory to meet the customer demands. There is
a hike in prices because of the inventories, transportation,
facilities, operations, technology, materials and labour.

1. Discuss the quantitative measures of Supply Chain
Performance.
2. What do the metrics of non-financial measures comprise
of?
3. How is the resource utilisation a crucial part of Supply
Chain?
4. What are the measures taken for gauging different fixed
and operational costs related to a supply chain?
46
Notes
Unit 7
Inventory Planning and
Management
Objectives
following topics:
\\ Managing Inventory
\\ Inventory Models
\\ Inventory Classification Technique
Introduction
Inventory is the term for the goods available for sale, raw
materials and semi-finished products used to produce
goods available for sale. Inventory represents one of the
most important assets of a business because the turnover of
inventory represents one of the primary sources of revenue
generation and subsequent earnings for the company’s
shareholders.
First, the assets must be part of the company’s primary

business. For instance, a sandwich shop’s delivery truck is
not considered inventory because it has nothing to do with
the primary business of making and selling sandwiches. This
is considered a fixed asset for the sandwich shop. To a car
dealership, on the other hand, this truck would be considered
inventory because they are in the business of selling vehicles.
Second, the assets must be available for sale or will soon be

ready to sell. If some business assets could be sold but are
never actually made available for sale, they aren’t inventory.
These are just assets or investments of the company.
Third, the purpose of owning the assets must be to sell them

to customers. Going back to our sandwich shop example,
the truck was never meant to be sold to a customer. It was
purchased to deliver sandwiches and was sold when it couldn’t
perform that job. The car dealership, on the other hand, 47
purchases vehicles for the sole purpose of reselling them. Notes
Thus, the truck is considered inventory to them.
Inventory Management
Inventory Management is a business process which
is responsible for managing, storing, moving, sorting,
arranging, counting and maintaining the inventory i.e. goods,
components, parts, etc. Inventory management ensures that
the right inventory is available as per the demand at low costs.
Inventory Management makes sure that the core processes
of a business keep running efficiently by optimising the
availability of inventory.
Importance of Inventory Management

Inventory Management includes managing and controlling
raw materials, stocks, finished goods, warehousing, storage
and other aspects which help reach the product from
production to distributor or retailer. Each organisation
regularly strives on efficient inventory management to uphold
optimum inventory to be able to meet its necessities and
avoid over or under inventory that can impact the monetary
statistics of the firm.
Inventory is forever dynamic. A prerequisite of inventory

management is steady and vigilant assessment of exterior and
interior factors and control via planning and evaluation. Most
of the businesses have an individual department of inventory
planners who incessantly observe, control and evaluate
inventory and interface with manufacturing, procurement and
finance sections of the firm.
In a business or association, all the functions are interlinked

and coupled to each other and are time and again overlapping.
Some key features like supply chain management, logistic
handling and inventory management form the spine of the
business delivery function. Therefore, these functions are very
significant to the managers.
Example of Inventory Management
Inventory Management is very important for a business to
48 run smoothly. Imagine a cake manufacturing shop if it keeps
Notes running out of flour and sugar. Flour and sugar are like the
main raw materials which keep the business process running.
The cake maker needs to plan the quantities of sugar and flour
so that he never runs out of them when he wants to make a
cake. But inventory management is just not about bulking
up the supplies. If too much flour and sugar are stocked and
there is not as much demand for cake, the flour and sugar
would go bad which would cause financial losses to business.
Inventory Management advocated optimisation of inventory.
The inventory management makes sure that the cake maker
has almost the exact amount of sugar and flour which are just
enough to make cakes which match with the demand of cake
eaters who order cake from his shop.
Inventory Management Parameters
Inventory management can be efficiently done on the basis of
4 broad parameters:
1. Number of units in the stock

2. Cost of managing inventory
3. Availability of inventory on time
4. Location for storing inventory
Challenges of Inventory Management
1 Understanding the Inventory: Organisations should
take a holistic view into knowing both basic vs. non-basic
matter and at what time they should be ordered. Basic
items are those that you sell ant time of the year and
need incessant replenishing of stock. By sorting these out
from non-basic or seasonal items inventory levels can be
much more allied with a recognised schedule and product
lifecycle. However, knowing your items are just the first
step, one must have the knowledge about stock capacity,
what is going to be ordered, the size of the order, and
what needs to be refilled.
2. Incompetent Processes: Built on or rely on dated
software or manual processes are used for inventory
management systems. This creates an extremely
demanding work setting for anybody caught up in the
inventory management process. One must begin with 49
a review of current standard operating procedures and Notes

settle on where gaps may lie in the systems.
3. Client Demand: Customer needs are varying daily and
they are looking to their distributors to allow for elasticity
in orders. With the mounting demand of struggle, it
becomes more taxing to keep up with the exclusive needs
of the consumers to reassure they do not have those
needs met by some other firm. All these factors help in
understanding inventory management.
Inventory management plays a very vital role in the
entire logistic function. The higher inventory we need
to keep, higher will be the carrying cost on the average
idle inventory kept in the warehouse. But, if we purchase
inventory in smaller lots and avoid huge piling of
inventory, the cost or ordering and transportation will be
higher. This is because as we order smaller and smaller
quantities in each order, we will have to place more
number or order to meet the given annual demand. Thus,
a greater number of orders means higher ordering cost.
Thus, inventory management focuses on managing the
level and minimising the total cost of inventory, after
taking into consideration the stock-out costs, the carrying
cost, order cost and the cost of acquisition inventory.
4. Safety Stock: Safety stock also known as buffer
Inventory, is held over and above the cycle stock level
to cushion against and anticipated shortages of supply
or uncertainties of demands. Safety stock levels are
calculated on the basis of equating marginal savings
of preventing stock outs to marginal carrying cost of
additional inventory.
5. Speculative Stock: Speculative Stock is inventory in
excess of normal requirements that is held in anticipation
of price increase. The objective of holding speculative
stock is to increase profitability on the basis of the change
of value of the goods while they are being stored.
6. Dead Stock: Dead stock is inventory for which no
demand has been registered for a specified period of time.
Inventory management is the sum total of the activities
50 necessary for an acquisition, storage, sale, disposal or
Notes use of material. Inventory management is the practice
of planning, directing and controlling inventory so that
it contributes to the business profitability. Inventory
turnover is the measure of how well is the business
managing its inventory. It shows how many times a year
the inventory is turning through the organisation. Higher
is the turnover, better for the organisation.
Cycle Stock
Cycle stock, also known as Transition Inventory, is the
inventory required to meet basic demand under conditions
of certainty. This inventory is currently undergoing
transformation and functions as a vehicle for profit
generation. It can either be in the form of work in progress or
in the form of finished goods. The finished goods Transition
Inventory can either be undergoing quality check or could be
in the process of being transported from the point of origin
to the point of consumption. In-Transit stock refers to goods
undergoing movement between fixed stock points such as
warehouses. The concept of in- transit stock is important
because of funds can be tied up while goods are being
transported.
Reasons for Holding Inventory
1. Catering to the needs of customer during sales
fluctuations and other related problems.
2. To provide assurance on availability.
3. To store in advance expecting movement in sales.
4. Flexible raw material scheduling.
5. To suit variations in production scheduling
6. To take advantage of favourable raw material price.
7. To manufacture material in economic run sizes.
Adverse Effects of Inventories
1. Over depending on inventory can prohibit meaningful
feed-back and the quality of the product service bundle.
With large inventories, there is usually a long delay.
2. Large inventories hide operational problems that 51
might be solved if they were discovered. When a worker Notes

finds a non-confirming item and inventory provides
an immediate replacement, the worker has very little
interest to communicate the fact that a defective item was
created.
3. There is a financial cost to carrying excessive inventory.
It includes the lost opportunity invest the money tied up
in the inventory, as well as the rental cost for space used
to house the inventory.
4. There is risk of damage of goods held in inventory. Larger
the inventory, the more likely items are to be handled
before shipment. Often warehouse workers have to move
larger inventory just to find a specific item. Each time an
item is handled it undergoes the risk of damage.
5. Large inventories are associated with a risk of product
obsolescence and losses due to depreciation.
6. Technological advances and product innovations cannot
be adopted while preexisting inventories appear on the
balance sheet.
Types of Selective Inventory Control Techniques

ABC Analysis
This relates to the annual usage cost of a particular item.
Generally, 10 per cent of items account for nearly 70 per cent
of usage value. Another 20-30 percent may account for 20 per
cent of usage value and the balance 60 – 70 per cent accounts
for 10 per cent of the usage value. Items are classified as per
their usage value. ‘A’ item costs approximately 60 – 70 per
cent of the total inventory cost while they are less in number.
‘B’ items cost 20-30 per cent of the total inventory cost while
‘C’ class items are greater in number and carry less than 10
per cent of the cost of the entire inventory.
VED Analysis
Referring to the Vital, Essential and Desirable status of
inventory items, this term implies certain parts and items
that are considered to be vital for meeting operational
requirements and this aspect is taken into consideration while
52 making a forecast. While making a forecast, certain items and
Notes parts, which are considered as vital for meeting operational
requirements, are considered. The modified version of this is
the ABC analysis. VED analysis, takes into consideration both
the value and criticality of each item. Continuous review is
necessary for high value and critical items and thus is ordered
in low quantities. Low value, least critical items are reviewed
periodically and ordered in large quantities and have lower
safety stock requirements.
SAP Analysis
Refers to Scarce, Available and Plenty analysis which allows
to build into provision forecasts. The ordered quantity is
governed by the scarcity factor. The guideline for procurement
policy decisions would be the limitations in supply or the
obsolescence of the firm in the near future.
FSN Analysis
The Fast, Slow or Normal analysis determines the
consumption pattern of each item. However, a realistic
picture for procurement action will not be available from a
consumption pattern where the production run is slowed down
due to various other reasons.
SDE Classification
Classification based on the availability of an item. S items are
scarce items, which needs to be imported and thus take a long
time to obtain. D items are difficult to obtain, and E items are
easily obtainable.
Classification of Inventory
Interest or Opportunities Cost
Company may obtain a loan or forgo an opportunity to invest
in an attractive return. Interest or opportunity cost whichever
is higher is the largest component of holding cost.
Storage and Handling Cost
The cost is incurred when a firm rents out space. Here again
there is an opportunity cost, as the firm can utilise the storage
space productively for some other purpose.
yy Taxes, insurance and shrinkage, when inventories are 53
high, the insurance on the assets (i.e. Inventories) also Notes

increases.
yy Pilferage or theft of inventory by customers or employees.
yy Obsolescence occurs when inventory cannot be used or
sold to the full value due to change in model, engineering
modifications or low demand.
yy Deterioration through physical spoilage or damage results
in lost value.
yy Ordering cost refers to the cost involved in the ordering
process. The paperwork faxes, phone calls etc. will add to
inventory related costs.
Carrying Cost
It is also called as holding cost, carrying cost is the cost
associated with having inventory on hand. It is primarily
made up of the costs associated with the inventory investment
and storage cost. For the purpose of the EOQ calculation, if
the cost does not change based upon the quantity of inventory
on hand it should not be included in carrying cost. In the
EOQ formula, carrying cost is represented as the annual cost
per average on hand inventory unit. Below are the primary
components of carrying cost.
Out of stock costs are incurred when the order placed by the
customer cannot be filled from the available inventory. Over
stock costs are incurred when the company is having some
stock in hand even after the demand for the product has been
terminated.
Inventory Planning Models

1. Economic Order Quantity (EOQ):
This is the replenishment order quantity, which minimises the
combined cost of inventory maintenance and ordering.
yy Assumptions of basic EOQ model

yy Demand is known with certainty
yy Demand is relatively constant over time
54 yy No shortages are allowed
Notes
yy Lead time for the receipt of orders is constant
yy The order quantity is received all at once
According to EOQ model of supply chain, the inventory
holding/carrying cost is taken to be proportional to the
average inventory held during a period. Thus, by reducing the
inventory, it carrying cost can be reduced. On the other side,
smaller lot sizes will increase the number of lots per annum
to cover the annual demand and thus the cost of ordering will
be more. Thus, the economic lot size must balance both these
opposing costs.
The mathematical formula for economical lot size is:
Q = √2 D S / H C
Where:
Q = Order quantity in units
S = Cost of placing an order in rupees
D = Average annual consumption in units
H = Percentage of inventory cost vis a vis unit cost
C = Cost per unit

2. Material Requirement Planning (MRP)
Materials Requirement Planning (MRP) is a scheduling
procedure for production processes that have several levels
of production. MRP determines a schedule for the operations
and raw material purchases, given information describing the
production requirements of the several finished goods of the
system, the structure of the production system, the current
inventories for each operation and the lot sizing procedure for
each operation.
3. Distribution Requirement Planning (DRP)
Distribution Requirement Planning is a planning approach,
which considers multiple distribution stages and the
characteristics in each stage. It is a logical extension of
MRP. While MRP is determined by a production schedule,
which is defined and controlled by the enterprise, a DRP is 55
guided by customer demands, which cannot be controlled by Notes

the enterprise. A DRP allocates inventory from the mother
warehouse to the various distribution centers based on the
following:
a) Pattern of demand
b) Provision of safety stock
c) Quantity ordered
d) Re-order point
e) Average performance cycle length
DRP also coordinates the finished goods requirement across
the distribution network.
4. Just-in-Time System (JIT)
Just-in-Time (JIT) is a manufacturing philosophy, which
leads to production of necessary units, in the necessary
quantities, at the necessary time with the required quality.
It is an approach to achieving excellence in the reduction or
total elimination of waste (Non-Value-Added Activities). The
JIT-technique is a ‘Pull System’, based on not producing units
until they are needed. The Kanban Card is used as a signal
to produce. Overproduction, unnecessary inventory, defective
products, transport and waiting time are some examples of
waste according to JIT. The benefits of JIT include:
yy Better quality products.

yy Higher inventory turnover.
yy Higher productivity.
yy Lower production costs.
5. Vendor Management Inventory (VMI)
In VMI, the supplier takes charge of the inventory
management of the product and also manages the
replenishment process based on the customer’s consumption
pattern. EDI or other inter-organisational software packages
are used.
56
Check your Progress
Notes
1. Inventory Management makes sure that the core
processes of a business keep running efficiently by
optimising the _________________.
2. ___________________is Inventory required to meet
basic demand under conditions of certainty.
3. Higher is the turnover, ___________ for the
organisation.
4. _________________is emerging as an attractive
investment and is another dominant trend in the
Indian logistics sector.
Summary
The turnover of inventory represents one of the primary
sources of revenue generation and subsequent earnings for the
company’s shareholders. Inventory Management makes sure
that the core processes of a business keep running efficiently
by optimising the availability of inventory. A prerequisite
of inventory management is steady and vigilant assessment
of exterior and interior factors and control via planning
and evaluation. There are many challenges of Inventory
Management like Understanding the Inventory, Incompetent
Processes and demands of clients. Over depending on inventory
can prohibit meaningful feed-back and the quality of the
product service bundle. Various types of Selective Inventory
Control Techniques are in practice now. DRP also coordinates
the finished goods requirement across the distribution network.
Just-in- Time System (JIT) assures better quality products,
higher inventory turnover and higher productivity.

1. What is the significance of Inventory Management?
Explain with an example.
2. Mention the adverse effects of inventories.
3. How are the various costs in inventory broadly classified?
Elaborate.
4. What are the main Inventory Planning Models?
57
Unit 8 Notes
Inventory Management Strategy

Objectives
following topics:
\\ Development of Inventory Management Strategy
\\ Purchasing
\\ Inventory Management Control Systems
Introduction
Being the most aspect of any business, inventory management
is a process that oversees and controls the flow of inventory
units used by a business in its production and distribution
for sale. It also allows a business to prevent any kind of
losses. It keeps a track of costs of inventory throughout the
manufacture and sale process.
Inventory Management Strategy Development

Process
This process consists of three steps:
1. Market / Product Classification
Also known as ABC classification, this groups products
and markets with similar characteristics to ease inventory
management. The objective of this classification is to focus and
to refine the inventory management efforts. Classification can
be based on a variety of measures like sales, contribution of
profit, inventory value, nature of the item etc.
2. Segment Strategy
In the second step, the integrated inventory strategy for
each product or market group or segment is defined. Various
aspects of the inventory management process like service
objectives, forecasting methodology, management technique
and the review cycle are included in this strategy.
58 3. Operationalised Policies and Parameters
Notes Finally, the focused inventory management strategy has to
be implemented which involves clearly defining the detailed
procedures and parameters. The procedures have to define
the data requirements, software applications, performance
objectives, etc. The parameters give the actual numeric
values like the length of the review period, service objectives,
percentage of inventory carrying cost, order quantities and re-
order points.
Improved Inventory Management

Certain additional initiatives need to be taken to improve
the effectiveness of inventory. These are a number of policies
and procedures that form guidelines for inventory, related
decisions are incorporated in inventory management.
Performance Measures
Clear and consistent measures of performance are necessary
for the inventory management process. These measures must
bring out the trade-offs between service and inventory level.
For example, if the performance measure of the planner
focuses only on inventory level, then the planner will have
a tendency to minimise the inventory levels, which might
have a potential negative impact on the service level. On the
contrary, if the planner’s single focus is on service, it will lead
the planner to disregard the inventory level.
Training
Inventory management is complex owing to the number
of factors involved. The interface between the inventory
management in the enterprise and also other entities within
the value chain needs to be understood. Thus, the firms need
to increase not only the amount, but also the sophistication of
training in order to improve inventory management decision-
making. Planners must understand how certain inventory
parameters like service objectives, review periods, order
quantity, safety stock, etc. influence inventory operations and
performance, etc. Also, planners must understand how their
inventory management decisions will affect other members in
the value chain.
Integration of Information 59
Notes
Effectiveness and performance of inventory can be increased
substantially and the uncertainty can be decreased by
integrating the information that is required related to
forecasts, orders, marketing plans, status of inventory,
shipment, etc. across the enterprise and also among the
channel partners. Exchange of information using global
networks, forecasts and also a reliable measure of inventory
to reduce the uncertainty between the enterprise systems and
thus result in lesser need for buffer inventory.
Materials Planning
This is a scientific technique of determining the requirements
of raw materials, ancillary parts and components, spares, etc.
given by the production programme, all in advance planning.
The overall management planning and control system is a
broad perspective within which material planning functions,
and materials budgeting are an exercise translated in money
terms for its effective functioning, control as well as execution.
The actual planning starts with the information gathered from

the annual sales forecasts, production and general business
forecast. Forecasts provide the means for satisfying locational
needs, and the general business forecasts provide the means
to estimate in advance the trends in prices, wages and costs
of other services. While breaking down broad forecasts into
specific plans, the next step is to make the price and supply
available to confirm to the specific plan. The materials
consumption estimation is broken down into specific periods.
The quantities are checked against the inventory control
procedure, by taking into account the safety stock and lead-
time requirements.
Purchasing
Purchasing refers to the exchange of goods or services for cash.
In other words, it provides the right materials, at the right
price, of right quality and quantity at the right time and, from
a right source.
60 Objectives of Purchasing
Notes
yy Maintenance of a continuous supply of materials to support
production as well as the schedule
yy Avoidance of duplication of purchases, wastes, obsolescence
and delays
yy Adoption of proper standards of quality on the basis of
suitability
yy Procurement of materials at the lowest possible cost, at the
same time ensuring that it is consistent with quality and
service requirements
yy Maintenance of the company’s competitive position in the
market
The purchasing department has the following functions:
yy Selection of suppliers
yy Analysing bids
yy Price negotiations
yy Issuing purchase orders
yy Follow-up actions
yy Cost-analysis and study of market conditions
yy Maintenance of price catalogues, information library, etc.
Inventory Management and Control Systems

Inventory refers to the stock of materials of any kind stored
for future use, mainly in the, production process. Inventory
is critical to supply chain management because it directly
impacts both cost and service. These are the prime ingredients
for any logistical system. They also have an influence over the
other activity centres of logistics such as customer service,
transportation, warehousing, order processing and material
handling. At least a certain amount of inventory is inevitably
required somewhere in the chain to provide adequate service
to the end customer, as demand is mostly uncertain and it
takes time to produce and transport product.
It is necessary to have an optimum minimum of inventories, 61
where the inventories as well as the chances of stock out Notes

are minimum. A Company achieves this through inventory
management.
Inventory management has various functions like striking a

balance between demand and supply, minimising the costs
at acceptable inventory levels, providing the desired customer
levels, availing quantity discounts, etc.
Inventory control is a scientific method of storekeeping and

considerably brings down the acquisition and retention costs
of materials. It is concerned with maintaining the optimum
level of stock and also recording its movement. The need for
inventory control arises due to many factors such as increase
in the manufacturing units, growing complexity of the modern
industry, higher idle time cost of machine and men and a
higher degree of stress on liquidity.
There are several inventory control mechanisms such as ABC,

VED, SAP, and FSN analysis.
The various inventory models are Economic Order Quantity

(EOQ), Materials Requirement Planning, Just-in-Time, and
Distribution Requirement Planning. Most of the businesses
arise out of the idea, which is much, more fundamental than
mere profit making. The ultimate product or service is of
great importance. Materials Management involves much more
than cost-reducing techniques and includes cost control, cost
reduction, work simplification and value analysis.
The professional materials manager needs to judge the right

procedures, tools and techniques before approaching the job.
Control of materials function is a primary task. In future,
the materials managers have to be well equipped to face the
challenge the modern days have posed to them.
Check your Progress
1. The ________________procedures have to define

the data requirements, software applications and
performance objectives.
2. Clear and consistent measures of performance are
necessary for the _______________process.
62
3. The quantities are checked against the inventory
Notes
control procedure, by taking into account the
____________ and __________requirements.
4. Most of the businesses arise out of the idea,
which is much, more fundamental than mere
________________.
Summary
Inventory management keeps a track of costs of inventory
throughout the manufacture and sale process. This process
consists of three steps: market product classification, segment
strategy and operationalised policies and parameters. A
number of policies and procedures that form guidelines for
inventory; related decisions are incorporated in inventory
management. Purchasing provides the right materials, at the
right price, of right quality and quantity at the right time and
from a right source. Inventory control is a scientific method
of storekeeping and considerably brings down the acquisition
and retention costs of materials. There are several inventory
control mechanisms. The professional materials manager
needs to judge the right procedures, tools and techniques
before approaching the job.

1. What are the three basic steps of the strategy for
development process?
2. Discuss the required objectives of purchasing?
3. Why does the need of Inventory control rise? Explain.
4. How is training an important tool for improving inventory
management?
63
Unit 9 Notes
Transportation
Objectives
following topics:
\\ Purpose of Transportation
\\ Participants of the Transport Decisions
\\ Modes of Transportation
\\ Transportation Management
Introduction
Transportation is basically the movement from one location
to another as it makes its way from the beginning of a
supply chain to the customer’s hands. Transportation not
only ensures movement of people but also goods from one
place to another thus assisting the economy by the growth of
trade and commerce. Being one of the most visible elements
in the logistics operations, this function has gained a lot of
importance and interest from the logistics perspective.
Importance of Transportation
Transportation plays an important role in each and every
supply chain because products are usually not produced and
consumed in the same location. The third P in the marketing
mix, ‘Place’ is of much importance here. In fact, transportation
costs occupy a significant part of the total costs in most supply
chains.
With the growth in industry and commerce, transportation

facilitates in achieving the social and economic objectives.
As times are changing and according to the requirements,
the mode of transportation is changing to keep pace with the
growth of science and technology across the globe. The degree
of sophistication of the various transportation equipment in
use varies according to the level of economic condition and
64
growth of any particular region / country. As the economy
Notes has transformed from subsistence agriculture to commercial
agriculture, and also with the spurt of manufacturing
activities, the scope of development of transportation
modes has widened. In the olden days, the various modes of
transportation like human beings, camels, horses, donkeys,
carts and ships were being used. Today, these have paved
way to newer modes of transportation to suit the needs of
the modern world. In spite of the emergence of sophisticated
modes of transportation, older modes continue to serve the
society, but in a smaller way.
Transport, being the main component of logistics, plays

an important part in all management decisions within the
organisation, from strategic decisions to everyday operations.
Day to day management decisions also relies on transport,
as Just in Time methods for both production and distribution
have become the standard. With the growth in e-commerce,
resulting in more and more home delivery of products,
transportation costs have become very significant in retailing.
Especially for products sold online, transportation cost is a
larger fraction of the total delivery cost.
The appropriate use of transportation is the key to any supply

chain’s success e.g. Wal-Mart uses a responsive transportation
system to lower overall costs. Wal-Mart uses the technique of
aggregation for products leaving for different retail stores on
trucks leaving to a supplier. At Distribution Centers (DCs),
Wal-Mart uses cross-docking, where product is exchanged
between trucks such that each truck going to a retail store has
products from different suppliers.
Basically, transportation serves two main purposes:
yy Product Movement: One of the primary function of

transportation is the forward and backward movement
of the product in the value chain. It is necessary that
the product be moved only when they are necessary and
there is an enhancement in the product value. This is
because transportation utilises the financial resources
for expenditure like driver’s labour, operation cost of
the vehicle and other administrative expenditure. The
environmental resources are utilised both directly and
65
indirectly. An example of direct usage can be the fuel and
oil costs and an indirect usage can be the environmental Notes
expense caused by air, noise pollution in the environment.
yy Product Storage: Temporary storage for in-transit goods
are expensive. But in circumstances where the warehouse
space is limited, utilising the transportation vehicles may
be a better option. One option is where the product is
loaded on the vehicle and then it takes a roundabout or
indirect route to its destination. The vehicle can be used as
a temporary storage option where the origin or destination
warehouse has limited storage capacity. Another option is
to take a diversion. This is done when there is an alteration
in the shipment destination while the delivery is in
transit. While, telephone was used for diversion strategies
originally, today satellite communication handles this task
efficiently.
A transportation strategy to be successful, should recognise
the following:
yy Customer requirements: The supply chain involves

continuous and efficient movement of product from vendor
to manufacturer to customer. Thus, the transportation
program must reflect and meet the customer’s needs. The
vital aspects are time and service.
yy Timely movement of shipments: Customers demand
their shipments be delivered as they require - on the date
needed, by the carrier preferred, both shipped complete
and delivered complete and in good order. A transportation
program, which can do this, can provide customer
satisfaction and give a competitive edge.
yy Mode selection: Selecting the mode of transport is
an important consideration. The transit time has to be
considered while doing so.
yy Carrier relationships: Volume catches the attention of
the carrier of forwarder. The carrier attention with volume
creates a competitive interest in a business. Another side to
this attention is that the business cannot be divided among
many carriers. The chief reason being that responsive
transportation can create a competitive advantage and this
can be done only with a focused relationship with a carrier.
66 yy Measuring/benchmarking: There is a necessity to
Notes know about the performance of the strategy as well as the
carriers. Measuring and benchmarking can be of assistance
to this. Measuring means comparing performance versus
standards. Benchmarking means learning what other
companies do. Benchmark needs to be done with a
company in the same industry.
yy Flexibility: As change is happening everywhere, the
strategy has to be ready to change. There is a constant
change in the customers, products, business, suppliers and
the overall corporate emphasis, which can dramatically
change the company’s strategy. It is important to recognise
that change will occur. Just as times are changing, the
strategies will also keep changing. A company must adapt
itself to such an environment.
Participants in the Transportation Decisions

Primarily there are five key parties in transportation
decisions. Each of these parties has a role in the
transportation environment.
yy Shipper: The party, which requires the movement of the

product between the two points in the chain. The shipper’s
objective is to fulfill the customer order with responsiveness
but at the minimum cost.
yy Consignee: The destination party or receiver. The consignee
also has the similar objective of receiving the goods at a
lowest cost and with maximum responsiveness.
yy Carrier: The party, which moves or transports the product
with an objective of maximising the revenue at the least
cost. Carriers have a tendency to charge a higher rate
and reduce their costs by trying to consolidate various
individual loads into economical loads and thus would
seek flexibility in pick-up and delivery with the client. This
motive is in conflict with the manufacturer’s objective of
reducing total transportation costs.
yy Government: The Government has a high interest level in
the transactions because a stable and efficient transportation
environment is necessary to sustain economic growth. To
67
facilitate this, carriers must offer competitive services
while operating profitably. Notes
yy Public: The ultimate determinant of transportation by
desiring goods at reasonable prices. Their concerns are
related with the accessibility, expenditure, effectiveness as
well as the safety and environmental standards.
Factors Affecting Carrier Decisions

yy Vehicle related cost: Cost incurred by the carrier for
purchase or lease of the vehicle to transport goods.
yy Fixed operating cost: Costs which can be associated
with the airport, terminals and labour which are incurred
whether vehicles are in operation or not.
yy Quantity-related costs: Usually variable in nature
except in circumstances where labour for loading and
unloading is fixed.
yy Trip-related cost: Includes the price of labour and
fuel incurred for each trip independent of the quantity
transported.
yy Overhead cost: Any cost incurred for planning, scheduling
a transportation network as well as the information
technology costs incurred.
Factors affecting shipper’s decision:
yy Transportation cost: Total amount paid to various
carriers for transporting products to customers.
yy Inventory cost: Cost of holding inventory incurred by the
shipper’s supply chain network.
yy Facility cost: Cost of various facilities in the shipper’s
supply chain network.
yy Processing cost: Cost of loading / unloading orders and
the other processing costs associated with transportation.
yy Service level cost: Cost of not being able to meet delivery
commitments. This cost to be considered in strategic,
planning and operational decisions.
68
Modes of Transportation
Notes
Air
This is the least hazardous in nature when compared to all
other modes of transport. Air transport is expensive, and
is very suitable for products having high value or extreme
perishability. The prohibitive aspect of this mode is its high
cost. From the operator’s point of view, though the fixed cost
is low compared to other modes like rail, water and pipeline,
variable costs are very high as a result of fuel, maintenance,
and the labour for crew.
Though the cargo handled by air is growing at a fast pace, it

is still not important when compared to the cargo handled by
other modes of transportation. Air, by whatever type of airline,
is generally considered a premium means of transportation.
The best justification for the high cost can be an emergency
situation, which necessitates the service of air transport.
Technological developments like new cargo-handling
equipment at air terminals and the use of larger containers
have been beneficial.
Sea / Water
This is the oldest mode of transportation. Water transport,
due to its nature, is limited to certain areas. It is the slowest
modes of all the modes and a lot of delays also occur at ports
and terminals. Water transport is generally suited for carrying
very large loads at low cost. Usually the shipping fleet across
the globe comprises of tankers, dry bulk carriers, container
ships and special vessels. Some of the problems encountered
with this mode are rough weather characterised by storms,
ice, high waves, etc. in – transit. Also, there is a disadvantage
of a limited range of operation and speed.
Railways
Generally capable of transporting large quantities of freight
over long distances very economically these are the principal
carriers of men and material, and play a major role in the
country’s trade and commerce activities. It is the main source
of supply of essential commodities, which are transported
across the length and breadth of the country. Road traffic is
69
relieved to a certain extent and also air pollution caused by
trucks can be eliminated. The railways also charge competitive Notes
freight rates.
Roadways
Most popular mode of transport is roadways. With the
manifold growth in industrial and agricultural activities,
this mode has achieved a lot of importance. The various
advantages of this mode are flexibility, faster turnaround,
lesser risk of delays or strikes, door-to-door service, reach
to remote places and through movement from consign or to
consignee.
Pipeline
In India, pipelines are used for oil transportation by all
public and private sector petroleum refineries. They are also
utilised for transporting manufacturing chemicals, dry bulk
materials like cement and flour by hydraulic suspension and
also sewage and water within cities and municipalities. This
mode is unique in comparison with the other modes in the
sense that they operate throughout the day, with limited time
for changeover and maintenance. The basic advantage here
is that they reduce the operational costs, though the initial
investment is high and are eco-friendly. The disadvantage of
this being its lack of flexibility where only limited commodities
in the form of gas, liquid or slurry can be transported.
Transport Economics
The factors which influence transport economics are:
1. Distance: This is a major influence on the cost as it is

a direct contributor to variable costs like labour, fuel
and maintenance. The tapering principle, where the cost
curve increases at a decreasing rate as a result of the
distance function is relevant here.
2. Volume: It is viable to consolidate smaller loads into
larger loads to take advantage of the economies of scale.
3. Density: The product density or weight is discussed
here, where the product density can be increased within a
truckload for better capacity utilisation.
70
4. Storability: This refers to the product dimensions and
Notes how they affect the vehicle space utilisation. It is easier
to stow standard shaped items than odd – shaped items,
which occupy more space.
5. Handling: While loading or unloading trucks, railcars, or
ships, there is a necessity for special handling equipment
like trolleys, forklift trucks, conveyors, etc., to load or
unload trucks, railcars or ships.
6. Liability: These are product characteristics, which
basically affect the risk of damage and the resulting
incidence of claims.
7. Market Factors: Factors like lane volume and balance.
A transportation lane refers to the movements between
the points of origin and destination. When a vehicle is
sent from the point of origin, it may return empty-handed
or may bring back load. Due to the imbalances in demand
in both manufacturing and consumption locations, a
balanced (volume is equal in both directions) move is
nearly impossible.
It is the responsibility of the logistics managers to understand
the influence these factors have on the transportation cost and
minimise such expense.
Transport Documentation
yy Bill of Lading: A computerised basic document, which
is utilised in purchasing transport services. This serves
as a receipt of the commodities and quantities shipped. It
also serves as the basis for damage claims in case of loss,
damage, delay etc.
yy Freight Bill: This is how the carrier charges for the
transportation services he performs. The information
contained in the bill of lading is utilised for preparation of
this.
yy Shipping Manifest: This document is used when multiple
shipments are placed on a single vehicle. The document
provides a comprehensive list, which informs the entire
load content, making it unnecessary to view individual bills
of lading as all details relating to the stops, bills of lading,
71
weight, case count etc. for each shipment are listed in this
manifest. Notes
Transportation Management
Factors like globalisation and technological improvements
in the past years have changed the logistician’s view of
transportation. The logistics manager is expected to be
more proactive in identifying the desirable combination of
carrier services and also the suitable pricing structures in
order to meet the objectives of the firm. Transportation,
when managed independently of other value-added
logistics operations often represents the weaker elements.
Transportation decisions, which are made in co-operation with
related functions remove this weakness.
The two main fundamental principles in transportation

management and operations are economy of scale
and economy of distance. Economy of scale means the
transportation cost per unit of weight decreases with an
increase in the size of shipment. Economy of distance implies
that there is a decrease in the transportation cost per unit
with an increase in the distance. These principles are essential
while evaluating alternative transportation strategies or
operating practices.
Thus, transportation management is an important activity for

the organisation which involves the following process:
yy Analysis and understanding of environment: There

is a necessity to understand the transport environment, to
make sound transport decisions. The environment consists
of the five parties; shipper, consignee, carrier, government
and public.
yy Clarity in Objectives The order of preference in
performance of transportation functions has to be decided.
The manufacturer must determine his objectives at a
level at which service can be performed and the levels at
which customers expect, the amount of trade-offs that
can be expected. Such setting of objectives can enable the
company to choose an efficient mode of transport.
72 yy Selecting mode of transportation: A choice between
Notes single mode and intermodal transport has to be made to
achieve objectives efficiently.
yy In source or outsource: After selecting the mode, the
company must decide whether to in source the activity or
outsource to third parties. According to the mode selected,
the company must perform the functions.
yy Evaluation and control: The efficiency of the transport
system can be ascertained by measuring the customer
satisfaction.
Modern transportation has undergone a sea-change with
a change in the point of view of an operational function to
a strategic one. In the new era, transportation requires a
constant search for methods to ensure that the customer’s
order will arrive at their doorstep when required, in the
right quantities and in undamaged condition. Additionally,
transportation has to continually improve its flexibility and
ability to respond to the market place, at a short notice, while
providing better avenues for communication and also cost
reduction. This makes transportation a continuous perennial
activity rather than a one – time exercise.
Check your Progress
1. _________________________ costs occupy a significant

part of the total costs in most supply chains
2. With the growth in _________________, resulting
in more and more home delivery of products,
transportation costs have become very significant in
retailing.
3. ___________ is the least hazardous in nature when
compared to all other modes of transport.
4. In ______________transport there is a disadvantage of
a limited range of operation and speed.
Summary
With the growth in industry and commerce, transportation
facilitates in achieving the social and economic objectives.
73
The appropriate use of transportation is the key to any supply
chain’s success. Transportation serves two main purposes Notes
of product movement and product storage. A transportation
strategy to be successful, should recognise a lot pointers like
customer requirement, mode selection and so on. Primarily
there are five key parties in transportation decisions:
Shipper, Consignee, Carrier, Government and Public. It is
the responsibility of the logistics managers to understand
the influence that the factors of transport economics have
on the transportation cost and minimise such expense.
Transportation has to continually improve its flexibility and
ability to respond to the market place.

1. Why is transportation so important in supply chain?
2. What factors affect the carrier decisions?
3. What is the need of transport documentation ? Explain.
4. Discuss the two main fundamental principles in
transportation management and operations ?
74
Notes
Unit 10
Case Study
The Case of Alpha Machinery

It’s monsoon time and Mr. Ranjit, C.E.O of Alpha Machinery
Manufacturers located out of Pune was struck at Bangalore
after he missed out an evening flight to Pune, thanks to the
traffic jam. He went back to his guest house and gathers
his thoughts for the next day Board meeting wherein he
needs to address some serious concerns the Board has on the
performance of the company. Mr. Ranjit was made the C.E.O
four years back when this engineering machinery company
was growing because of a buoyant economy.
Alpha manufactures specialty equipment in this industry and

its fortune hinges on the engineering industry performance.
Alpha’s current sales are about Rs.288 crores. But there

is tremendous pressure on sales. Mr. Ranjit had projected
growth in sales for his Board but the last quarter results
(which is to be shared with the Board on the next day) shows
declining trend in sales. However, the pressure on costs is
going up compounding the problem of ‘squeesing margins’. Mr.
Ranjit is worried from many angles including his prospects
as C.E.O., his moral responsibility to stakeholders and future
of employees. He decides to take on the issue and picks a
discussion with his finance controller Mr. Jose. Mr. Ranjit
knows that Mr. Jose is a seasoned professional of high calibre.
In fact, he is the man waiting for the C.E.O slot if a change
were to happen!
Mr. Ranjit tells Mr. Jose that the losses currently happening
need to be plugged. Can anyone disagree! But the time frame
fixed was next quarter. He advises to revise the estimated
numbers for the next year at 5 per cent profits, a 20 per
cent increase in sales and he is not contended. He defined
that the profit contribution should happen by controlling
costs especially through reduction in labour, material and
overheads. He suggests to Mr. Jose every rupee saved is every 75
rupee earned as profit. Notes
Mr. Ranjit suggests that inventories are high and recommends

at least 10 per cent reduction in inventory by improving the
manufacturing process and discipline. Mr. Jose responds
stating that one cannot be ad hoc in determining the
percentage of reduction. Mr. Ranjit responds harshly that ad
hoc or scientific, the target must be achieved. Rather he states
that he would be happy if it is scientifically proven that more
of inventory could be reduced.
The company has inventory worth Rs.48 crores and 10 per

cent reduction in inventory means release of Rs.4.8 cores.
A better management practices could reduce carrying cost
of Rs.1.2 crores a year. Apart from this, Mr. Ranjit also
recommends reducing the size of purchase department. He
tells Mr. Jose that there is a trend to outsource a number of
activities and also to deploy right kind of technology and
people with supply chain perspective and current level of
staffing could be reduced. Mr. Jose is shocked but refused to
react immediately. Sensing his discomfort, Mr. Ranjit comforts
him stating that we may lose some good people for the overall
interest of the organisation.
Mr. Ranjit ends the telephone conversation stating that some

of the issues may crop up at the next day’s Board meeting and
Mr. Jose must meet him at Pune office by 9 a.m. with details
and a plan to manage the future of the company.
Mr. Jose digs at his desk and laptop at office immediately

after the conversation. He also catches up a conversation
with his colleagues informally on the pretext of the next
day’s Board meeting on operations review. He finds that the
purchases aggregate to Rs. 172.80 crores for the above project
turnover. The company buys a wide variety of materials from
few kilograms of rare material to tons of specialty steels.
A big part of the purchase budget goes on foundry castings,

forgings, stamping, fasteners and subassemblies. Many
of these are currently supplied by vendors who have been
nurtured over years. Some of them are exclusive suppliers and
their fortunes are tied with the company.
76 The purchase department is responsible for buying, vendor
Notes coordination, in-bound material movement and so on. The
department has a general manager and a team of vendor
coordinators, engineers and support staff. The current cost of
the department covering their salaries and benefits is about
Rs.1.48 crores.
Mr. Jose calls his new management trainee from a premier

school to help him to resolve some of the issues and support
his boss, Mr. Ranjit.

1. Discuss the actions that Mr. Jose may take on reducing
inventories by 10 per cent and is it good to reduce
inventories and does Mr. Ranjit sound ad hoc?
2. How would you manage the cost of goods purchased?
3. What are the steps to be taken for reducing the payroll
cost? Develop options for the same.
77
Unit 11 Notes
Road and Rail Transportation

Objectives
following topics:
\\ Purpose of Road-Railer Traders
\\ Fundamentals of Road Transport
\\ Strengths and Weaknesses of Rail Transport
Introduction
Around the world both the developed and rapidly developing
nations are investing very large sums of money in developing
their transport infrastructures. Roads, airports, seaports and
railways are all being developed, especially in countries such
as China and India. Massive investments in both high-speed
passenger and freight rail systems are being made. China
alone is investing US$17.6 billion in a passenger rail line
across the deserts of northwest China, US$22 billion in a
network of freight rail lines in Shanxi province in North-
Central China, US$24 billion in a high-speed passenger rail
line from Beijing to Guangzhou in South eastern China, and a
further US$88 billion in constructing intercity rail lines. It has
been compared with the development of the rail network in
the United States of America at the start of the 20th century
(source CILT World issue 19 May, 2009). China is by no means
alone in recognising the environmental and economic benefits
of rail links especially over long distances.
Railways play a key role in transporting intermodal containers

as well as carrying large volumes of bulk freight such as
coal, grain, fuel and other bulk commodities some wider
information on rail transport has been included.
Road-Railer Trailers
Road-Railer is the brand name for a method of effectively
converting a road-going articulated semi-trailer into a rail-
78
going rail wagon. This is achieved by placing a railway bogie
Notes under the rear of a specially designed road semi-trailer. This
same bogie attaches itself to the kingpin of the following road
trailer. This process is repeated until the train is complete.
The road wheels of the semi-trailer are mechanically retracted
to prevent them from interfering with the movement of the
train. This system does not require specially adapted rail
wagons and allows for a more rapid transfer of vehicles from
road to rail. It does require that the road vehicles are specially
designed for the purpose.
Rail Transport
Rail transport is a relative newcomer to the scene of freight
transport, not as young as air transport, but very young
compared to waterborne and road transport.
Railways generally rely on a system of fixed infrastructure

based on two parallel metal rails laid on supports known
as sleepers although mono-rail systems do exist. Railways
require a solid base and must be constructed with relatively
shallow gradients as well as wide radius curves.
Rack and pinion systems may be installed to improve

the operational restriction created by steep gradients but
nevertheless the problem is a real one for railway engineers.
In addition, the rail track needs to be free from barriers to the
uninterrupted forward progress of the train.
Therefore, bridges, tunnels and crossing points for roads need

to be constructed to allow an unimpeded passage for the train.
In addition, railways will require stations to allow the transfer
of passengers or cargo from and to the train. A method of
management for the trains’ operation is required to avoid
collisions between trains operating at different speeds on the
same section of track. This is achieved through a system of
signaling and train scheduling.
Loading Gauge
This refers to the maximum permitted height and width
of the rolling stock that may be used on a given section of
railway. The loading gauge will be a function of the height of
overhead restrictions such as bridges and tunnels, which in 79
turn restricts the effective operating height of the train. In Notes

addition, the distance between train pathways and trackside
structures will dictate the width of the rolling stock permitted.
The strengths and weaknesses of rail transport:
1. High average speed for journeys is in the range of 50 to

300 miles.
2. Rail in the majority of cases runs from city centre to city
centre, which can cut journey times.
3. The railway effectively utilises land space. Over any
strip of land of a given width, the railway can carry more
passengers and freight than any other land-based system.
4. The general public perceive railways as being less
environmentally adverse, both visually and as regards
physical pollution, than other forms of transport.
5. The bulk-handling capacity of the railway means they
are very cost effective when handling bulk materials in
coupled train loads thus relieving the road system of large
numbers of heavy trucks.
Check your Progress
1. _____________play a key role in transporting

intermodal containers as well as carrying large
volumes of bulk freight.
2. _______________is the brand name for a method of
effectively converting a road-going articulated semi-
trailer into a rail-going rail wagon
3. __________________is the maximum permitted height
and width of the rolling stock that may be used on a
given section of railway.
4 The railway effectively utilises ______________.
Summary
Roads, airports, seaports and railways are all being developed,
especially in countries such as China and India. Railways
play a key role in transporting intermodal containers as
80 well as carrying large volumes of bulk freight. A method
Notes of management for the trains’ operation is required to avoid
collisions between trains operating at different speeds on
the same section of track which is done through a system of
signaling and train scheduling. The distance between train
pathways and trackside structures will dictate the width of
the rolling stock permitted. The railway effectively utilises
land space. The bulk-handling capacity of the railway means
they are very cost effective.

1. Give an account of Road-Railer trailers.
2. Describe in detail the Rail transport as relatively a new
comer to the scene of freight.
3. Give an explanation of the strengths and weaknesses of
the rail transport?
4. What is Loading Gauge? Elucidate.
81
Unit 12 Notes
Maritime Transportation
Objectives
following topics:
\\ Structure of Maritime Industry
\\ Common Shipping Terms
\\ Importance of Inland Waterways
Introduction
The concept of maritime industry in transport for facilitating
trade on an international level can be understood by knowing
about the structure of the industry. The industry includes
all projects in the business of supplying, manufacturing,
constructing or designing. Maritime transport is engaged in
the shipment of cargo as well as people by sea or any other
waterways.
Structure of the Industry

Liner Conferences
Liner conferences are formal groups of shipping lines that
operate on certain shipping routes. They were first set
up to control the trade between colonial powers and their
colonies. Today they are seen by many as being a very
controversial anachronism as they work together to agree
tariffs for certain routes. They work fundamentally for
the interests of the member shipping lines to help to avoid
destructive price competition (as they see it). For their part,
the shipping lines would argue that there would be much
more price and capacity volatility without the stability
that the liner conferences provide. The shipping lines have
invested huge amounts of capital in the ships themselves and
the conference system provides a way of managing forward
revenue streams.
82 The European Union (as well as many of the conference’s
Notes customers) has criticised them for anti-competitive actions
and is examining ways of changing the status quo. As a matter
of record the liner conferences are the only industry that is
currently exempted from anti- competition laws in Europe and
the USA (it is called anti-trust legislation in the USA). There
is a huge body of opposition to these price fixing organisations
and it is very likely that further legislative action will be
taken against them.
Shipping Lines
They own and operate the various types of ships in their fleets.
Their role is to provide the physical means by which cargo
may be safely and efficiently transported by sea.
Ships’ Agents
They provide services to the shipping lines in the ports where
the ships call. A ship’s agent will deal with many important
and diverse matters on behalf of the shipping line. These
services may include provisioning with food and spare parts,
arranging any necessary repairs for the ship, dealing with
local port and customs authorities, organising berths, pilots,
tugboats (if required), crew change and refueling.
Freight Forwarders
Often referred to as freight management companies these
days, their role is to oversee and manage the movement of the
freight from the point of origin to the point of destination.
Freight management companies provide integrated door-

to-door solutions for their customers that may include
arranging different modes of transport, customs clearance
and documentation, arranging port handling and generally
supervising all aspects of the movement. In order to do this
effectively they usually have worldwide networks of offices and
agents in many countries.
Common Shipping Terms

As with many specific areas of industry, sea-freight has
developed a whole plethora of terms and abbreviations over a
period of time that spans centuries. In fact, there are so many
that it is not possible to outline them all in this chapter. The 83
terms that are listed below are the ones that most commonly Notes
cause problems for the newcomer to the trade. The list is
a very long way from being exhaustive and many useful
websites exist with very detailed lists for those who may need
more information.
Full Container Load (FCL)
As the term implies, this refers to a load that will fill a given
container.
Less than Container Load (LCL)
Once again, as the term implies, this is a shipment that
will not fill a container and therefore will require to be
consolidated with other LCLs in order to economically fill a
shipping container.
Hook to Hook
This term is used by many shipping lines when quoting prices
for break-bulk sea freight. It means that the shipping line’s
price includes loading the goods on to the vessel and unloading
the goods at the destination port. It also includes the cost of
transporting the goods between the origin and destination
ports. It is important to note that this price does not typically
include insurance nor does it include the stevedoring cost at
both ports to attach or detach the cargo from the ship’s lifting
gear. In addition, it does not include other port handling costs.
Full Liner Terms
This means the same as hook to hook.
Liner-in
The shipping line is responsible for the cost of loading the
cargo on board the vessel.
Liner-out
The shipping line is responsible for the cost of unloading the
cargo at the destination port.
Free-in and/or Free-out
In effect this is the opposite of hook to hook. Many purchasers
of sea-freight who are new to the industry make the mistake
84 of interpreting ‘free’ as meaning free to them. Whenever the
Notes term ‘free’ is used in this context it means free to the shipping
line. Therefore, the party purchasing the sea-freight will be
responsible for the cost of loading and unloading the goods on
and off the ship.
Break Bulk Cargo
This is a general term for non-containerised loose freight. Out-
of-gauge cargo and heavy weight items that are unsuitable for
containerisation fall into this category. Bulk cargoes such as
crude oil, loose grain or bulk powders and iron ore would not
be classified as break bulk.
Documentation
One very important aspect of moving goods internationally
by sea is the associated documents required by various
government agencies, financial institutions and trading
partners at both origin and destination. The following contains
a brief overview of some of the major documents used:
yy Bills of Lading
A bill of lading is issued by the shipping line as a receipt for
the cargo being transported on its ship. It is also a contract
of carriage to deliver the cargo to a named destination.
In addition, it lays out what has been loaded and in what
condition. A bill of lading is a negotiable document unless it
states otherwise. This means that the goods may be bought
and sold during the sea voyage using the bill of lading as title
to the goods. Therefore, the legal bearer of the bill of lading is
the owner. There are several different types of bills of lading to
suit differing circumstances.
yy Letters of Credit
Although these documents are not necessarily required to
facilitate the actual international transport of goods by sea
or to fulfil the customs authorities’ requirements, they are
nevertheless crucial to facilitating the exchange of goods for
money across international borders. They act as a protection
for both the buyer and seller. A Letter of Credit (LC) issued by
a bank in one country (the issuing bank) on behalf of a buyer
names the seller as beneficiary to the funds outlined in the LC 85
provided certain terms are clearly met by the seller. The LC is Notes
then sent to the seller’s bank in a different country, which is
known as the advising bank. This method is used to guarantee
that the seller gets his payment in time and in full, and the
buyer does not release funds until the goods are received in
full and in good condition. This is an extremely complicated
financial area and the above description is intended as a
general guide only.
yy Certificate of Origin
This is a document issued by a certifying body that establishes
the origin of the goods being transported. This is often
required by Customs authorities at the final destination due
to trade tariff s, international trade treaties or embargoes on
trade with certain countries.
yy Commercial Invoices
The commercial invoice produced by the seller establishes
among other things the weight of the goods, the number of
items, a description of the goods, and the price of the goods
being sold. Where LCs are also being used there should not
be any discrepancy between the details contained in the
two documents. The cost of the goods being imported assists
the customs authorities to arrive at a customs duty tariff.
However, it should be noted that they are under no obligation
to accept the value on a commercial invoice, if they disagree
with the value stated.
yy Packing Lists
A packing list is a detailed list of all the items to be
transported. A packing list typically contains as a minimum a
brief description of the items; their weight, the length, width,
height of each item, and how many items are contained in
each package. This allows a cubic capacity to be calculated for
each item. In addition, the shipping line will ask the consignor
to identify which items on the packing list may be stackable
and which items could be loaded on deck exposed to the
elements.
It is very important to understand that items loaded on the

open deck will be exposed to extremes of temperature, salt and
86 water from sea spray or rain, and the possibility of being lost
Notes overboard in the sea. Packing lists are required for customs
formalities as well.
yy Other Documents
Depending on the nature of the goods, the originating country
and the final country of delivery, various documents may also
be required. These may include documents such as:
yy Insurance certificates
yy Certificates stating that the goods meet a certain safety or
engineering standard
yy Data sheets relating to the management of certain
hazardous chemicals
yy Certificates verifying that pallets or packing materials
have been fumigated to avoid the importation of biological
pests
This list is by no means exhaustive and requirements often
change very quickly and with little warning.
Inland Waterways
Although the main subject of this chapter is deep-sea shipping
it must always be remembered that many ocean-going vessels
and barges are able to penetrate deep into some land masses
through the use of navigable rivers and canal systems.
Examples of well-known navigable rivers include the Amazon
in Brazil, the Nile in Egypt, the Yangtse in China, the Rhine-
in Europe and the Mississippi-Missouri in the United States
of America. In addition, many developed countries have
networks of canals that are capable of transporting cargo
between industrial centers.
Movement of commodities like tea, jute and spices in the

eastern sector, connected to the river port in Kolkata, was
among the early commercial drivers of pre-independence
India. Logistical convenience of river transport, which used to
be a determining factor in the location of industrial activity,
may be less today, though access to water for processing and
in some cases effluent treatment is still a consideration in
location.
Growth in this sector has been sluggish, with the outstanding 87
exception of the tidal river-canal system in Goa, where the Notes

Mandovi-Zuari-Cumbarjua system moved some 30 million ton
of iron ore in 2003-04 (GMOEA 2004).
IWT-based cargo movement becomes viable if technological

and physical viability and commercial potential exists and
operating policies of carriers and associated agencies are
conducive. Some factors that affect operational economics
are the availability of right-of-way (waterway); carriers
(navigational vessels); terminal facilities (jetties and ports)
and managerial and supporting infrastructure systems.
Check your Progress
1. A bill of lading is a _________ document.

2. The LC is sent to the seller’s bank in a different
country, which is known as the ________ bank.
3. Logistical convenience of river transport used to be
a determining factor in the location of ___________
activity.
4. ________provide services to the shipping lines in the
ports where the ships call.
Summary
Liner conferences are formal groups of shipping lines that
operate on certain shipping routes. Freight management
companies provide integrated door-to-door solutions for their
customers that may include arranging different modes of
transport, customs clearance and documentation. One very
important aspect of moving goods internationally by sea is
the associated documents required by various government
agencies, financial institutions and trading partners at both
origin and destination. Movement of commodities like tea,
jute, and spices in the eastern sector, connected to the river
port in Kolkata, was among the early commercial drivers of
pre-independence India. IWT-based cargo movement becomes
viable if technological and physical viability and commercial
potential exists and operating policies of carriers and
associated agencies are conducive.
88
Notes
1. Explain the structure of the maritime industry.
2. Elaborate the use of some common shipping terms.
3. What are the different types of documents required for
moving goods internationally by sea?
4. Give an account of Inland Waterways.
89
Unit 13 Notes
Air Transport
Objectives
following topics:
\\ Structure of Airlines industry
\\ Handling air Cargo
\\ Importance of Air Hubs and Spokes System
Introduction
Unlike sea transport, the air transport industry is only about
a hundred years old. Due to the very particular requirements
associated with the air cargo business it has developed
methods of operation that are unique in the world of logistics.
These tend to be most noticeable in the field of cargo handling
due to the restrictions imposed by the aircraft themselves. The
whole area of safety of operation and security from terrorist
attacks significantly impacts the business.
Due to the specialised nature of air transport this chapter

aims to give only a very brief overview. The advantages of
transporting goods by air are obvious. The goods in that cargo
may be carried securely to very long distances in a short space
of time. This delivers the possibility of reducing inventory
carrying for global businesses and allows certain perishable
goods to be available all year round instead of seasonally,
thus expanding markets. It can provide rapid emergency
support to industries where critical equipment is required
in a short timescale to avoid plant downtime and is able to
deliver essential humanitarian aid swiftly and effectively.
The disadvantages are the high unit costs as well as size and
weight restrictions. Security and safety considerations also
limit the type of cargo that may be transported by air.
Structure of the Industry

National governments have always taken a large and keen
90
interest in the way that the airline business is organised.
Notes This has led to international treaties regarding how the
business should be operated. For example, the Convention
for the Unification of Certain Rules Relating to International
Carriage by Air (often referred to as the Warsaw Convention)
was signed in 1929. This international agreement lays out
the rules relating to the conditions for international transport
by air, establishes the liabilities of international air carriers
and sets limits for their financial liability for damage, delay
or loss. There are many other such international agreements
and national restrictions that limit among other things access
to certain trade routes, overflying rights and the carriage
of certain types of cargo. National governments take a great
interest in the air transport industry due to strategic military
concerns and the potential effectiveness of air attack by
foreign military powers.
International Air Transport Association (IATA)

Along with its US equivalent, the Air Transport Association
of America (ATA), these two trade associations set many of
the standards of operation for the industry; examples include
standards related to safety, security, training, Unit Load
Devices (ULD) and many others. They also provide services
to their members such as the Cargo Accounts Settlement
Systems (CASS), which is a web-based system that allows
airlines and freight forwarders to make only one payment to,
or receive one payment from, airlines or cargo agents. This has
significantly reduced the burden of paperwork and in 2008, 18
million air way bills were processed through the system.
Airlines
These are the companies that own (or lease) and operate
the aircraft used to carry both passengers and cargo. The
national airlines of some countries are still owned by the
respective governments of the countries the airline represents
and are known as flag carriers. Some airlines specialise in
providing certain services only. For example, the so-called
budget airlines specialise in no-frills cheap air transport for
passengers. Others concentrate solely on-air cargo and a few
offer only heavy-lift air cargo options. It should always be
remembered that passenger aircraft often carry cargo in their 91
holds along with passenger baggage. Notes
Cargo Agents
These are freight forwarders who are licensed by IATA to
handle freight on behalf of customers who wish to send cargo
by air. IATA sets standards of operation, ensures that the
agents are insured and allows the agent to issue their own air
way bills known as House Air Way Bills (HAWB).
Airport Authorities
Airport authorities own (or lease) and operate the airport
infrastructure.
Air Cargo Handling

Unit Load Devices (ULD)
ULDs are the containers of the skies. They come in many
forms but perform exactly the same purpose as any transport
container. They allow cargo to be stowed efficiently and
safely while maximising the use of the available space. Many
ULDs are shaped to reflect the shape of the aircraft hold
and are therefore often specific for use in certain aircraft.
Air freighters may have a main deck and a lower deck in the
fuselage. The main deck is often loaded with flat metal pallets
of specific dimensions that carry the cargo secured by Netting
Lower Deck ULDs may be shaped to reflect the fuselage shape
and be made of light metal with a door or netting on one side
to allow for cargo stacking. IATA has developed a system of
identifying ULDs; the latest version of which came into force
from 1 October, 1993. There is also a system of type coding
ULDs that uses three capital letters, for example AMA or
AMU. The first letter is a description of the container, the
second describes the base dimensions, and the third describes
certain physical details such as the shape, load restraint
and handling required. If this is not complicated enough the
Air Transport Association of America has another system of
classifying ULDs. The IATA ULD technical manual provides
information on the entire cargo handling system.
92 Air Cargo Handling Equipment
Notes
Due to the physical restrictions imposed by aircraft design
sophisticated handling systems have been developed to quickly
and safely transfer cargo from the airport cargo handling
center to the aircraft itself. ULDs are moved around using
fixed conveying systems that consist of tracks fitted with
rollers that are often powered. These conveying systems
are also capable of turning the pallet to travel in a different
direction. For example, when a ULD is being rolled into a
cargo hold on the plane it may need to be turned through 90˚
to correctly position it for safe stowing inside the aircraft.
Documentation
Air Way Bills (AWB)
An Air Way Bill is a contract to transport goods by air and
is issued by the carrier airline. It limits the liability of the
airline and details the goods being carried. It also includes the
charges for this service. Unlike a sea-freight bill of lading, an
air way bill is a non-negotiable document.
They are sometimes used as through delivery documents by

road transport companies where the majority of the journey
distance has been completed by air. They may be used for both
domestic and international carriage of goods.
House Air Way Bills (HAWB)
A House Air Way Bill is issued by a freight forwarding
company that is entitled to do so. For example, an IATA cargo
agent would be entitled to issue a HAWB as they will have the
relevant insurances in place. And an issuer will assume the
liability as the carrier in the same way as the airline carrier
would for an AWB. These are most often used in the situation
where small cargo shipments are consolidated by the freight
forwarder, for onward shipment to the final destination. These
individual HAWBs for all the shipments consolidated will be
detailed in a Master Air Way Bill (MAWB), which details the
contract between the freight forwarding company and the
carrier airline.
Other Documentation 93
Notes
Packing lists, commercial invoices, certificates of origin and a
variety of other cargo or country- specific documents may be
required by the airlines, security services and customs services
at both origin and destination airports.
Air Hubs and Spokes

Due to the high unit costs associated with air transport,
created by relatively low volumes of cargo compared to other
transport modes, long distances and the high operating costs
of aircraft, air carriers utilise a system of air hubs. These hubs
are all around the world and strategically located relative to
their geographical position and proximity to markets for air
cargo.
These hubs are utilised by airlines, freight forwarding

companies and air cargo customers to gain the best efficiencies
from the use of carrying capacity over very long distances.
Cargo is consolidated by freight forwarding companies or the
airlines and then carried between air hubs where the cargo is
deconsolidated and either loaded on to another feeder aircraft
or mode of transport for the final destination. This does not
necessarily mean that the cargo will be carried by the shortest
route, but it generally means that the lowest cost of transport
is achieved.
Check your Progress
1. The goods in the__________ may be carried securely

to very long distances in a short space of time.
2. National governments take a great interest in the air
transport industry due to _____________________.
3. ______________________ is a web-based system that
allows airlines and freight forwarders to make only
one payment to, or receive one payment from, airlines
or cargo agents.
4. Air freighters may have a main deck and a lower deck
in the ____________.
94
Summary
Notes
The advantages of transporting goods by air are obvious.
The goods in that cargo may be carried securely to very long
distances in a short space of time. National governments have
always taken a large and keen interest in the way that the
airline business is organised. This has led to international
treaties regarding how the business should be operated.
Along with its US equivalent, the Air Transport Association
of America (ATA), these two trade associations set many of
the standards of operation for the industry. These are the
companies that own (or lease) and operate the aircraft used to
carry both passengers and cargo. ULDs are the containers of
the skies. They come in many forms but perform exactly the
same purpose as any transport container. An Air Way Bill is a
contract to transport goods by air and is issued by the carrier
airline. A House Air Way Bill is issued by a freight forwarding
company that is entitled to do so. Due to the high unit costs
associated with air transport, created by relatively low
volumes of cargo, long distances and the high operating costs
of aircraft, air carriers utilise a system of air hubs.

1. Discuss the significance of International Air Transport
Association (IATA).
2. What are the different aspects of Air Cargo Handling?
3. Describe the importance of Air Cargo Handling.
4. List the different types of documentation done in Air
Cargo Handling.
95
Unit 14 Notes
Intermodal and Multimodal

Transportation
Objectives
following topics:
\\ Strategies Used for Intermodal Transportation
\\ The Aim of Multimedia Transport System
\\ Information about Containerisation
Introduction
Around the world both the developed and rapidly developing
nations are investing very large sums of money in developing
their transport infrastructures. Roads, airports, seaports
and railways are all being developed, especially in countries
such as China and India. Massive investments in both high-
speed passenger and freight rail systems are being made.
China alone is investing US$17.6 billion in a passenger rail
line across the deserts of northwest China, US$22 billion in
a network of freight rail lines in Shanxi province in North-
Central China, US$24 billion in a high-speed passenger rail
line from Beijing to Guangzhou in South eastern China, and a
further US$88 billion in constructing intercity rail lines. It has
been compared with the development of the rail network in
the United States of America at the start of the 20th century
(source CILT World issue 19 May, 2009). China is by no means
alone in recognising the environmental and economic benefits
of rail links especially over long distances.
This chapter is primarily concerned with intermodal

transport. However, as railways play a key role in
transporting intermodal containers as well as carrying large
volumes of bulk freight such as coal, grain, fuel and other bulk
commodities some wider information on rail transport has
been included.
96
Definition of Intermodal Transportation
Notes
The following is a useful definition from the European
Conference of Transport Ministers; the movement of goods
in one and the same loading unit or vehicle, which uses
successively several modes of transport without handling of
the goods themselves in changing modes.
Undoubtedly the introduction of unitised loads in the form of

International Standards Organisation (ISO) containers and
pallets revolutionised the movement of freight from the 1960s
onwards. Pallets first appeared on the global transport stage
(courtesy of the United States military forces) in the 1940s.
The assembly of goods on to pallets allowed swift transfer of
loads from warehouse to truck or any other mode of transport
such as trains, ships or aircraft. The reduction in personnel
required and transit time was remarkable. In 1958, Fred
Olsen’s reported loading 975 tons of unitised cargo in 10 hours
with an 18- to 22-man longshore gang (stevedores) instead of
the usual 200 tons (Van Den Burg, 1975).
Containerisation and Multimodal Transportation

Ever since globalisation transformed the transport sector,
national boundaries have become permeable to penetration
by trade, creating the need for flexible transport solutions.
Intermodalizm and containerisation were the by-products
of this era and were poised to metamorphoses transport of
general cargo, moving it seamlessly through sea and land
arteries. Forty years ago, the physical process of exporting or
importing goods was arduous. Goods needed to be transported
by lorry to the port, unloaded into a warehouse and then
reloaded into the ship piece by piece.
Malcolm McLean’s idea of containerisation changed the basics

of cargo transport by standardising the dimensions of the
container and simultaneously improving the productivity of
ports by mechanising handling of container-carrying ‘cellular’
ships and reducing their handling to a few hours only.
Unitisation helped elimination of multiple handling of cargo
and made transfers quick, cheap and easy. As containerisation
came to stand for cargo care, it grew by leaps and bounds the
world over.
Indian Railway’s strategic initiative to containerise cargo 97
transport put India on the multi-modal map for the first time Notes
in 1966. Given the continental distances in India (almost 3000
km from North to South and East to West), rail transport
could be the cheaper option for all cargo over medium and long
distances, especially if the cost of inter-modal transfers could
be reduced. Containerised multi-modal door-to-door transport
provided the ideal solution to this problem. It was this idea
that saw the Indian Railways entering the market for moving
door-to-door domestic cargo in special DSO containers starting
in 1966.Though the first ISO marine container had been
handled in India at Cochin as early as 1973, it was in 1981
that the first ISO container was moved inland by the Indian
Railways to India’s first Inland Container Depot (ICD) at
Bangalore, also managed by the Indian Railways.
Multimodal Transport System

As we know, every mode of transport has its own strengths
and weakness in absolute as well as relative terms. These
strengths and limitations put challenges and opportunities
before surviving and growing in the competitive environment.
Furthermore, challenges before the transportation industry
have further been intricate in the last two decades, mainly
due to growing awareness about the alluring contribution of
logistics and supply chain management for sustainable growth
of the corporate enterprises. That is why, after realising
their limited strengths and emerging challenges, various
modes of transport have started cooperating with each other
to pool their recourses and facilities so as to have a win-win
situation to all while meeting the service expectation of their
customers. The beginning of the state-of-the-art transport
technology has given the impetus to the concept of multi
modal transportation, emphasising the coordination of two or
more modes to transport rather than in competition with each
other. Multimodal transport system has been defined as the
carriage of goods by at least two different modes of transport
on the basis of a multi-modal transport contract from place
in one country to a place designated for delivery situated in a
different country.
98 In another definition, multimodal describes a shipment
Notes that takes several different means of transportation; road,
rail, ocean, air, from its point of departure to its point of
destination. This meaning has evolved recently to limit the use
of this term to freight for which a single bill of lading covering
more than one of these alternatives is issued. In Multimodal
transport system, one transport document, and one rate and
through liability are used.
Multimodal transport, an old concept is a term used

to describe the linking of transport responsibilities,
documentation and liability in the movement of goods (by
land, sea, and air) using the existing infrastructure. This
linking results in improved transport efficiency and provides
the user with a single point of responsibility and greater cost
transparency.
The ultimate aim of multi-modelism is to make the movement

of goods from seller to buyer more efficient through faster
transit at reduced costs. Multimodal transport brings benefits
by enabling exports to be placed in the market places of the
world at a reduced cost and so be more competitive. Likewise
costs associated with imports will be reduced thus leading to
reduced foreign exchange outflow and cheaper imported goods.
Multimodalism is all about:
yy Coordination of the different modes of transport

yy Coordination of documentation
yy Coordination of the commercial and physical aspects of the
commercial transaction between the buyer and the seller.
Thus, multi modal/ inter modal transportation is the use of
more than one mode of transport for the movement of shipment
from the origin to its destination. Inter modal systems are
joint, point to point through transportation services involving
two or more modes on a regular basis. In this system, inter-
modal operators use multiple modes of transport to take the
advantage of the inherent economies of each and thus provide
integrated service at the lowest total cost.
Piggyback 99
Notes
Piggyback is the best known and most widely used inter
modal transportation system, which is an outcome of the
coordination between railways and roadways. It is also called
as Trailor on Fat Car’ (TOFC) or Container in Flat Car
(COFC). This system involves picking up goods in a trailer or
container by truck, delivering it to rail, removing the truck,
trailor and loading it on a flat car of rail for a long distance
by rail and at the destination, detaching the trailor from rail,
reattaching it to a truck which makes the final delivery.
This inter modal transportation system became very popular

and widely used from the 1960s in the USA and 1980s onward
in India, accounting for maximum freight cargo movements in
recent years.
Fishyback
The inter modal transportation system is achieved by
coordination of road and water modes of transport. It functions
in the same fashion as piggyback combines roadways and
railways. In other words, in fishyback service, the goods
containing boxes are loaded on the trailor which will be
further loaded on a ship. Again, at destination, it will be
unloaded from the ship and reloaded on truck train for final
delivery.
This coordinated transportation system is used widely in the

case of export/import freight cargo.
Trans-ship
Trans-ship refers to a inter modal transportation system
which is the combination of coordination efforts of railways
and waterways for the bulk movement of freight cargo. Again,
it functions in the same pattern.
Air Truck
As the name itself says, this inter – modal transportation
system is the outcome of the coordination between airways
and roadways. That is, it refers to exchange of goods
containers/ boxes between air and road carriers. It is also
referred to as birdy-back.
100
Check your Progress
Notes
1. Most of the countries are recognising the
environmental and economic benefits of
______________especially over long distances.
2. __________________ helped elimination of multiple
handling of cargo and made transfers quick, cheap
and easy.
3. Various modes of transport have started _________
with each other to pool their recourses and facilities
so as to have a win – win situation.
4. _______________ describes a shipment that takes
several different means of transportation; road, rail,
ocean, air.
Summary
Massive investments in both high-speed passenger and freight
rail systems are being made. Multimodal transport brings
benefits by enabling exports to be placed in the market places
of the world at a reduced cost and so be more competitive.
The assembly of goods on to pallets allowed swift transfer of
loads from warehouse to truck or any other mode of transport
such as trains, ships or aircraft. Indian Railway’s strategic
initiative to containerise cargo transport put India on the
multi-modal map for the first time in 1966. Multi modal/ inter
modal transportation is the use of more than one mode of
transport for the movement of shipment from the origin to its
destination.

1. Discuss the main features of multimodalism.
2. What do you understand by containerisation?
3. How would you define Intermodal Transportation?
4. Differentiate between piggyback and fishyback.

101
Unit 15 Notes
Case Study
Audio Duplication Service, Inc. (ADS)

Audio Duplication service is a compact disk and cassette
duplication and distribution company. Its major customer, the
big record companies, uses ADS to duplicate and distribute
CDs and cassettes. ADS stores the master tapes and, when a
customer requests it, makes a certain number of copies and
delivers them to its customers’ customer, music stores and
others point of sale such as department stores Wal Mart and
Kmart and electronic stores such as Circuit City and Best Buy.
ADS has about 20 percent of the $5 billion market, while its
two biggest competitors share another 40 percent.
Manager at ADS are currently trying to understand and react

to some difficult supply Chain- related issues.
Some of the big national retailers are putting pressure on

ADS’s customers, the record companies, to manage inventory
in the following way, known as a vendor-managed inventory,
or VMI, agreement. The record companies will be put in
charge of deciding how much of each album, CD and cassette
title is delivered to each store and when each delivery is made.
To help with these decisions, the record companies will be
provided with continuously update point-of-sale (POS) data
from each of the stores.
Also, the record companies will own the inventory until it

is sold, at which point payment will be transferred from the
retailers to the record companies. Since ADS provides the
record companies with duplication and distribution services,
the record companies have asked ADS to help with the
logistics of the VMI agreement.
In the past, ADS has shipped to the distribution centers of

large national retailers, and the retailers have arranged for
distribution to the individual stores. Now, the retailers are
providing strong incentives to ship directly to individual
stores. Of course, this means higher expenses for ADS.
102 In general, ADS’s shipping costs are increasing. Currently,
Notes ADS has a shipping manager who arranges with different
shippers to make deliveries on a shipment-by-shipment basis.
Perhaps there is a better way to manage these deliveries,
either by purchasing a fleet of trucks and doing the shipping
in house or by outsourcing the entire shipping function to a
third party. May be something between these two extremes
will be best.
Of course, ADS is facing even bigger issues, such as the future

of the audio duplication industry as online audio distribution
technology become more prevalent. In any event, each record
company periodically reviews its contract with its audio
duplication service, so management must address each of the
above issues effectively for the company to remain successful.
Questions
1. Why are ADS’s customers’ customers moving towards
VMI arrangements?
2. How will this impact ADS’s business? How can ADS
management take advantage of this situation?
3. How should ADS manage logistics?
4. Why are the large national retailers moving towards a
direct shipment model?
103
Unit 16 Notes
Warehousing
Objectives
following topics:
\\ Objectives of the Warehousing
\\ Functions within Warehouse
\\ Role and Benefits of Warehousing
\\ Different Types of Warehouses
Introduction
Warehousing is a support function for logistics and plays
an important role in attaining the overall objectives of an
organisation’s supply chain system. Warehouse is a place
where inventory is stored. It is basically an area of interface
for production, market, customers as well as suppliers. The
performance of warehouse is often judged by its productivity
and its cost performance.
In today’s highly interconnected and interdependent supply

chain networks, successful warehouse management involves
a thorough understanding of how the basic warehouse
management functions impact the supply chain. The
warehouse, being a critical link in the supply chain, serves
as the source of order status information for the customers,
provides inventory visibility for the supply chain partners and
for the enterprise as a whole.
Objectives of Warehouse
While focusing on warehouse objectives of improving profit
through reducing cost and enhancing customer service level,
the following have to be taken into consideration:
yy Utilising the storage space to the maximum

yy Higher productivity of labour
104 yy Reduced material handling
Notes
yy Reduced order filling time
yy Maximum utilisation of assets
yy Reduced operating cost
Functions within the Warehouse

Receiving: Collection of activities involved in proper receipt
of all materials coming into the warehouse, providing the
assurance that the quantity as well as quality is as per
ordered and distributing the materials to storage or to the
other organisational functions which require them.
Pre-packing: This is done in the case when products are

received in bulk from a supplier and repacked into single
consignments. The entire merchandise, which is received,
may be processed at once, or a portion may be held in bulk for
processing later.
Storage: Putting away the inventory received to complement

order picking. It can be explained as the physical holding of
merchandise while it awaits demand. Method of storage
depends on the size and the quantity of the items in inventory
and the handling characteristics of the product or its
container.
Order Picking: Physical selection of the products from their

locations after receiving the customer orders. In other words,
process by which items are removed from storage in order
to cater to a specific demand. A document named Pick List
containing details like sales order number, shipment details,
item details, quantity, etc. facilitates order picking.
yy Packaging and / or pricing: This is basically optional

which may be done after the picking process.
yy Sortation and / or accumulation: When a warehouse
stores multiple product, this activity is done.
yy Packing and shipping: Performance of tasks related to
dispatching an order. This includes the tasks like checking
whether order is complete or not, packing material in an
appropriate shipping container, preparation of shipping
documents, including packing list, address label and 105
the bill of lading, weighing the shipments to determine Notes

shipping charges, accumulate orders by outbound carrier,
loading trucks etc.
yy Traffic management: Choosing the best mode of
transportation for inflow and outflow.
The nature of warehouses within supply chains may
vary tremendously, and there are many different types of
classification that can be adopted, for example:
o by the stage in the supply chain: materials,
work-in-progress or finished goods
o by geographic area: for example, a parts
warehouse may serve the whole world, a regional
warehouse may serve a number of countries, a
national warehouse may serve just one country, or
a local warehouse may serve a specific region of a
country
o by product type: for example, small parts, large
assemblies (e.g. car bodies), frosen food, perishables,
security items and hazardous goods
o by function: for example, inventory holding or
sortation (e.g. as a ‘hub’ of a parcel carrier)
o by ownership: owned by the user (e.g. the
manufacturer or retailer) or by a third-party
logistics company
o by company usage: for example, a dedicated
warehouse for one company or a shared user
warehouse handling the supply chains for a number
of companies
o by area: ranging from 100 square metre or less to
well over 100,000 square metre
o by height: ranging from warehouses about 3 metre
high through to ‘high-bay’ warehouses that may be
over 45 metre in height
o by equipment: from a largely manual operation to
a highly automated warehouse.
106
The Role of Warehouses
Notes
The prime objective of most warehouses is to facilitate the
movement of goods through the supply chain to the end
consumer. There are many techniques used to reduce the need
to hold inventory, such as flexible manufacturing systems,
supply chain visibility and express delivery and many of
these have been encompassed in a range of supply chain
initiatives, for example Just-in-Time (JIT), Efficient Consumer
Response (ECR) and collaborative planning, Forecasting and
Replenishment (CPFR). However, as part of this movement,
it is often necessary to hold inventory, particularly where the
following two conditions apply:
yy The demand for the product is continual: In

some industries, such as fashion, a particular style
may be manufactured on a one-off basis. Under these
circumstances, the goodscan be ‘pushed’ through the
supply chain to the stores where they are sold and there
is therefore no need to hold inventory in warehouses.
However, most goods are offered for sale on a continual
basis and therefore they need to be ‘pulled’ through the
supply chain based on customer demand.
yy The supply lead time is greater than the demand
lead time: Where goods are ‘pulled’ through the supply
chain, this can only be achieved without inventory where
the supply can take place within the lead time offered
to the customer. For example, if goods are offered to
customers on a next-day-delivery lead time, it is often the
case that materials cannot be sourced, goods manufactured
and transport undertaken within this timescale. In this
situation, the goods must be supplied from inventory.
Inventory is therefore, often beneficial to smooth variations
between supply and demand. In addition, even when the full
cost of inventory is taken into account it may be more cost
effective to build up inventory so as to reduce costs elsewhere
in the supply chain.
Examples of this may be to enable manufacturing economies of

scale, to obtain purchasing discounts for large quantity orders,
to build seasonal stock in advance, and to cover for production
shutdowns. Also, inventory may be held just in case specific
undesired events occur in the future, as with humanitarian 107
aid supplies (e.g. tents and blankets) and power station spares Notes
(e.g. steam turbine rotors).
Benefits of Warehousing
Economic
This refers to the overall reduction in the logistical costs
by utilising one of more benefits. The major benefits are as
follows:
Consolidation: Material from a number of manufacturing

plants destined to a particular customer on a single shipment
are consolidated and received by the consolidating warehouse
which results in reduced transportation cost. The advantage
is that it combines the flow of logistics from several small
shipments to a specific market area. Several firms may also
join together and use this consolidation service, which will
benefit each shipper individually.
Bulk Breaking: Various combined customer orders are

received from a manufacturer and shipped to individual
customers. A break bulk warehouse sorts or splits individual
orders and delivers them locally.
Cross Docking: This facility is similar to bulk breaking but

involves multiple manufacturers. Truckloads of products
arrive from multiple manufacturers, which are sorted
customer wise. Then they are loaded into the truck destined
for the appropriate customers. This system is widely used by
retailers.
Postponement: A warehouse with facilities for light

manufacturing activities like packaging and labeling can
enable postponement of final production until the exact
demand is known. The benefit here is a reduced level of risk
and lower inventory as the final labeling and processing
activity is done only on knowledge of the actual demand and
thus the basic product is used for a variety of labeling and
packing configuration.
Stock Piling: Stocks piled in the warehouse act as buffer

inventory which help to tide over situations of material
constraints and customer demands.
108 Service
Notes
Service benefits may not reduce costs and the justification
for a warehouse based on service is an increase in the market
share, revenue and thus an increase in margin. The benefits
are as follows:
Spot Stocking: A selected amount of a firm’s product line

is placed in a warehouse to fulfill customer orders during a
key period of maximum seasonal sales. Features include an
arrow product assortment and stocks placed in many small
warehouses catering to specific markets over a limited time
horizon.
Assortment: Various product combinations are stocked in

an assortment warehouse in anticipation of customer orders.
This is similar to spot stocking except that this has a broader
product line, is limited to a few strategic locations and
functions throughout the year.
Mixing: Similar to the bulk breaking process with an

exception that various different manufacturer shipments
are involved. Truckloads of products are shipped from
manufacturing plants to warehouses. Upon arrival at mixing
warehouses these are unloaded and the desired combination
of specific product for a particular customer or market
is selected. Inventory is sorted to suit specific customer
requirements.
Components and Materials for Assembly Units: Such a

warehouse supports production by supplying components or
sub – assemblies in a regular and timely manner.
Warehousing Alternatives
The various warehouse strategies are as follows:
1. Private Warehouse
These refer to having the entire facility under the financial
and administrative control of the firm, i.e. the firm owns the
product and also operates the warehouse. The actual facility
can be either owned or can be taken on lease, for a short
period. The major benefits of this warehouse are:
Control: The enterprise has complete decision-making 109
authority over all activities in the facility thus enabling Notes

integration of warehousing operations with other internal
processes of the firm.
Flexibility: Operation policies and procedures can be

formulated and altered to suit individual needs.
Cost: The basic objective of this warehouse is not profit –

making, thus the cost aspects are less compared to public
warehouses.
Marketing: An intangible benefit is a marketing advantage

over other firms due to the firm’s name attached with the
warehouse thus enhancing customer perception.
2. Public Warehouse
These are similar to private carriers in transportation
service. Services are provided to others by firms that have
warehousing space, storage facility and material handling
equipment for their own use and are used a lot in logistical
systems. These are designed to handle the most general
packaged products or commodities, which would not require
specialised storage or handling arrangement. The products
usually stored are food grains, paper rolls, bulk material
(cement, fertilizers), furniture, chemicals, etc.
A major advantage of a public warehouse is that they provide

financial flexibility and economies of scale. More operating
and management expertise is provided, as warehousing is
the core business for such firms. Variable costs are lower
compared to private facilities. With more customers and
higher volumes, the fixed costs are spread over resulting
in economies of scale. Public warehouses are of great use
to firms, which are newly formed, and have the desire of
expanding their distribution network and thus needn’t invest
in developing a private warehouse. They can alternatively
hire a space in a public warehouse or channel their funds into
other activities, which generate more revenue. This would
improve their performance and thus increase the return on
investment. Location flexibility is also available through
public warehouses. Firms can also close storage facilities in
110 one market and open at other places without any financial
Notes losses.
3. Contract Warehouse
Combine features of both public and private warehouses.
The risk is shared and there is a long-term relationship that
will result in lower costs. Benefits include economies of scale,
flexibility, information, and equipment sharing among clients.
4. Other Types of Warehouse
General Merchandise Warehouses: Deal in all commodities
except specialised or commodity items. These can either be
public or private.
Refrigerated/Cold Storage Warehouses: Used for storing

perishable items, which are kept at low temperatures to
preserve quality. These are expensive and a variation of this
type of warehouse is known as the controlled temperature
warehouse, which is lesser expensive and is used for storing
fruits, milk etc.
Bonded Warehouses: A special type of warehouse whereby

distributors can produce, transfer and store products without
paying excise taxes and duties on them. The government
licenses these to various parties.
In-bond Warehouses: Bring in imported merchandise, store

as well as display the merchandise in shops, which sell for
export or sell merchandise, which is directlyexported.
Special Commodity Warehouses: These are specialised and

handle a specific or a bulk commodity.
Combination Warehouses: Warehouses, which combine all

the above facilities.
Nature of Warehousing Costs

The warehousing costs can be either:
yy Fixed Costs: Incurred irrespective of how much or how
little throughput is experienced.
yy Variable costs: Vary with the throughput.
111
Decisions in Planning the Warehouse
Notes
Warehouse Site Selection
Cost and service are the key considerations here. The other
supplementary factors are:
Nature of Product: This influences the number and location

of warehouses. For perishable commodities, proximity to
the consumption centers is essential. It is preferable to have
limited number of warehouses, which have delivery limitation
in terms of distances and geographical reach.
Infrastructure: The efficiency of the warehouse operations

improves with the availability of suitable infrastructure
like roads, utilities (water, electricity, communication etc)
and labour, the unavailability of which will increase the
transportation cost. For example, for cold storage, availability
of electricity is a major influencing factor.
Access: Again, when there the warehouse is located at a place

where there is little accessibility, the transportation costs will
escalate.
Availability: The availability of warehouse space is an issue,

especially in the metros.
In the case of non-availability, alternative location at the

outskirts will be the alternative, but which will increase the
transportation costs.
Market: To offer better service to customers, warehouses need

to locate in proximity to consumption centers so that frequent
deliveries by customers in small quantities can be organised at
a limited time.
Regulations and Local Taxes: Government regulations

guide the site selection for certain hazardous chemicals,
explosives etc. In such cases, there are limited options for
site selection. Also, the regional sales tax and octroi charges
influence the site selection. With a lack of uniformity in the
sales tax structure across the States, warehouses will be
planned to make maximum utilisation of this.
112 Product-Mix Consideration: The product mix is directly
Notes related to the design and operation of a warehouse.
Considerations such as product sales, demand, weight, bulk,
packaging, etc. needs to be made.
Future Expansion
Some consideration about the estimated requirements for
future operations in case of expansion must be made. A five to
ten year expansion plan must be considered while establishing
the warehouse facilities so that normal operations are not
disturbed during expansion.
Selecting the Material Handling System
As movement is the primary function within a warehouse, it is
necessary to select the appropriate material handling system.
Warehouse Layout
yy The warehouse layout needs to fit specific needs.
Considerations to be made while planning the layout and
operation are:
yy Deciding on the receiving and shipping locations
yy Identify minimum paths for movement of equipment and
people, for speedy storage and retrieval
yy Classifying items as slow, medium and fast and then
allocating separate area for these
yy Placing the material handling systems at their assigned
location
Determination of Warehouse Space and Design
yy A sales forecast or total tonnage expected is used to
estimate the final sise of the warehouse required. A
number of techniques like linear programming, simulation,
etc. are used to determine warehouse size.
yy Warehouse designing is a specialty planning activity
usually done by an architect. Specifications like size of
warehouse, lay-out, path of material- handling equipment,
are required. The warehouse must be designed for
maximum utilisation of available space and material
handling equipment.
Factors to be considered while initiating warehouse 113
operations: Notes
yy While stocking the warehouse, a complete list of inventory,

needs to be obtained. Quantities of individual stock keeping
units to be determined while planning the warehouse.
yy Hiring and training of personnel is an important issue.
There must be clarity about the role played by personnel
hired for specific requirements and each group of
employees needs to be given special training.
yy The management must ensure that work procedures are
developed and also understood by personnel.
yy Protection against theft of merchandise must be ensured.
Adequate security measures to be undertaken by allowing
only authorised personnel to enter the premises, where
computerised inventory control and processing systems are
of use.
yy Product deterioration arises from careless storage and
non–compatibility among products stored in the same
facility. Careless handling by warehouse employees is a
matter of concern.
yy When firms handle a large number of products it is
economical to utilise computers for billing and inventory
control. The computer inventory needs to be compared with
the physical stock
yy Accident prevention is an important consideration.
Warehouse Management Systems

This is a software solution to control movement and storage of
materials within a warehouse, transportation management,
order management and a complete accounting system. The
following activities are managed through a WMS:
yy Inbound: Functions like addition of a new purchase order,

palletisation, receipt of goods, putting away received goods
etc.
yy Inventory Management: Transferring inventory, holding
and adjusting inventory, awareness of inventory balances
etc.
114 yy Outbound: Tasks such as creating an order of shipment,
Notes shipping multiple orders, allocation of orders, shipping
order status etc.
Check your Progress
1. The performance of _____________ is often judged by

its productivity and its cost performance.
2. Inventory is often beneficial to smooth ____________
between supply and demand.
3. A _______________warehouse sorts or splits individual
orders and delivers them locally.
4. _____________flexibility is also available through
public warehouses.
Summary
The warehouse, being a critical link in the supply chain,
serves as the source of order status information for the
customers, provides inventory visibility for the supply chain
partners and for the enterprise as a whole. While focusing on
warehouse objectives of improving profit through reducing
cost and enhancing customer service level, few points have
to be taken into consideration. The prime objective of most
warehouses is to facilitate the movement of goods through
the supply chain to the end consumer. A major advantage of
a public warehouse is that they provide financial flexibility
and economies of scale. For warehouse site selection, cost and
service are the key considerations. Warehouse Management
Systems is a software solution to control movement and
storage of materials within a warehouse.

1. Elaborate the order picking function of warehouse.
2. How would be the nature of warehouses determined?
3. Give an account of Warehousing alternatives.
4. What factors are to be considered while initiating
warehouse operations?
115
Unit 17 Notes
3PL and 4PL

Objectives
following topics:
\\ Advantages of Outsources
\\ 4 PL System
\\ Key Trends in Logistics Outsourcing
\\ Selection of a Service Provider
Introduction
Logistics involves getting the right goods to right place at the
right time at the right cost in the right condition. To survive
in today’s highly competitive markets, companies are focusing
on their core competencies to adopt outsourcing as a strategic
solution to improve quality of service and also reduce cost of
key and non-core activities. An accepted trend today is to form
a collaborative relationship with logistics service providers
on the basis of the backbone of information technology, for
integrating knowledge-based supply chain.
Business organisations across the world are struggling for

competitiveness for both growth and survival. Customers
are demanding more and more value-added services from
prospective suppliers for the amount spent. Business
organisations have started reviewing business processes and
realised that cost cutting and differentiating in value delivery
systems is essential. Focusing on core business areas can be
done throughout sourcing non-core operations to experts in
the field.
Logistics operations are an area of specialised function and

a majority of marketing and manufacturing organisations
do not have the requisite expertise in housed. Thus, there
is a requirement for outsourcing operations to experts in
the field. It has become an accepted practice to use strategic
116 partnerships that are known as ‘third party service providers’
Notes in integrated logistics.
Most companies consider using the services of a 3PL in their

supply chain operations when they realise that it is essential
in providing efficient and effective competitive customer
service which requires huge investment and is difficult to
develop on their own.
Advantages of Outsourcing
Outsourcing has the following advantages:
1. Focus on core competencies
yy Management is freed from repetitive/mundane tasks,
reduces investment and generates cash.
yy Organisation can concentrate on core competencies.
2. Scope to adopt “best-in –class” practices
yy Vendors have considerable strength and focus on
outsourced processes. To remain competitive, they are
continuously looking to improvise their services and adopt
best practices to make them more efficient.
yy Ithelps organisations achieve faster, efficient, effective and
more economical business process.
3. Organisations become more competitive
yy Can respond more effectively to changing demands.
yy Allows companies to gain more scalability.
yy Outsourced activities allow companies to have greater
leverage in responding to changes and to gain market
access and expand.
4. Reduced cost and advanced technologies
yy Vendors often implement latest technologies to make their
processes and services. Companies can take advantage of
these technologies, which they might not be always able to
do if they were conducting activity in-house.
yy Vendor’s economies of scale helps drive down overall cost
in the system, thus enabling companies to realise more
productivity and efficiency.
117
First Party Logistics
Notes
First Party Logistics are companies, which do their own
logistics activities.
Second Party Logistics

Second party logistics people provide their own assets such as
truck owners, warehouse operators etc.
Third Party Logistics

Third Party Logistics Provider (3PL) performs logistics
services on behalf of another company. 3PLs provide the
management skills along with the physical assets, labour
and systems technology to provide professional logistics
services, relieving companies of the responsibility of
performing these services themselves. 3PL’s typically can
provide transportation, warehousing, pool distribution,
management consulting, logistics optimisation, freight
forwarding, transportation management, rate negotiations,
cost evaluations, and contract management services. 3PL is
the function by which the owner of goods outsource various
elements of the supply chain to one 3PL company that can
perform the management function of the clients in bound
freight, customs, warehousing, order fulfillment, distribution,
and outbound freight to the clients customers. 3PL is a
service provider who gives service for one or more portfolios
of services in stand-alone or integrated manner with own or
leased or contracted assets or services.
A 3PL can also be described as a contract logistics service

provider who manage inventory/material flow between
companies and encompasses all processes and activities such
as transportation, warehousing, documentation.
Common 3 PL functions are as follows:

1. Transportation Management
yy 3PLs fleet (or alliance partners) offer optimised network to
serve their customers.
118 yy 3PLs plan load management, routing, equipment and
Notes driver management by Shipment Management System
(SMS).
yy SMS can be effectively integrated with Warehouse
Management Software (WMS), to provide integrated
logistics solutions concepts such as multi-stop workload
or less than truckload which are often used to serve
customers better.
yy Multi-vendor consolidation reduces overall costs. Full
truckload economies can be used to combine freight from
different vendor to common destinations.
2. Warehouse management
yy 3PLs run and manage warehouses using Warehouse
Management Systems, radio frequency scanning and bar
code labeling
yy 3PLs manage and track the movement of goods from initial
receipt to outbound shipment.
yy Real time, periodic and accurate information can be
provided to manage inventory and demand better.
yy Additional services such as advanced shipment
notifications can be generated to inform the retail partners
in the supply chain.
3. Packaging
yy 3PLs often have ability to do final product packaging in
their warehouse, thus eliminating the need to ship product
to offsite packaging companies. This in turn means reduced
product handling, reduced cycle time and reduced costs.
yy 3PLs can offer variety of packaging services like custom
pallets, display shippers, inserts and coupons, labeling and
printing, repackaging / conversion and also wrapping and
bundling.
Advantages to Companies by Using 3PL Services

yy Focus on core competencies: Outsourcing enables
companies to focus on the core businesses and strengths.
The companies limited resources can be saved and the
company can remain focused on what it can do best.
yy Lower Investment: Organisations can outsource and 119
save a large amount required for building logistics Notes

assets, networks and facilities such as warehouses. As
an alternative or these investments, the companies can
outsource these requirements by outsourcing and investing
in their core processes.
yy Enhanced technological capabilities and flexibility:
Utilisation of technological capabilities has enhanced
the efficiency of logistics operations. But, it may not be
feasible always for companies to invest in newer systems
or upgrade their existing systems. However, deploying
third party logistics providers can insure against
such technological changes. 3 PL often invest in such
technologies for providing competitive services.
yy Best practices: Outsourcing logistics to third party logistics
enables companies to implement best practices and also
allows organisations to achieve best performance. These
are:
o Essential characteristics of a 3 PL
o Solutions Orientation
o Logistics Know-how
o IT Capability
o Management and organisational Skill
o Innovativeness
o Independent and best of breed approach
Fourth Party Logistics

Information technology plays a key role in logistics and supply
chain management. In fact, logistics integration, which is
a complex exercise, is completely dependent on IT support.
Third party logistic suppliers provide logistics solutions to
clients on the basis of their domain knowledge they have
acquired over the years. 4 PL companies provide logistics
solutions built around the domain knowledge provided by
third party logistics companies. Thus, 4 PLs have emerged
out of the vacuum created by 3PLs. Fourth Party Logistics
120 (4PL) is the integration of all companies involved along the
Notes supply chain. 4PL is the planning, steering and controlling
of all logistic procedures (for example flow of information,
material and capital) by one service provider with long-term
strategic objectives. Fourth-party logistics (4PL) has evolved
as a breakthrough supply chain solution comprehensively
integrating the competencies of third-party logistics (3PL)
providers, leading edge consulting firms and technology
providers.
4 PLs see the process and what is required for the process
to succeed. A 4PL is a supply chain manager and enabler
who assemblies and manages resources, build capabilities
and technology with those of complimentary service
providers. They act as the first point for delivering unique
and comprehensive supply chain solutions. 4PL leverages
combined capabilities of management consulting and
3PLs. They act as an integrator assembling the resources,
capabilities, and technology of their own organisation and
other organisations to design, build and run comprehensive
supply chain solutions. 4 PL is an emerging trend and it
is a complex model and offers greater benefits in terms of
economies of scale.
Features of a 4 PL
yy Covers the customer’s entire supply chain
yy Collaboration between two or more logistics service
providers on a resource-sharing
yy Basis for extending logistics solutions to a common
customer.
yy Flexible arrangements
The requirements of a 4 PL:
yy 3PL cost advantage are one time achieved through the

contract process
yy Performance and competency across the logistics network
yy Logistics planning and consulting
yy IT support
yy Operative and administrative logistics functions
yy Customer Relationship Management 121
Notes
yy Linking analytical capabilities with strong implementation
and operational capabilities
yy Building a high level of customer confidence in outsourcing
and its solutions
yy Offering transparent and flexible win-win contracts
Advantages to companies using 4PL services:
yy Reduced inventory and cycle time.
yy Improved delivery performance.
yy Lower supply chain cost.
yy Improved order fulfillment, capacity utilisation.
yy Overall productivity.
4 PL attempts to do the following to create value by:
yy Reduction of complexity/eliminate redundancy.
yy Economics of scale
yy Tailor made solutions
yy Improved customer service at reduced cost.
yy Access to new technology.
Selection of a Service Provider

Selection of a service provider is a strategic one and has long-
term effects upon the customer service capabilities of an
organisation.
Major issues to be considered before deciding on a 3PL or 4PL

partner:
Switching cost: Outsourcing logistics services results in

reorganising the existing assets of a company in tuning with
the working methodology of the service provider. It includes
activities such as management of existing assets, fully or
partly to the service provider, deploying existing assets
on lease to service provider and divesting existing assets
and completely switching over to the usage of a logistics
infrastructure by the service provider. A high degree of risk is
122 involved in each of the activities. Though outsourcing reduces
Notes cost substantially, switching over to other service providers in
terms of poor customer service during the period of transition
and stabilising new system will cause more loss.
Degree of control: The firm, which is outsourcing needs to

be particular about the degree of control over activities of the
service provider, for getting the desired service by the end
user. It is not possible to have direct control over the activities
of the service provider but the service provider should ensure
timely availability of information to monitor activities.
Degree of outsourcing: The following factors influence an

organisation’s logistics outsourcing in part or in total:
- Existing logistics infrastructure of the company
- Policy of management for third party involvement
- Anticipated benefits
- Product portfolio of the company
The areas of responsibility and authority both at the outsourcer’s

and service provider’s end must be clearly differentiated.
Channelising logistics services to suit the needs of channel

partners:
Logistics service standards are to be quantified as per

requirements of channel members who service the end
users or consumers in turn. Logistics acts as a key enabler
for efficient channel management. Channel and logistics
management must go together for effective and efficient
physical distribution system.
Interface: Suitable co-ordination through an intelligent

interface is necessary for proper working of two organisations
together in partnership. A match of cultures is essential.
Proper interface between employees of both organisations

is very important for formulating policies and guidelines
for smooth operations of the outsourcing firm and service
provider. Mismatch in technologies used at the two ends
may result in problems too. Differences in technologies used
in communication, material handling, storage, inventory
management may cause delays and errors resulting in 123
performance below the expected level. Notes

Key Trends in Logistics Outsourcing
The following are some of the important observations from
logistics outsourcing:
1. Adoption of Internet, ERP, SCP and SCE technologies

continues to accelerate
yy Many ERP systems are used for financials, payroll
and HR, but not for core operations.
yy Most ERP systems lack logistics service provider-
specific functionality forcing the use of customised
solutions.
yy Need to increase intelligence and productivity of
ERP by adding Internet communication technology,
Supply Chain Planning and Supply Chain Execution
components
yy ROI from these technologies is often unclear.
2. Global visibility has now become a basic requirement
yy Customers desiring to decrease transport costs,
increase delivery reliability and cross docking activity,
and shorten cycle times are demanding end-to-end
visibility of goods.
yy For example: Shippers not only want to be able to
track their goods via the Internet but also to receive
automatic notification when a shipment is deviating
from its schedule.
yy Logistics service providers need to build or buy
Inventory Visibility in the Supply Chain to meet this
requirement.
3. Most carriers and 3PLs are unprepared to move to
strategic supply chain partnerships
yy In India, most carriers and 3PLs, are unprepared to
move from a transaction-based customer relationship
to strategic supply chain partnerships with customers.
yy Shippers expect their logistics providers to help
them improve supply chain processes and increase
revenues.
124 yy Customers will succeed via mass customisation and
Notes Web commerce initiatives. Logistics suppliers need to
respond to such initiatives.
yy SCM IT tools will help in facilitating of cross-docking,
delayed allocation, in-transit merge, postponed
assembly and other value-added services, increasing
their customers’ supply chain agility and velocity.
yy Innovators will use IT to move beyond tactical
logistics to influence product and procurement
strategies.
4. Ability of matching market Demand with available
Supply Leveraging suppliers’ distribution systems and
collaborating closely with them to ensure seamless
information flow across the supply chain.
yy Using tactical initiatives such as sales promotions
and pricing changes to shift demand towards in-stock
products and accessories.
yy Usage of scientific tools for better demand forecasting.
5. Outsourcing of non-core activities
yy Increasing number of organisations are now
outsourcing their non-core activities to specialist
logistics service providers for whom it’s their core
business.
yy Past cost centres have now become present profit
centres and the focus has turned to innovation and
continuous improvement.
Fig 17.1: A holistic view of Logistics Service Provider

125
Service Level Agreement (SLA)
Notes
SLAs should summarise the contract obligations and are
usually a part of the initial contract agreement. They are
likely to include all aspects of outsourcing provision and, as
well as being a definition of the service that is to be provided,
they should specify the level of service to be achieved. Both
contractors and users should be involved in drawing up the
SLA.
Typically, an SLA will include:
yy description of the service to be provided; service standards

that are to be met;
yy client and provider responsibilities;
yy provisions for compliance (legal, regulatory, etc);
yy monitoring mechanisms and reporting requirements;
yy dispute resolution;
yy compensation for service level failure;
yy performance review procedure and timetable;
yy revision procedure for activity or technical change.
Monitoring an Outsourced Logistics Operation

Whether running a logistics operation as an in-house manager
or as a third-party contract manager the basic reasons for
monitoring the operation are very similar to measure whether
the operation is meeting set service levels at an acceptable
cost. The major difference is that for an outsourced operation
there will be certain selected metrics that will need to be
provided to the client company. These metrics will also be used
to confirm to them that the operation is being well run and
that service levels are being met. In addition, these metrics
will relate particularly to the service level agreement and the
main outsourcing contract.
Different methods of monitoring the cost and performance of a

logistics operation are described in. These are usually linked
to the twin goals of cost and service performance achievement
or improvement. Further to this there are also a number of
126 other monitoring activities that are more specific to outsourced
Notes operations.
Linking these together, the main methods for monitoring and

controlling a 3PL are, therefore, likely to include:
yy Monitoring against the contract.

yy Monitoring against the SLA (Service Level Agreement):
The service level agreement should identify key
performance measures and link the supplier’s payment to
performance against them.
yy Budgetary control
yy Management information and metrics
yy Review meetings: There should be a series of meetings to
enable performance review and to investigate variance
analysis. Dependent on the issues involved, meetings will
vary with regard to regularity, personnel, etc. (there are
likely to be quarterly strategic meetings between senior
management and weekly operational meetings between
supervisors).
Check your Progress
1. Focusing on core business areas can be done through

outsourcing __________ to experts in the field.
2. A __________can also be described as a contract
logistics service provider.
3. _____________ consolidation reduces overall costs.
4. Business organisations across the world are
struggling for competitiveness for both _________ and
__________.
Summary
Logistics operations are an area of specialised function and a
majority of marketing and manufacturing organisations do not
have the requisite expertise in housed. First Party Logistics
are companies, which do their own logistics activities. Second
party logistics people provide their own assets such as truck
owners, warehouse operators etc. Third party Logistics 127
Provider (3PL) performs logistics services on behalf of Notes

another company. Information technology plays a key role in
logistics and supply chain management. Selection of a service
provider is a strategic one and has long-term effects upon the
customer service capabilities of an organisation. SLAs should
summarise the contract obligations and are usually a part of
the initial contract agreement. The service level agreement
should identify key performance measures and link the
supplier’s payment to performance against them.

1. What are the major issues to be considered before
deciding on a 3PL or 4PL partner?
2. What are the basic reasons for Monitoring an outsourced
logistics operation?
3. List the advantages to companies by using 3PL services.
4. Give an account of Third Party Logistics.
128
Notes
Unit 18
Logistics Planning and Strategy
Objectives
following topics:
\\ Basic Features of Logistics
\\ Strategic Logistic Planning
\\ The Components of Information Decisions in Supply Chain
Strategy
\\ Competitive and Generic Strategies
\\ Implementation of Strategies
Introduction
In the modern-day dynamic business environment,
competitive pressures and customer demands, force a large
number of firms to shift their priorities towards understanding
the logistics supply chain process for delivering superior value
to customer. In order to achieve this objective, the historic role
of warehousing, transportation, storage, and handling have
started with a more comprehensive role, which pervades the
entire supply chain.
Logistics strategy facilitates gaining a competitive edge to

support emerging technologies.
Basic Features of Logistics

As a service function logistics involves the four basic features:
1. Reliability: Influences the degree of trust, which a

supplier can have in a company’s capability for honouring
commitments. The supplier has to be perceived as reliable
and for this the supplier needs to exhibit certain service
characteristics. A high degree of reliability in terms of
inventory and material delivery is expected from the
supplier end.
Thus, a key objective of the logistical system needs to be 129
reliability in meeting the needs of the customer, according Notes
to the resource planning.
2. Responsiveness: It is the speed with which customer
demands are being responded. Responsiveness is expected
at all levels of the supply chain. Response to pre-sales
enquiry by using latest available information and
communication technologies is an important strategy.
Supplying material as per customer needs and frequent
deliveries in fewer lot sizes are important. Deliveries can
also be made at the various assembly centers, which are
in proximity to the markets. A firm will gain a winning
edge in competitive markets through a responsive
strategy.
3. Relationship: Firms spend huge amounts in Customer
Relationship Management (CRM) related activities for
development of long-term relationships to retain customers
and also reduce the element of risk in demand management.
Partnering with the right supplier and considering the
supplier operations as an extension of its own operations
will enhance the efficiency and effectiveness of the supply
chain.
4. Rationalisation: This refers to reducing the supplier
base and partnering with select suppliers. The supplier’s
facility is treated as an extension of the buyer’s facility
and there is sharing of information, experience and
resources for mutual advantage.
Requirements for an effective Logistics Strategy

Characteristics of an effective logistics strategic planning and
project management are as follows:
Dedicated Planning Resources and Programs: Unless

proper resources are set aside for long-term planning, it will
not be carried out to the level of necessity to assess ways of
changing economic, technological, competitive, demographic
and regulatory environments affecting long-range requirement
of logistics. A dedicated logistics planning team needs to
be organised. The logistics planning team should include
130 analytical and operational backgrounds that are required to
Notes resolve complex issues.
Formal Logistics Planning Methodology: Logistics is

filled with interdependent activities, which impact other
areas of the organisation. Planning activity goes through
three important phases such as investigation, vision and
implementation. In the investigation phase, a logistics audit
is conducted and the company’s current performance and
practices are compared with world-class practices. The vision
phase involves application of world-class practices to the
current environment. In the implementation phase, detailed
project plans for completing the recommended initiatives are
developed and monitored.
Strategic Logistics Planning

Business firms have been forced to reengineer or redefine
their business process so that efficiency and effectiveness
can be brought into the operations. The main reason for this
has been the increasing globalisation of business activities,
intense competition and uncertain markets. Different
firms have different process of strategy formulation and
implementation. The process of strategic logistics planning
has the following steps:
yy Analysing the external and internal environment,

which will help to determine the resource requirements,
limitations and any other factors
yy The environmental analysis identifies the company’s
strengths, weaknesses, opportunities and threats in
customer service.
yy SWOT enables in formulating the appropriate resources
and the logistics mix or resources required for achievement
of organisational goals.
yy A structural design is needed to implement the strategy.
The primary concern here is the strategic planning of
warehouses; transportation and information flow in the
entire supply chain. A proper interface between channel
structure of the firm and its logistical network can be done
with the help of a structural design.
yy The efficiency of the functional elements in the movement 131
of information and inventory across the supply chain will Notes

influence the success of the strategy implementation.
yy Selection of transportation route, mode and carrier
operator is a key aspect for offering and maintaining a
reliable and consistent service level.
yy The role of material procurement and management also
cannot be ignored.
yy Implementing the strategy is absolutely important and
its success depends on efficiency of the human resources,
equipment and the interfaces involved. A major task at
the level of operation are order registration, processing,
picking, replenishment and dispatching.
Thus, the process of strategic logistics planning will improve
the overall responsiveness of the organisation.
Fig 18.1: Strategic Logistics Planning (Source: Sople, 2004)
Components of Information Decisions in Supply

Chain Strategy
yy Push Versus Pull: While designing the pieces of supply
chain, it is necessary to determine whether these are part
of the push or pull phase in the supply chain. Push systems
132 require an elaborate Master Production Schedule (MPS)
Notes and Master Requirements Planning (MRP). The Master
Production Schedule rolls the Material Requirements
Planning (MRP) system. In contrast, for pull systems,
information is real demand is reflected.
yy Competitive Strategy: This defines the customer
needs to be satisfied through its products and services. A
firm’s competitive strategy depends upon the customer
requirements. It targets the customer segments with a
main objective of providing products and services to cater
to the customer needs.
yy Product Development Strategy: Mentions clearly the
portfolio of new products, which needs to be developed by
a company giving an indication whether efforts towards
these are done internally or externally.
yy Marketing and Sales Strategy: Specifically mentions
about market segmentation and details relating to
positioning, pricing and promotion of the product.
yy Supply Chain Strategy: A wide term, which includes
supplier, operations and logistics strategy. Includes
decisions relating to inventory, transportation, operating
facilities and information flows. The strategy specifies the
activities of supply chain such as operations, distribution
and service.
yy Other Strategies: A company also devises additional
strategies for finance, accounting information technology
and human resources.
Logistics Strategies
Formulating a logistics strategy can be viewed from the
following three angles:
yy Customer demands satisfied through strategy

implementation
yy Targeting customers
yy Resources required for implementing strategies
Formulating a strategy is not an isolated process. Logistics
strategy needs to have congruence with the overall goal and
strategy of the business. A synergy with the other domains 133
of the organisation is necessary. An example of this can be Notes

the Management Information Systems of an organisation
encompassing all the functional areas of business.
The MIS, being an information sharing system across the

supply chain has considerable synergy with logistics operation.
Considering the importance of formulating a logistics strategy,
the following are the possible approaches:
The following competitive and generic strategies could
be pursued for logistics operations:
1. Cost Leadership: Achieving cost leadership is facilitated
by logistics cost reduction to a major extent. This can be
achieved by many ways. Examples of achieving logistics
cost reduction are:
yy Reducing transaction costs through IT support
yy Warehouse operations based on scale economics
yy JIT, cross docking and postponement, which results in
reduction of inventory and related costs.
yy Reduced vendor base and co-partnerships with
suppliers.
2. Differentiation: This strategy focuses on offering
superior service. Examples of offering logistics services for
differentiation:
yy On time and consistent delivery
yy Logistics solutions to suit individual requirements
yy Tracking consignments
3. Collaboration: A strategy where the customer works
in collaboration with the suppliers. An example here is
Vendor Managed Inventory (VMI). In VMI, customer
places no orders but instead shares information with the
vendor. This information relates to actual usage or sales
of their product, their current on hand inventory and
details of additional marketing activity. On the basis of
this information, the supplier takes responsibility for
replenishment of the customer inventory.
4. Diversification: Firms having a lot of operations adopt
this strategy. The basic objective here is to lower the cost
134 and get better control over operations, thus providing
Notes superior customer service.
5. Outsourcing: Outsourcing services to logistics service
providers having expertise in this area in order to bring
efficiency and effectiveness into the logistics operations.
An example in outsourcing is, Customs Clearance service
providers. As a majority of exporters and importers
do not have a proper expertise in this area of logistics
operations, many logistics service providers offer customs
clearance services to their clients. This can reduce the
overall transaction cost.
Implementation of Strategy
Implementation of the strategy is an important activity after
the formulation. The firm needs to evolve a proper framework
to successfully implement its logistics strategy.
Important aspects for implementation of the strategy are:
yy Financial dimensions of control, such as net income return

on equity, net profits etc.
yy Non-financial parameters of control, such as quality of
service, customer satisfaction, delivery time etc.
yy The organisational culture and employee motivational
programmes initiated by the company facilitate behavioral
controls for employees.
yy The structure of the organisation is of importance.
Organisational structure with a wide span of control
give higher motivation to employees to perform well and
strategy implementation can be done successfully in such
organisations.
yy Skills of the implementers of the strategy are also an
important consideration. The successful implementation
of logistics strategy depends to a great extent on the
information shared with internal and external customers
and also logistics partners.
yy Transparency at both the buyer and seller’s end helps
to build an element of trust, thus adding value to the
customer delivery chain, which makes the task of
implementation simpler.
135
Check your Progress
Notes
1. Logistics strategy facilitates gaining a competitive
edge to support _______________technologies.
2. A high degree of reliability in terms of _________ and
_________ is expected from the supplier end.
3. Planning activity goes through three important
phases such as __________, __________ and
______________.
4. In ________________, customer places no orders but
instead shares information with the vendor.
Summary
Logistics strategy needs to have congruence with the overall
goal and strategy of the business. A structural design is
needed to implement the strategy. The primary concern
here is the strategic planning of warehouses; transportation
and information flow in the entire supply chain. A proper
interface between channel structure of the firm and its
logistical network can be done with the help of a structural
design. Different firms have different process of strategy
formulation and implementation. The process of strategic
logistics planning will improve the overall responsiveness
of the organisation. The structure of the organisation is of
importance. Organisational structure with a wide span of
control give higher motivation to employees to perform well
and strategy implementation can be done successfully in such
organisations.

1. How can the basic features of logistics establish it as a
service function?
2. Mention the steps taken for achieving logistics cost
reduction.
3. Which are the aspects for implementation of logistic
strategy in a firm? Explain.
4. What are the characteristics for an effective Logistics
Strategy?
136
Notes
Unit 19
Packaging and Material Handling
Objectives
following topics:
\\ Process of Packaging and its Types
\\ Functions of Packaging and Packaing Material
\\ The Benefits, Drawbacks and Movement Of Containers
\\ Unitisation of Products
Introduction
Packaging is a marketing tool related to the performance of
marketing function. The basic objective behind packaging is to
prevent damage to the product during storage, transportation
and handling, when it is in movement for distribution in the
market. It forms an important cost element of goods and
represents 5–30 per cent of the value of goods, depending
on the type of product. It has a significant impact on the
cost and productivity of the logistical system. The main cost
elements are the purchase of packaging materials, introducing
automated or manual packing operations and further the
need for disposal of material. A systems approach is necessary
to manage packaging. Any central planning logic, which is
designed to control total distribution costs, must keep in mind
the costs related to packaging.
Types of Packaging
Consumer Packaging
This packaging is done with a marketing emphasis.
The packaging design focuses on aspects like customer
convenience, market appeal, shelf utilisation, product
protection, etc.
The proper package design should have its base on a complete

assessment of the logistical packaging requirements, which
requires a complete evaluation of how all the components in 137
the logistical system influence packaging. Notes
Industrial/Logistical Packaging
This is a concept of containerisation or unitisation where
the individual products are grouped into carton, bags, bins
or barrels for handling efficiency. The master cartons are
grouped into larger units for handling, the combination that
is referred to as containerisation or unitisation. Logistical
packaging is designed to meet the distribution objectives.
Determining the degree of protection required to cope

with anticipated physical and element environments is an
important issue in package designing.
Functions of Packaging
Damage Protection
The master carton protects products from damage while
movement and storage, in addition to being a restraint to
pilferage. The cost of protection increases according to the
degree of value and fragility of the product. The vulnerability
of damage is related to the environment in which it is stored
and transported. The physical environment relates to the
logistical system. When the firm has more control over
its physical environment, lesser the packing precautions
are required. An example for this can be the utilisation of
privately owned transportation, which will move the product
in a controlled environment. But if common carriers are used
for transportations, more precaution needs to be exercised as
the product may be transported in a variety of vehicles and
there is lesser control. Certain situations in which the carrier
will cause in–transit damage to the product are vibration,
compression, puncture and impact. Securing the package
with a tight strap or to load the carrier in a right pattern can
reduce this.
The outside elements also influence the packaging. There

are certain factors like temperature, humidity etc. which
are beyond the control of logistical management. It has to
be determined in advance how the contents of the packing
will react to each of these factors and design the packing
accordingly.
138 Utility/Convenience
Notes
This refers to how packaging can affect the logistical
productivity and efficiency. When products are packed in
certain configurations and order quantities, it increases the
logistical output. Packaging thus provides convenience of
handling and storing. Also the concept of unitisation is very
significant here. Unitisation refers to the process of grouping
the master cartons physically into one restrained load for
easier material handling and transportation.
Communication
Packaging plays a significant role by assisting all channel
members to identify the contents of the package. An attractive
surface decoration can serve as a display item. Information
such as the manufacturer’s name, quantity, code number etc
is mentioned on the package. The labels must be visible from
reasonable distances. Handling and damage instructions
are provided on the package. Especially for hazardous
products such as chemicals such instructions can be of
great assistance. Tracking is one more feature of logistical
packaging. The consignment moves along multiple storage
locations, transportation systems at various points with
other consignments. For a well–controlled material handling
system to track the product as it is received, sorted or shipped,
packaging identifiable through a bar code is essential.
Packaging Cost
The packaging cost depends upon factors like nature of
product, physical dimensions, value, regulations etc. Delivery
of the product at minimum overall packaging cost is essential.
These are the costs included in packaging.
yy Unit Package Cost: Basic material or container price.

This will depend upon factors like volume, freight charges,
and methods of over packing and development costs. An
increase in the volume attracts lesser price.
yy Operation Cost: The packaging equipment must have the
strength and ability to withstand the stress of high-speed
filling equipment, in order to make the production process
cost effective and efficient.
Warehousing 139
Notes
The packed product is shipped to the user’s warehouse for
storage before shipment. Shape of the package and strength of
the package are the factors of key importance here.
Distribution
Moving the product from the user’s warehouse involve several
forms of transport. The costs of these are referred to as
transport costs, which are governed either by the weight of the
finished pack or the volume. They may also depend upon the
shipping distance and value of the item being handled.
Types of Packaging Material

yy Shrink-wrapping: Form of packing where a pre -
stretched plastic sheet or bag is placed over platform and
master cartons. Heating locks the cartons. Advantages of
this packaging are adaptability to various shipment sizes,
low cost, and the ease of identifying contents and damage.
A major disadvantage is disposal of waste material.
yy Stretch-wrapping: The unit load is wrapped with a
tightly drawn external plastic material. Then it is rotated
on a turntable to place the stack under tension. Platform is
wrapped directly into the unit load.
yy Aluminum-wrapping: The main area of usage is foil.
These are used as a replacement for beverage cans,
stackability being the main advantage. Metal tubes and
moulded trays are the other two forms. While metal
tubes are used in pharmaceuticals, crafts, and cosmetics,
moulded trays are used in the food industry.
yy High-density Plastic Boxes: Containers with lids similar
to those purchased for home storage applications. These
are rigid and sturdy, thus ensuring high protection.
yy Plastic Strapping: A load is unitised so that many
smaller containers can be handled as a single larger
container. The strapping, which is usually about one to
one and a half inch wide, is bound tightly around the
containers.
140 yy Plastic Foam Dunnage: Used to pack irregular shaped
Notes products into standard shaped boxes. These are light
and do not increase the transportation cost and also
provide substantial protection. A major issue here is the
environmental problems related to disposal.
yy Film-based Packaging: This utilises flexible materials
instead of rigid packaging like corrugated fiberboard boxes.
Corrugated fiberboard cases represent an important part
of the paper and board industry, in terms of both tonnage
and value. Corrugated fiberboards are commonly used for
television, washing machines, refrigerators, cigarettes,
personal care products, etc. among a host of other products.
The advantages here include automatic operation, reduced
labour costs of manually boxing products.
yy Blanket-wrapping: A traditional form of packing, which
is generally used in household packing. This packing is
most suitable for irregular shaped products like chairs,
tables and other furniture. Generally household goods
carriers use these services.
yy Returnable Containers: These are mostly re-usable
packages like steel or plastic and sometimes corrugated
fiberboard boxes. These are used by automobile
manufacturers to pack inter-plant shipment of body parts.
yy Intermediate Bulk Containers: Used for granular and
liquid product shipment quantities smaller than tank
cars but larger than bags or drums. Resin pallets, food
ingredients, and adhesives are packed in these containers.
yy Plastic Pallets: The rapid growth in the utilisation of
plastic in packaging is noticeable. These are lightweight
and recyclable.
yy Pallet Pools: Third-party supplies maintain and lease
high–quality pallets all through the country. Palletisation
has contributed immensely to logistical productivity.
Advantages include reduced damage, lesser costs of
disposal, and improved use of pallet resources. The
disadvantage is the costly investment in pallets.
yy Refrigerated Pallets: A self-contained refrigerated
shipping unit, which can be placed inside a regular dry van
as a Less Than Truck Load shipment. This integrates the 141
demands of environment and unitisation. Notes
Unitisation
Products are grouped together in cartons, bags and barrels for
handling efficiency. The containers used to group individual
products are called master cartons. When the master cartons
are grouped together, it is called unitisation. The concept
of unitisation has its base upon the theory that all shippers
must pack their cargo in such a manner that it is moved
and handled entirely by mechanical equipment like lifts and
cranes, all through the distribution network. It enables faster
loading and unloading by transportation equipment, results
in more efficient distribution center operations and also a
reduced level of pilferage.
According to the unit load concept:
yy Small, heavy and expensive items are enclosed in

containers with double or triple wall to avoid pilferage and
damage.
yy The boxes or containers are secured to pallets with shrink-
wrap or steel strapping.
yy Large items can be directly secured to pallets, with
assurance that they are completely protected from damage.
yy Palletisation for unitisation
yy Pallets enable unifying dry cargo loads. Basically, it is a
flat tray upon which a lot of articles can be placed, and can
be handled as one article. For securing the articles to the
pallets, metal strapping, plastic films or more elaborate
forms of devices are used.
Benefits of palletisation include reduction in time required
to load or unload the products from the vehicle, and better
utilisation of warehouse space. Other benefits include,
assembly of individual packages according to a single
customer order, easy handling of pallets for road as well as rail
vehicles. The reduction in the rate of damage in transit and
reduced delivery time is the added benefit. A drawback can be
the lack of uniformity in pallets.
142
Containerisation
Notes
Container refers to physical equipment, which is used
for unifying a number of shipments, which then move as
individual units. These are used to handle bulk commodities
as well as merchandise and are especially adaptable for inter-
modal transport.
Benefits of Containerisation
yy Reduced door to door shipment
yy Reduced freight costs
yy Reduced damage and pilferage, thus eliminating
intermediate handling of packages
yy Higher productivity of labour
yy Lesser documentation
yy Reduced warehousing and inventory costs
yy Better utilisation of capital equipment through uniformity
of cargo
yy Environmental control
Drawbacks of Containerisation
yy All cargo need not necessarily suit containerisation
yy Heavy capital investment in equipment required
yy Difficult to thrust liability as there are several carriers and
also no intermediate inspection
yy Proper equipment to handle containers may not be
available
yy System not comfortable with air freight
Movement of Containers
While moving the container, the consignor is faced with
several choices as the follows:
yy By Road: This is done by using equipment like direct

lifting cranes, forklift trucks, portal frames and other self-
loading devices.
yy By Rail: For long distances, road may prove uneconomic 143
and thus the rail transport can be used to transfer Notes

containers.
yy By Port Terminals: The container finally arrives at the
port to be shipped whether road or rail transport is used to
transfer containers.
yy By Ships: To secure benefits of rapid loading and
unloading and thus to ensure efficient utilisation of space,
containers are built or customised. Wide hatches give
complete access to holds in these ships
Designing a Package
Designing the package involves the following steps:
yy Briefing the Designer: The person who is designing

the package needs to understand what is in the mind of
the manufacturer. A complete marketing analysis may
be given to the designer or some specific objectives may
be given. The designer needs to list his views about the
problem.
yy Gathering Information about the Package: Meeting
the people involved in the production process, various
channel members like sales personnel, dealers etc. has to
be done. Facts about the packaging materials need to be
gathered.
yy Writing the Design Platform: The designer gives a
report giving details of what he has understood and what
must be done to achieve the objectives he has laid down.
The product and packaging engineers need to work
together.
yy Creative Phase: Here, the creative people are involved.
They are given a precise definition of the problem and a set
of objectives to work upon. They are required to find visual
solutions to the problems stated within the boundaries
outlined in the platform of design.
yy Consulting Suppliers: Then, the appropriate suppliers of
materials need to be called in. The ideas are synchronised
with reality. The ideas need to be practical and also cost
effective.
144 yy Initial Presentation: The ideas are presented at a first
Notes visual presentation meeting. The client actually sees the
work being done. The designs should be judged in relation
to the design platform.
yy Modification: Modifications, if any which need to be done
after the first presentation, must be made.
yy Design Testing: To test package, a number of tests have
been developed, a few of which have been listed below:
yy Image Tests: Use the qualitative and quantitative
research to assess consumer attitudes, preferences and
message communicated.
yy Usage Tests: Examine the functional related attitudes
towards packaging and usually involve in-placement tests.
yy Visibility Tests: Are designed to evaluate legibility of
pack graphics, relative impact of different pack elements,
and the relative impact of different designs they include
the use of Brainwave analysis: Used for both advertising
and package designing. Method is based on “Alpha” and
“Beta” brainwaves.
yy Final Design Phase: A final meeting with client is held
to finalise the design. In this stage the various aspects of
packaging like labels, contents, colour schemes, artwork on
label, etc. need to be finalised.
yy Production Design: The complete designs are presented
to the clients for approval. The design is approved and also
set as per the initial discussions concerning the marketing
strategy. Any variance needs to be resolved by consulting
the experts in the respective fields.
yy Finishing the Job: The finalised artwork is turned over
to the suppliers for producing the packs.
Factors Effecting Choice of Packaging Materials

yy Characteristics of Materials to be Packaged
yy Destination
yy Kind of Transportation
yy Handling, storability and storage considerations
yy Conditions of usage and distribution 145
Notes
yy Cost
yy Availability of the type of package and choice of substitutes
Check your Progress
1. Certain factors like temperature, humidity etc. which

are beyond the control of ____________.
2. Products are grouped together in cartons, bags and
barrels for __________ efficiency.
3. When products are packed in certain configurations
and order quantities, it increases the ______________.
4. _____________ provides convenience of handling and
storing.
Summary
Packaging plays a significant role by assisting all channel
members to identify the contents of the package. Tracking
is one more feature of logistical packaging. Delivery of the
product at minimum overall packaging cost is essential.
The containers used to group individual products are called
master cartons. The concept of unitisation has its base upon
the theory that all shippers must pack their cargo in such a
manner that it is moved and handled entirely by mechanical
equipment. A drawback can be the lack of uniformity in
pallets. Container refers to physical equipment, which is
used for unifying a number of shipments, which then move as
individual units.

1. Discuss in detail the whole concept of containerisation.
2. What steps are involved in Designing a Package?
3. State the main functions of packaging?
4. What do you understand by the term unitisation in
context to packaging?
146
Notes
Unit 20
Case study
Trans India Freight Services: Redefining

Automotive Logistics Packaging
Trans India Freight Services Pvt Ltd. is an Indian arm
of Allcargo Global Logistics and has designed on 40-foot
equivalent unit high-cube containers for transportation of
cars. These containers will be moved primarily on rails.
Currently around 98 per cent of cars’ transport, operations
are carried on by roadways and the remaining is by railways.
The road sector for car transport is highly fragmented. When
carrying automobiles on road the speed of the carrier is 20–
40 km/hr and they do not travel at night. For example, Delhi
to Mumbai takes six to nine days, which results in holding up
of an inventory. The high-multiple handling results into 10
per cent of the cars getting damaged during transportation.
With the new logistical packaging for car transportation on
rail there will be significant reduction in transit times and
in-transit damages to the cars. In the beginning the cost of
transportation will be comparable to road transportation.
However, with full-fledged operation, the cost will go down by
5 per cent and with double stacking the cost reduction will be
20 per cent. In the new packaging system, the cars are placed
on to ‘trans-rak’, which is a simple, fixed-frame system. It is
fitted into 20ft, 40ft, 45ft, 53ft and pallet wide ISO containers
ensuring safe, simple and secure transportation of vehicles in
containers (see Figure 2). It ensures total security in shipping
cars directly from the factory to arrive in perfect condition
inside and out at destination. The trans-rak are free from
theft, dirt and weathering; no knocks, dents or scratches;
no road, rail, roro or quayside handling, simple to operate
for containerising the cars with no special skills. Trans-rak
adjusts for all car shapes and are lifted and lowered with
a hand-held drill. This was not the first attempt to carry
automobiles by rail. Indian Railways has tried it earlier. A few
passenger trains were converted into car carriers. However,
the venture was financially unviable because carriers did not
147
get returned load. The success of this packaged transportation
depends on the rail infrastructure with dedicated freight Notes
corridors.
(Source: http://www.trans-rak.com, www.cargotalk.in/

pdfs/nov07.pdf)
Questions
1. Explain the term ‘logistical packaging’ with regard to
automobile industry.
2. What is the novel packaging solution offered by Trans India’
and why?
3. How is ‘trans-rak’ enhancing the performance of auto logistical
system?
148
Notes
Unit 21
Order Processing
Objectives
following topics:
\\ The concept of order processing
\\ Order pattern recognition
\\ The strategy of documentation, invoicing and collection
\\ Credit verification
Introduction
The process associated with picking, packing and delivery of
the packed items to a shipping carrier is the order processing.
These facilities are also called distribution centres or DC’s.
This process may be a completely manual or completely
mechanised through computer systems and are generally
referred to as Warehouse management Systems.
The Concept of Order Processing

Order processing is the set of activities occurring between
order entry and order release to the warehouse. Order
processing activities include -
yy Order pattern recognition

yy Credit verification
yy Order status communication and order changes
yy Order batching and assignment for efficient transport and
picking
Order Pattern Recognition

Order pattern recognition identifying requests for unusual
items or quantities by a customer yields big customer service
and inventory management dividends.
149
Credit Verification
Notes
For individual consumers, credit verification should take
place before order release and inventory commitment. Credit
verification should take place online and in near real-time. For
large corporate customers, each customer should be classified
as a -
yy Green-light Customer: The customers with exemplary

payment histories with orders released without credit
checks.
yy Yellow-light Customer: The customers with good to
average payment histories having a prespecified sample
of orders checked or a check on all orders in excess of a
prespecified value.
yy Red-light Customer: The with poor credit histories and
all orders held for credit checks.
Order Batching and Assignment

Orders should be assigned to their optimal shipment and
pick wave. The optimal shipment assignment (to a mode,
carrier, and specific shipment) minimises transportation cost
yet satisfies the customer’s response time requirements. The
optimal pick wave assignment (to a group of orders picked
together in a warehouse) minimises the material handling
cost yet satisfies the departure time requirement of the
order’s shipment. Order batching should be online and in
real-time so that delivery time commitments can be made
online and communicated immediately to the customer. Once
assigned, order release to the transportation management
shipment and warehouse management system should be
automated in real-time.
Order Changes and Status Communication

Customers and consumers should be allowed to change orders
until the loading of the order into the transportation container
and/or until the point the change will delay the entire
shipment. Order changes outside those parameters should be
entered as new orders.
150 Order status communication should be proactive when there
Notes is an exception to the order contents, timing or terms agreed
upon at order entry. Order status information should be
updated in real-time and should be available perpetually
to the customer/consumer either by phone or online. If a
telephone call is required, the communication should be
completed with one phone call and preferably made with a
dedicated customer service representative or team member.
Most corporate Web sites enable customers to track the status
of their orders.
Documentation, Invoicing and Collections

An order is not truly complete until it has been documented,
invoiced, collected and archived. Documentation is made
perfect by eliminating paperwork, handwriting and key entry
throughout the order flow documentation process. Ideally,
all customer orders, transportation documents, picking
documents, and invoices are electronic and the number of
required documents is minimised. In some cases, the same
document may serve all four purposes.
Invoicing is best conducted electronically and collections as

well. EDI and the Internet provide a natural platform for
electronic invoicing and collections.
When possible, collections should be immediate, permitting

multiple payment options. Again, a bigger net catches more
fish.
Customer Response Systems

Modern vernacular for a Customer Response System (Crs)
is Customer Relationship Management (CRM). For all the
reasons outlined previously, CRM software is one of the
hottest software market spaces.
The CRS is one of five subsystems in a logistics information

system.
The functionality in a customer response system includes:
yy Order entry
yy Order processing
yy Contact management 151
Notes
yy Customer activity profiling
yy Order pattern recognition
yy Customer transaction databases
yy Open order databases
yy Customer service policy maintenance
yy Customer service performance measurement
yy Call/customer transaction management systems
yy Customer satisfaction monitoring
yy Infrastructure sufficient to provide real-time order and
inventory status information even in peak demand periods
yy Embedded CSP guidelines to maintain CSP disciplines
yy Automated, single-point order entry
yy Online order assignment to optimal shipments and pick
waves
Transaction Center Monitoring

Each customer interface should be monitored to record the
length of the transaction, the wait time experienced by the
customer, the number of balks due to wait time or down time
and the overall satisfaction with the transaction experienced
by the customer.
Check your Progress
1. Orders should be assigned to their ____________and

pick wave.
2. The __________ is one of five subsystems in a logistics
information system.
3. Credit verification should take place online and in
near _____________.
4. Each ____________ should be monitored to record the
length of the transaction.
152
Summary
Notes
For individual consumers, credit verification should take place
before order release and inventory commitment. The optimal
shipment assignment (to a mode, carrier, and specific shipment)
minimises transportation cost yet satisfies the customer’s
response time requirements. Order status information should
be updated in real-time and should be available perpetually
to the customer/consumer either by phone or online. Invoicing
is best conducted electronically and collections as well. The
Customer Response Systems (CRS) is one of five subsystems in
a logistics information system.

1. Give in detail the credit verification process in order
processing.
2. Describe the customer response systems as a subsystem
in the logistics information.
3. What do you understand by documentation, invoicing and
collection in logistics?
4. What is the whole concept of Order Processing?
153
Unit 22 Notes
Order Picking and Dispatch

Objectives
following topics:
\\ Different Concepts of Order Picking
\\ Dispatch and Receiving Processes
\\ The Activities Engaged in Cross-docking
Introduction
Order picking represents a key objective of most warehouses:
to extract from inventory the particular goods required by
customers and bring them together to form a single shipment
– accurately, on time and in good condition. This activity is
critical in that it directly impacts on customer service, as well
as being very costly. Order picking typically accounts for about
50 per cent of the direct labour costs of a warehouse.
Order Picking Concepts

yy Pick-to-order. This is basically where a picker takes one
order and travels through the whole warehouse (e.g. on foot
or on a truck) until the whole order is picked. For example,
in retail food distribution centres it is quite common for
order pickers to take one or more roll-cage pallets and fill
these with goods just for one store. The pickers may do
this for goods located across the entire warehouse or just
for their particular zone (see ‘zone picking’ below). Another
type of pick-to-order is where pickers have separate
compartments or containers for a number of orders on their
trolley or roll-cage pallet. They may then pick-to-order for
a number of orders simultaneously, placing goods for each
customer into a specific compartment.
yy Pick-by-line or Pick-to-zero. Under this concept, the
exact numbers of cases or items are presented for picking.
For example, they may be brought forward from the
154
reserve storage area or they may be specifically ordered
Notes from suppliers for cross-docking. In both instances, the
unit load of one product line is picked to waiting customer
orders (hence pick-by-line) and the picking continues until
that line is exhausted (hence pick-to- zero).
There are three main picking concepts that may be applied.
These are:
1. Batch Picking
The main disadvantage of a pick-to-order regime is that
pickers typically walk the entire pick face for a single order.
In situations where a typical order may only have a few
order lines (i.e. only a few different SKUs being ordered) and
where the product range is very large, then this would be
very inefficient. It is therefore common, particularly for small
orders, to batch these together and pick the total requirement
of all the orders for each SKU on a single picking round. This
method can achieve great benefits in terms of picking time,
but of course the goods then need to be sorted at the end of the
picking run into the different customer orders. This sortation
may be undertaken either manually or using automated
sortation equipment.
2. Zone Picking
This is where the warehouse is split into different zones with
specific order pickers dedicated to each zone. On receipt of a
customer order, the Warehouse Management System (WMS)
would typically examine each order line (i.e. SKU) on the
order and identify in which zone the picking face for that
SKU is located. The WMS would then issue separate picking
instructions to each zone. When the goods have been picked,
they would of course all need to be collated together ready for
packing (if necessary) and dispatch.
This method may be appropriate where different equipment

is used for picking different types of product, where a single
order would be too great a quantity for one picker to pick, or
where the dispatch times mean that all the order lines must
be picked quickly. It is also used where there are different
zones for products, for example where products are separated
for reasons of security, hazard or temperature regime.
Zone picking may occur with either pick-to-order or batch 155
picking (or, indeed, pick-by-line) techniques. Notes

3. Wave picking
Orders may be released in waves (for example, hourly or each
morning and afternoon) in order to control the flow of goods
in terms of replenishment, picking, packing, marshalling
and dispatch. The timing of the waves is determined by the
outgoing vehicle schedule, so that orders are released to allow
enough time to meet this schedule. Note that orders may not
be released at the same time to each zone. For example, some
zones may require a long time for order picking whereas a
small range of high-security items may be picked just before
dispatch. The use of waves allows for close management
control of operations such as sorting and marshalling, which
may be limited in terms of how many orders can be handled at
the same time.
E-fulfilment
There has been a rapid growth in recent years in the use of
the internet for ordering goods, both from the home and from
businesses (e.g. individuals being able to order goods for
their own office or department, rather than ordering through
a centralised purchasing department that would consolidate
such orders). The orders that result from internet ordering
tend to have rather different characteristics. They are often
small orders, with few order lines (i.e. a small number of
product lines being ordered), few items per line, and often
requiring individual units rather than whole cases. These
characteristics increase the picking workload for a given
throughput of goods. It is therefore important that the picking
solutions adopted are well suited to the picking of large
numbers of small orders at unit level.
For low-throughput operations, this may involve the use of

multiple order picking using pigeon-hole trolleys, or trolleys
containing a number of tote bins. By these means, a dozen or
more orders can be picked at one time, with the picker sorting
the orders to pigeon-hole or tote bin. An alternative is to
batch-pick goods and bring them back to a manual sortation
area, which may comprise a number of pigeon-hole shelves
156 (each representing an order). The goods are then sorted to
Notes these pigeon-holes. This may be assisted by a put to light
system as described above.
For high-throughput operations, zone picking may be conducted

with tote bins (each representing an order or batch of orders)
being circulated on conveyors to each zone that holds goods
for that order (or orders). Goods are then picked into the
appropriate tote bin for that order from pallets, shelving or
flow racks, and directed to the packing area. Alternatively, a
batch-pick can be conducted directly on to a conveyor, followed
by automated high-speed sortation. Both of these methods can
be supported by pick-to-light technology where appropriate. In
addition, where there are large product ranges, dynamic pick
faces can be used for medium- and slow-moving lines.
A particular characteristic of many internet operations is the

high proportion of single-line orders (e.g. a consumer ordering
just a digital camera). There is no need to sort these goods
in the same way as for multiple-line orders that need to be
brought together, and therefore single-line orders may be
subject to a separate process, bypassing order sortation and
being sent directly to packing.
Replenishment
Replenishment is the activity of transferring goods from
reserve stock (or sometimes directly from goods-in) to the
picking face. Both the efficiency and accuracy of picking are
greatly affected by the replenishment operation. If picking
stock has not been replenished to the pick face, then an order
requiring that SKU cannot be completed. The picker will have
travelled to a pick slot unnecessarily and the customer will be
dissatisfied (or the picker will need to return to the slot again
once the goods have been replenished). Similarly, if goods have
been replenished to the wrong pick slot then the customer is
likely to receive the wrong goods (depending on the checking
procedures in place).
Replenishment is often triggered when the pick face only

has a certain quantity of goods left. However, with this type
of system there is always the danger of the location being
replenished too early (and thus the goods still in the pick
face may need to be double-handled and put on top of the 157
replenishment load) or, more seriously, the goods may arrive Notes
too late, with some pickers being unable to pick those goods.
This uncertainty can be minimised by the use of real-time
computer systems to issue replenishment instructions. In
many operations the actual order quantities are in fact known
a few hours ahead of picking and therefore a further method is
to base the replenishments on the known order quantities for
the next pick wave.
Thus, there should be no pick face stock-outs occurring even

when there is particularly heavy demand for an individual
SKU.
It is important to design the replenishment task not only so

that it is effective but also so that it does not interfere with
the picking task, particularly in high throughput operations.
Otherwise the replenishment operatives may interfere with
and slow down the order pickers.
Methods to overcome this problem include:
yy Setting out separate replenishment and picking aisles.

These may be laid out as alternate aisles with, for example,
replenishers filling carton-live storage from the rear and
pickers picking from the front. A similar layout is possible
using ground-level pallet live storage.
yy Undertaking the replenishment and picking tasks
at different times of day. For example, if picking is
undertaken in the evening ready for next-day delivery then
it may be possible to carry out most of the replenishment
before the picking task begins. In the case of carousels, it is
essential that these tasks are undertaken at different times
as the same access point is required for both tasks. Another
example is where picking occurs from ground-level narrow-
aisle racking (which is found in some operations as a result
of severe space constraints). While this should be avoided if
possible, where it does occur, then low-level order picking
should not take place at the same time as narrow-aisle
truck put away and replenishment tasks (for health and
safety reasons).
158 yy Having multiple locations for fast-moving goods, so that
Notes replenishers and pickers are not operating at the same pick
slot.
yy It should always be remembered that successful order
picking is dependent on an effective replenishment
operation.
Receiving Processes
The receipt of goods into a warehouse needs to be a carefully
planned activity. In most large warehouses, incoming vehicle
loads are booked in advance so that the appropriate resources
can be allocated to the activity. On arrival, drivers report to
the gatehouse, where staff check the vehicle documentation
and direct the driver where to go, either directly to an
unloading bay or to a parking area.
The vehicle, or container, doors may be sealed, particularly in

the case of imported goods. Where this occurs, the seal number
needs to be checked against that advised by the sender so that
it can be ascertained whether the doors have been opened
during transit (and hence there may be the possibility of loss).
On unloading, the goods are normally checked to ensure that

they are the correct items and of the required quantity and
quality. This may be undertaken by cross-checking against
purchase orders, but this can be very time-consuming. An
alternative method is for the sender to transmit an Advance
Shipping Notice (ASN) by EDI and for this to be related
automatically to the appropriate purchase order. The goods
can then be checked specifically against the ASN for that
vehicle. For approved and trusted suppliers, it may be that the
quantity and quality can be assumed to be correct as per the
ASN, in which case the goods can be unloaded and transferred
immediately to storage.
If goods are to be quarantined (e.g. stored until quality control

results are available), then this can be undertaken by placing
the goods into the normal reserve storage area and using the
warehouse management system to ensure that the goods are
not picked for any customer orders.
Some packages may require some form of processing, such as 159
applying bar-code labels (e.g. attaching license plate numbers Notes

(LPNs) to identify each pallet or sticking labels to each case),
palletising (e.g. for goods received loose as cartons, as is
common in the case of containerised shipments), re-palletising
(e.g. if the pallets are of the wrong type or of poor quality)
or placing into tote bins (e.g. to be put away into mini load
storage).
The unit loads then need to be checked, particularly if they

are to be put away into an automated storage and retrieval
system. For example, pallets may be weigh-checked on a
conveyor and then passed through a dimension checking
device, which would register any protrusions outside the
permitted dimensions by means of photoelectric cells. Any
pallets that do not conform (e.g. because the cartons have
shifted in transit) are then sent to a reject spur on the
conveyor for manual rectification.
When the goods are ready for placing into storage, they may
be put away and the computer system advised of the location
number or, more normally, the warehouse management
system would identify the most appropriate location and issue
a put-away instruction (e.g. on a paper put-away sheet or
transmitted to a truck driver’s radio data terminal).
A key objective in designing the receiving process is to enable

the goods to be put away to the required location in the
warehouse with the minimum handling and minimum delay
possible.
This often requires close co-ordination with suppliers, in terms

of procurement agreements and the timing of deliveries.
Dispatch Processes
After order picking, the goods for a particular order need to
be brought together and made ready for dispatch. This may
involve added value activities, such as labelling, tagging,
assembly, testing, and packing into cartons. Where production
postponement is undertaken, these activities may be quite
extensive.
160 The goods then need to be sorted to vehicle loads and placed
Notes in, or on to, unit loads ready for dispatch. This may be a
conventional operation (e.g. loading into roll-cage pallets and
then using a powered pallet truck to take the goods to the
marshalling area) or it may be automated (e.g. using conveyor
sortation and automatically loading tote bins on to dollies, i.e.
wheeled platforms).
In the case of goods being dispatched on pallets, the whole

pallet may be stretch wrapped, or shrink-wrapped, so that
the goods do not move during transit. The goods are then
transported to the appropriate marshalling area, which will
have been allocated based on the outgoing vehicle schedule.
There may be one or more marshalling areas associated with
each loading door. Particularly where large items are required
for a customer order, the goods may in fact be brought
together for a customer order for the first time directly in the
marshalling area. The goods are then loaded on to the vehicle
and secured.
Loading is often an activity that needs to take place within

a short period of time (i.e. most of the vehicles may need to
leave at about the same time of day). This can be alleviated
by preloading drop trailers, or swap-bodies, during the hours
leading up to the dispatch times. In this situation, the vehicle
fleet is designed to have more articulated trailers than tractor
units and similarly more swap-bodies than vehicles. The extra
trailers or swap-bodies can thus be pre-loaded whilst the
vehicles are still delivering the previous loads. If a customer
plans to collect the goods, then the vehicle load will need to
be assembled and held in the marshalling area, awaiting
collection. Good co-ordination is necessary in such instances to
avoid the load taking up valuable marshalling area space for
longer than necessary. In the case of temperature-controlled
goods, it is important to consider how the dispatch activities
are managed, particularly when loading vehicles that are
compartmentalised and thus capable of transporting goods at
different temperatures. For example, loading the vehicles at
three different loading docks (e.g. at ambient, chill and frozen
temperatures) may be very time-consuming, whilst loading at
a single loading dock will require close control to ensure that
the temperature chain is maintained.
161
Cross-docking
Notes
Cross-docking is an activity whereby goods are received at a
warehouse and dispatched without putting them away into
storage. The goods may thus be transferred directly from the
receiving bay to the dispatch bay. This normally involves some
form of sortation.
Goods for cross-docking need to arrive by a strict time

schedule linked to the vehicle departure times. The outgoing
vehicles may be taking a mix of cross-docked goods (e.g. fresh
goods) and stocked goods (e.g. long-shelf-life items), and thus
a great degree of co-ordination is required to ensure that the
operation can occur smoothly. If sortation is required, then a
pick-by-line technique may be used to pick individual products
from incoming pallets and place them on outgoing customer
pallets. This may be undertaken manually or by using
automated sortation equipment.
Check your Progress
1. __________picking is where the warehouse is split

into different zones with specific order pickers
dedicated to each zone.
2. __________ is often an activity that needs to take
place within a short period of time.
3. Goods for _________ need to arrive by a strict time
schedule linked to the vehicle departure times.
4. The use of waves allows for close management control
of operations such as ______ and __________.
Summary
Order picking typically accounts for about 50 per cent of the
direct labour costs of a warehouse. Pick-to-order is basically
where a picker takes one order and travels through the whole
warehouse until the whole order is picked. Orders may not
be released at the same time to each zone. Under the concept
of Pick-by-line or pick-to-zero, the exact numbers of cases or
items are presented for picking. Replenishment is the activity
of transferring goods from reserve stock (or sometimes directly
162 from goods-in) to the picking face. A key objective in designing
Notes the receiving process is to enable the goods to be put away
to the required location in the warehouse with the minimum
handling and minimum delay possible. Cross-docking is
an activity whereby goods are received at a warehouse and
dispatched without putting them away into storage.

1. What is replenishment? What are the activities included
in it?
2. Give a detailed account of E-fulfilment.
3. Explain the Dispatch processes used in order picking.
4. What are the basic order picking concepts? Describe all
thoroughly.
163
Unit 23 Notes
Warehouse Location and Design

Objective:
following topics:
\\ Designing Procedures of a Warehouse
\\ Business Requirements and Design Constrains
\\ Obtaining Data for Warehouse Design
Introduction
A warehouse layout is the first step in designing an
installation. The role of the storage installations has greatly
evolved and has become more strategic over time. Ware houses
not only provide storage but also the service and support
facilities to the companies. So, they are needed to be designed
so that each and every installation fulfils its functions and can
also adapt to the needs that may arise in the future.
Design Procedure
The design of a large and modern warehouse is very complex
and requires a range of skills and disciplines, including,
operations, construction, materials handling, information
systems, personnel, finance and project management. The
operations (e.g. supply chain or logistics) function often
sponsors the project, as that function will be responsible for
its eventual successful running. External warehouse designers
may be an important part of the team, as many organisations
only design warehouses on an infrequent basis. They,
therefore, do not necessarily possess all the necessary skills in-
house. Usually, a Steering Group, comprising senior directors
and executives, oversees the project and provides guidance on
future business strategy and financial resources.
The design process is shown below as a series of steps. In

reality, these steps are normally undertaken in an iterative
164
manner, as decisions at a later step may necessitate decisions
Notes made at an earlier step being reconsidered. Suggested steps
are as follows:
yy Define business requirements and design constraints.

yy Define and obtain data
yy Formulate a planning base
yy Define the operational principles
yy Evaluate equipment types
yy Prepare internal and external layouts
yy Draw up high-level procedures and information system
requirements
yy Evaluate design flexibility
yy Calculate equipment quantities
yy Calculate staffing levels
yy Calculate capital and operating costs
yy Evaluate the design against business requirements and
design constraints
yy Finalize the preferred design
Business Requirements and Design Constraints

The wider business requirements set the context and the
design requirements for a warehouse. These are likely to
include the required:
yy warehouse roles (e.g. to act as a decoupling point, a cross-

dock facility or a returns centre)
yy throughput levels and storage capacities
yy customer service levels
yy specified activities, such as production postponement and
added value services
These requirements will also specify how quickly the
warehouse needs to be operational, any financial constraints
(e.g. on capital expenditure) and any wider corporate policies
that may affect the design (e.g. information technology, 165
environmental and personnel policies). Notes
There will also be design constraints or considerations, to be

taken into account from various other stakeholders, such as:
yy government agencies, for example in terms of health and

safety regulations (e.g. manual handling and equipment),
working time directive, packaging regulations, product
recovery and environmental legislation
yy fire officer (e.g. requirements in terms of evacuation, fire
exits and fire/smoke containment)
yy insurance company (e.g. regarding fire detection and fire
suppression-overhead or in-rack sprinklers, etc.)
yy local authority (e.g. maximum building height, working
times, noise, etc.)
A warehouse is a long-term asset, with the building often
having a depreciation period of 20 to 25 years and the
equipment about 5 to 10 years. There are ways of reducing
the length of this commitment by leasing buildings, renting
certain types of equipment or outsourcing.
However, the long-term nature of the asset still has to be

considered very carefully, as leases are often for a lengthy
period of time and logistics contractors negotiate contract
periods so as to minimise their own exposure. There may be
compromises in terms of the nature of equipment or buy-back
clauses, as a result of the agreements achieved.
In view of the long-term commitment that is normally

associated with warehouse design, it is quite likely that a
number of business scenarios can be envisaged within this
period of time. In fact, it is almost certain that the original
business plan will change. It is therefore important to
undertake scenario planning so that the most likely future
possibilities are identified and the warehouse (or the wider
supply chain strategy) can be designed to accommodate these
scenarios if and when required. This means incorporating
flexibility as an integral part of the design.
166
Define and Obtain Data
Notes
The next step is to define and obtain the base data on
which the design will be conducted. Although data are often
obtainable for recent months and years, the warehouse will
almost certainly need to be designed for future requirements.
The data will therefore need to be adjusted to reflect likely
changes such as business growth, changing customer
requirements and competitive market pressures. Normally,
data are collected for the base year (e.g. the most recent year
of the current operation) and then projected forward in line
with the business plan to the planning horizon. There may
in fact be a number of planning horizons used. For example,
a 1-year horizon may be used to calculate the initial staffing
level, a 5-year horizon may be used for sizing the building and
the design of fixed equipment, and a 10-year horizon may be
considered for the purchase of land and for possible modular
expansion of the building.
Typical Data Required for Warehouse Design:

yy Products
For each product line, information is required concerning:
o product group
o quantity throughput (e.g. by item, case, pallet or
cubic metre)
o value throughput (to reconcile to business financial
figures)
o seasonality
o inventory turn (at average and peak)
o characteristics (e.g. unit load weight/dimensions)
o number of order lines
yy Order Characteristics
o order profile (e.g. lines per order and units per order
line);
o order frequency (by season, week, day and time);
o number of order lines for each SKU (to identify pick 167
frequency); Notes
o time profile (e.g. percentage of orders received by
week, by day, by hour);
o unit load and packing requirements;
o service levels (e.g. cut-off times, order lead times,
and order fill target).
yy Intake and Dispatch Patterns
o number of vehicles per day and by hour
o types of vehicle (e.g. bed-height and end- or side-
loaded
o unit load types and profiles (e.g. SKUs per pallet
and need for re-palletising)
o volumes per dispatch route
o own vehicles or third-party
o cross-docking profiles (e.g. quantities, timing and
sortation requirements)
yy Warehouse Operations
o basic operations to be undertake
o ancillary functions, e.g. packing, returns, quality
control, battery charging, offices warehouse cleaning,
maintenance workshop, services, stand-by generator
restaurant, locker rooms
yy External Area Requirements
o security facilities, including gatehouse
o truck parking and manoeuvring areas, car parking
o vehicle wash and fueling points
yy Site and Building Details (for redesign of existing facilities)
o location, access and ground conditions
o drawing to show building dimensions, columns,
gradients, etc.
168 o drawing to show external area, roadways and
Notes adjacent facilities
o services (e.g. electricity supply)
yy Cost Data
o rent (or land and building costs) and rates
o building maintenance and security
o heat, light and power
o wage rates and shift premiums
o equipment costs, depreciation rules, maintenance
costs
yy Any existing facilities or equipment
o size, condition, numbers
Most organisations do not keep the exact data required for
warehouse design and therefore, a wide range of methods
normally need to be used to assemble the data. These methods
include extracting data from computer records and paper
records, sampling or surveying existing operations, projections
based on forecasts, interviews with customers, site drawings,
information from equipment and information technology
suppliers and input from relevant management and staff.
Assumptions often have to be made based on informed opinion
and experience and these should be clearly highlighted and
agreed with the Steering Group.
Formulate a Planning Base

The relevant data need to be brought together as a structured
planning base. This requires detailed data analysis (e.g. using
spreadsheets) and needs to be presented to the project team,
Steering Group and external stakeholders as clearly as

possible, for example, by means of summary tables, graphs,
charts and drawings. A useful way to present the throughput
and storage data is as a warehouse flow diagram.
The flow diagram forces some initial consideration of

warehouse zoning, in terms of whether to separate picking
stock from reserve storage inventory (which is likely to
be the case if the volume of goods is too great to fit into one 169
convenient size location). Also, the warehouse may be divided Notes

by product groups, by temperature regime, by the degree of
hazard, by the need for security, by size of items or by Pareto
classification.
Define the Operational Principles

The basic operations will have been determined at the outset
by the definition of the various roles that the warehouse must
perform (e.g. as a decoupling point, consolidation centre,
assembly centre or returns centre). However, it is necessary to
detail these as far as possible before design commences. For
example, the warehouse tasks may include vehicle unloading,
quality assurance, storage, picking, production postponement,
added value services, packing, crossdocking, sortation
and vehicle loading as well as such ancillary activities as
accommodating sales offices or providing vehicle wash
facilities.
The time available for each activity is an important factor in

determining how each should be performed. For example, if
there is a late-evening cut-off time for orders and the service
level is for next-day delivery, then the time window available
for order picking may be limited to only a few hours. On the
other hand, it may be possible to instruct suppliers to deliver
goods to the warehouse earlier, so this activity could be
scheduled for the morning in order to balance the workload
over the day. An indicative time profile, could therefore be
established.
At this stage, general operational methods may be identified

for each activity. For example, if there are many small orders
across a wide range of SKUs, then batch picking may be
identified as the most likely picking concept. Similarly, for
cross-docking, a pick-by-line concept may be adopted. Each
activity should be examined to determine whether some
general operational methods of this nature can be identified at
this early stage.
Evaluate Equipment Types

There is a wide range of equipment available to warehouse
170 designers. Some of these may be well suited to a particular
Notes operation and some very badly suited. It is vital that an
appropriate equipment type is identified as subsequent
changes could be extremely expensive and disruptive to
implement.
It is therefore important to proceed in a structured manner so

that appropriate equipment types are not discarded without
proper consideration. A narrowing down of options should
therefore be carried out. It should be noted that the reasons
for discarding equipment at each stage are just as important
as the reasons for selecting equipment.
Prepare Internal and External Layouts

When most people think of a warehouse design, they picture a
layout drawing. This is obviously a critical part of the design
process. Once the operational principles have been established
and the equipment types chosen, then the internal and
external layouts can be drawn.
Computer packages, such as Computer-Aided Design (CAD)

software can be very useful in this regard, but it is up to
the designer to decide how the different components of the
warehouse should be brought together.
Check your Progress
1. ____________designers may be an important part

of the team, as many organisations only design
warehouses on an infrequent basis.
2. The wider business requirements set the context and
the design requirements for a __________.
3. It is vital that an appropriate _________ is identified
as subsequent changes could be extremely expensive
and disruptive to implement.
4. Computer packages, such as ________________can be
very useful in regard to internal and external layouts
drawings.
171
Summary
Notes
A warehouse is a long-term asset, with the building often
having a depreciation period of 20 to 25 years and the
equipment about 5 to 10 years. The design of a large and
modern warehouse is very complex and requires a range of
skills and disciplines. The wider business requirements set
the context and the design requirements for a warehouse. The
next step is to define and obtain the base data on which the
design will be conducted. Most organisations do not keep the
exact data required for warehouse design. The relevant data
need to be brought together as a structured planning base.
There is a wide range of equipment available to warehouse
designers.

1. How would you explain the design constrains as per
business requirements?
2. What points are to be focused on for listing Typical data
required for warehouse design?
3. What would be most useful to prepare internal and
external layouts?
4. How should the basic operational principles be defined to
determine the various roles of a warehouse?
172
Notes
Unit 24
Organisational Structure for
Global Logistics
Objectives
following topics:
\\ Significance of Logistics
\\ Contribution of Logistic to Corporate Strategic Planning
\\ The Role of the Logistics Distribution Manager
Introduction
Organisation structure helps in creating, implementing and
evaluating plans. The organisation structure gives concrete
shape to the organisation. Basically, it is a pattern in which
various parts or components are interrelated or interconnected.
It prescribes the relationship among various positions and
activities.
Logistics was generally viewed as a facilitating or support

function prior to the 1950s. The organisational logistics
responsibility is dispersed all through the firm. This resulted
in duplication and waste, with fragmentation. Aspects of
logistics related activities were performed without any cross-
functional co-ordination. The primary idea behind functional
aggregation was done with a belief that grouping all functions
of logistics into a single organisation would increase the
integration.
Basically, the organisational chart for a company represents a

pyramid, which gives a clear view of how and where everyone
fits and also the reporting relationships.
Logistics significance is highlighted by the following concepts:
1. Structural Compression: The role of the chief logistics

executive is changing and this ignites the motivation for
logistical structural compression. An environment with
173
restricted head count as well as intensive control of assets
has enabled the senior logistics manager to emerge as Notes
an important part of the firm’s continuous move towards
gaining and maintaining customer loyalty.
2. Centralisation/Decentralisation: An enterprise is
considered decentralised if their basis of function is
autonomous. Every unit would be responsible for their own
logistical planning as well as its execution. A centralised
organisation has the opposite policy. A central headquarters
group directs logistical planning and execution. In today’s
organisation, which is information-intense, the distinction
between centralisation and decentralisation is becoming
hazy. Recent trends have seen a shift towards centralised
organisations. But with the recent developments in
distributed information processing, a centralised logistics
organisation is no longer required for efficient data
processing. Logistical responsibility gets pushed down
the organisation, as a result. Basically, there is a direct
relationship between the desired degree of centralisation
and the complete nature of business operations.
Customers who desire a host of products sold by different
business units of a conglomerate have encouraged
many cross-divisional or various business units. The
availability of information technology is considered a
major benefit of decentralisation. To conclude, today’s
organisations, which are agile, enjoy both centralisation
and decentralisation, simultaneously.
3. Line and Staff Distinction: Traditionally, line
performed or executed day-to-day operations, while the
staff was engaged in planning. Today this distinction is
no longer relevant. Logistics managers in all levels are
involving themselves in both planning and operations.
Direct involvement and assumption of responsibility
with regard to the reason and methodology of performing
work is the key to a leading-edge practice in logistics.
One of the major reasons for the elimination of line/
staff distinction is the impact of logistics information
systems. A desired balance of the nature of work for
line and staff needs to be communicated which results
174 in an organisation which reflects the total employee
Notes resources dedicated to serve customers through maximum
integration.
In line organisations, logistics activities are centralised
into departments and placed under the responsibility of
a single manager. Activities are divided on the basis of
importance to the achievement of the overall organisation
objectives. The manager is in the operational role. In a
staff organisation, functions are more of planning and
measuring nature. There is not much requirement of
reassignment of people. This type of structure can be
implemented in a very short time. A drawback is the
resistance from line personnel who refuse to follow the
logistics manager and opts to follow their own views. An
organisation to have the best of both the structures needs
to opt for staff and line function organisations. Providing
a structure for logistics reduces the conflict among
various activities of physical distribution. But this leads
to an additional functional area, within an organisation
and thus interfunctional conflict increases.
Matrix to Horizontal Structure

Under a functional structure, logistical activities like
transportation and warehousing are grouped into clusters and
authority and responsibility create a direct relationship. The
matrix model of authority and responsibility has been gaining
a lot of popularity in service organisations like consulting and
public accounting. The matrix organisation’s potential has
gained a lot of interest as mangers are struggling with the
challenges of process management. A technical resource group,
which can be deployed geographically in order to satisfy line-
unit requirements, is required by a matrix approach.
This approach helps in sharing scarce assets and technical

resources on a flexible basis. It also reduces the duplication
of skilled personnel among business units. A horizontal
organisation is a modern extension of a matrix approach.
While an organisation is restructured, the key issue for the
logistics managers is the concern to make the most innovative
new structure
Empowerment 175
Notes
The main concept in empowerment is the availability as
well as willingness of senior management to freely share
the relevant information. Empowerment ranges from
accommodating all requirements of an order on a single
call basis to an on- the -spot resolution of discrepancies of
delivery. An organisation that is empowered, allows mid-
level management to resolve problems as well as utilisation
of pro-active judgement. The response speed shows the
extent to which an organisation is empowered. From logistics
point of view, empowerment makes it necessary for frontline
managers to be positioned in order to complete all the aspects
of their respective work. Empowerment, to be effective in an
organisation, requires fully established ways as well as means
of gaining differential advantage.
Teaming
A Self-directed Work Team (SDWT) has originated from the
idea that multiple viewpoints are better than the one which
have a long standing in administrative practice. The SDWT is
not structured typically for any specific assignment or problem
solving. From logistics point of view, a special purpose work
group can be formulated in order to facilitate the development
of a new software application or for handling a unique
requirement, like selecting a new location for distribution
warehouse. A self-directed team is unique in the way its
performance is planned and executed. The team members
are empowered to perform whatever it takes to complete the
designated work, effectively as well as efficiently.
Strategic and Operational Structure
It is the position of logistics in light of other enterprise
functions. Logistics is considered as a strategic element of the
overall organisational structure or an operational element. By
this, its activities are spread under various other functions
i.e., marketing, finance and production. If it is treated as a
strategic element then various activities of logistics need to
be grouped together. In the recent times, logistics has become
a strategic department equivalent to marketing, production
and finance as it helps in achieving interdepartmental
objectives and also helps increase customer satisfaction.
176
Logistics Organisational Structures
Notes
Associated with the failure to include relevant logistics
factors within the corporate business plan, the need is to
recognise that the logistics function may also require a specific
organisational structure. For many years, logistics was barely
recognised as a discrete function within the organisational
structure of many companies. Although now, the importance of
distribution and logistics has become much more apparent to a
broad range of companies, a number have failed to adapt their
basic organisational structures to reflect this changing view.
Such companies have traditionally allocated the various

physical distribution functions amongst several associated
company functions. This failure to represent distribution and
logistics, positively within the organisational structure is often
a result of historical arrangement rather than a specific desire
to ignore the requirement for a positive logistics management
structure. Clearly, some positive organisational structure is
essential if the logistics function is to be planned and operated
effectively.
Several of the more forward-looking logistics-oriented

companies have seen the need for some formal organisational
change to represent the recognition now being given to
the distribution and logistics activity. This new functional
approach emphasises the need for logistics to be planned,
operated and controlled as one overall activity. The precise
structure will obviously differ from one company to another.
Role of the Logistics or Distribution Manager

The role of the logistics or distribution manager can vary
considerably from one company to another, dependent on
the internal organisational structure, the channel type (own
account, third party, etc.), the industry or product, and the
customer profile. Factors such as these will certainly affect
the extent of the operational role to a lesser extent than the
nature of the planning role.
In an earlier section of this chapter, the need for companies

to include the planning of logistics and distribution in the
overall corporate strategy was emphasised. It is useful
here to consider the part that the logistics or distribution 177
manager can play in the planning process. Several years Notes

ago, M A McGinnis and B J LaLonde (1983) identified three
main themes; the contribution that the logistics/distribution
manager can make to corporate strategic planning; the
advantages of this contribution; and the preparation that the
manager can make to increase the effectiveness of his or her
input.
The main points were as follows:
1. Contribution to corporate strategic planning:

o an understanding of the functional interfaces
o an understanding of distribution’s activities
o familiarity with the external environment as it
relates to distribution
o insights regarding competitor distribution strategies
o familiarity with customer distribution needs
o familiarity with channels of distribution
o distribution data
2. Advantages of contributing to corporate plan:
o understanding of impact of corporate strategy on
distribution activities
o increased physical distribution responsiveness
o increased sensitivity to the distribution environment
o identifying distribution opportunities
o improving communications
3. Preparation for strategic planning:
o know the company
o develop a broader perspective of distribution
o know the distribution environment
o develop rapport/liaison with others
o know customer needs
178 o improve communication skills
Notes
Logistics-related planning activities are thus a vital input
in the overall business strategy. The more specific activities
were outlined in the early chapters of this book. They involve
a medium to long-term planning horizon and will include
aspects such as the number of facilities, their size and
location, transport networks, fleet size and mix of vehicles,
stock levels, information systems, etc.
Check your Progress
1. A _________________group directs logistical planning

and execution.
2. One of the major reasons for the ____________of line/
staff distinction is the impact of logistics information
systems.
3. An _________________organisation allows mid-
level management to resolve problems as well as
utilisation of pro-active judgement.
4. The role of the _______________manager can vary
considerably from one company to another.
Summary
The organisation structure gives concrete shape to the
organisation. The role of the chief logistics executive is
changing and this ignites the motivation for logistical
structural compression. Recent trends have seen a shift
towards centralised organisations. Logistics managers in
all levels are involving themselves in both planning and
operations. A horizontal organisation is a modern extension of
a matrix approach. Some positive organisational structure is
essential if the logistics function is to be planned and operated
effectively. Logistics-related planning activities are a vital
input in the overall business strategy.

1. Explain the logistics activities in Matrix to Horizontal
Structure?
2. Evaluate the part that the logistics or distribution 179
manager can play in the planning process. Notes

3. How would you elaborate the significance of logistics.
4. What do you understand by Line and Staff Distinction.
180
Notes
Unit 25
Case Study
Case of Supply Chain Starbucks

Starbucks is pretty much a household name, but like many of
the most successful worldwide brands, the coffee-shop giant
has been through its periods of supply chain pain. In fact,
during 2007 and 2008, Starbucks leadership began to have
severe doubts about the company’s ability to supply its 16,700
outlets. As in most commercial sectors at that time, sales were
falling. At the same time, though, supply chain costs rose by
more than $75 million.
Supply Chain Cost Reduction Challenges: When the supply

chain executive team began investigating the rising costs and
supply chain performance issues, they found that service was
indeed falling short of expectations. Findings included the
following problems-
Fewer than 50% of outlet deliveries were arriving on time.

Several poor outsourcing decisions had led to excessive 3PL
expenses.
The supply chain had (like those of many global organisations)

evolved, rather than grown by design, and had hence become
unnecessarily complex.
The Path to Cost Reduction: Starbucks’ leadership had three

main objectives in mind to achieve improved performance and
supply chain cost reduction. These were to:
Reorganise the Supply Chain

yy Reduce cost to serve
yy Lay the groundwork for future capability in the supply
chain
yy To meet these objectives, Starbucks divided all its supply
chain functions into three main groups, known as “plan”
181
“make” and “deliver”. It also opened a new production
facility, bringing the total number of U.S. plants to four. Notes
Next, the company set about terminating partnerships with

all but its most effective 3PLs. It then began managing the
remaining partners via a weekly scorecard system, aligned
with renewed service level agreements.
Supply Chain Cost Management Results: By the time

Starbucks had completed its transformation program, it had
saved more than $500 million over the course of 2009 and
2010, of which a large proportion came out of the supply chain,
according to Peter Gibbons, then Executive Vice President of
Global Supply Chain Operations.

1. What gaps were identified in Starbucks supply chain?
2. What supply chain solutions can be given to Starbucks
supply chain?
3. How will one evaluate and hire a 3PL for outsourcing its
logistical operations?

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MBAP921D

Mr. Sharad Mehra

Dr. S J Chopra Dr. Veena Dutta

Dr. Kamal Bansal Mr. Ashok Sahu

SLM Development Team

Mr. Tarun Batra Mr. Rahul Sharma Mr. Shantanu Trivedi

Course Code: MBAP921D

Version: July 2019

Unit 1 Logistics and Supply Chain Management...................................................... 01

Logistics and Supply Chain

The Great Logistics and Supply Chain History

The revolutionary invention of rowing vessels created the

Under an agreement with Philipp of Burgundy, Franz von

The quick response and Efficient Consumer Response (ECR)

Modern Supply Chain

Globalisation is still moving forward today. Efficient logistics

yy Configuration of product and network, which covers the

Moreover, firms now accept that efficient consumer response

complex and cannot be used without adequate computational Notes

Value chain management is the process of organising these

In his book, Porter splits a business’s activities into two

Primary activities include the following:

yy Inbound logistics refers to receiving, storing and

yy Procurement is how the raw materials for the product are

Check your Progress

1. ______________________ was the first time-definite

Questions for Discussion

Various analytical and quantitative methods form the core

location etc. All these models have one intrinsic limitation.

The MCDM solution methodologies address the multiple

where k (>1) the number of criterions to be optimised, z’s are

Other techniques that can be used are:

yy Neural network-based techniques for the evaluation

Information Technology and SCM

OEMs, Suppliers, Manufacturers, retailers, shippers and

For manufacturing firms and original equipment

Some of the technologies are as under:

Electronic POS software systems streamline retail operations

Since the tags store data digitally, they open up a whole

The benefits of RFID in logistics go well beyond that to control

ERP system holds a high level of integration that is achieved

represents and constructing a set of rules for accessing data. Notes

With the advancement of technology, we can say that world is

Check your Progress

1. Retailers can increase functionality by installing a

Logistics and Supply Chain

Indian Logistics Sector

Today, the Indian logistics sector is a sunshine industry and

There exists a tremendous scope for further jump in

To ensure ease of trading in the international and domestic

The need of the hour is to formulate an integrated logistics

the sector’s performance at regular intervals against the set Notes

To alter the country’s logistics landscape, GoI has taken a

A new Logistics Division in the Department of Commerce

The logistics sector now finds a place in the harmonised

The central idea of supply chain mgmt. is to apply a total

Virtually every industry is broadening its product lines to

Global Economic Scenario

tendencies are perhaps reflection of a penchant for innovation Notes

Supply chain management is important in business today. The

Measures of supply chain efficiency are inventory turnover

Companies that face diverse sourcing, production and