MDSL833D Logistic Startegy

Logistics Strategy
Course Design
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Advisory Council
Chairman
Dr Parag Diwan
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Members
Dr Kamal Bansal Dr Anirban Sengupta Dr Ashish Bhardwaj
Dean Dean CIO
Dr S R Das Dr Sanjay Mittal Prof V K Nangia

VP – Academic Affairs Professor – IIT Kanpur IIT Roorkee
SLM Development Team

Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
Dr K K Pandey
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Print Production
Mr Kapil Mehra Mr A N Sinha

Manager – Material Sr Manager – Printing
Author
Reji Ismail
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
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Course Code: MDSL-833D
Course Name: Logistics Strategy
Version: July 2013
© MPower Applied Learning Enterprise

UNIT 20: Case Study
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Contents
Block-I
Unit 1 The Evolution of Logistics .............................................................................................. 3
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Unit 2 Logistics Blueprint ....................................................................................................... 13
Unit 3 Logistics Performance Analysis ................................................................................... 21
Unit 4 Logistics Implementation............................................................................................. 51
Unit 5 Case Study .................................................................................................................... 61
Block-II
Unit 6 Logistics Modelling....................................................................................................... 65

Unit 7 Customer Service and Order Processing ..................................................................... 85
Unit 8 Inventory Planning and Management....................................................................... 103
Unit 9 Efficient Warehousing ................................................................................................ 123
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Unit 10 Case Study .................................................................................................................. 153
Block-III
Unit 11 Packaging Strategy..................................................................................................... 157

Unit 12 Green Logistics ........................................................................................................... 175
Unit 13 Supply Chain Engineering ......................................................................................... 191
Unit 14 Transportation Planning............................................................................................ 215
Unit 15 Case Study .................................................................................................................. 237
Block-IV
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Unit 16 Logistics Information System .................................................................................... 241

Unit 17 SCOR Modelling ......................................................................................................... 259
Unit 18 Manufacturing Logistics Strategy ............................................................................. 295
Unit 19 Retail Strategy and Supply Chain............................................................................. 311
Unit 20 Case Study .................................................................................................................. 327
Logistics Strategy
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Block-V
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Unit 21 Strategy for Logistics Providers................................................................................. 333
Unit 22 Logistics Organisational Design ................................................................................ 361
Unit 23 International Logistics ............................................................................................... 373
Unit 24 Views of International Logistics ................................................................................ 389
Unit 25 Case Study .................................................................................................................. 405
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Glossary ............................................................................................................................................ 407
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UNIT 1: The Evolution of Logistics
1
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-I
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Detailed Contents Logistics Strategy
2
Notes
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UNIT 1: THE EVOLUTION OF LOGISTICS
___________________ UNIT 3: LOGISTICS PERFORMANCE ANALYSIS
z Introduction z Introduction
___________________
z Origin of Logistics z Logistics Activity Profiling
___________________
z Logistics Players z Inventory Turn
z ___________________
Logistics Development z Total Quality Logistics
___________________ z Logistics Productivity Measures
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UNIT 2: LOGISTICS BLUEPRINT
z
___________________
Introduction UNIT 4: LOGISTICS IMPLEMENTATION
z Concept of Logistics Blueprint
___________________ z Introduction
z Logistics in Corporate Strategy
___________________ z Logistics Implementation Steps
z Components to Examine when Developing a z Benchmarking
___________________
Logistics Strategy
___________________ UNIT 5: CASE STUDY
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Unit 1
3
Notes
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Activity
The Evolution of Logistics Name___________________

two of the biggest
players in the Logistics
___________________
business in India.
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________
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\ Origin of Logistics ___________________
\ Logistics Players ___________________
\ Logistics Development
___________________
___________________
Introduction
___________________
The evolution of logistics and Supply Chain Management (SCM) in
the 1990s can be traced back to “physical distribution
management” in the 1970s when there was no coordination among
the various functions of an organization, and each was committed
to attain its own goal. This myopic approach then transformed into
“integrated logistics management” in the 1980s that called for the
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integration of various functions to achieve a system-wide objective.
Supply Chain Management (SCM) further widens this scope by
including the suppliers and customers into the organizational fold,
and coordinating the flow of materials and information from the
procurement of raw materials to the consumption of finished goods.
The objectives of Supply Chain Management (SCM) are to
eliminate redundancies, and reduce cycle time and inventory so as
to provide better customer service at lower cost. The focus has
shifted from the “share of the market” paradigm to the “share of
the customer paradigm, wherein the goal is to create “customer
value” leading to increased corporate profitability, shareholder
value, and sustained competitive advantage in the long run.
Origin of Logistics
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Logistics involves getting, in the right way, the right product, in

the right quantity and right quality, in the right place at the right
time, for the right customer at the right cost. The logistic network
consists of the suppliers, the retailer and the users. The purpose of
an integrated logistic network in a supply chain is to fulfil
customer orders through providing place utility to deliver products
Logistics Strategy
4 and services to end users. The place utility is achieved by

Notes managing a number of key functions of a supply chain. The
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___________________ functions include:
___________________ z Demand management
___________________ z Inventory management
___________________ z Transportation
___________________
z Warehousing
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___________________
z Order processing
___________________
z Information Management
___________________
Logistics is a key enabler of supply chain collaboration. Improving
___________________
performance in this field allows supply chains to increase their
___________________ efficiency significantly and help to create innovations in different
areas. In this context, an important task is to find structures and
approaches, which enable all types of performance management in
logistics and supply chains for a better fulfilment of customer
needs.
Supply chain management is a cross-function approach including
managing the movement of raw materials into an organization,
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certain aspects of the internal processing of materials into finished
goods, and the movement of finished goods out of the organization
and toward the end-consumer. As organizations strive to focus on
core competencies and becoming more flexible, they reduce their
ownership of raw materials sources and distribution channels.
These functions are increasingly being outsourced to other entities
that can perform the activities better or more cost effectively. The
effect is to increase the number of organizations involved in
satisfying customer demand, while reducing management control
of daily logistics operations. Less control and more supply chain
partners led to the creation of supply chain management concepts.
The purpose of supply chain management is to improve trust and
collaboration among supply chain partners, thus improving
inventory visibility and the velocity of inventory movement. There
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are four major decision areas in supply chain management:

1. Location
2. Production
3. Inventory
4. Transportation (distribution)
In addition, there are both strategic and operational elements in 5

each of these decision areas. Notes
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___________________
Logistics Lingo and Notations
___________________
A system of figures or symbols used in a specialized field to
___________________
represent numbers, quantities etc. You need to make sure that you
are fully aware of logistics lingo and notations. ___________________
For example: In case of global logistics companies, it is required ___________________
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to know the terms and definitions of the possible items you will be ___________________
discussing. Such as a carnet is your merchandise’s passport. Global
___________________
logistics companies help to secure one if your merchandise will
___________________
only be in a country temporarily, as would be the case if you are
taking equipment into a country to do an event, or you are renting ___________________
your equipment to someone in a foreign country. ___________________
One should know that your freight broker or forwarder is the

person who acts as your liaison at your ship-to country. Therefore,
your global transport logistics company must be in a position to
either arrange for this person, or handle this person completely for
you. It is the duty of this broker/forwarder to grease the wheels to
help your shipment past customs and to its final destination.
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Incoming country places tariffs, duties, and import fees which are
the taxes on your items. This is done to make them less
competitive against the market of the import company.
Logistics Players
India is a huge market for a business like logistics. This opens up a
wide array of opportunities for the logistics companies who are the
major players in the world. The countries like India are a growing
one with a steep slope towards the growth and progress. This is the
reason for the high demand in the logistics services that are
presently conducting businesses and earning huge profits in
developing economies like India. It is estimated that few years in
the past, the logistics market that was provided by India was of the
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worth of US $ 14 billion. It is also estimated that the logistics

market will grow in India at the rate of 7 to 8%, which attracts
major players in the logistics business of the world. The logistics
companies that are established and conduct business in India are
the ones, which provided services to millions of retailers in India
which ultimately caters the requirements that are set up by
around a billion people. In the guide to follow, we are going to
Logistics Strategy
6 discuss about the various logistics companies that are major

Notes players in the Indian market.
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___________________
TNT Express
___________________
This is a company, which is multinational, and also a leader in the
___________________
logistics services that are provided to the businesses all over the
___________________
world. It has been established in the international market for a
___________________ long time. The company is professional and hence guarantees safe
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___________________ and the timely delivery of the goods and services of various
businesses all over the world. It is operative in around 200
___________________
countries of the world, out of which one is India. It has 2300
___________________ worldwide offices, 47 jet carriers as well as 26000 vehicles that are
___________________ deployed on roads.
___________________
AFL
It is a leader in the market that is provide by India and is availed
services by a lot of business in India. The company is able to
deliver world-class service to businesses in India that avail
services of the AFL. It is done through an expertise in the domain
services related to the logistics sector. In 1970, it was the time
when this company introduced its first courier service to be
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launched in India. This was done by a setup of collaboration with
the DHL Express services in logistics.
DHL
It is one of the major players in India when it comes to the logistics
domain. It is a market leader then it comes to the areas of transport
over the road, air and ocean freight as well as the international
express services in logistics. The company DHL is the one, which
has ranked number one in the area of business logistics in the
world. It is very professional and makes one in a million errors in
delivery. It is operative in 220 countries, has 4700 worldwide offices
as well as 350 aircrafts and 72000 vehicles on road itself.
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Blue Dart
It is operative in India to a large extent and is also a leader in the
Asia Pacific and the Oceania regions. It is the top integrated
packages distribution services. It covers 21340 cities of the world
as well as operative in over 200 countries like other logistics
companies. It is best service provider in logistics and specialized in
free pick up from the location of your business as well as
regulatory clearances that are often introduced in the field of real 7

time tracking of your packages in transit. It provides free proof of Notes
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delivery through its computerized network. ___________________
Gati ___________________
___________________
It is a company, which is a key leader in the Indian market of the
supply chain management. It specializes in the express delivery of ___________________
the cargo as well as supply chain related areas. It is operative in ___________________
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India since the year 1989. The company also provides services
___________________
related to the warehousing.
___________________
Safexpress ___________________
It is one of the largest companies that has its roots and is operative ___________________
in India since a long time. The company is responsible for
___________________
providing its business customers with a solution in integrated
logistics. In the year 2002, this company was declared by the
Limca book of awards as the single-handedly the most widespread
and the most availed service in India for logistics requirements.
Ashok Leyland
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This company is a leader in India when it comes to logistics of the
Indian army. It is a single and a key leader that exists in the
tractors, trailers as well as different kinds of trucks. The company
offers services that are a display of the world-class quality in the
fields of the packaging as well as the transportation.
Logistics in India does not differ from logistics anywhere else in
the world. It is the art and science of managing and controlling the
flow of goods, products, services, energy, information and people
from the origin point to the destination point. Proper combination
of several activities such as material handling, warehousing, and
information, for the purpose of ensuring supply of the right
product, at the right time, at the right place, for a right cost in the
right condition is included.
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Check Your Progress

Fill in the blanks:
1. The logistic network consists of the suppliers, the
..................... and the users.
2. The purpose of...................................... is to improve
trust and collaboration among supply chain partners.
Logistics Strategy
8
Logistics Development
Notes
Activity
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Make a presentation on
India has been the student and not the expert in the past when it
___________________
Confederation of Indian comes to the field of logistics. However, with its current expertise,
Industry (CII) and its role in
___________________
Logistics Development in valuable human resources and positive plans, it surely is walking
India.
___________________ on the path of being a service provider of class.
___________________ There are several factors that benefit the Indian economy for
___________________ reaching success in the field of logistics, namely:
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___________________ 1. India is the fourth largest economy in the world.
___________________ 2. It is believed that about one-quarter of the youth population of
___________________ the world resides in India.
___________________ 3. India has human resources that are high in knowledge and
abilities.
___________________
4. It is the second-largest English-speaking workforce.
5. It has the second largest pool of qualified technical workforce.
India spends around 13% of its Gross Domestic Product (GDP) on
logistics as opposed to the usual practice of 10% by other
developing nations. The Indian economy is striving for
improvements in the field of logistics and supply chain
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management to gain the competitive edge in today’s worldwide
economy. The Indian government has favoured the logistics market
of India by making some helpful plans and policies to assist in its
growth.
There are several events organized for the promotion of logistics in
India, which are focused in their approach and relevant to the
business solutions besides providing a solid platform for allowing
people from a wide industry spectrum to meet and provide
business within themselves from all over the country. This has
been an emphatic source of providing business solutions and their
development.
Several global third party logistics providers (3PLs) have already
started developing their operations and service networks in India
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with a purpose to explore the rampant Indian economy.

This has resulted in the creation of the need for a vast range of
supply chain management (SCM) and logistics solutions which
cover several factors such as supply chain, logistics, material
handling, storage, Information technology (IT), warehousing and
inventory management. This has benefited the efficiency and
productivity of the complete value chain in several dimensions of 9

profits, speed and customer service. Notes
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The Confederation of Indian Industry (CII) is the premier business ___________________
organization with a known commitment towards the development ___________________
of logistics in India. It has established the CII Institute of
___________________
Logistics, which is a specialized state-of-the-art institute of
excellence with its focus on SCM, and logistics. It is brought up to ___________________
satisfy the latest industry needs for specialized SCM and logistics. ___________________
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India is being treated as the destination of the future in the field of ___________________
logistical service providers all over the globe. Indian logistical ___________________
market players have started to gear up and position themselves in
___________________
the global scenario. The true potential of these service providers is
yet to be realized. India is keen to offer transportation and ___________________
logistical service to grow itself as an emerging marketplace. The ___________________

key sectors include fashion, gems, jewellery, pharmaceuticals,
precision tools and engineering goods, all of which need special
shipping provisions.
Logistics by the Numbers: Key Performance Indicators in

Logistics
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Key question in picking or staying with a current logistics provider
is whether or not they can provide you with the same data that you
are accustomed to have if you are running your own internal
warehouse operation. It seems like a simple question but it is
usually not asked until the decision on the 3PL (third part
logistics) has already been made. When adding a third party
distribution centre (DC) to your business environment, understand
the numbers you need to know and make sure that the 3PL you
are looking at can provide them.
Here are some of the numbers you need to know from your third
party logistics provider in order to be knowledgeable for your
company’s management team and your customers:
z Units ordered from each distribution centre
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z On time order accuracy

z Orders shipped complete
z Number of shipments per month
z On hand inventory
z Picking accuracy
Logistics Strategy
10 Imagine the problems in asking your current logistics provider

Notes what the order accuracy or order pick rate was for the quarter and
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___________________ getting an answer of “we can’t provide that information.” If that is
the case then you are just dealing with a warehouse as opposed to
___________________
a third party logistics provider. Also ask the prospective 3PL to
___________________
provide their overall company numbers for the KPI’s that are
___________________ relevant to you. If they are within your own company’s parameters
___________________ then their service matches your needs. More importantly, if they
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cannot provide these numbers then you already know that you
___________________
could run into problems. To help you compare potential providers,
___________________ the Warehouse Education Research council says that the average
___________________ warehouse has an order accuracy rate of 99.5%.
___________________ KPI’s also create a reality check when a mistake happens. If there
___________________ is an error in picking but full accuracy is achieved 99.7% of the
time, you need to ask if that is an acceptable occurrence. If I owned
my own warehouse would I manage my pick and pack service to
this type of error rate? Mistakes will happen, but if your third
party logistics provider can prove to you that they happen very
infrequently then your conversations with your sales team and
your customers will be easier.
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Before you pick a logistics provider, make sure to think ahead for
all the information you need in order to run your business
efficiently and effectively; then, make sure your potential or
current 3PL partner can provide them. These questions will
greatly reduce your long-term costs and your company’s exposure.
Check Your Progress

Fill in the blanks:
1. The ................ is the premier business organization
with a known commitment towards the development
of logistics in India.
2. ................ is being treated as the destination of the
future in the field of logistical service providers all
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over the globe.
Summary
Logistics as a concept is considered to evolve from the military’s
need to acquire supplies as they moved from their base to a
forward position.
From a firm’s point of view, the logistics activities are represented 11

as part of the value chain. ‘Inbound logistics’ and ‘outbound Notes
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logistics’ are two of the five primary activities of a business firm in
___________________
the value chain. Logistics expenditures in business is only second
to materials cost in manufacturing and cost of goods in wholesaling ___________________
and retailing. In India, it accounts for 13% of GDP according to a ___________________

study report by the Asia-Pacific Logistics Institute in 2005. In
___________________
comparison with the US, in India, logistics cost as a percentage of
GDP is higher and so is the component of losses. Logistics costs ___________________
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could be a significant portion of controllable costs. Very often, cost ___________________
containment or reduction could provide the firm with competitive
___________________
advantage.
___________________
Lesson End Activity ___________________
___________________
Conduct a debate for and against the motion, “India is being
treated as the destination of the future in the field of logistical
service providers all over the globe.”
Keywords
Supply Chain Management: Supply chain management (SCM)
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is the management of a network of interconnected businesses
involved in the provision of product and service packages required
by the end customers in a supply chain.
Logistics: Logistics is the process of planning, implementing and
controlling the efficient, effective flow and storage of goods,
services and related information from the point of origin to the
point of consumption for the purpose of conforming the customer
requirement.
Inbound Logistics: It means the movement of materials received
from suppliers.
Order Management: It includes understand various
specifications and design order requirements with each suppliers,
which will help in identifying ways of reducing cost and also help
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in reducing price structure.
Questions for Discussion

1. Define Logistics notations.
2. Give some examples of logistics players.
3. Explain logistics by the numbers.
Logistics Strategy
12
Further Readings
Notes
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___________________ Books
___________________ Bowersox D, Closs D, and Mixby Copper, M., Supply Chain
___________________ Logistics Management, McGraw Hill, 2002.
___________________ Ballou, Business Logistics/Supply Chain Management, Pearson

___________________
Education.
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___________________ Bowersox, D. J., Logistics Management, Tata McGraw Hill, 2002.
___________________ Web Readings

___________________
www.quickmba.com/strategy/value-chain
___________________
www.supplychain-forum.com/article
___________________
www.articlesbase.com›Business›Outsourcing
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UNIT 2: Logistics Blueprint
Unit 2
13
Notes
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Activity
Logistics Blueprint
___________________
Identify the six phases of
effective project management
___________________
in any project of your choice.
___________________
Objectives
___________________
topics: ___________________
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\ Concept of Logistics Blueprint ___________________
\ Logistics in Corporate Strategy ___________________
\ Components to Examine when Developing a Logistics Strategy
___________________
___________________
Introduction
___________________
Blueprint for Excellence, depicts how seven leading companies in
industries ranging from consumer goods to manufacturing to high-
tech undertake complex logistics projects. In some cases, these
projects alter the company's business model. Although different,
these companies share a common approach: their business and
logistics managers created a detailed blueprint for managing
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change. That blueprint allowed for greater agility, and minimized
logistics failure when navigating economic speed bumps.
Concept of Logistics Blueprint

It doesn’t matter whether a company is large or small, when it
undertakes dramatic supply chain reengineering projects it needs
a blueprint.
While many companies prepare a business case—which is often
limited to the financial aspects of the change—many don’t prepare
a formal case for change. Included in this document should be such
topics as the company’s competitive position in the marketplace,
future goals for the organization, and people and their skill base.
The Right Solution: Designing the right solution often includes
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developing and analyzing a number of potential models before

finalizing the ultimate solution. The final solution should include
the new model and processes, as well as the organizational and
operational infrastructure required to support it.
The Right People: Much of the success of a complex project lies in
the hands of the individuals charged with designing, planning, and
Logistics Strategy
14 executing it. “Great talent is critical,” Read says. “If this is one of
Notes the initiatives that is important for a company’s future success,
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___________________ you have to put the right people—the top talent—and the right mix
of people, on the job.”
___________________
___________________ Experts
___________________
The more professional your project manager is, the less their
___________________ subject matter expertise,”. So it’s important to surround the
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___________________ professional project manager with strong subject matter experts,
who serve as members of the core project team.
___________________
The right plan: “For a complex project to be a success, there
___________________
needs to be a plan that spells out the schedule, tasks,
___________________ responsibilities, and roles.
___________________
The right approach: “A number of project management
techniques can work well,” Vitasek says. “The point is to have one
and use it,” and ensure that project team members are trained in
how to do so.
Six Steps to Success

Kate Vitasek identifies six phases of effective project management:
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z Phase 1, deciding whether or not to pursue a project—involves
“determining whether the project is sufficiently feasible and
has a potential return significant enough to justify developing
a detailed specification and business plan,” Vitasek says.
z Phase 2, project definition and planning, includes defining the
project in a detailed statement of work and developing a sound
business case and plan for the project.
z Phase 3, the execution stage, includes developing a detailed
project plan and updating the business plan and statement of
work.
z Phase 4, Testing takes place during the critical fourth phase,
with deliverables for this phase including the test plan and the
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test results.
z Phase 5 is the go-live phase, when the project is launched.
z Phase 6 evaluation, involves assessing the project, comparing
actual results to the project’s original goals and objectives,
reviewing results, and identifying and documenting lessons
learned so that they can be incorporated in future initiatives.
“Most companies want to jump straight to Phases 3 and 5,” Vitasek 15

says. “If you skip or skimp on the other phases, however, you Notes
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increase the likelihood of less-than-optimal results.” ___________________
Logistics Master Planning ___________________
___________________
Companies everywhere are under increasing pressure to improve
customer service levels, while at the same time holding or, more ___________________
likely, reducing the costs of their logistics operations. Meeting the ___________________
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twin challenge of customer service improvement and cost reduction
___________________
now places distribution network design centre stage as a key
business priority. ___________________
___________________
Logistics master planning modelling is the best way to simulate
the options. ___________________
Logistics master planning helps to choose the best service, least ___________________
cost options for your business.

Logistics master planning expertise and the tools help to plan and
optimize distribution operations in ways that will significantly:
z Improve customer service
z Reduce distribution costs
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By using a selection of sophisticated logistics planning software
tools one can model every aspect of your distribution network,
including:
z Product flows
z Customer locations
z Inventory profile and throughput
z Sales forecasts
Risk Profiles
Logistics master planning options might include, for example:
z Maintaining the present network design
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z Consolidation of existing distribution depots

z Relocation of depot sites
z Outsourcing warehousing operations
Logistics Strategy
16
Logistics in Corporate Strategy
Notes
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When a company creates a logistics in companies, it is defining the
___________________
service levels at which its logistics organization is at its most cost
___________________ effective. Because supply chains are constantly changing and
___________________ evolving, a company may develop a number of logistics strategies
___________________
for specific product lines, specific countries or specific customers.
___________________ The supply chain constantly changes and that will affect any
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logistics organization. To adapt to the flexibility of the supply
___________________
chain, companies should develop and implement a formal logistics
___________________ strategy. This will allow a company to identify the impact of
___________________ imminent changes and make organizational or functional changes
to ensure service levels are not reduced.
___________________
___________________
A company can start to develop a logistics strategy by looking at
four distinct levels of their logistics organization.
Strategic: By examining the company’s objectives and strategic
supply chain decisions, the logistics strategy should review how
the logistics organization contributes to those high-level objectives.
Structural: The logistics strategy should examine the structural
issues of the logistics organization, such as the optimum number of
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warehouses and distribution centers or what products should be
produced at a specific manufacturing plant.
Functional: Any strategy should review how each separate
function in the logistics organization is to achieve functional
excellence.
Implementation: The key to developing a successful logistics
strategy is how it is to be implemented across the organization.
The plan for implementation will include development or
configuration of an information system, introduction of new
policies and procedures and the development of a change
management plan.
Components to Examine when Developing a Logistics

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Strategy
When examining the four levels of logistics organization, all
components of the operation should be examined to ascertain
whether any potential cost benefits can be achieved. There are
different component areas for each company but the list should at
least include the following:
z Transportation: Does the current transportation strategies 17

help service levels? Notes
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z Outsourcing: What outsourcing is used in the logistics ___________________
function? Would a partnership with a third party logistics ___________________
company improve service levels?
___________________
z Logistics Systems: Do the current logistics systems provide
___________________
the level of data that is required to successfully implement a
___________________
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logistics strategy or are new systems required?
___________________
z Competitors: Review what the competitors offer. Can changes
to the company’s customer service improve service levels? ___________________
z Information: Is the information that drives the logistics ___________________
organization real-time and accurate? If the data is inaccurate ___________________

then the decisions that are made will be in error. ___________________
z Strategy Review: Are the objectives of the logistics
organization in line with company objectives and strategies.
A successfully implemented logistics strategy is important for
companies who are dedicated to keeping service levels at the
highest levels possible despite changes that occur in the supply
chain.
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It is an important asset for the logistics manager to develop his
financial knowledge. It leads to the recognition of logistics
activities within the company.
Logistics, a company’s key function, influences the

following main financial domains:
z Costs Reduction: By reducing logistics costs (transportation,
storing, import...) the logistics manager has a direct impact on
the company’s EBIT (Operating profit). The company is more
profitable, the value of the company or its share increases.
z Assets Turnover: The logistics manager influences the
company profitability by improving the inventory rotation, by
reducing obsolete inventory, and by optimizing warehouses
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location and surfaces.

z Sales Increase: By increasing the service level and improving
the logistics flexibility, the logistics manager has a positive
impact on company sales and customer loyalty.
He directly has an influence on EBIT (Operating profit) and as a
consequence on the company’s value or its share’s value.
Logistics Strategy
18 Logistics Finance provides the following working capital financing

Notes products:
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___________________ z Inventory-in-Transit Financing
___________________
z Inventory-in-Storage Financing
___________________
z Import/Export Financing
___________________
z Purchase Order Financing
___________________
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z Inventory and Receivables Financing
___________________
___________________ Methodology
___________________ After a transaction between a Buyer and Supplier has been
negotiated:
___________________
___________________
Logistics Finance steps in to facilitate the purchase of the goods
thereby extending the payment cycle for Buyers and shortening
the payment cycle for Suppliers.
The Buyer and Supplier commercial relationship remains
unchanged.
Logistics Finance works seamlessly with the Logistics Providers
that have been appointed by the Buyer or Supplier.
)U
Logistics Finance’s Financial Solutions allow a Buyer or Supplier
to reduce their capital locked up in goods during a period that no
economic value is being added.
Check Your Progress

Fill in the blanks:
1. When a company creates a logistics in companies, it is
defining the .............. levels at which its logistics
organization is at its most cost effective.
2. Meeting the twin challenge of customer service
improvement and .............. now places distribution
network design centre stage as a key business priority.
(c
Summary
Logistics system planning/coordination components form the
information system backbone for manufacturers and
merchandisers and reflect activities necessary to produce and
deploy inventory. These components define core activities that
guide enterprise resource allocation and performance from
procurement to product delivery. Companies everywhere are under 19

increasing pressure to improve customer service levels, while at Notes
S
the same time holding or, more likely, reducing the costs of their ___________________
logistics operations. Meeting the twin challenge of customer service
___________________
improvement and cost reduction now places distribution network
design centre stage as a key business priority. ___________________
___________________
PE
Using the Internet, find out what is EBIT and how to calculate it. ___________________
___________________
Keywords ___________________
Information Flow: It identifies specific locations within a ___________________

logistical system that have requirements. Information also ___________________
integrates the three operating areas.
Physical Distribution: Physical distribution is the set of
activities concerned with efficient movement of finished goods from
the end of the production operation to the consumer.
Transportation: It is the operational area of logistics that
geographically moves and positions inventory.
)U
1. What is logistics blueprint?
2. Describe logistics master planning in detail.
3. Explain logistics and finance.
Further Readings
Books
Ballou, Business Logistics/Supply Chain Management, Pearson
Education.
(c
Bowersox, D. J., Logistics Management, Tata McGraw Hill, 2002.
Web Readings
www.articlesbase.com › Business › Outsourcing
Logistics Strategy
20
Notes
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___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 3: Logistics Performance Analysis
Unit 3
21
Notes
S
Activity
Logistics Performance Analysis

___________________
Warehousing function in
___________________
Logistics.
___________________
Objectives
___________________
topics: ___________________
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\ Logistics Activity Profiling ___________________
\ Total Quality Logistics ___________________
\ Logistics Productivity Measures
___________________
___________________
Introduction
___________________
In today's world, it is not the strongest or biggest companies that
win. It is the most adaptable companies equipped with the best
technology that do well. Many companies assume that competitive
advantage will come from economies of scale, fixed supply chains,
predictable consumer markets and static operations optimized for
efficiency and asset utilization. This is no longer true for the
)U
future.
The twenty-first century has changed the way companies operate.
With the coming of the information age, firms are being
increasingly forced to transform their domestic and international
supply chains at a rapid pace, driven by both the suppliers and the
customers, both expecting that companies will provide standards
acceptable in this globalized world.
With such changes in the air, logistics will ultimately yield a
sustainable advantage in the market when implemented through
changes in the corporate infrastructure – people, technology,
facilities and/or strategic corporate relationships. These impacts of
these changes are visible in the trends projected for the logistic
industry worldwide - and are described in the remaining part of
(c
this section.
Logistics Activity Profiling

Customer order profiles and item activity profiles are important for
logistics activity profiling. Customer order profiles represent the
outbound activity, i.e., how the customers are ordering the
Logistics Strategy
22 products. Item activity profiles provide insight into viable storing

Notes and slotting options for each item within the warehouse.
S
___________________
Customer Order Profiles
___________________
The three most basic Customer Order Profiles are described below:
___________________
___________________
Order Mix Distribution: These distributions answer warehouse
zoning questions such as “Should my fast, medium, and slow
___________________
movers be zoned separately in the warehouse?” To answer this
PE
___________________ question, a distribution of the orders for fast, medium, or slow
___________________ movers is compared with any combination of the three. If
warehouse data indicates that most orders call for a mix of fast
___________________
and slow movers, zoning the items by velocity will have order
___________________ consolidation impacts that need to be considered. Order mix
___________________ profiles are also used to analyse the percentage of order lines for
full cartons, broken cartons, or a combination of the two. Analysis
of this information provides options on storing full and broken
cartons together. The goal is to determine what percentage of your
customers is ordering full and broken carton quantities of the same
item, before investing time and money in changing the current
storage strategy.
)U
Order Increment Distribution: The order line distribution of the
percent of a full carton ordered is beneficial when evaluating if the
current packaging is in logical increments for the customer. For
example, if results indicate that 90% of the customers are ordering¸
carton quantities, the warehouse can consider effective
alternatives. Options could involve first the supplier by changing
the carton size, second the warehouse operations by breaking down
cartons at receiving in order to save time during picking, and third,
the marketing department by encouraging customers to order in
full carton quantities.
Order Lines Distribution: This distribution of the number of
lines contained on each order is important when evaluating
operating strategies. A warehouse with mainly one and two line
orders would most likely have a very different picking strategy
(c
than a warehouse with many large multi-line orders.
Item Activity Profiles

Item Activity Profiles are beneficial when analysing products
activities for the purposes of determining storage mode, product
slotting, and facility layout options.
There are several types of item profiles, the three most basic are 23
defined next. Notes
S
Popularity profile - is a ranking of the items based on how often ___________________
they are ordered or picked (frequency). Volume profile is a ranking ___________________
of the items based on how much is ordered (cube movement).
___________________
Finally, the item order completion profile displays the items
ranked from most to least popular against the order set. This ___________________
profile reveals the percentage of the orders that will be completed ___________________
PE
by a subset of the items and is valuable when conducting cost ___________________
benefit analysis for improved productivity.
___________________
Total Logistics Cost Profile ___________________
z Inventory Carrying Cost: The cost of holding goods in stock. ___________________

Expressed usually as a percentage of the inventory value and ___________________
includes cost of capital, warehousing, depreciation, insurance,
taxation, obsolescence, and shrinkage.
Inventory carrying costs are made up of the following:
Capital Cost
z Storage Cost
)U
z Insurance
z Obsolescence
z Deterioration
z Tax, etc.
Cc = cost of holding one unit per unit time* avg. amount of
inventory held per unit time. Carrying cost is measured in terms of
percentage.
Example
Assume that the average inventory in a year for an item = 2000
units
Price of the item = ` 100
(c
Average Investment on Inventory = 2000 × 100

= ` 2,00,000
By having the average inventory, the organization involves the
following additional Cost.
Logistics Strategy
24 Capital Cost (Opportunity Cost) = 500

Notes
S
Storage = 1000
___________________
Insurance = 5000
___________________
Obsolescence = 1000
___________________
Deterioration = 4000
___________________
___________________
Tax = 4000
PE
___________________ Total = 20,000
___________________ ` 20,000 contributes 10 percent of the Average investment of

` 2,00,000. So the inventory carrying cost for this organization is
___________________
valued at 10 percent (10 percent of ` 100) per unit per year.
___________________
___________________ Carrying Cost Behaviour

)U
Figure 3.1: Carrying Cost Behaviour
When managers control inventory by using the “ordering in lots”

method, first they should determine the stock level and then decide
the amount of the stock to be carried. The costs involved in this
method are divided into two categories of costs; “Holding costs”
(Variable costs depending on quantity) and “Ordering Costs”
(Fixed costs Cost of Transportation)
Cost of Transportation
One important factor in the continuing strength of surface travel
(c
demand in the face of telecommunications alternatives is that the

cost of driving that is paid directly by users is actually declining.
This is partly because of the increasing energy efficiency of
automobiles and partly because of a reduction in the real cost of
fuel since 1980. From 1978 to 1991, transportation outlays
decreased from 20.2% to 16.9% of the gross national product, as
shown:
25
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
Source: Eno Foundation
___________________
Exhibit 3.1: Transportation’s share of the gross national product failing
___________________
The increasing energy efficiency of travel, with a consequential
reduction in this portion of travel costs, is one reason why ___________________
transportation continues to be attractive as an economic input. In

comparing consumer expenditures for transportation and
telecommunications in Exhibit 3.2, two observations stand out.
First, transportation spending is much higher than
telecommunications spending, which also includes home computer
purchases. Second, the share of transportation spending is actually
)U
falling.
Transportation seems less expensive than it really is, because a
substantial portion of the costs is indirect and not felt by vehicle
drivers and owners. Costs of automotive transportation are not
fully covered by the “user fees” of fuel taxes, vehicle taxes, and tolls
and require “subsidies” from local property taxes, general funds,
and other indirect revenue sources. These costs include
expenditures for roadway construction and maintenance, highway
services, and parking. In 1991, about 40% of the $78 billion spent
by federal, state and local government on highway capital and
operating costs came from sources other than highway user fees
Costs of parking are also mostly paid indirectly. An estimated 90%
of all commuters park at no cost in employer-supplied parking.
(c
Much of the retail and other commercial business parking outside

central business districts is also free. Parking, of course, involves
significant costs: land, development, maintenance, and
administration. The average annual cost of an off-street parking
space has been estimated as $1000 (Shoup, 1990).
Logistics Strategy
26
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
Source: Bureau of Labor Statistics
___________________
Exhibit 3.2: Consumer Expenditures: Transportation Share Failing;
___________________
Telephone Share Constant
___________________
Riders of public transit also do not feel direct costs of
___________________ transportation, since most transit systems, to meet operating costs,
rely heavily on state and local tax sources or fund transfers to
supplement fare box revenues. In 1991, state and local assistance
accounted for more than 52% of transit operating costs (APTA,
1992).
This socializing of the cost of surface mobility means that
transportation users experience a lower cost than would otherwise
)U
be borne. This then becomes one of the many economic forces that
determine when and how much people drive and whether they
make the effort to carry passengers. Even though telecommuting
provides an alternative to commuting, the fact that driving is
becoming less expensive in terms of direct out-of-pocket costs paid
by drivers reduces the incentive for commuters to try
telecommuting.
As long as transportation remains as inexpensive and functional as
it is, the potential for telecommunications to displace surface
transportation is limited. Coping with transportation disruptions
caused by disasters and events is the exception to this conclusion.
Unless public policies or other causes raise the perceived, directly-
felt cost of travel, there is unlikely to be a slackening in the
(c
per-capita demand for travel, even as telecommunications

applications diffuse more widely and more opportunities to avoid
travel emerge. This conclusion comes straight from utility
experience. When electricity is inexpensive, or does not increase in
price at times when supplies are low, people use more of it.
In many urban areas, in peak-demand periods, transportation is
under-priced for users, and demand exceeds capacity. When prices
are too low, demand for a desirable good rises to meet the supply. 27
In the case of driving, congestion is the only cost to drivers that Notes
S
limits the “supply” and functionality of transportation. ___________________
Some drivers perceive rising traffic congestion as a growing cost of ___________________
driving. There is much objective evidence that traffic congestion is
___________________
becoming worse (Downs, 1992); however, the proportion of drivers
who actually experience congestion on a regular basis has not been ___________________
measured. Of drivers who do experience it, the evidence is lacking ___________________
PE
that a major proportion perceive congestion as a large enough cost ___________________
to motivate behaviour changes.
___________________
Warehousing Cost ___________________
Warehousing costs are levied by the warehouse owners and are an ___________________
unavoidable expense for the companies that use the space. The ___________________
owners should be conversant with the applicable charges. In years
to come, users will find it increasingly mandatory to implement
near line storage, to reduce their data warehousing costs and make
data analysis more efficient and effective.
As the warehouses grow in number and provide more services,
determining the cost of the company gets more difficult. Basic costs
)U
need to be understood, even if there is a third party involved.
There are generally three types of expenses involved and they
should be understood, while calculating the costs.
The first is the General Overhead Cost. This consists of the cost of
space per cubic square foot. It may further include rent or
mortgage, property taxes and utilities. General Overhead Costs
also comprise of the cost of racks, tables and other equipment used
in staging areas. They include the cost of various security devices,
as well as the cost of material handling equipment, depreciation
and document destruction services, if necessary and the cost of
repairs or shrinkage.
The second type of cost included is the delivery cost. This cost
includes freight charges from outside vendors. These costs may
(c
also include the cost of gas, the insurance and the cost of the
delivery trucks. These rates are subject to the time involved in
negotiating rates and to select vendors, as well as the time to
prepare shipping documents.
The third type of cost is the labour cost. This involves the receiving
of incoming goods, including entering the relevant data into the
Logistics Strategy
28 computer and assigning warehouse positions. It includes the time

Notes taken to move goods from shipping to pallet positions. It is
S
___________________ necessary for warehouse owners to be informed about the existing
warehousing costs.
___________________
___________________ Method
___________________
1. Measure the outside walls of the warehouse. This should
___________________ include all areas of the building on which you are paying rent
PE
___________________ and which are considered a part of the warehouse. If the
building is oddly shaped or has been expanded multiple times,
___________________
this task can be somewhat time-consuming. Once you have
___________________ completed the measurement, calculate the number of square
___________________ feet in the warehouse. For this example, we will say the
warehouse is 175 feet deep and 230 feet long. This results in a
___________________
total of 40,250 square feet (175 × 230 = 40,250). This is the
first number you will need to complete your storage cost
calculations.
2. Review the financial statements to determine the expenses
incurred by the warehouse during the previous 12 months.
Add the cost to rent the building, utilities, security contracts
)U
and the cost for any services such as landscaping or janitorial
services. Add to this the costs of payroll and any employee
benefits provided, including health insurance, 401k
contributions and taxes. Include insurance cost as well as
equipment cost such as forklifts, copiers, computers and
vehicles. To this list, add any other expenses incurred by the
warehouse during the time period in question. When all the
data has been collected, total the amounts to determine the
annual cost to operate the warehouse.
3. Divide the total expenses incurred by the warehouse by the
number of square feet in the warehouse. If the total of Step 2
were $750,000 then your cost per square foot would be $18.63.
This information is valuable when calculating the cost of a new
facility as compared to an existing facility.
(c
4. Calculate storage costs an additional way. Take the total

number of units shipped during the previous 12 months and
add the total number of units currently stored in the
warehouse. This is the total number of units handled during
the previous year. Divide the total warehouse cost of $750,000
by the number of units handled, which for this example will be
500,000 units, which gives you a warehouse storage cost of 29

$1.50 per unit. This calculation can help to determine overall Notes
S
profitability. ___________________
Custom Duties ___________________
___________________
The custom duty in India is regulated by the Customs Act of 1962.
Main purpose of the custom duty in India is the prevention of ___________________
illegal export and import of goods. Rates of the custom duty levied ___________________
PE
on the imported and exported goods are assigned in the Custom
___________________
Act, 1962.
___________________
Customs Act of 1962 was devised mainly to prevent the interest of
___________________
the indigenous industries and securing the Indian currency from
exchange rate. If too many illegal goods and services would be ___________________
imports and exports to and from the country, then this would harm ___________________
the Indian industry and directly affect the exchange rate of the
Indian currency.
Custom Duty in India

Custom duties in India fall under various categories. Below is a list
of the different types of custom duties in India:
)U
z Basic Duty: This is the general kind of duty levied under the
Customs Act, 1962.
z Additional Duty (Countervailing Duty): This duty is levied
under the Custom Tariff Act, Section 3.
z Anti-dumping Duty: This duty prevents the dumping of
foreign goods by the transnational companies.
z Protective Duty: This duty protect the interests of the Indian
industrial sector.
z Export Duty: This duty is levied on the export of goods.
Acts under custom duty in India
Foreign Trade (Exemption from Application of RULES in Certain
(c
Cases) Order, 1993
Customs Act, 1962

Registrars of Companies in different states chiefly manage:
z Customs Tariff Act, 1975
z Foreign Trade (Development and Regulation) Act, 1992
Logistics Strategy
30 z Taxation Laws (Amendment) Act, 2006

Notes
S
z Provisional Collection of Taxes Act, 1931
___________________
z Central Excise Tariff Act, 1985
___________________
z Foreign Trade (Regulation) Rules, 1993
___________________
z Central Excise Act, 1944
___________________
___________________ Perfect Order
PE
___________________ The notion of the perfect order is that desired customer service
___________________ capability, in terms of availability and operational performance,
___________________
should be such that the firm achieves target service goals each and
every time. The total order cycle performance should have zero
___________________
defects. Put simply, this means that the order should be complete
___________________ in terms of all aspects of service from order receipt to delivery
coupled with error-free invoicing and information transmission. In
order to improve its service and reduce defects, UPS, whose
primary business is time-definite delivery of packages and
documents, has invested heavily to provide technology solutions
with tailored software and hardware that offer a way to integrate
tracking features into the customer’s intranet or website.
)U
This raises the fundamental question – how much basic service
should a logistical system provide? Considering the costs and
investments involved, this is not easy to answer. The answer may
depend on the firm’s overall marketing strategy and the relative
emphasis it places on specific elements of the marketing mix. If a
firm seeks to differentiate on the basis of logistical competency,
then it will try to provide high levels of basic service. If the firm
competes on price, then it is highly unlikely that it will be able or
will desire to implement high-level logistical performance as this
would reduce its ability to be cost competitive.
It may also depend upon the stage in the product life cycle. During
the ‘introduction’ stage of the product, a ‘perfect order’ would be
unrealistically expensive, as it would also be in the ‘decline stage’
(c
of the product. However, the cost for such a service orientation

during the ‘maturity stage’ of the product life cycle may be well
justified.
In many ways, the concept of a perfect order is the logical
extension of quality. However, as the typical perfect order program
involves activities that exceed the basic service program, it is
expensive to maintain. Some of the common causes of failure of 31

perfect orders are: Notes
S
z Order entry error, ___________________
z Missing information, ___________________
___________________
z Non-availability of ordered item,
___________________
z Inability to meet shipment date,
___________________
PE
z Picking error,
___________________
z Inaccurate documentation,
___________________
z Late shipment,
___________________
z Late or early arrival,
___________________
z Damaged shipment,
___________________
z Invoicing error, and
z Error in payment processing.
The commitment to perfect order performance is often supported
by significant amounts of information exchange between the
businesses to facilitate and maintain performance requirements.
The logistic partner also has to develop an in-depth understanding
)U
of requirements of the customer. Such commitments are, therefore,
based on specific agreements between a supplier and selected
customers and implemented through highly structured working
arrangements that develop over time.
Supply chain visibility applications can contribute to higher perfect
order rates in three ways:
1. Measuring Current Conditions: What gets measured gets
action. Measuring performance across various areas of the
supply chain is critical to understanding where to make the
most dramatic improvements. Using supply chain visibility
applications to isolate problem areas initiates process,
technology, or operational improvements necessary to increase
performance.
(c
Many supply chains are comprised of disparate systems that

are not fully integrated. Supply chain visibility applications
bring cohesion to disparate systems by analysing data from
multiple sources to identify specific points in the process that
may require attention.
Logistics Strategy
32 Whether problem areas are isolated to a particular region, a

Notes specific process, or even an individual location, supply chain
S
___________________ visibility applications can deliver vital information to help
companies make the most effective decisions.
___________________
___________________ Visibility solutions also provide powerful abilities to drill down

to the detailed information that comprises high-level metrics.
___________________
Viewing the detailed data behind the metrics provides
___________________ compelling information that can help companies identify
PE
___________________ improvements to increase perfect order rates.
___________________ For example, if on-time delivery performance has slipped, the

___________________
ability to view the vendors with the lowest on-time
performance can lead to understanding root cause
___________________
relationships. Identifying the factors that contribute to
___________________ performance measurements are key to prioritizing the actions
to take for continual improvements.
2. Monitoring Improvements: Once the key metrics are
measured, companies can design effective implementation
strategies to target the areas that most need improvement.
As soon as companies act to improve their problem areas, they
can monitor the supply chain through visibility applications to
)U
track the progress of improvement initiatives. Whether in the
form of a dashboard, email, or mobile devices, information is
readily available to capture current supply chain performance
and trends over time.
Company executives can monitor their supply chains more
strategically by viewing end-to-end processes and overall
performance. Visibility solutions display one version of the
truth by incorporating data from multiple sources. As a
holistic view of the supply chain expands, so does the
opportunity to make mid-course corrections that can improve
perfect order rates.
3. Maintaining Supply Chain Performance: By spanning the
extended supply chain, visibility applications can become a
(c
valuable asset in maintaining perfect order rate

improvements.
Whether through real-time alerting to conditions that may
result in a less than perfect order to displaying orders at risk
of out-of-stocks, companies can maintain performance levels by
acting on issues as they occur.
Alerting through dashboards and mobile devices accelerates 33

the ability to address issues that could negatively impact Notes
S
perfect order rates. ___________________
Visibility applications can be enhanced over time to ___________________
accommodate the ever-changing demands of the supply chain.
___________________
As companies continue to refine their perfect order rate goals,
visibility applications can adapt and help maintain perfect ___________________
order improvements. ___________________
PE
Supply chain visibility applications can increase perfect order rates ___________________
without significant financial impact. Achieving a balance between ___________________
the cost of improvement and the cost of imperfect orders can be
___________________
challenging.
___________________
Inventory Turn ___________________
Number of times a firm’s investment in inventory is recouped

during an accounting period. Normally a high number indicates a
greater sales efficiency and a lower risk of loss through un-saleable
stock. However, an inventory turnover that is out of proportion to
industry norms may suggest losses due to shortages, and poor
customer-service. The preferred method of computing inventory
)U
turnover is to compare the cost of sales (also called Cost of Goods
Sold or COGS) to average inventory (Cost of sales ÷ Average
inventory). Another method, which compares net sales revenue to
the inventory (Net sales revenue ÷ Inventory) is also used but it
introduces the distortion of sales mark-up that is not documented
in the inventory records. Also called inventory turns or stock
turnover.
Although the first calculation is more frequently used, COGS (cost
of goods sold) may be substituted because sales are recorded at
market value, while inventories are usually recorded at cost. Also,
average inventory may be used instead of the ending inventory
level to minimize seasonal factors.
This ratio should be compared against industry averages. A low
(c
turnover implies poor sales and, therefore, excess inventory. A

high ratio implies either strong sales or ineffective buying.
High inventory levels are unhealthy because they represent an
investment with a rate of return of zero. It also opens the company
up to trouble should prices begin to fall.
Logistics Strategy
34 Example:
Notes
S
The cost of goods sold is $500,000. The opening stock is $40,000
___________________
and the closing stock is $60,000 (at cost). Calculate inventory
___________________ turnover ratio.
___________________ Calculation:
___________________ Inventory Turnover Ratio (ITR) = 500,000/50,000*
___________________
= 10 times
PE
___________________
This means that an average one dollar invested in stock will turn
___________________ into ten times in sales
___________________ *($40,000 + $60,000)/2 = $50,000
___________________
Fill Rate
___________________
It is the proportion of orders that can be immediately met by
available inventory. Increased customer satisfaction associated
with a high fill rate must be weighed against the higher expense of
maintaining a greater depth and breadth of inventory.
A stock out occurs when the fill rate exceeds current inventory.
This occurs when a business does not have enough products on
)U
hand to meet consumer demand.
Many different formulas exist for calculating inventory fill rate.
A closely related inventory formula is the safety stock calculation,
which represents the stock kept on hand to mitigate or eliminate
stock-outs. Companies use these technical mathematical formulas
to ascertain how the fill rate compares to the safety stock
calculation. Information pieces needed to complete the safety stock
and fill rate formulas include lead time, logistics, inventory
turnover, and other data specific to the company’s inventory
process. Companies typically compute these formulas on a monthly
or quarterly basis. A basic formula for inventory fill rate is to
convert goods sold into a percentage from goods on hand. For
example, a company stocks 100 widgets for sale; over the next 30
days, the company sells 73 widgets. The company’s inventory fill
(c
rate is 73 percent. Essentially, the formula means very little on its

own. That gives rise to the more technical inventory formulas that
provide more information on safety stock, logistics, and other
factors that impact a company’s inventory process.
Accounting ratios can also play a role in calculating a company’s
fill rate. These include inventory turnover and inventory period.
Inventory turnover tells a company how many times each year a 35

company sells through its entire stock of inventory. The basic Notes
S
formula is to divide average inventory into the cost of goods sold; to ___________________
find average inventory, add the beginning inventory to the ending
___________________
inventory and divide by two. A high figure indicates the company
sells through its inventory several times a year, requiring high ___________________
stock levels to ensure a good fill rate. ___________________
Inventory period is the number of days of inventory currently on ___________________
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hand. This helps a company work its way into the inventory fill ___________________
rate formula. The inventory period formula is average inventory
___________________
divided by cost of goods sold, with average inventory being
beginning inventory plus ending inventory divided by two. A high ___________________
ratio indicates a company has several days of inventory on hand ___________________
for sale. This means that safety stock should be higher.
___________________
Purchase and Customer Order Cycle Times

z Customer Order Promised Cycle Time: The anticipated or
agreed upon cycle time of a Purchase Order. It is gap between
the Purchase Order Creation Date and the Requested Delivery
Date. This tells you the cycle time that you should expect
)U
(NOT the actual).
z Customer Order Actual Cycle Time: The average time it
takes to actually fill a customer’s purchase order. This
measure can be viewed on an Order or an Order Line level.
The measure starts when the customer’s order is
sent/received/entered. It is measured along its various steps of
the order cycle. Through credit checks, pricing, warehouse
picking and shipping. The measure ends at either the time of
shipment or at the time of delivery to the customer (sometimes
tracked by using an EDI #214). This “actual” cycle time should
be compared to the “promised” cycle time.
z Manufacturing Cycle Time: Measured from the Firm
Planned Order until the final production is reported. It usually
takes into account the original planned production quantity
(c
versus the actual production quantity. Example: X% of the

planned quantity must be completed on a production run or
the cycle time should not be considered.
z Purchase Order Cycle Time: Measured from the creation of
the PO to the receipt at your location. One of the keys here is
not having your RDD (Requested Delivery Date) exceed the
Logistics Strategy
36 agreed to lead time. If it does, it may artificially inflate your

Notes
Activity Lead Time.
S
Highlight the major conditions
___________________
to be satisfied in order for a Additionally, any in-between points available will add value to the
transaction to become a legal
___________________ metric.
“Contract”.
___________________ Example: Creation of the PO, Shipment from the Vendor, Receipt
___________________ at the DC. This will tell you the manufacturing time vs the transit
time.
___________________
PE
___________________ Check Your Progress
___________________ Fill in the blanks:
___________________
1. Inventory ................. is the number of days of
___________________ inventory currently on hand.
___________________ 2. The proportion of orders that can be immediately met
by available inventory is called ................. .
Total Quality Logistics

Total Quality Logistics provides domestic freight transportation
and all logistics services.
)U
Delivery of Goods
“Contract” is the contract for the supply of Goods which have been
ordered by Buyer and specified in Seller’s Approval of Order, which
contract is concluded based on these Terms and Conditions of Sale
unless otherwise specified in the Approval of Order.
Payment for Goods shall be due on or prior to the delivery date of
Goods and no discount may be taken. Payments received after the
due date thereof shall bear a service charge from their due date, at
the maximum lawful interest rate applicable, and if none – at the
annual rate of 5% above the base rate from time to time of the
central bank of the place of Buyer’s incorporation. All payments
shall be made to Seller’s designated bank account in the same
currency and for the same amounts as specified in the Approval of
(c
Order. Prices specified in the Approval of Order are net, excluding

packaging, and shall be deemed Ex-works (Incoterms 2000 as
amended). Prices are based, inter alia, on production costs for
supplies, labour, deliveries, duties and services current on the
order date. In the event of material increase in any such costs,
Seller reserves the right either to adjust the prices for Goods
accordingly, or to cancel any certain part of the sales relating to 37

undelivered Goods. Duties, taxes, fees, levies and other compulsory Notes
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payments applicable to the sale of Goods any time, as well as ___________________
freight, express, insurance and delivery charges, shall all be borne
___________________
and paid in full by Buyer, unless otherwise expressly stipulated.
___________________
Delivery dates noted on the Approval of Order are subject to
reasonable adjustment. The acceptance of shipment by a common ___________________
carrier or by any licensed public truckman shall constitute proper ___________________
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delivery. Risk associated with the Goods shall pass to Buyer on ___________________
delivery or with the passing of title in the Goods, whichever occurs
___________________
first; provided however, that where delivery is delayed due to
circumstances caused by or within the responsibility of Buyer, risk ___________________
of loss shall pass to Buyer upon Seller’s notification that Goods are ___________________
ready for dispatch. Seller warrants that Goods sold hereunder
___________________
meet their descriptions or specifications, subject to use, storage
and application thereof in accordance with and based on Seller’s
standard tolerances, instructions of use and recommendations.
Each delivery of Goods shall (without prejudice to Seller’s rights
under clause 8 hereinabove) be considered a separate contract and
the failure of any delivery shall not vitiate any contract as to
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deliveries of other Goods and payment therefore.
Shipping Accuracy
The degree of agreement between the quantity and type of Stock-
Keeping Units (SKUs) on an order form, picking document, or BOL
and those actually present in a given load. Poor shipping accuracy
is linked to low levels of customer satisfaction and increased costs
for correcting errors. RFID or barcode labelling and scanning
systems are often implemented to increase accuracy.
Development of Liner and Tramp Trade

For shipping accuracy, Liner companies, by the very nature of
their function, need a larger organization structure than a tramp
company. One of the oldest liner companies is the P&O started in
(c
1837, followed by Samuel Cunard in 1840. The opening of the Suez

Canal, which facilitated development of trade routes to the east,
caused tremendous expansion of the liner trade. In the years
following the First World War, there was another era of expansion
and after the Second World War, the traditional liner companies
have consolidated and merged. More growth that is new has been
Logistics Strategy
38 in the developing countries. For example, the P&O group now

Notes constitutes some hundred-member companies and is one of the
S
___________________ largest shipping groups in the world. It owns a very large fleet of
ships.
___________________
___________________ In the mid-sixties, containerisation gained momentum and huge

capital investment was necessary to introduce containerisation. So
___________________
many rival groups formed consortia; for example, the Atlantic
___________________ Container Line (ACL) (formed by Cunard), Holland-America Line,
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___________________ Swedish America Line, Swedish Trans-Atlantic and French Line.
Individual members, who own ships, charted their ships to large
___________________
players like ACL to operate. Tramp shipping also has benefited
___________________
from such co-ordination. Consortia such as Sea bridge have been
___________________ organized to operate a large fleet chartered to it by its member
___________________ companies.
Further development has been in diversification strategies. Even
very large shipping companies like P&O operate in every
conceivable type of ship in every possible trade.
Organization of a Shipping Company

The functions of some of the more important departments in a
)U
shipping company are as follows:
1. Husbandry: It is department, which keeps the ships
seaworthy. So it has to look into Maintenance Research and
Technical Repairs. It also looks into the personnel affairs of
the ship.
2. Insurance Department: It keeps track of fulfilment of all
insurance formalities and settlement of legal claims.
3. Finance Department: It looks into the revenues and
expenditures concerned.
4. Operating Department: It is very crucial department for a
shipping company. The main concern of this department is to
maximize the economic employment of the ship. As part of this
(c
objective, it has a major function of coordination, not only

amongst the other departments of the company but also with
the ship, the shipbroker and the agents who will have to
attend to the various and many problems that may arise at the
ship’s ports of call. Where there are no bunkers and the
amount to be transported is substantial, the operating
department encounters continuing problems. the prices of
bunkers vary in different parts of the world and careful 39

planning can make substantial swings possible. Notes
S
Another specific activity of this department is scheduling. ___________________
Scheduling concerns where to send the ships and when. ___________________
For general cargo liners, this is a twofold problem. ___________________
The decision to open up a new route or line. This is ___________________

fundamental and will require a special research team. Not ___________________
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only has the supply and demand on the new possible routes to
___________________
be considered, but also the strength of the competition, the
conference involved, and whether they will accept, reject or ___________________
tolerate someone joining the trade. ___________________
If it is decided to join the conference, many of the questions ___________________

concerning scheduling such as sailing dates, ports and ___________________
frequency of service will be determined by the conference.
Once the run is established, the line manager must maintain
schedules and combat the problems of delays, strikes,
breakdowns and the annual dry-dock. For Tramp ships, the
problem is to charter the vessel out to obtain a maximum
profit to the company.
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5. Marketing: Marketing in shipping as in any other business
involves:
(i) Product Analysis
(ii) Traffic and Market Development
(iii) Promotions and Product Development
6. The Technical Department: This department will be
responsible for the maintenance and efficient functioning of
the ships as carrying vehicles and the safety of the ship and
crew. This requires not only a comprehensive technical
knowledge but also an awareness of the precise details
regarding national and international regulations concerning
pollution, port health, safety and the like.
(c
This department must be aware of and be frequently involved in

research so that the company’s ships and future ship buildings do
not fall behind in technical efficiency and safety.
Logistics Strategy
40
Inventory Accuracy
Notes
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Inventory accuracy starts with an understanding of the conditions
___________________
under which errors occur and ends with error-resistant processes,
___________________ intelligent use of technology, a well-trained and highly motivated
___________________ workforce, and an on-going process of continuous improvement. In
between, there’s cycle counting, root cause analysis, process
___________________
evaluation, user interface design, procedures, employee training,
___________________ accountability, control methods, process checks, audits, exception
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___________________ reporting, transaction techniques, measurement, counting
___________________
methods, bar codes, RF systems, speech-based technology, light
systems, and software
___________________
Inventory accuracy has an effect on various areas of an
___________________
organization. The purchasing department relies on accurate
___________________ inventory data to trigger the purchase of materials and supplies.
Production and planning requires an accurate inventory to plan
and schedule production. An inaccurate inventory can cause out of
stock items, which result in late deliveries to customers and the
potential loss of business. Companies can improve the accuracy of
the inventory database by developing a procedure and monitoring
employees to ensure compliance.
)U
1. Develop processes for material handling in the organization.
The procedure should detail the steps employees must take to
bring materials into the company and the transaction of parts
into and out of stock and within departments such as
production.
2 Train employees to use the processes. The company should
fully train employees on the inventory procedures. Each
employee should understand the importance of inventory
accuracy and the affect it has on the company.
Separate training sessions for groups of employees can focus
the lessons on the procedures for that group of workers. For
example, production workers will have different procedures
than workers in the receiving or stocking department
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3. Monitor employees and implement Audits. The inventory

procedures only have value if employees follow the rules.
Monitor workers to ensure they comply with the procedures.
Audits of paperwork and counts can verify if employees are
following inventory procedures.
4. Implement a cycle counting procedure. Cycle counting is a 41

continuous counting procedure based on use frequency or Notes
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value of the material. ___________________
To set up a cycle count, the inventory is broken down into ___________________
groups that determine how frequently the counter will
___________________
inventory the parts. For example, the company may determine
that parts used frequently will undergo counting once a month ___________________
while parts that do not move through the supply chain a great ___________________
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deal undergo counting twice a year. ___________________
Companies should dedicate an employee to the task of cycle ___________________
counting. Cycle counters become familiar with the various part
___________________
numbers, inventory transactions and causes of discrepancies.
___________________
Cycle counting involves investigating the cause of inventory
___________________
discrepancies when found. The act of cycle counting can shine
a light on problems in the inventory procedure.
5. Develop a procedure for reconciling discrepancies. In some
organizations, management must approve the reconciliation of
inventory discrepancies. Cycle counters or those tasked with
maintaining the accuracy of the inventory may adjust the
inventory database to correct discrepancies.
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6. Plan annual physical inventories. Companies can plan an
annual or biannual physical inventory to count the entire
inventory and adjust quantities to clean the system.
The discrepancies uncovered during a physical inventory also
monitor the effectiveness of the cycle counting system and the
inventory procedures.
Logistics Productivity Measures

Logistics Workforce Productivity and volumetric: In a highly
competitive business environment, logistical competency is critical
to the survival and growth of the organization. Logistical resources
are scarce and right allocation of such resources is vital. Logistical
(c
performance measurement is to ensure right allocation and to

monitor utilization of the resources. Performance measurement is
required to ensure careful evaluation and review of logistical
performance of a company. Importance of logistical performance
can never be overstated in competitive environment.
Logistics Strategy
42
Objectives of Logistical Performance Measurement Systems
Notes
S
Monitoring, controlling and directing are said to be three objectives
___________________
of measurement systems for logistical performance. Specific
___________________ measures are developed to keep fulfilment of the above
___________________ measurement objectives for logistical performance measurement.
___________________ 1. Monitoring measures: are used to track historical performance

for reporting to management or customers
___________________
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___________________ 2. Controlling measures: track on-going performance for refining
logistical system if it goes below the performance standards.
___________________
3. Directing measures: are developed to encourage performance
___________________
by employees. Based on assessment done using these
___________________ measures good performance is rewarded.
___________________
4. Perspectives of measurement: based on perspectives of
measurement two types of measures are developed. The
measurement perspectives are activity based and process
based.
5. Activity based measures: measure performance at individual
activity level. These activities are small tasks performed to
execute customer orders.
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6. Activity based performance measures indicate efficiency and
effectiveness of first level efforts in the process of customer
satisfaction.
7. Process based performance measures measure effectiveness
and efficiency of customer satisfaction process. They examine
total performance cycle time, or total service quality. These
two examples collectively indicate effectiveness and efficiency
of customer satisfaction process.
8. Internal performance measurement: comparing activities and
processes to operations and or goals to previous year.
For example, customer service may be compared to previous year’s
performance and current year’s goal. All the information necessary
(c
to calculate these internal measures is available internally. Hence,

they are called internal performance measures.
Internal performance measures are classified into following
categories Cost, customer service, productivity, asset management
and quality.
1. Cost Measures: Logistical cost is a measure very popularly 43

used to measure logistical performance. It is a reflection of Notes
S
logistical performance as this indicates the resources expended ___________________
to meet specific operating objectives. It is measured in rupees
___________________
or dollars as a percentage of sales or as a cost per unit of
volume ___________________
Some of the cost measures commonly used are Total Cost Per ___________________
Unit, Cost as a Percentage of Sales, Inbound Freight, ___________________
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Outbound Freight, Ware House Costs, Administrative Costs, ___________________
Order Processing, Direct Labor, Comparison Of Actual Vs
___________________
Budget, Cost Trend Analysis, Direct Product Profitability.
___________________
Customer service measures: Service levels are common
Customer service measures. They indicate a firm’s ability to ___________________
meet customer expectations ___________________
Some of the customer service measures commonly used are Fill

rate, Stock outs, Shipping errors, On-time delivery, Back
orders, Cycle time, Customer feedback, Sales force feedback,
Customer surveys.
2. Productivity Measures: Productivity measure are normally
easily understood and extensively used although sometimes it
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may become difficult to obtain all relevant details. This
measure gives an indication of resource utilization.
Productivity measures are static, dynamic and surrogate.
Static measures take all factors of output and input into
account. This is also called total productivity. As the
measurement is across only one span of time, it is called static
productivity measure.
Benchmarking Methods
1. Sources of information for performance measures are
published logistical data, published by periodicals and
university research. This information being public knowledge
lacks in competitive advantage.
(c
2. Bench marking a non-competitive company. This leads to a

comprehensive study, and being bilateral, proprietary
knowledge adds value mutually. As one organization is
studied, the information lacks broadness of perspective.
Logistics Strategy
44 3. Alliances of Organizations: They share each other’s bench-

Notes mark data. This yields comparatively better data. But it is
S
___________________ difficult to maintain such alliances.
___________________ Examples of bench marking: asset management cost, customer
___________________ service, productivity, quality, strategy, technology, transportation,
warehousing, order processing Comprehensive supply chain
___________________
measurement: Four types of metrics developed for outcome and
___________________ process in a supply chain are customer satisfaction, time, cost and
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___________________ assets.
___________________
Characteristics of an Ideal Measurement System
___________________
1. Cost/Service Reconciliation: As cost and service [e.g. freight
___________________ bill and shipment] are separated by time, cause/effect
___________________ relationship between them is not established. These get
apportioned to different heads of cost and benefit. An ideal
measurement system should reconcile them.
2. Dynamic Knowledge Based Reporting: Performance
reports generally report performance characteristics for a
particular time period. They do not reveal current situation.
They do not reveal data in the extended past nor do they
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reveal the trend in future. An ideal system should do all these
to enable appropriate action proactively.
3. Exception based reporting: Logistical management desires
a report on exception from anticipated results. This is like a
deviation from standard that is an indicator of process
deviating from desired course. An ideal report enables
manager to act proactively.
Levels of measurement and information flow Measurement is
expected to yield information at various levels to facilitate
proactive decisions rather than reactive. This is achieved by
signalling a process deviation or break down for action to prevent
recurrence. Information should be reported in different levels for
hierarchy as per the decision-making needs of that level.
(c
Various levels of measurement and information flow are direction,

variation, decision and policy.
z Direction Level: This level is concerned with execution of
operational plan. The focus is on day to day transactions to
implement predetermined program. Measurement is
concerned with detection of trends and exceptions. Exception
is a change from desired result of a micro level plan in the 45

process. Measurement covers broad area and information Notes
S
provided serves as data-base for subsequent levels. ___________________
Managerial Utility is Limited ___________________
___________________
z Variation Level: Accumulated deviations from plan are
measured. At direction level, these variations appear to be ___________________
exceptions. Variation measurement is identification of trends ___________________
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that may result into problems. Concerned manager is expected
___________________
to interpret the trend, identify appropriate action at his/her
level and issue instructions or seek help from higher in the ___________________
hierarchy. Decisions at this level are generally on specific ___________________

transactions. ___________________
z Decision Level: At this level, measures help decision -maker ___________________
make modifications to operational plan after appraisal of
exceptions and deviations of previous levels. Information is
more selective and manager friendly. Modifications to plan
need additional resources. At this levels system objectives are
not changed if the operational plan is unable to meet them.
But existing plan is reinforced to meet these objectives by
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additional resource allocation.
z Policy Level: Policy level measurement focuses on change in
system objectives. Need for change in policy may be triggered
by any level in the logistical management. It may be done by
functions outside the department. Marketing department may
initiate a change in the service levels in view of competition.
Report Structures
Reports are an important part of any measurement system. They
are generated from management information system. These
reports are expected to give rapid and accurate information or else
decision making becomes ineffective. Three types of reports used in
logistical system are status, trend and ad hoc.
(c
z Status Reports: Give information about status of a particular

logistical aspect. The report is in detail and enables line
manager to ascertain current situation. The report may cover
several locations with respect to the aspect under
measurement. If the aspect selected is inventory, in detail
information about inventory levels at all locations is given.
This type of report is relevant to the direction level in the
Logistics Strategy
46 earlier discussion. Trend Reports: are required at a higher

Notes level as compared to the last and more manager friendly, in
S
___________________ the sense they help in decision making. They indicate the
trend in future with respect to the chosen logistical aspect.
___________________
___________________ Ad hoc Reports: Ad hoc reports are ordered at some time to

make available information in detain on specific areas of
___________________
performance for some decision making need. There are two
___________________ types of Ad hoc Reports. They are diagnostic report, position
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___________________ paper and policy report.
___________________ z Diagnostic Report: Detailed information about some phase of

___________________
logistical performance. if back orders are the chosen phase
then information about current back orders and planned
___________________
corrective actions on them.
___________________
z Position Paper: This report contains alternative courses of
action for an anticipated or current problem. Lower levels of
management prepare these reports for executives at higher
levels. An alternative suggested may need additional
resources. When these resources are approved, the operational
plans are modified. Position reports request additional
resources but do not suggest change in system objectives.
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z Policy Report: Policy reports are ordered by CEOs whenever
a policy modification is requested where change in objectives is
suggested. These reports contain information outside the
realm of logistics. They are highly specific and tailor made to
the need of the organization.
Storage Density
Storage and retrieval systems (AS/RS) are inventory management
systems that are widely used in manufacturing facilities,
distribution centres, and warehouses throughout the United States
and the world. AS/RS systems generally consist of machines that
move up and down one or multiple parallel storage aisles, storing
and retrieving products and materials for dissemination to internal
(c
and external destinations alike.

The advantages of these systems are numerous. They provide
users with increased inventory control and tracking, including
greater flexibility to accommodate changing business conditions.
These AS/RS systems are comprised of modular subsystems that
can be easily replaced to minimize downtime and extend the
service life of the overall system. They also reduce labour costs, 47
lowering necessary workforce requirements, increasing workplace Notes
S
safety, and removing personnel from difficult working conditions ___________________
(such as cold food storage environments). Perhaps most
___________________
significantly, however, AS/RS systems can produce major savings
in inventory storage costs, as vastly improved warehouse space ___________________
utilization—both vertically and horizontally—creates greater ___________________

storage density.
___________________
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Zollinger lists the following ten conditions: ___________________
1. Two or three shifts ___________________
2. Critical inventory levels ___________________
3. Production flexibility is essential ___________________
4. Joint storage of parts and tools ___________________
5. High land cost areas

6. No limit on building height
7. Skilled technicians are on-staff or available
8. High value parts or assemblies are used
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9. The number of Stock Keeping Units (SKUs) in not large
10. Tight existing site space in which an AS/RS installation may
eliminate the need to move
Every situation is different but these guidelines provide an
overview of the sorts of applications that are best suited to AS/RS.
Check Your Progress

Fill in the blanks:
1. .................. level is concerned with execution of
operational plan.
2. .................. measure gives an indication of resource
utilization.
(c
Summary
Logistics Performance analysis involves gathering formal and
informal data to help customers and sponsors defines and achieve
their goals. Performance analysis uncovers several perspectives on
a problem or opportunity, determining any and all drivers towards
Logistics Strategy
48 or barriers to successful performance, and proposing a solution

Notes system based on what is discovered.
S
___________________
___________________ Lesson End Activity

___________________ Write a short report on Storage and retrieval systems (AS/RS).
___________________
___________________ Keywords
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___________________ Husbandry: It is department, which keeps the ships seaworthy.
___________________ Insurance Department: It keeps track of fulfilment of all
___________________ insurance formalities and settlement of legal claims.
___________________ Finance Department: It looks into the revenues and

___________________
expenditures concerned.
Fill Rate: The proportion of orders that can be immediately met
by available inventory.
Inventory Period: Inventory period is the number of days of
inventory currently on hand.

)U
1. What is logistics activity profiling?
2. Explain inventory cost and transportation cost in detail.
3. Describe perfect order.
4. Define inventory turns and fill rates.
5. What are purchase order and customer order cycle times?
6. Explain storage density.
Further Readings
Books
(c
Bowersox D, Closs D, and Mixby Copper, M., Supply Chain

Logistics Management, McGraw Hill, 2002.
Education.
Web Readings 49
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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(c
Logistics Strategy
50
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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(c
UNIT 4: Logistics Implementation
Unit 4
51
Notes
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Activity
Logistics Implementation
___________________
Warehousing function in
___________________
Logistics.
___________________
Objectives
___________________
topics: ___________________
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\ Logistics Implementation Steps ___________________
\ Benchmarking ___________________
___________________
Introduction ___________________
The supply chain constantly changes and that will affect any ___________________
logistics organization. To adapt to the flexibility of the supply
chain, companies should develop and implement a formal logistics
strategy. This will allow a company to identify the impact of
imminent changes and make organizational or functional changes
to ensure service levels are not reduced.
)U
Logistics Implementation Steps
Applications Integration:
1. One Inventory Data Base
2. Easy Access/Inquiry/Real Time Updating
Integration of Logistics Plans and Related Plans Adjustment are
as follows:
1 Logistics Plans: Purchasing/Production/Supply/Inventory
Facility Investment/Manpower
2. Related Plans Adjustment: Sales/Sales Promotion
Integration of Delivery Function

(c
Raw and Package Materials/Production/Finished Goods/GAP

Analysis.
GAP Analysis
A technique for determining the steps to be taken in moving from a
current state to a desired future-state. Also called need-gap
analysis, needs analysis, and needs assessment.
Logistics Strategy
52 Gap analysis consists of (1) listing of characteristic factors (such as

Notes attributes, competencies, performance levels) of the present
S
___________________ situation (“what is”), (2) cross listing factors required to achieve
the future objectives (“what should be”), and then (3) highlighting
___________________
the gaps that exist and need to be filled.
___________________
To investigate the gaps in current research, the state of play of
___________________
current government research and the possible future scenarios of
___________________ governments and society in 2020 were the main inputs. The
PE
___________________ following Figure 4.1 depicts the single steps of the gap analysis
methodology used in the project:
___________________
___________________
___________________
___________________
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Figure 4.1: Input for GAP Analysis
The gaps have been assessed in terms of relevance and importance

towards the eGovernance cycle as depicted in the following Figure
4.2:
(c
Figure 4.2: eGovernance Cycle

For the assessment of gaps in the roadmapping workshops, a 53

questionnaire has been developed and handed out to the regional Notes
S
workshop participants. ___________________
Results of Gap Analysis ___________________
___________________
Brief description of gaps ranked as highly relevant and important
to the eGovernance cycle. ___________________
___________________
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Table 4.1
___________________
Gap title Short description of gap
The conditions for efficient sub-contracting / outsourcing
___________________
to private sector with respect to general interest service
requirements is a major issue. Comparative legal and
policy analysis and understanding of the means and ___________________
impact of cooperation between private organisations and
government are needed ___________________
Lean Government Lack of studies about the efficiency of the cooperation
through these Public-Private Relationships structures. ___________________
Studies needed for the comparative analysis in various
member states of such partnerships
Research is needed to identify and set up a portfolio of
services which assess their potential for outsourcing and
those which must be provided by governments. Missing
technologies for full automation of public-services
Solutions for legal, social and ethical aspects (e.g.
privacy, security, etc.) are lacking
Maturity and z Impact of full automation to decrease the problem

dissemination of of increasing bureaucracy, to re-qualify and re-use
)U
automated services the free human resources needs to be understood.
How to deal with the huge bureaucratic resistance to
front- and back-office reengineering?
z Software tools for the transparent political decision-
making not available
Incident Politics z The missing technologies for full automation of

public-services have to be created as well as the
solutions for some legal, social and ethical problems
(e.g. privacy, security, etc.) have to be found. Full
automation could help to solve the problem of
increasing bureaucracy, but the ways how to re-
qualify and re-use the free human resources must be
found, contrarily there will be a huge bureaucratic
resistance to front- and back-office reengineering.
The software tools for the transparent political
decision-making must be implemented.
Competition among z Lack of knowledge concerning the role of
nations and among eGovernment policy and eGovernment services
regions quality in the decision of citizens and companies to
select a regional government. The gap is related to
the problem of identifying how ICT can help a
government improve its attractiveness to citizens
and organisation.
(c
Transparency z The need to understand better what are the

conditions of access and use of these data so that the
rights of citizens and organisations guarantee by
law can be protected and enforced . Also how
government can in a legitimate way use ICT to
provide services which add value the public data.
Government z Impact of a single access point to the society and
Network the market not understood in terms of economics,
public value, etc.
z What is the demand for enabling cooperation
among private and public agencies
Logistics Strategy
54 Example of a gap storyline: New types of IT-governance.

Notes
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___________________
General
___________________ z In the future of 2020 it is expected that more and more will be
outsourced and (semi-) autonomous agencies will be used for
___________________
executing public administration functions and tasks.
___________________
z Functions and roles might be reallocated to different
___________________
government agencies at central and decentralized levels.
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___________________ Traditionally these organizations (agents) report to their
___________________ principals by writing extensive reports and engaging in formal
agreements.
___________________
z In this, future politicians might try to influence (manage!) the
___________________
operation of public administration and healthcare more
___________________
directly to improve efficiency and service levels.
z Within government, some functions and services will remain
at local, regional, or national levels, while others will operate
at the European level. Many of these functions and services
will interact or share data.
z For this purpose new types of governance mechanisms become
)U
necessary that might have a different degree of centralism and
decentralism, need for coordination or integration, and balance
between tight control and autonomy.
z A better understanding of new types of IT governance
mechanisms is necessary to deploy shared and distributed
services in public service networks.
z IT governance mechanisms comprise the system and structure
for defining policies, monitoring and controlling policy
implementations, and managing and coordinating the
procedures and resources aimed at ensuring the efficient and
effective execution of services that rely on ICT.
z Failure to fully recognize the need for IT governance or to
understand which type of IT governance mechanisms are
(c
needed might easily result in failure of government operations.
Benchmarking
Benchmarking is comparing your business to others to understand
your current position and learn from it.
Benchmarking is about learning and developing rather than 55

winning or losing so all comparisons are measurements. That is, if Notes
S
you compare your profits to another business in your industry and ___________________
find yours are low, it could be that you realise you can increase
___________________
your prices.
___________________
The process can be very time consuming, especially at the
beginning. Even if you contract an external benchmarking firm to ___________________
help you, you will still need to spend a lot of time developing a plan ___________________
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and investigating your business. ___________________
You can choose to benchmark your entire business or just some key ___________________
aspects of it. The main thing is to make benchmarking a
___________________
continuous process rather than a once off effort.
___________________
History of Benchmarking ___________________
Benchmarking is the process whereby an assessment of an act or

performance is measured by some means, whether this is by a
measurement of time, value or quantity. For example, an
assessment of moving items from one storage location to another
can be measured by time for a single movement or by quantity if
the performance is over a set period. A benchmarking project will
)U
gather the assessments and develop a plan of action to improve the
process that was assessed. The popularity of benchmarking was
spearheaded by the Xerox Corporation in the 1980’s and is now
used in corporations throughout the world.
Types of Benchmarking
Three types of benchmarking can be identified; internal which is
focused on the processes of a single company, external which
examines processes outside of a company’s direct industry and
competitive, which examines processes at firms within the same
industry.
1. Internal Benchmarking: The internal benchmarking
process allows a company with a number of facilities that
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operate the same supply chain processes to compare and

contrast the ways in which the process is performed in those
facilities. For example if a company operates five distribution
centres in the US and Canada, the benchmarking process can
examine a number of operations that take place at each of the
distribution centres and compare how they are performed and
what improvements can be made by comparing the results of
Logistics Strategy
56 the benchmarking. If a company benchmarks the processes

Notes around inventory accuracy, shipping accuracy and storage
S
___________________ density, the results of the assessments of the facilities can help
a company to improve on those processes at all of the facilities.
___________________
___________________ 2. External Benchmarking: For companies that have

performed internal benchmarking and want to investigate new
___________________
ways in which to improve performance of their internal
___________________ processes, external benchmarking can produce significant
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___________________ improvements. Many companies believe that their processes
are as efficient as possible, but quite often, the efficiencies are
___________________
limited by the knowledge within the company. The external
___________________
benchmarking process takes a company outside of its own
___________________ industry and exposes them to different methods and
___________________ procedures. For example, a manufacturer and distributor of
electrical components have internally benchmarked their
warehouses for a number of years and have exhausted ideas on
improving efficiencies. They approached a very successful
retail company to visit their central warehouse and benchmark
the processes that occur there to compare to their own
warehouse processes. The external benchmarking allowed the
manufacturer of the electrical components to assess the
)U
processes seen in the retailer’s warehouse and develop an
improvement plan for their own facilities based on the results.
3. Competitive Benchmarking: For companies that are not
performing as well as their competitors they may want to
identify the reasons why their processes are not as efficient.
Consulting and research firms can perform competitive
benchmarking studies for companies that will identify the
strengths and weaknesses of their processes based on those of
their competitors. The company can then produce
improvement plans based on the results of the competitive
benchmarking.
4. Components of Benchmarking: There are a number of
components to a benchmarking study. Not every
(c
benchmarking project will incorporate these components, but a

combination of these can be used.
Financial Benchmarking: This involves a financial
analysis of the operations that are assessed. For example,
a company can compare the cost of storing a component in
each of its warehouses.
Performance Benchmarking: This can compare the 57

efficiency of performing a task in one company location to Notes
S
another, or to a competitor’s. ___________________
Product Benchmarking: This method compares the ___________________
product of one company against another, or comparing
___________________
between facilities in the same company.
___________________
Strategic Benchmarking: This method observes how other
___________________
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companies compete. This can be within the same industry
or outside of the companies industry. ___________________
Functional Benchmarking: This is considered to be ___________________
traditional benchmarking where a company will ___________________

benchmark a single process at a location or a number of
___________________
locations to identify where efficiencies can be made.
___________________
Check Your Progress
Fill in the blanks:
1. ................. is a technique for determining the steps to
be taken in moving from a current state to a desired
future-state.
)U
2. ................. is comparing your business to others to
understand your current position and learn from it.
Summary
The logistics manager’s basic challenge is to balance service
expectations and cost expenditures in a manner that achieves
business objectives. Almost any level of logistical service can be
achieved if a firm is willing to commit the necessary resources.
Logistical service is a balance of service priority and cost. It has as
its metrics three elements: availability, operational performance,
and service reliability.
Total logistical cost includes all expenditures necessary to perform
logistical requirements considering the interrelationships between
(c
the different logistical activities. The total-cost perspective is what

drives logistics today. The typical enterprise seeks to develop and
implement an overall logistical compotency that satisfies key
customer expectations at a realistic total cost expenditure.
Logistics Strategy
58
Lesson End Activity
Notes
S
Draw the structure of Supply Chain Management on a chart.
___________________
___________________
Keywords
___________________
Gap Analysis: A technique for determining the steps to be taken
___________________
in moving from a current state to a desired future-state.
___________________
PE
Benchmarking: is comparing your business to others to
___________________
understand your current position and learn from it.
___________________
Internal benchmarking: process allows a company with a
___________________ number of facilities that operate the same supply chain processes
___________________ to compare and contrast the ways in which the process is
performed in those facilities.
___________________
Financial benchmarking: This involves a financial analysis of
the operations that are assessed. For example, a company can
compare the cost of storing a component in each of its warehouses.
Performance benchmarking: This can compare the efficiency of
performing a task in one company location to another, or to a
competitor’s.
)U
1. What is logistics implementation?
2. Explain GAP analysis.
3. Define benchmarking.
Further Readings
Books
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Education.
Web Readings 59
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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(c
Logistics Strategy
60
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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UNIT 5: Case Study
Unit 5
61
Notes
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Case Study
___________________
___________________
___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
PE
___________________
Case Study: Improving Supply Chain Responsiveness at a
Leading European Grocery Retailer ___________________
___________________
How does a leading European Grocery Retailer with nearly 1000
stores and over 10 million SKU/Store combinations respond when ___________________
the need to cater to rising consumer incomes, expectations and
individualism translates into higher supply chain complexity and ___________________
costs? The answer: Improve visibility and enhance collaboration
between retail stores and central functions in order to replenish
stores more efficiently while simultaneously lowering logistics
costs.
Working with a leading edge supply chain consulting form, the
retailer realized that the increasingly unpredictable nature of
consumer behaviour makes planning more and more difficult. So,
more time is spent on planning but the results are less valuable
)U
because planning involves making assumptions about what will
happen rather than reacting to what customers are actually
doing. Consequently, the retailer determined that the only way to
be responsive to increasing consumer demands was to build
processes and define rules that required less day to day planning.
According to the retailer’s VP of Supply Chain: “Ten years ago we
made a fundamental choice to no longer believe in the power of
forecasting. We don’t believe in the predictability of customer
behaviour. As the offer in products, information and services
keeps growing forecasting is getting more difficult.” They quickly
determined that this required development of a highly automated
replenishment process with a single point of customer demand
forecasting and centralized control management.
“Now the supply chain is designed as a pull chain with input from
customer behaviour and forecasting models. The base for logistics
is what the customer buys supported by other parameters around
when do customers visit,” says the retailer’s VP of Supply Chain.
Decisions and store planning and forecasting needed to be much
(c
more reactive which required the availability of continuous, near

real-time information. Traditional processes were typically built
around batch processing cycles, usually one per day. Moving from
a batch to a flow system (continuous operation and continuous
decision making) facilitated individualized delivery schedules
based on geography, transport costs, type of merchandise etc.
Naturally, some batching still occurred in the process, such as
deliveries to the distribution centre from suppliers or the start of
Contd…
Logistics Strategy
62 a new promotion but the emphasis is on continuous flow of

Notes information, with no artificial barriers to impede the reaction
S
time.
___________________
To determine how much of a particular product to send to a
___________________ particular store requires knowledge of the present and historic
service levels as well as constraints of both the product and the
___________________ store. Each item/store combination has a unique set of
parameters. For some products, such as dry groceries, the
___________________
parameter is simple – when one full case is sold, one new case is
___________________ ordered. But for items like fresh produce, factors like the desire
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for freshness, an attractive presentation and the cost of shrinkage
___________________ must all be taken into account before deciding on an order
schedule. Predictive forecasting is only used for special situations
___________________
such as promotions and events. Once the promotion is started,
___________________ however, ordering is quickly adjusted to reflect actual consumer
behaviour in the store (e.g. real time POS data).
___________________
According to the retailer’s VP of Supply Chain, “The
___________________ replenishment process is now fully automated. We have a central
control room where the switchboard is operated. Here we monitor
the assortment behaviour, the effect of the weather, the
differences in revenues compared to that type of local store etc. It
is all in one place and there is centrally integrated responsibility
for all DCs, local stores etc. Local stores only have to focus on
sales, their store (clean, products available) and customer
attention. The central department decides what products come in,
in what amounts and prescribes how to fill the store. The store
just has to execute. “As a result of these enhancements to their
)U
planning and replenishment processes, the retailer was able to
realize some substantial benefits including a 50% reduction in out
of stocks. The amount of time employees spend on store
processing has declined significantly and improved availability of
goods, fewer leftovers and less time spent on ordering has
translated into more time for employees to work directly with
customers.
In addition, supplier investigation into product availability also
proved that availability increased 14% during promotions. Most
importantly, however, the net result of creating a collaborative,
automated, real-time event driven system is increased confidence
that on any given day a customer who walks in to any one of the
retailer’s stores will leave satisfied.
Question:
Analyse the case and write down the case facts.
Source: http://www.capgemini.com/m/en/tl/tl_18th_Annual_Trends_in_Logistics_and_
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Transportation__Synchronization.pdf
UNIT 6: Logistics Modelling
63
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-II
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64
Notes
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UNIT 6: LOGISTICS MODELLING
___________________ UNIT 8: INVENTORY PLANNING AND
MANAGEMENT
z Introduction
___________________ z Introduction
z Gravity Location Model
___________________ z Inventory Performance Measures
z Quantity Discount Model
___________________ z Setting Customer Service Levels
z Probabilistic Models
z Inventory Management
___________________
PE
UNIT 7: CUSTOMER SERVICE AND ORDER
PROCESSING
___________________ UNIT 9: EFFICIENT WAREHOUSING
___________________
z Customer Service and Order Processing Measures z Concept of Efficient Warehousing
___________________
z Customer Service Process z Assessment
z
___________________
Customer Service Policy Making z Export of Goods
z ___________________
Delivery Order Processing z Licensing of Warehouse in India
UNIT 10: CASE STUDY

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Unit 6
65
Notes
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Activity
Logistics Modelling
___________________
Prepare a chart to show
diagrammatically the EOQ
___________________
model of inventory.
___________________
Objectives
___________________
topics: ___________________
PE
\ Gravity Location Model ___________________
\ Quantity Discount Model ___________________
\ Probabilistic Models
___________________
___________________
Introduction
___________________
In this unit we will study about logistics modelling, the systems by
which a company organizes the physical distribution of its
products.
Gravity Location Model

)U
The gravity model is the most common formulation of the spatial
interaction method. It is named as such because it uses a similar
formulation than Newton’s formulation of gravity. Accordingly, the
attraction between two objects is proportional to their mass and
inversely proportional to their respective distance. Consequently,
the general formulation of spatial interactions can be adapted to
reflect this basic assumption to form the elementary formulation of
the gravity model:
Pi Pj
Tij = k
dij
z Pi and Pj: Importance of the location of origin and the location

of destination.
z dij: Distance between the location of origin and then location of
(c
destination.
z k is proportionality constant. Related to the rate of the event.
For instance, if the same system of spatial interactions is
considered, the value of k will be higher if interactions were
considered for a year comparatively to the value of k for one
week.
Logistics Strategy
66 Thus, spatial interactions between locations i and j are

Notes proportional to their respective importance divided by their
S
___________________ distance.
___________________
Extension
___________________
The gravity model can be extended to include several parameters:
___________________
Pi λ Pj α
___________________ Tij = k −
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dijβ
___________________
z P, d and k refers to the variables previously discussed.
___________________
___________________ z β (beta): A parameter of transport friction related to the

efficiency of the transport system between two locations. This
___________________
friction is rarely linear as the further the movement the
___________________ greater the friction of distance. For instance, two locations
services by a highway will have a lower beta index than if they
were serviced by a road.
z λ (lambda): Potential to generate movements (emissiveness).

For movements of people, lambda is often related to an overall
level of welfare. For instance, it is logical to infer that for
retailing flows, a location having higher income levels will
)U
generate more movements.
z α (alpha): Potential to attract movements (attractiveness).

Related to the nature of economic activities at the destination.
For instance, a centre having important commercial activities
will attract more movements.
Calibration
A significant challenge related to the usage of spatial interaction
models, notably the gravity model, is related to their calibration.
Calibration consists in finding the value of each parameters of the
model (constant and exponents) to insure that the estimated
results are similar to the observed flows. If it is not the case, the
model is almost useless as it predicts or explains little. It is
(c
impossible to know if the process of calibration is accurate without

comparing estimated results with empirical evidence.
In the two formulations of the gravity model that have been
introduced, the simple formulation offers a good flexibility for
calibration since four parameters can be modified. Altering the
value of beta, alpha and lambda will influence the estimated
spatial interactions. Furthermore, the value of the parameters can 67

change in time due to factors such as technological innovations and Notes
S
economic development. For instance, improvements in transport ___________________
efficiency generally have the consequence of reducing the value of
___________________
the beta exponent (friction of distance). Economic development is
likely to influence the values of alpha and lambda, reflecting a ___________________
growth in the mobility. ___________________
Often, a value of 1 is given to the parameters, and then they are ___________________
PE
progressively altered until the estimated results are similar to ___________________
observed results. Calibration can also be considered for different
___________________
O/D matrices according to age, income, gender, type of
merchandise and modal choice. A great part of the scientific ___________________
research in transport and regional planning aims at finding ___________________
accurate parameters for spatial interaction models. This is
___________________
generally a costly and time-consuming process, but a very useful
one. Once a spatial interaction model has been validated for a city
or a region, it can then be used for simulation and prediction
purposes, such as how many additional flows would be generated if
the population increased or if better transport infrastructures
(lower friction of distance) were provided
)U
Capacitated Plant Location Model
A typical supply chain has to meet the criteria of cost, delivery and
inventory locked up in the system. Many researchers have worked
on the problem of locating facilities (such as plants and
warehouses) on a network so as to minimize the sum total of
distribution and location costs. Food Corporation of India annually
spends over ` 30,000 crore on distribution and warehousing costs
(while distributing food grains all over India). Modelling these
problems invariably results in a mixed 0-1 integer liner program.
In single stage capacitated warehouse location problem (SSCWLP),
goods are moved from plants to warehouses (having limited
capacities) to markets. Geoffrion and Graves and Kouvelis et al.
used flow variables as xikj: flow from plant ‘i’ to warehouse ‘j’ to
(c
market ‘k’. And Sharma used xij and yjk as flow variables: xij
denotes flow from plant ‘i’ to warehouse ‘j’ and yjk denotes flow from
warehouse ‘j’ to market ‘k’. Formulation style of Sharma results in
greatly reduced number of variables and it is expected that
mathematical model of Sharma will take significantly less amount
Logistics Strategy
68 of computer time for obtaining the optimal solution (this was

Notes verified by Sharma and Berry).
S
___________________
Modelling of these problems has yet another dimension, i.e.,
___________________ concept of ‘strong’ and ‘weak’ formulations. In the context of SPLP
___________________ (simple plant location problem: here plants/warehouses of
unlimited capacity supply good directly to markets), Erlenkotter
___________________
gave ‘strong’ and ‘weak’ constraints. This was extended to CPLP
___________________ (capacitated plant location problem: here plants/warehouses of
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___________________ limited capacity supply good directly to markets) (see Cornuejols et
al. for details). Strong formulation gives better bounds of the linear
___________________
programming relaxation of the mix 0-1 integer linear program that
___________________
results in faster convergence of the branch and bound based
___________________ approach used for its solution.
___________________ It can be seen that efficient modelling leads to faster solution to
supply chain problems and this was demonstrated by Sharma and
Namdeo by extending its application to 2-stage warehouse location
problems. These ideas offer exciting opportunities to model supply
chain problems.
Inventory Modelling
)U
Mathematical equation or formula that helps a firm in determining
the economic order quantity, and the frequency of ordering, to keep
goods or services flowing to the customer without interruption or
delay.
Deterministic Model
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Figure 6.1: Deterministic Model

Demand (D) 69
Notes
S
Demand rate is uniform and is known. D is the annual demand.
___________________
Lead time (L) ___________________
Lead time is known and constant. ___________________
___________________
Costs
___________________
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Ordering cost, carrying cost are known. Purchase cost is irrelevant;
it means no price discount is offered. Shortage cost is not ___________________
permitted. ___________________
Decision to be taken: ___________________
How much to order? – Ordering quantity (Q) ___________________
When to order? - Reorder Level ___________________
To answer for the questions related with the decisions, you have to
proceed as follows:
Any organization, it has to minimize the total inventory cost.
Total annual inventory cost = ordering cost + carrying cost +
purchase cost + shortage cost
)U
With regard to this model, the shortage cost is not permitted.
Total annual inventory cost = ordering cost + carrying cost +
purchase cost
Since you should find the ordering quantity and re-order level,
next you should consider relevant cost.
Total annual relevant cost = ordering cost + carrying cost
= (no. of orders) (ordering cost per order)
+ (average inventory) (Carrying Cost)
D/Q = No. of Orders
Average inventory according to the figure = (min. inventory+ max.
inventory)/2
(c
= (0+Q)/2
= Q/2
Total annual relevant inventory cost = (D/Q)×Co+ (Q/2)×Cc
Since you have to establish ‘Q’
Logistics Strategy
70 Differentiating w.r.t. Q and equate it to zero.

Notes
S
= – (D/Q) × Co + Cc/2 = 0s
___________________
D Cc
___________________
or =
Q 2
2
___________________
or
___________________
2DCo
= Q2
___________________ Cc
PE
___________________ or Q2 = 2DCo/Cc
___________________ or Q = √[2DCo/Cc] Answer to the question how much
___________________ to order
___________________ Total annual relevant inventory cost
___________________ = (D/Q)Co+(Q/2)Cc
Substituting q = √[2DCo/Cc]
= (D/√[DCoCc/Cc])Co + (√[DCoCc/Cc]/2)Cc
= (√[DCoCc])/√2 + √[DCoCc]/√2
= (2/√2) √[DCcCO]
)U
= √[2DCoCc]
Total annual inventory cost
= Total annual ordering cost + Total annual carrying cost + Total
annual purchase cost
D Q
TC = C0 + Cc + D.C
Q 2
= Purchase cost + total annual relevant inventory cost

= DCp+ √[2DCoCp]
Graphically also you can approximate, find out EOQ as follows:
(c
Figure 6.2: Economic Order Quantity

Example: The demand for certain item 4800 unit per year. Each 71
unit cost `100. Notes
S
Inventory cost charges are estimated at 15%. No shortage cost is ___________________
allowed. The ordering cost ` 400 per order. Lead time is one day. ___________________
Assume 250 working days.
___________________
Find the following:
___________________
1. EOQ ___________________
PE
2. Time between the orders ___________________
3. Number of orders required each year. ___________________
4. Minimum relevant Inventory cost. ___________________
5 Minimum total inventory cost ___________________
6. Reorder Level. ___________________
7. Plot a graph for inventory level fluctuation with time.

Solution:
(i) EOQ = √(2DCo/Cc)
= √(2 × 48000 × 400)/(.15 × 100)

)U
Cc = (15/100) ×100 = 1600
(ii) To determine reorder level
= L × (D/12)
= 2 × (48000/12250) = 192 units
(iii) Time between orders
Q/t = D
t = Q/D
Inventory Level
(c
= 1600/48000
Logistics Strategy
72 = .033 years
Notes
S
= .033 ×250
___________________
= 8.33 days
___________________
(iv) Number of orders
___________________
= D/Q
___________________
___________________
= 48000/1600
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___________________ = 30 orders
___________________ (v) Total minimum relevant cost
___________________ Inventory cost = √2DCoCc

___________________ = √2 × 48000 × 400 × .15 × 100
___________________
= ` 24,000
(vi) Total minimum inventory cost
= DCp+√(2CoCc)
= 48000×100+24000
= ` 4824000
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Inventory Level vs. Time
Figure 6.3: Inventory Level vs Time

(c
Economic batch quantity model:

1. Demand:
It is known and constant.
It is nothing but annual production requirement
2. Production Rate: 73
Notes
S
It is known and is estimated based on capacity of plant
___________________
3. Lead Time:
___________________
It is known and constant
___________________
4. Cost:
___________________
Setup/ordering Cost: Since there is no purchase, there is no
___________________
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ordering cost. Only setup cost comes into picture in the place of
ordering cost .this is known. ___________________
___________________
Carrying Cost: It is known and constant.
___________________
Product Cost: assume that product cost per unit does not vary
with production i.e. unit is irrelevant of quantity of production. ___________________
___________________
Decision
How much to produce?
When to produce?
Inventory Model (Economic Batch Quantity)
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(c
tp - It is the production period.

t - It is the time interval between the two productions.
From the figure, it can be concluded that up to tp period both
production and consumption takes place and inventory is built up
at the rate of (p-d). Where ‘d’ is the demand rate.
Logistics Strategy
74 Once the tp period is reached there is no production only

Notes consumption at the rate of ‘d”.
S
___________________
Next production starts after ‘tth’ period.
___________________
To find quantity of production ‘Q’, production time period tp & time
___________________ interval between production‘t’.
___________________ The following procedure is carried out.
___________________
Total inventory cost = setup cost + carrying cost + production cost
PE
___________________ + shortage cost.
___________________ Total relevant inventory cost = setup cost + carrying cost
___________________ Shortage and production cost are zero because no shortage is
___________________ allowed and the production cost becomes irrelevant cost
___________________ From the figure the average inventory is calculated as follows,
Avg.inventory = (Imax +Imin)/2.
= (Imax+0)/2
= Imax/2.
To find Imax, from the fig.
Imax/tp = (p-d).
)U
So, Imax = (p-d)tp.
To find tp,
tp × p = Q
tp = Q/p
Imax = (p-d) Q/p
Imax = (1-d/p) Q.
Total relevant inventory cost
= setup cost + carrying cost
Setup cost = (number of setup) × setup cost per setup
= (D/Q) Co
(c
Carrying cost = (Average inventory)× carrying cost per unit

= [(Imax+Imin)/2 ]×Cc
= (1-d/p)×(Q/2) Cc
Total relevant inventory cost = (D/Q)Co+(1-d/p)(Q/2)Cc
For cost minimization, differentiate w.r.t. Q and equate it to zero. 75

Notes
S
DC0/Q2 = (1 – d/p)Cc
___________________
Q = √[2DCo/Cc(1-d/p)
___________________
Total annual relevant inventory cost = D/√[2DCo/(1-d/p) Cc] +
___________________
√[2DCO/(1-d/p] Cc)/2
___________________
= √[DCoCc(1-d/p)/√2 + √[DCoCc(1-d/p)]/√2
___________________
PE
= (2/√2) √[DCoCc(1 – d/p)]
___________________
= √[2DCoCc(1 – d/p)] ___________________
Total annual inventory cost = √2DCcCo(1 – d/p) + CpD ___________________
___________________
Deducing EOQ from EBQ Model
___________________
It is known that in case of EOQ model, the production rate is
infinity i.e. there is an instantaneous replenishment.
Now
EBQ = √[(2DCo)/(1-d/p)Cc]
So when p = √
)U
EBQ = EOQ
Example: ABC Power Company has planned to cover demand for
electricity using coal. Annual demand for coal input is estimated to
be 8 lakh tones. It is used uniformly throughout the year. Coal can
be strip mined at the rate of 5000 tonnes per day. The setup cost
for mining is 200 rupees per run. The inventory holding cost is 5
rupees per ton per day. The total numbers of working days are
given as 250. Determine.
1. EBQ
2. duration of mining run
3. Time between runs.
4. Minimum relevant inventory cost
(c
5. Plot graph showing whole inventory fluctuation Vs time.

Solution:
To find EBQ,
EBQ = √[2DCo/Cc(1-d/p)]
Logistics Strategy
76 Where
Notes
S
D = 8,00,000 tonnes per year
___________________
D = 8,00,000/250
___________________
= 3200 tonnes per day
___________________
p = 5000 tonnes/day
___________________
___________________
Co = ` 200/run
PE
___________________ Ch = ` 5/tones/day
___________________ (i) EBQ = √[(2 × 8,00,000 × 2500)/(5 × (1 – 3200/5000))]
___________________ (ii) Duration of each mining run Q/p = tp

___________________ tp = 42164/5000
___________________ = 8.43
= 8.5 days (approx.)
(iii) Time between runs
Q = t*d
T = Q/d
)U
= 42164/3200
= 13.17 days.
(iv) Minimum relevant inventory cost = √[2DCoCc (1 – d/p)
= √[2 × 8,00,000 × 2500 × 5 × (1 – 3200/5000)]
= ` 84853
Graphical Representation of above problem
(c
77
Notes
S
Activity
Prepare a presentation to
___________________
explain quantity discount
model with figure.
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Check Your Progress

Fill in the blanks:
1. ……………. are those costs that are incurred in the
purchase cycle are called procurement costs or
inventory ordering costs.
)U
2. The ……………. function concerns short-range
variation in either demand or replenishment.
Quantity Discount Model

As it is mentioned already, the purchase cost becomes relevant
with respect to the quantity of order only when the supplier offers
discounts.
Discounts means if the ordering quantity exceeds particular limit
supplier offers the quantity at lesser price per unit.
This is possible because the supplier produces more quantity. He
could achieve the economy of scale the benefit achieved through
economy of scale that he wants to pass it onto customer. This
(c
results in lesser price per unit if customer orders more quantity.

If you look at in terms of the customer’s perspective customer has
also to see that whether it is advisable to avail the discount
offered, this is done through a trade-off between his carrying
inventory by the result of acquiring more quantity and the benefit
achieved through purchase price.
Logistics Strategy
78 Quantity Discount Model

Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 6.4: Quantity Discount Model
Suppose if the supplier offers discount schedule as follows:

z If the ordering quantity is less than or equal to Q1 then
purchase price is Cp1.
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z If the ordering quantity is more than Q1 and less than Q2 then
z If the ordering quantity is greater than or equal to Q2 then
Then the curve you get cannot be a continuous total cost curve,
because the annual purchase cost breaks at two places namely at
Q1 and Q2.
Probabilistic Models
In the previous section, it is assumed that the lead time and
demand is constant. But in real life situations it is not so. The
demand is always uncertain because it is difficult to exactly
(c
estimate the required quantity by the customer and the supplier is

also usually not reliable. In the sense, he does not supply in the
specified time period. Considering this kind of situation the
decision should be taken regarding the quantity of ordering, time
at which the order to be placed, the time between the orders and
how much inventory to be kept against the uncertainty of demand
and lead time become cumbersome.
To deal with the above scenarios the inventory model to be adopted 79

is known as Probabilistic Inventory Model. Notes
S
The inventory models called probabilistic inventory model because ___________________
the demand, lead-time, or both are random variables. The ___________________
probability distribution of demand and lead-time to be estimated.
___________________
The inventory models answers for questions related to the decision
___________________
raised above are called Probabilistic Inventory Model.
___________________
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One such model is fixed order quantity model
___________________
In this model,
___________________
1. The demand (D) is uncertain, you can estimate the demand
___________________
through any one of the forecasting techniques and the
___________________
probability of demand distribution is known.
___________________
2. Lead time (L) is uncertain, probability of lead time distribution
is known.
3. Cost (C) all the costs are known:
(a) Carrying costs Cc
(b) Ordering costs Co
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Stock Out Cost
It is difficult to calculate stock out cost because it consists of
components difficult to quantify so indirect way of handling stock
out cost is through service levels. Service levels means ability of
organization to meet the requirements of the customer as on when
he demands for the product. It is measured in terms of percentage.
For example, if an organization maintains 90% service level, this
means that 10% is “stock out” level. This way the stock out level is
addressed.
Safety Stock
It is the extra stock or buffer stock or minimum stock. This is kept
to take care of fluctuations in demand and lead time.
(c
If you maintain more safety stock, this helps in reducing the

chances of being “stock out”. But at the same time, it increases the
inventory carrying cost. Suppose the organization maintains less
service level that results in more stock out cost but less inventory
carrying cost. It requires a trade-off between inventory carrying
Logistics Strategy
80 cost and stock out cost. This is explained through the following
Notes figure:
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
Figure 6.5: Safety Stock
___________________
Safety stock (S.S*) is to be stocked by the organization.
Advantages:
1. Since the ordering quantity is EOQ, comparatively it is
meaningful. You need to have less safety stock. This model
relatively insensitive to the forecast and the parameter
changes.
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2. Fast moving items get more attention because of more usage.
Weakness:
1. We cannot club the order for items, which are to be procured
from one supplier to reduce the ordering cost.
2. There is more chance for high ordering cost and high
transaction cost for the items, which follow different reorder
level.
3. You can not avail supplier discount. While the reorder level
fall in different time periods.
Warehouse Layout Design and Modelling

Warehouse layout optimization can bring new levels of efficiency to
(c
your operations, which in turn will reduce the cost of materials

handling and improve service levels and lead-times. All too often
we see warehouse operations that are over resourced with people
and equipment, driven by poor warehouse layout, extended
information flows, and process flows that add unnecessary time
and cost to the operation.
These issues can be fixed at low cost without the need for 81
complicated I.T. Solutions or additional capital equipment spend. Notes
S
Many times organisations start from a fixed view of what size the ___________________
facility will be, and most times the square footage is based on ___________________
affordability. The problem with this, is that the building may end
___________________
up be too big, and therefore more expensive or to small and put
operational constraints into the facility before the design even gets ___________________
off the ground. ___________________
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___________________
Key Factors Considered
___________________
Warehouse Layout and Sizing: The correct way to size the
___________________
facility is from the inside, that way the actual size required will fit
the operational requirements, and will ensure that all available ___________________
space is used and you are not paying for unused space. ___________________
1. Estimating Space Requirements: Short and long term,

based upon forecasts, historical usage patterns, and projected
changes. Developing new layouts to maximize usage of space.
Short- and long-range sizing of individual areas: racks,
shelving, automated systems, docks, staging, offices, and
support. The final sizing needs to come from the operational
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requirements of the building, this can only come from
modelling the design.
2. Order Picking: Methods for Piece Pick, Case Pick, and Pallet
Pick Operations.
Deciding on the amount of space you will need is not just about
how much product you wish to store. The type of picking you
intend carrying out is a fundamental part of the decision process.
The methods for order picking vary greatly and the level of
difficulty in choosing the best method for your operation will
depend on the type of operation you have. The characteristics of
the product being handled, total number of transactions, total
number of orders, picks per order, quantity per pick, picks per
SKU, total number of SKUs, value-added processing such as
(c
private labelling, and whether you are handling piece pick, case
pick, or full-pallet loads are all factors that will affect the decision
on how much space will be required.
Holding requirements include defining the physical size of the
inventory on hand. Unless the on-hand total is fairly stable across
the year, it is usually preferable to plan for a high but not peak
Logistics Strategy
82 inventory level. To fully utilize the space, it is important to

Notes determine how product needs to be stored (e.g., floor stacked, pallet
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___________________ rack, shelving, case flow) and how much of each fixture type will be
required. Cube data (length × width × height) for each product is a
___________________
very useful kind of information for many aspects of capacity
___________________
planning.
___________________
Workflow requirements encompass everything from how product
___________________ arrives to how it leaves the facility and everything in between. The
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___________________ objectives of this aspect of planning are to minimize product
handling, to reduce travel as much as possible, and to minimize
___________________
the resource requirements (labour, packaging, transportation) to
___________________
move the product to the customer.
___________________
Among the factors to consider are the following: (1) Link the way
___________________ product arrives with where it is to be stored (location capacity). If
possible, store all of a product in one location and pick from that
location as well. This does not work if stock rotation matters
(expiration dates, serial number, or lot control issues). (2) Locate
the highest-volume products (greatest number of orders, not
physical size) closest to the outbound shipping area to minimize
the travel required to pick and ship orders for them. (3) Because
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vertical travel is always slower, locate as many products as
possible on or close to the floor. (4) Allow for staging space to
handle product that is in transit, such as items waiting to be put
away.
Future requirements include accommodating growth in the form of
higher volume of existing SKUs, an increase in the number of
SKUs, more customers, and more orders. If expansion is already a
thought, consider how that will be accomplished from the outset.
Check Your Progress

Fill in the blanks:
1. The objectives of ................. aspect of planning are to
minimize product handling, to reduce travel as much
(c
as possible, and to minimize the resource

requirements to move the product to the customer.
2. ................. is the extra stock or buffer stock or
minimum stock.
Summary 83
Notes
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A typical supply chain has to meet the criteria of cost, delivery and
___________________
inventory locked up in the system. Many researchers have worked
on the problem of locating facilities (such as plants and ___________________
warehouses) on a network so as to minimize the sum total of ___________________
distribution and location costs. Food Corporation of India annually
___________________
spends over ` 30,000 crore on distribution and warehousing costs
(while distributing food grains all over India). Modelling these ___________________
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problems invariably results in a mixed 0-1 integer liner program. ___________________
___________________
Prepare a project on Warehouse Layout Design and Modelling and ___________________

discuss any two relevant cases.
___________________
Keywords
Safety Stock: The safety stock or buffer stock function concerns
short-range variation in either demand or replenishment.
Excess inventory: It is a cost burden to industry in terms of
)U
capital tied up, the cost of obsolescence and the cost of servicing
product in the supply chain.
Inventory Costs: Costs associated with the maintenance of
inventory.
Average inventory: It is defined as half the batch size plus safety
stock.
Inventory Ordering Costs: These are those costs that are
incurred in the purchase cycle are called procurement costs or
inventory ordering costs.
Ordering costs: These are incurred in the purchase cycle, while
set-up costs are incurred in the manufacturing cycle.

(c
1. Explain gravity location modelling.

2. Briefly explain capacitated plant location model with
examples.
3. What is warehouse layout design and modelling?
Logistics Strategy
84
Further Readings
Notes
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___________________ Books
___________________ Bowersox D, Closs D, and Mixby Copper, M., Supply Chain
___________________ Logistics Management, McGraw Hill, 2002.
___________________ Ballou, Business Logistics/Supply Chain Management, Pearson

___________________
Education.
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___________________ Bowersox, D. J., Logistics Management, Tata McGraw Hill, 2002.
___________________ Web Readings

___________________
___________________
___________________
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(c
UNIT 7: Customer Service and Order Processing
Unit 7
85
Notes
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Activity
Customer Service and Order

___________________
Prepare a questionnaire for
Gap Analysis for Customer
___________________
Service Measurements.
Processing ___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Customer Service and Order Processing Measures
\ Customer Service Process ___________________
\ Customer Service Policy Making ___________________

\ Delivery Order Processing ___________________
Introduction
Logistics contributes to an organization's success by providing
customers with timely and accurate product delivery. The key
question is who is the customer? For logistics, the customer is any
delivery destination. Typical destinations range from consumers'
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homes to retail and wholesale businesses to the receiving docks of
a firm's manufacturing plants and warehouses. In some cases, the
customer is a different organization or individual who is taking
ownership of the product or service being delivered. In many other
situations, the customer is a different facility of the same firm or a
business partner at some other location in the supply chain.
Regardless of the motivation and delivery purpose, the customer
being serviced is the focal point and driving force in establishing
logistical performance requirements. It is important to fully
understand customer service deliverables when establishing
logistical strategy. This unit details the nature of customer service
and the development of facilitating strategies.
(c
Customer Service and Order Processing Measures

Performance measurement is a fundamental building block of a
total quality organisation. Historically, organisations have always
measured performance in some way through the financial
performance, be this success by profit or failure through
liquidation.
Logistics Strategy
86 1. Customer Satisfaction: This first is probably the most

Notes important of the 5 basic measures. It’s the only measure that
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___________________ will connect you with the relevance of the work you’re doing. If
customers aren’t happy, then everyone is wasting at least a
___________________
portion of their time. Measure how your customer judges the
___________________
outcome of your product or service, through surveys or at the
___________________ end of each transaction with the customer. You can ask them
___________________ directly, give them a survey form, or send them to a website
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form. If you also collect data about what aspects of your
___________________
product or service are most important to customers, it will give
___________________ you clues about more specific things that might be important
___________________ to measure also e.g. easy access to support staff or accuracy of
___________________
bills.
___________________ 2. Product/Service Defects: Defects is a measure of quality, and

a translation of what the customer expects your product or
service to do, into something you can count to assess how often
the product or service actually does what is expected.
3. Your customer satisfaction measure is a companion to this one.
And the extra data collected about what is most important to
customers about your product or service will help you define
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what constitutes a defect (e.g. something breaks, something
doesn’t operate correctly, a delivery deadline was missed, an
invoice has errors).
4. Cycle Time: The time it takes to produce or deliver your
product or service for your customer is a surprisingly useful
thing to measure. It’s not just about meeting the time
commitments you made to your customer. It’s just as
importantly about focusing everyone on the things that make
the cycle time what it is. And this is usually dead time
between hand-offs in the process, waste and rework due to
errors or lax standards, and even things that didn’t need to be
done at all. An alternative or companion measure to cycle time
might be on time delivery, which links it more to the
customer’s experience. Just remember the value of measuring
(c
cycle time for internal benefit too.

5. Productivity: Productivity is a measure of your process
efficiency, and is essentially the rate at which you can produce
outputs, relative to the input it takes to do so. A great measure
to focus you on eliminating waste and rework in delivering
your products and services to your customers. For example,
one way to think about productivity is to compare how much 87

you’re producing relative the time it takes, such as number of Notes
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work hours. Another way to think about productivity is about ___________________
quantity versus cost - how much are you producing, relative to
___________________
what it costs in resources and labour.
___________________
6. Innovation (or Improvement) Ideas: Even if you’re not
ready to call it innovation (call it improvement instead), this ___________________
fifth basic measure is about stimulating one of the behaviours ___________________
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that support a performance culture, namely making active ___________________
suggestions about how to improve performance.
___________________
Operational Performance ___________________
Operational performance is a measure of the logistical competency ___________________

of the firm. It can be viewed in terms of performance cycles. ___________________
However, the concept of the performance cycle is shown in the
Figure, which describes the ‘order performance cycle’.
Performance cycles are differentiated by mission, type of customer
being serviced, and the degree of operational variance experienced
over time. Performance cycle operations can be measured in terms
of:
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(1) Speed,
(2) Consistency,
(3) Flexibility, and
(4) Malfunction/recovery.
(c
Figure 7.1: Operational Performance

Logistics Strategy
88 Speed: Performance-cycle speed is the elapsed time from when an

Notes order is placed until customer delivery. Depending upon the item,
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___________________ the time required for performance-cycle completion can be as short
as a few hours or as long as several weeks.
___________________
___________________
The usual business arrangement is for a supplier’s delivery
commitment to be based on the order requirements of the
___________________
customer. Usually, the basis of performance-cycle expectations is a
___________________ combination of efficient logistical operations and the need to meet
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___________________ customer requirements effectively.
___________________ In critical items, consignment arrangements are often used. The

product is inventoried at a customer’s business establishment and
___________________
the inventory placed in anticipation of need. This can be an
___________________ expensive way for a supplier to do business. This often reflects of
___________________ the relative power in a business relationship e.g. in business-to-
business marketing. Typically, such requirements are also found
as prerequisites in certain industries, e.g. in the healthcare
industry.
Performance-cycle timing has a direct relationship to inventory
requirements. The greater the performance cycle speed, the lower
is the investment in inventory of the customer. This relationship is
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crux of time-based logistics arrangements.
Firms always attempt to improve their performance cycles. HLL
whose stock replenishment time used to be 2 to 3 weeks, claimed in
2003 that it had effectively reduced it to 3 to 4 days. Not
surprisingly, this resulted in considerable savings in warehousing
requirements and working capital investments in inventory for
HLL.
Consistency: Consistency refers to a firm’s ability to perform at
the expected delivery time over a large number of performance
cycles. Failure to be consistent translates directly into customers
needing to carry extra safety stock to protect against possible late
delivery. Most firms place a great emphasis on consistency as it
reflects compliance to delivery commitments over time.
Consistency is fundamental to all logistical operations as it has a
(c
direct impact on safety stock requirements.

Flexibility: Operational flexibility is a firm’s ability to handle
extraordinary customer service requests. Sometimes, firms have to
meet service levels for specific markets or customers that require
flexibility. Typically, flexibility becomes critical in situations such
as:
(1) one-time change in ship-to destinations, 89

Notes
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(2) support of unique sales and marketing programs,
___________________
(3) new-product introductions,
___________________
(4) product phase-out,
___________________
(5) unexpected stock-outs, and
___________________
(6) product recall, etc.
___________________
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Though it is difficult to measure flexibility, this is a critical
___________________
performance parameter. As a general rule, a firm’s overall
___________________
logistical competency can be defined on this capability because in
many ways, logistical excellence rests in the ability to be flexible ___________________
Malfunction/Recovery: Regardless of how fine-tuned a firm’s ___________________

logistical operation is, malfunctions will occur and measures to ___________________
prevent malfunctions are a part of the logistics strategy. The
continuous performance of service requirements under all types of
operational situations is difficult, but every reputed firm should
have contingency plans to recover from malfunctions. The degree of
compliance is a measure and control of the speed and ability of the
firm to recover from malfunctions.
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Reliability
Logistics quality is all about reliability. Reliability is a measure of
the ability of the firm to comply with levels of planned inventory
availability, operational performance and to rapidly provide
accurate customer information regarding logistical operations and
order status. However, to achieve quality in logistics and a high
level of reliability, the measures of service quality used by the firm
become exceedingly important. There are three areas that require
attention:
z Measurement variables,
z Measurement units, and
z Measurement base.
(c
Measurement Variables: The performance activities that are

specified in the basic service program are the variables that need
to be measured for reliance assessment. Some of these are back-
orders, stock-outs, and back-order age. These are called static
variables and provide an early warning of potential problems in
the future.
Logistics Strategy
90 Many other variables like sales, orders, returns, cancelled orders,

Notes short-shipments, damage claims, etc. also need to be monitored
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___________________ over time. These are called flow variables and track system
performance.
___________________
___________________ Measurement Units: The selection of unit measures is an

important exercise. Different measures generated from the same
___________________
activity may not provide the same managerial information. For
___________________ example, stock-outs when measured in terms of units treat all
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___________________ products on an equal basis, though high-margin, fast-moving, or
critical products will require greater attention as they have a
___________________
greater impact on the profitability of the firm. The example reflects
___________________
the importance of selecting of appropriate measurement units for
___________________ reliability assessment. The units of measurement selected,
___________________ therefore, should reflect the critical parameters in the firm’s
customer service strategy.
Measurement Base: The measurement base defines how
performance reporting is aggregated. For example, the service
measurement base could be at the overall system level, the product
group level, or the order level, etc.
Grouping the overall logistical system into one measure to
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summarize customer service performance may be easy and
relatively inexpensive. However, aggregated measurements very
often conceal potential problems as they average performance.
At the other end, it is difficult and expensive to collect and
maintain data at the customer or product detail level. However,
with significant advancements in information technology coupled
with declining communication costs, customer service performance
evaluation at any desired level is becoming more of a reality with
each passing day. For example, using product data imaginatively,
P&G was able to provide better service quality and also able to
reduce its own cost of replenishment in Mumbai where it had six
distributors. The company data indicated that the internal
competition between the distributors impacted the reliability and
(c
quality of service in Mumbai. The company, therefore, decided to

appoint a super-stockist to replace their existing distribution
system. The new system worked at reducing the duration of the
replenishment cycle by three days without impacting turnover.
The improved efficiency of the new system made it possible for
P&G to reduce distributor margins by 2 percent, resulting in better
profits for the company.
A major part of service quality is continuous improvement by 91

learning from malfunctions and improving the operating system to Notes
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prevent reoccurrence. With proper measurement systems, firms ___________________
cannot only improve reliability, but also their profits.
___________________
Management must evaluate the trade-offs when selecting the most
___________________
appropriate combination of measures, units, and the aggregation
base, so as to assess and improve reliability in customer service ___________________
___________________
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Gap Analysis for Customer Service Measurements
___________________
The measurement of service quality generally refers to a
___________________
comparison of what a customer feels or a company should offer (i.e.
___________________
their expectations) with the company’s actual performance. Service
quality can be considered as a function of expectations- ___________________
performance gap. Service quality is the degree and direction of ___________________
discrepancy between the customers’ service perception and
expectations.
Gap analysis measures the magnitude of discrepancy between
expectations and offerings, facilitating managers to take corrective
actions at the appropriate time to improve the quality of customer
service.
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The Figure 7.2 is a model for analysing service gap. There are two
compartments in the figure, the left-hand compartment looks at
the service process from the customer’s point of view while the
right-hand compartment represents the internal environment of
the firm.
Service Gap Analysis

The service quality gap is reflected on the left hand side of this
figure. This represents the customers’ assessment of service
quality.
The right-hand compartment shows four areas where
organisational shortfalls ultimately lead to the customer-perceived
service quality gap. These organisational gaps can be described as
(c
follows:
z Market Information Gap: The firm’s incomplete or
inaccurate knowledge of customers’ service expectations.
z Service Standards Gap: The firm’s failure to accurately
translate customers’ service expectations into specifications or
guidelines for employees.
Logistics Strategy
92 z Service Performance Gap: Lack of appropriate internal

Notes support systems (e.g. standards, training, technology, flexibility)
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___________________ that enable employees to deliver to service standards.
___________________ z Internal Communication Gap: Inconsistencies between
___________________ what customers are told the service will be like and the actual
service performance (e.g. due to lack of internal
___________________
communication between the service standards publicised and
___________________ what is actually provided by the after-sales service
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___________________ representatives).
___________________ The critical discrepancies or gaps that may exist in the desired and
___________________
actual levels of customer have a direct impact on customer
satisfaction. Service performance in these areas is crucial for long-
___________________
term association and customer loyalty. This ultimately reflects in
___________________ loss of customers and reflects in terms of sales revenues and
profits.
)U
Figure 7.2: Gap Analysis
The major gaps may exist in the following ways:

z There may be a discrepancy between the company’s customer
service and the customer service standard.
z The service levels prevailing in the industry may be higher
than the level of customer service provided by the firm.
(c
z There may be a difference in the level of customer service

offered and the customer’s expectation about the service
standard.
z A gap may exist in the level of customer service and the
service levels needed for the product itself or for creating
competitive advantage in the market place.
A systematic and comprehensive approach towards customer 93

service starts with comprehensive strategy for customer service. Notes
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Activity
Here, gap analysis can be used as a systematic method to conduct ___________________
Prepare a chart to show the
a comprehensive service quality audit in order to identify process flow of customer
___________________
service.
discrepancies so that the shortcomings are identified so that the
changes necessary to improve customer service can be incorporated ___________________
in the corporate strategy. The top management of the firm, with ___________________
the chief logistics manager, must be the driving force to develop a
___________________
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comprehensive customer service policy based on this analysis.
___________________
Adequate resources also have to be provided to follow the service
strategy. It is the function of top management to create the ___________________
motivation and inculcate the values necessary for the organization ___________________
to provide quality customer services that gives the firm a
___________________
competitive edge.
___________________
Check Your Progress
Fill in the blanks:
1. ................. represents the customers’ assessment of
service quality.
2. ................. defines how performance reporting is
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aggregated.
Customer Service Process

The customer service process flow provides the overall structure
for this SMF, providing a consistent set of processes to record and
track user contact.
When a user contacts the Service Desk, the Customer Service
Representative (CSR):
z Records the user’s contact information and the details of the
request.
z Classifies the user’s request.
Determines the supportability of the request.
(c
z Resolves the user’s request.

z Confirms the resolution and closes the request.
z Ensures good service.
Logistics Strategy
94 Figure illustrates the process flow for customer service.

Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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Figure 7.3: Customer Service Process
Customer Service Policy Making

Customer service policy making is a process by which:
(1) Consumers identify their needs,
(2) Collect information,
(3) Evaluate alternatives, and
(4) Make the purchase decision. These actions are determined by
psychological and economical factors, and are influenced by
environmental factors such as cultural, group, and social
(c
values.
Order Processing
“Order processing” is the term generally used to describe the
process or the workflow associated with the picking, packing and
delivery of the packed item(s) to a shipping carrier. The specific
“order fulfilment process” or the operational procedures of 95

distribution centres are determined by many factors. Each Notes
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Activity
distribution centre has its own unique requirements or priorities. ___________________
What is the purpose of
There is no “one size fits all” process that universally provides the delivery order processing?
___________________
most efficient operation. Some of the factors that determine the
specific process flow of a distribution centre are: ___________________
z The nature of the shipped product - shipping eggs and ___________________
shipping shirts can require differing fulfilment processes ___________________
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z The nature of the orders - the number of differing items and ___________________
quantities of each item in orders ___________________
z The nature of the shipping packaging - cases, totes, envelopes, ___________________

pallets can create process variations
___________________
z Shipping costs - consolidation of orders, shipping pre-sort can ___________________
change processing operations
z Availability and cost and productivity of workforce - can create
trade-off decisions in automation and manual processing
operations
z Timeliness of shipment windows - when shipments need to be
completed based on carriers can create processing variations
)U
z Availability of capital expenditure dollars - influence on
manual verses automated process decisions and longer term
benefits
z Value of product shipped - the ratio of the value of the shipped
product and the order fulfilment cost
z Seasonality variations in outbound volume - amount and
duration of seasonal peaks and valleys of outbound volume
z Predictability of future volume, product and order profiles
z Predictability of distribution network - whether or not the
network itself is going to change
Delivery Order Processing

(c
Modern companies recognize the importance of a leaner materials

management system and better information flow between business
partners involved in ordering, delivering, and receiving materials.
In the component supplier industry, in particular, a new procedure
is being used to streamline business processes: the Material
Information System (MAIS).
Logistics Strategy
96 In the MAIS procedure, the customer transmits information to the

Notes component supplier and forwarding agent in a pick-up sheet
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___________________ (similar to a just-in-time delivery schedule). The information in
this sheet details the materials required and the date on which the
___________________
customer’s forwarding agent is scheduled to “pick up” the
___________________
materials at the supplier location.
___________________
Delivery order processing in the R/3 System has been designed for
___________________ component suppliers and is based on the MAIS procedure. In
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___________________ delivery order processing, the pick-up sheet is entered into the R/3
System and processed as a delivery order.
___________________
___________________
Delivery order processing has been designed to optimize shipping
control by providing:
___________________
z An efficient source of information for the customer, component
___________________
supplier, and forwarding agent
z A simple process for ordering and receiving materials from the
component supplier
z A secure basis for planning
Order Processing System

)U
Order Processing involves various procedures like pick up,
packaging, and delivery of packed items to the shipping carrier.
We have designed and developed the best Order Processing
software, which can help you to take your business orders
effectively and encourages interest from your customers towards
repeating their business. For overall customer satisfaction, it is
very critical to have an automated Order Processing System. Our
Order Processing Systems helps in unifying all the departments
handling the orders, from sales representative or website to
warehouse staff to help achieve the efficiency and speed you
require for order processing.
Order processing is the core of logistics activity. The receipt of the
customer order is the trigger that sets into motion all the logistics
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functions that culminate in the delivery of the product to the

customer. Of prime importance to good order processing is a good
flow of communications, which binds the entire system together,
supported by a suitable and efficient management information
system that allows the processing of customer orders as well as
collecting relevant information for management decision making.
The processing of a customer’s order goes through a few well- 97

defined phases: Notes
S
External Elements: While the firm’s internal systems may be ___________________
quite fast and efficient, there is an external element in this ___________________
transaction. In the first case, there is a transmittal of the order,
___________________
which could be through the post, telephone or facsimile. This order,
when received, has to be recorded and entered into the firm’s ___________________
system. This induces a delay and potential for inaccuracy. The ___________________
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second external element in this transaction is the dispatch of the ___________________
order through a transport provider or the firm’s own units. Often,
___________________
these two elements contribute the most to extending the order
cycle time. A change in the method of order placement, such as ___________________
doing it on line, can significantly reduce the time taken to process ___________________
the order. This also reduces the potential for inaccuracies in the
___________________
order.
The second external element is addressed by suitable location of
inventory and selection of carriers for delivery of the product. The
shipment time comprises the interval between placing the product
on the delivery vehicle to the time the customer gets it. To shorten
the delivery time, the choice has to be made between suppliers of
)U
the transport service as well as between modes of transport. In the
making of this decision, the cost factor plays an important role and
customer service is the entry point for users who need to engage IT
with their questions and concerns. Although multiple roles and
teams are required to interact with and support the Customer
Service SMF, the majority of the processes and activities within it
are performed by a functional team called the Service Desk.
The Service Desk is a team and, just like any other team, it can be
centralized, distributed, or virtual. The team operates as a
functional unit that focuses on ensuring that customer service-
related activities are carried out with high quality.
Customer Service and Order Processing Organization

Companies need to stop treating customer service support as lowly
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department in organizations to deal with customers’ problems, and

start to advance their role.
Go Beyond the Official Support Domain

Some companies only support customers on ‘official’ requests such
as calls to 1800 numbers or support tickets generated in help
Logistics Strategy
98 systems. The evolved support organization must go to where

Notes customers already are at, like in the social web to find, triage, and
S
___________________ respond to customers. For example, Logitech was proactive in
responding to my customer needs in Twitter-shifting the
___________________
conversation to email and solving my problems. The many
___________________
companies who have joined Get Satisfaction, conduct support on
___________________ Twitter and Facebook are already demonstrating this value.
___________________
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Become a Strategic Asset to Marketing
___________________
Outsourced support site Get Satisfaction’s credo that “Support is
___________________
Marketing” is spot on. As customers share their product experience
___________________ with their trusted peers – they influence their network. Comcast’s
___________________ Frank Eliason and his Comcastcares team as an indicator of a PR
blessed support individual becoming a marketing asset. As a
___________________
result, customer support experiences are indeed the scope of
marketing. Perhaps the most trusted members of a company are
not the VPs of marketing and their shiny blog, but the rough and
tumble support technician who resonates and resembles a
customer.
Influence Product Development

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Customer touching groups have more insight to the needs of the
market and must integrate with product development teams. For
example, Intuit integrates community in their actual product –
enhancing how customer voices influence their next-generation.
Customer interactions should be recorded, prioritized and share
with product teams who are designing the next generation of
products.
Let Go and Allow Customers to Self-Support Each Other

In many cases, customers as a collective know more about the
product set than a support team or product team do. Microsoft and
other tech companies have developed a thriving community of
customers that self-support each other in their developer forums.
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Companies struggle letting-go of answering questions about

products, but should instead use the right collaboration and
knowledge capturing tools to allow customers to self-support each
other.
Become Proactive, Not Reactive 99

Notes
S
Support organizations must not only be responsive and wait for
customer issues to go awry, but be proactive and head off issues ___________________
before they become customer problems. Beyond companies forced ___________________

to issue recalls, asking customers how their experience is going on
___________________
a regular basis is key. Expect support organizations to develop
___________________
advanced monitoring strategies and couple with CRM systems to
instantly alert stakeholders of issues that can be corrected. ___________________
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___________________
Anticipate, and Move Beyond Real Time
___________________
Most companies already have 24/7 support organizations that can
___________________
handle customer needs round-the-clock yet need to prepare for real
time responses. Shuffling customers with issues (esp. influencers) ___________________
into a queue only amps frustration. The truly evolved support ___________________
organization anticipates customer issues using proactive
techniques mentioned above.
Get Actionable: The path to the evolved state of support isn’t
easy, to start with, companies should get started by:
Measure based on Value – Not as a Cost Centre

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Support organizations must not only measure based on customers’
satisfaction number of calls received and closed, but develop
marketing and PR metrics. Measure on how many crises were
diverted, new knowledge gleaned, and interactions in the open
web.
Develop an Internal Marketing Plan

Get a seat at the table by demonstrating the strategic component
of customer facing support efforts. Show marketing, product
development, and leadership teams why your scope has increased –
as should your internal influence.
Enhance Your Existing Processes

(c
Put in processes that enable support in the real-time open web.

You’ll need the right roles, processes, and tools to grow where your
customers already are. Develop a triage system that integrates
marketing’s efforts in social with your own internal processes to
identify, triage, and react to customers.
Logistics Strategy
100 Conduct Internal Training – and Fire Drills

Notes
S
New technologies require new processes, skills, and roles. Support
___________________
organizations must train staff to learn new tools like mobile, social
___________________ networks, and brand monitoring tools. Conduct internal “fire
___________________ drills” and have contingency plans to avoid staying off this list.
___________________
Expand CRM and Customer Systems to Connect to Social Web
___________________
Customers are off the reservation, as should your systems. Learn
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___________________ to identify, prioritize, and capture customer interactions as they
___________________ spread to social platforms and the two mobile.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. ................ is the term generally used to describe the
process or the workflow associated with the picking,
packing and delivery of the packed item(s) to a
shipping carrier.
2. In the ................ procedure, the customer transmits
information to the component supplier and forwarding
agent in a pick-up sheet (similar to a just-in-time
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delivery schedule).
Summary
Customer service is a series of activities designed to enhance the
level of customer satisfaction, i.e. the feeling that a product or
service has met the customer expectation. Its importance varies by
products, industry and customer; defective or broken merchandise
can be exchanged, often only with a receipt and within a specified
time frame.
Lesson End Activity

Study a case of any two retail chains on policy making for
(c
customers and prepare an assignment based on your research and

findings.
Keywords
Market Information Gap: The firm’s incomplete or inaccurate
knowledge of customers’ service expectations.
Service Standards Gap: The firm’s failure to accurately 101

translate customers’ service expectations into specifications or Notes
S
guidelines for employees. ___________________
Service Performance Gap: Lack of appropriate internal support ___________________
systems (e.g. standards, training, technology, flexibility) that
___________________
enable employees to deliver to service standards.
___________________
Questions for Discussion ___________________
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___________________
1. Explain CS & OP measures.
___________________
2. Describe the CS & OP processes.
___________________
3. What is order processing?
___________________
4. Define CS & OP systems.
___________________
5. Explain CS organizations.
Further Readings
Books
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Education.
Web Readings
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Logistics Strategy
102
Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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UNIT 8: Inventory Planning and Management
Unit 8
103
Notes
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Activity
Inventory Planning and

___________________
Write a brief note on inventory
performance measures.
___________________
Management ___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Inventory Performance Measures
\ Setting Customer Service Levels ___________________
\ Inventory Management ___________________
___________________
Introduction
Inventory decisions are high-risk and high-impact from the
perspective of logistics operations. Commitment to a particular
inventory assortment and subsequent shipment to a market or
region in anticipation of future sales determine a number of
logistics activities. Without proper inventory assortment,
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marketing may find that sales are lost and customer satisfaction
will decline. Likewise, inventory planning is critical to
manufacturing. Raw material shortages can shut down a
manufacturing line or modify a production schedule, which, in
turn, introduces added expense and potential for finished goods
shortages. Just as shortages can disrupt planned marketing and
manufacturing operations, overstocked inventories also create
problems. Overstocks increase cost and reduce profitability
through added warehousing, working capital requirements,
deterioration, insurance, taxes, and obsolescence.
Inventory Performance Measures

Inventory Performance measurement is a necessity, as it would
(c
indicate as to how good or bad is the inventory management being

carried out by an organization. It would also give opportunity to
compare various performance indicators with some of the
benchmark company in similar industry.
Key Measures may be classified as under:
Logistics Strategy
104
Financial Indicators
Notes
S
z Inventory Investment: Inventory investment is basically the
___________________
expenses met for acquisition of inventory. Whereas higher
___________________ investment in inventory may improve Fill Rate i.e. fraction or
___________________ percentage of demand that is actually met, the downside is
that it may block more funds, which is not available for
___________________
alternate application. To check if there is right amount of stock
___________________ inventory one way is to compare the value of current inventory
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___________________ to an “ideal inventory investment.” To calculate the value of
___________________
“right” amount of inventory requires first to separate the
inventory items with (i) recurring demand items, and (ii)
___________________
sporadic usage items.
___________________
z Recurring Usage Items: Recurring usage products are used
___________________ on a regular basis. Typically these items:
Have had usage in at least eight of the last twelve months.
Have had usage in at least four continuous months in the
last twelve months (This condition identifies seasonal
items that are only used during certain times of the year).
Replenishment of these items is normally based on safety
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stock quantities, order points, line points, and standard order
quantities:
z Safety Stock Quantity: The “insurance” inventory
maintained in stock to protect from stock outs resulting from
unexpected customer demand or vendor shipment delays.
z Order Point: The Safety Stock Quantity plus predicted
demand during the anticipated lead-time.
z Line Point: The Order Point plus predicted demand during
the supplier review or order cycle; the normal length of time
between typical replenishment orders with the supplier.
z Standard Order Quantity: Is the minimum quantity that
can be ordered once.
(c
Replenishment orders are typically placed with a supplier when

the Replenishment Position (On Hand - Committed on Current
Outgoing Orders + On Current Incoming Replenishment Orders) of
an item is between its Order Point and Line Point:
(a) Estimation of Ideal Inventory Investment 105

Notes
S
Stock receipts for these replenishment orders will normally be
received when the replenishment position is somewhere ___________________
between a point equal to the Line Point – ___________________
Line point ___________________

Quantity Demand during order cycle Order issue ___________________
Order point Demand during
___________________
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anticipated lead time
___________________
Safety Stock Safety Stock
___________________
(b) Estimation of Ideal Inventory Investment ___________________
Line point ___________________

Quantity Demand during order cycle Stock Received ___________________
Order point Demand during
anticipated lead time
Safety Stock Safety Stock
Inventory Availability
One of the primary reasons for having inventory is to satisfy
customer demand in a timely manner. Maintaining a high level of
)U
inventory availability is usually cited as the primary reason why
companies keep such high levels of finished goods and service parts
on hand. Given this logic, one should measure a company’s success
in filling orders to see if high inventory retention is working as a
policy.
Calculation of Inventory Availability

To measure inventory availability, divide the total number of
completed orders received by customers no later than their
required date during the measurement period by the total number
of completed orders that customers should have received during
the measurement period.
Inventory Availability Formula:
(c
Total number of completed orders received by customer by required date

Total number of orders that should have been completed
Logistics Strategy
106
Inventory Turnover
Notes
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___________________ Importance of Inventory Turnover
___________________ Inventory is often the largest component of a company’s working
___________________
capital; in such situations, if inventory is not being used by
operations at a reasonable pace, then a company has invested a
___________________
large part of its cash in an asset that may be difficult to liquidate
___________________ in short order. Accordingly, keeping close track of the rate of
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___________________ inventory turnover is a significant function of management.
Turnover should be tracked on a trend line in order to see if there
___________________
are gradual reductions in the rate of turnover, which can indicate
___________________ that corrective action is required to eliminate excess inventory
___________________ stocks.
___________________
Calculation of Inventory Turnover
The most simple turnover calculation is to divide the period-end
inventory into the annualized cost of sales. One can also use an
average inventory figure in the denominator, which avoids sudden
changes in the inventory level that are likely to occur on any
specific period-end date.
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Inventory Turnover Formula:
Cost of goods sold
Inventory
A variation on the preceding formula is to divide it into 365 days,

which yields the number of days of inventory on hand. This may be
more understandable to the layperson; for example, 43 days of
inventory is more clear than 8.5 inventory turns, even though they
represent the same situation.
So the Inventory Turnover formula became as follows:
Cost of goods sold
365 [divide]
Inventory
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Raw Material (Specifically) Turnover Formula

The preceding two formulas use the entire cost of goods sold in the
numerator, which includes direct labour, direct materials, and
overhead. However, only direct materials costs directly relate to
the level of raw materials inventory. Consequently, a clearer
relationship is to compare the value of direct materials expense to
raw materials inventory, yielding a raw materials turnover figure.
This measurement can also be divided into 365 days in order to 107
yield the number of days of raw materials on hand. Notes
S
The formula is: ___________________
Direct materials expense ___________________
Raw materials inventory ___________________
Or: ___________________
Direct materials expense ___________________
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365 [divide]
Raw materials inventory ___________________
___________________
Inventory Planning
___________________
This section describes the key parameters and procedures for
___________________
planning inventory. The discussion focuses on three issues: when
to order, how much to order, and inventory control procedures. ___________________
Determining Order Point (When to Order?)

As discussed earlier, the reorder point determines when a resupply
shipment should be initiated. The reorder point, which is defined
by item and distribution centre, can be specified in terms of units
or days of supply.
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This discussion focuses on determining reorder points under
conditions of demand and performance-cycle certainty. The
certainty conditions imply that future demands and performance-
cycle lengths are known.
The basic reorder point formula is
R = D×T
where R = reorder point in units
D = average daily demand
T = average performance-cycle length
To illustrate this calculation, assume demand of 10 units/day and a
20-day performance cycle. In this case,
(c
= 10 units/day × 20 days = 200 units

The use of the reorder point formulations discussed above implies
that the resupply shipment will arrive just as the last unit is
shipped to a customer. This approach is satisfactory as long as
both demand and performance cycles are certain. When there is
uncertainty in either demand or performance-cycle length, an
Logistics Strategy
108 inventory buffer is necessary to compensate for the uncertainty.

Notes The buffer, which is usually called safety stock, handles customer
S
___________________ demands during longer than expected performance cycles or above
average daily demand. When this buffer stock is necessary for
___________________
conditions of uncertainty, the reorder point formula is
___________________
R = D × T + SS
___________________
where R = reorder point in units
___________________
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D = average daily demand
___________________
___________________ T = average performance-cycle length
___________________ SS = safety or buffer stock in units
___________________
Determining Lot Size
___________________
The lot-sizing concept balances the cost of maintaining inventories
against the cost of ordering. The key to understanding the
relationship is to remember that average inventory is equal to one-
.half the order quantity. Therefore, the larger the order quantity,
the larger the average inventory and, consequently, the greater the
maintenance cost per year. However, the larger the order quantity,
the fewer orders required per planning period and, consequently,
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the lower the total ordering cost. Lot quantity formulations
identify the precise quantities at which the annual combined total
cost of ordering and maintenance is lowest for a given sales
volume.
Economic Order Quantity: The Economic Order Quantity (EOQ)
is the replenishment order quantity that minimizes the combined
cost of inventory maintenance and ordering. Identification of such
a quantity assumes that demand and costs are relatively stable
throughout the year. Since an EOQ is calculated on an individual
product basis, the basic formulation does not consider the impact of
joint ordering of products. EOQ extensions are discussed later in
this chapter.
The most efficient method for calculating economic order quantity
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is mathematical. Earlier in this chapter, a policy dilemma

regarding whether to order 100, 200, or 600 units was discussed.
The answer can be found by calculating the applicable EOQ for the
situation.
To make the appropriate calculations, the standard formulation for
EOQ is:
109
EOQ = √2CoD/CiU
Notes
S
Where EOQ = Economic Order Quantity (EOQ)
___________________
CO = cost per order ___________________
Ci = annual inventory carrying cost ___________________
D = annual sales volume, units ___________________
U = cost per unit ___________________
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While the EOQ model determines the optimal replenishment ___________________
quantity, it does require some rather stringent assumptions that ___________________
constrain its direct application. The major assumptions of the
___________________
simple EOQ model are:
___________________
1. Satisfaction of all demand
___________________
2. Continuous, constant, and known rate of demand
3. Constant and known replenishment performance-cycle time.
4. Constant price of product that is independent of order quantity
or time (i.e., no purchase quantity or transportation price
discounts are available)
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5. Infinite planning horizon
6. No interaction between multiple items of inventory
7. No inventory in transit
8. No limit on capital availability. The constraints imposed by
some of these assumptions can be overcome through
computational extensions, as discussed next. However, the
EOQ concept illustrates the importance of the trade-offs
associated with holding and acquisition cost.
EOQ Extensions
While the EOQ formulation is relatively straightforward, there are
some other factors that must be considered in actual application.
The most persistent problems are those related to various
(c
adjustments necessary to take advantage of special purchase

situations and unitization characteristics.
Three typical adjustments are volume adjustment, Quantity
discounts, other adjustments, volume transportation rates
In the EOQ formulation discussed previously, no consideration was
given to the impact of transportation cost on order quantity. When
Logistics Strategy
110 products are purchased on a delivered basis and the seller pays
Notes transportation cost from origin to the inventory destination, such
S
___________________ neglect may be justified. The seller is responsible for the shipment
until it arrives at the customer’s place of business. However, when
___________________
product ownership is transferred at origin, the impact of
___________________
transportation rates on total cost must be considered when
___________________ determining order quantity.
___________________ As a general rule, the greater the weight of an order, the lower the
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___________________ cost per pound of transportation from any origin to destination. A
freight-rate discount for larger-size shipments is common for both
___________________
truck and rail and is found in most transportation rate structures.
___________________
Thus, all other things being equal, an enterprise naturally wants
___________________ to purchase in quantities that maximize transportation economies.
___________________ Such quantities may be larger than the purchase quantity
determined using the EOQ method.
The impact of volume transportation rates on total cost of
procurement cannot be neglected. Thus, any EOQ must be tested
for transportation cost sensitivity across a range of weight breaks
if transportation expenses are the buyer’s responsibility. Finally,
two factors regarding inventory cost under conditions of origin
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purchase are noteworthy. (Origin purchase means that the buyer
is responsible for freight cost and product risk when the product is
in transit.) First, the buyer assumes full risk on inventory at time
of shipment. Second, the transportation cost must be added to the
purchase price to obtain an accurate assessment of the value of
goods tied up in inventory. Once the inventory has been received,
the amount invested in the product must be increased by the
transportation expenses. Inventory carrying cost should then be
assessed on the combined cost of the item plus transportation.
Another consideration when establishing the order quantity is the
unitization characteristic. Many products are stored and moved in
standard units such as cases or pallets. Since these standardized
units are designed to fit transportation or handling vehicles, there
may be significant diseconomies when the EOQ is not a unit
(c
multiple.
Other EOQ Adjustments 111

Notes
S
A variety of special situations may occur that will require
adjustments to the basic EOQ. Examples are: ___________________
1. Production Lot Size: Production lot size refers to the most ___________________
economical quantities from a manufacturing perspective. ___________________
2. Multiple-item Purchase: Multiple-item purchase describes ___________________

situations when more than one product is bought concurrently, ___________________
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so that quantity and transportation discounts must consider
___________________
the impact of product combinations.
___________________
3. Limited Capital: Limited capital refers to situations with
budget limitations for total inventory investment. ___________________
4. Private Trucking: Since the product line must be satisfied ___________________
within the budget limitations, order quantities must recognize ___________________

the need to allocate the inventory investment across the
product line.
Discrete Lot Sizing

Not all resupply situations operate with uniform usage rates like
those in the previous EOQ computations. In many manufacturing
)U
situations, the demand for a specific component tends to occur at
irregular intervals and for varied quantities. The irregular nature
of usage requirements is a consequence of demand being
dependent upon the production schedule. That is, the required
assembly parts must be available at the time manufacture occurs.
Between requirement times, no need exists to maintain component
inventory in stock if it can be obtained when needed. Inventory
servicing of dependent demand requires a modified approach to the
determination of order quantities, referred to as discrete lot sizing.
Identification of the technique as “discrete” means that the
procurement objective is to obtain a component quantity equal to
the net requirements at a specific point in time. Because
component requirements fluctuate, purchase quantities using
discrete lot sizing will vary between orders. Varieties of lot sizing
(c
techniques are available. The options of:

1. Lot-for-Lot Sizing: The most basic form of discrete ordering
is to plan purchases to cover net requirements over a specified
period. No consideration is given to the cost of ordering under
lot-for-lot sizing. In one sense, the lot-for-lot technique is pure
dependent-demand-oriented, since no ordering economies are
considered. The order quantity exactly matches manufacturing
Logistics Strategy
112 or demand quantity. The basic technique is often used when

Notes the item being purchased is inexpensive and the requirements
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___________________ are relatively small and irregular. Lot-for-lot sizing often uses
electronic order transfer and premium transportation to
___________________
minimize processing and delivery time.
___________________
2. Period Order Quantity: The Period Order Quantity (POQ)
___________________
technique builds on the EOQ logic. Here, three steps are
___________________ performed to accomplish component procurement. First, the
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___________________ standard EOQ is calculated. Second, the EOQ quantity is
divided into forecasted annual usage to determine order
___________________
frequency. Third, the number of orders is divided into the
___________________ relevant time period (e.g., fifty-two for weeks or twelve for
___________________ months) to express the order quantity in time periods.
___________________ To illustrate, let us work with an EOQ of 300 and a forecast of
2,400. To adjust to a twelve-period year, the POQ technique
would be as follows:
EOQ = 300
Forecast = 2400
Orders Per Year = 2400/300
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= 8.00
Order Interval = 12/8.00
= 1.5 months
Under the POQ application, orders are planned approximately
every six weeks. The typical order is 300 units unless usage
deviates from planned quantity and requires a “catch-up” or
“light” re-supply order.
The main advantage of the POQ approach is that it considers
inventory-carrying cost and thereby minimizes inventory
carryover. The disadvantage is that similar to the basic EOQ,
POQ also requires stable demand to realize its full potential.
3. Time-Series Lot Sizing: The fundamental objective of time-
(c
series lot sizing is to combine requirements over several

periods to arrive at procurement logic. The time-series
approach is dynamic because the order quantity is adjusted to
meet current requirement estimates. This is in contrast to
basic EOQ, which is static in the sense that once the order
quantity is computed, it continues unchanged for the demand-
planning horizon.
Least Unit Cost 113

Notes
S
It seeks to identify a combination of requirements over a number of
periods resulting in the lowest cost per SKU. Starting with initial ___________________
period net requirements, each future period’s per unit ___________________

requirements are evaluated to determine a combined quantity for a
___________________
given number of periods in which the unit cost is minimized. The
___________________
least-unit-cost approach essentially evaluates purchasing
requirements in incremental number of weeks of supply into the ___________________
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future. ___________________
The first week considers one week of supply. The analysis then ___________________
considers adding a second week. Unit cost-including quantity
___________________
discounts, ordering cost, inventory-carrying cost, and
___________________
transportation cost-is evaluated for each option.
___________________
While the discount, ordering, and transportation costs will cause
average unit cost to decline as more periods are added, inventory-
carrying cost will increase as more time periods are added because
of the additional inventory. Thus, order quantities and order
frequency will vary substantially under the least-unit-cost
technique. While this approach does provide a way to overcome the
static features of EOQ and POQ, the technique may cause unit
)U
costs to vary widely between time periods.
Least Total Cost

The least-total-cost approach seeks the quantity that minimizes
total cost for successive periods. In this sense, least total cost,
which is the balancing of ordering and carrying, is similar to EOQ
in objective. The fundamental difference is that order interval is
varied to seek the least total cost. The calculation is based on a
ratio of ordering to carrying cost (CdCi), called the economic part
period. The economic part period defines the quantity of a specific
component that, if carried in inventory for one period, would result
in a carrying cost equal to the cost of ordering. The least-total-cost
technique selects order sizes and intervals that most nearly
(c
approximate the economic part-period calculation. Thus, order

sizes remain fairly uniform; however, substantial differences do
occur in elapsed time between order placements. The least-total-
cost technique overcomes the failure of the least unit cost to
consider trade-offs across the overall planning period.
Logistics Strategy
114 Part-Period Balancing

Notes
S
Activity Part-period balancing is a modified form of the least-total-cost
___________________
What do you mean by the technique that incorporates a special adjustment routine called
term ‘forecasting’?
___________________ look-ahead look-back.
___________________ The main benefit of this feature is that it extends the planning
___________________ horizon across more than one ordering point to accommodate usage
peaks and valleys when calculating order quantities. Adjustments
___________________
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are made in order time or quantity when a forward or backward
___________________
review of more than one order requirement indicates that
___________________ modifications to the economic part-period may be beneficial. The
___________________ typical procedure is to first test the look-ahead feature to
determine if more time results in approximation of the economic
___________________
part-period quantity. Look-back is typically utilized if look-ahead
___________________ leaves the lot size unchanged. In this sense, look-back means that
a future order, which under the economic part-period rule would
normally be scheduled for delivery during the fourth period, should
be advanced if earlier delivery would reduce total cost. The net
result of incorporating the look-ahead/look-back feature is that it
turns the application of the economic part-period concept into a
simultaneous review of multiple periods.
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Check Your Progress
Fill in the blanks:
1. Inventory ................ is basically the expenses met for
acquisition of inventory.
2. The ................ sizing concept balances the cost of
maintaining inventories against the cost of ordering.
Setting Customer Service Levels

In order to manage inventory under customer service level
requirements few key capabilities to unlock the benefits of
optimized inventories are essential:
(c
In-depth Analysis: To evaluate past practices and target future

inventory strategies: Process production encompasses many types
of inventory: raw material, work-in-progress, in-test material,
rework/scrap material, products in transit, safety stock, and cycle
stock. Changes in one component can significantly impact others.
Smaller batch sizes reduce work-in-process levels, but also reduce
productivity. Cycle times can be shortened to reduce cycle stock, 115

but doing so increases the time spent in making production Notes
S
transitions. Optimizing the distribution network and rationalizing ___________________
inventories at each point in that network are the keys to an
___________________
efficient supply chain.
___________________
Efficient Network Design: For a distribution system, that moves
materials at the lowest cost: With ever increasing numbers of ___________________
products and delivery points, an efficient distribution network is ___________________
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vital to controlling inventory costs. Our solution optimizes the ___________________
supply chain network by finding the most economical way to
___________________
supply each customer, such as changing distribution locations to
support more frequent service, changing transportation modes to ___________________
reduce costs, packaging changes, or improving forecasts to reduce ___________________
overall inventory levels. The result is a cost-effective distribution
___________________
system that minimizes inventory costs while maintaining
acceptable customer service levels
Forecasting
Forecasting has long been associated with processes that impacts
on stock. Such process includes production, procurement and sales.
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Irrespective of the industry type, whether “make to sell” or “buy to
sell”, elements of forecasting springs up. This is because the
driving phenomenon of “demand” is inevitable.
In a “make to sell” industry, the producer cannot wait for orders to
be received before the production process is initiated. In like
manner, the “buy to sell” entrepreneur cannot wait for customers
to request for an item before he procures the item. However, these
behaviours might be practicable for special order.
From the foregoing, it is evident that some level of inventory must
exist at any point in time. It can be raw materials for production
and/or finished goods. The crux of the matter then becomes, what
should be the relative inventory level at a particular point in time.
In objectively answering this question, some form of forecasting
must be made.
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Inventory forecasting is a proactive and futuristic strategy aimed

at providing estimated stock level to meet demand at a particular
point in time. Pro-activeness can be interpreted as a step taken,
prelude to a known event. Forecasting involves estimating what
will be needed based on certain assumptions. It can also be viewed
as projections of some sort.
Logistics Strategy
116 A number of factors can determine the turn of demand for a

Notes particular product. They include but not limited to price,
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___________________ availability of close substitutes, market trends, season and
advertising strategy. My concern in this posting is not to
___________________
emphasize demand as a concept but the perception of inventory
___________________
forecasting as a tool that can either make or mar an entrepreneur.
___________________
In analysing the subject matter, it is worthy to briefly mention two
___________________ important concepts namely “over stocking” and “under stocking”.
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___________________ Inventory forecasting can give rise to the duo especially when it is
faulty and the consequences can be grave as asserted in a prior
___________________
posting titled: Increasing Profitability through Inventory and
___________________
Financial Reports Analysis: A case for SAP Business One. It
___________________ belongs to the school of thought that believes that forecasting is
___________________ usually wrong simply because it’s an estimate and can be
misleading. Can an estimate be exact? (It is debatable!). However
it is not enough to rule it out as an invaluable strategy for decision
making especially when the metrics and estimation are objective.
The question therefore is what is the rationale behind the
estimate? And how objective is the method used.
Broadly, three methods can be adopted when forecasting. They are
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Intuitive, Intrinsic and Extrinsic. The intuitive method is based on
subjective judgement and informed opinions that are not historical
based. The intrinsic method is historical based and works on the
premise that a prior event might repeat itself. The extrinsic
approach is dependent on happenings in another sector and adopts
the theory of proportionality.
How to Forecast Inventory Needs?

If you are a manufacturer, wholesaler, or retailer and have
repetitive orders of the same products, you have undoubtedly
asked yourself at what stock level you need to replenish your
inventory. The goal is to reduce inventory levels while being able to
fill most of the orders that come through the door. Here’s how.
1. Lead Time: When you place a purchase order with a supplier,
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it will take some time for the inventory to reach your door.
This is called lead time. A local supplier’s lead time may be one
to four days, while an overseas supplier’s may be four weeks.
Therefore, you should have at least enough inventory to last
during the lead time.
Many things can happen during the lead time period. The 117
supplier may delay in delivering your order, for example, or Notes
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you may get an unexpected bounce in sales. So in addition to ___________________
having enough stock during the typical lead time, you should
___________________
also keep a bit extra, known as safety stock.
___________________
The reorder point, therefore, is calculated as follows:
___________________
Reorder point = lead time demand + safety stock
___________________
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Lead time demand is what you expect to sell during the lead
___________________
time period and is calculated as follows:
___________________
Lead time demand = lead time (usually in days) x forecasted
daily unit sales. ___________________
If the lead time is 14 days and the forecast is three units per ___________________
day, for example, the lead time demand is 42 units. ___________________
2. Inventory Replenishment: Replenishment is an area within

operations where retailers can find an edge to beat the
competition and meet customer needs. Excelling at
replenishment enables a retailer to implement the
promotional, pricing and assortment strategies established.
Plus, additional profit can be gained by minimizing inventory
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levels and reducing lost sales.
Inventory Replenishment Models are:
z Fixed Replenishment (M1): Simplest model where period
and quantity are fixed. So this is advisable only for low
acquisition cost items where demand is constant over time:
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Figure 8.1: Fixed Replenishment
z Order Point (M2): This model is used when the demand is

highly variable over time, and we assume can monitor the
inventory level to properly reorder on time. Also we assume
the delivery time to be constant even though order periods are
not (!)
Logistics Strategy
118 The order point (Op) is simply computed with the average
Notes demand per day multiplied by the delivery lead-time so that to
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___________________ be fully replenished when the stock level is down to the safety
stock level. Please check our spread sheets available for use.
___________________
___________________ This model is suitable for example for spare parts or screws
where orders are not regular due to low consumption or high
___________________
minimum order quantity compared to daily consumption.
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 8.2: Order Point
z Periodic Replenishment (M3): The idea is to replenish the

stock level up to the maximum quantity (target level Qmax) at
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fixed period (weekly or monthly):
The target level (Qmax) is computed by multiplying the
average consumption per day with the consumption period (T)
and the delivery lead-time. Safety stock is obviously kept.
Please check our spread sheets available for use.
We should note that this model is not relevant is the demand
is not constant; the safety stock would be really high in such
case. Better to use the reorder point model (M2) if the demand
is variable.
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Figure 8.3: Periodic Replenishment

z On-demand replenishment (M4): This model is used for 119

high cost items where specific attention should be set as Notes
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consumption and delivery are variable. ___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
Figure 8.4: On-demand Replenishment
___________________
Inventory Management
Inventory management is the active control program, which allows
the management of sales, purchases and payments. Inventory
management software helps create invoices, purchase orders,
receiving lists, payment receipts and can print bar code labels. An
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inventory management software system configured to your
warehouse, retail or product line will help to create revenue for
your company. The Inventory Management will control operating
costs and provide better understanding. We are your source for
inventory management information, inventory management
software and tools.
A complete Inventory Management Control system contains the
following components:
z Inventory Management Definition
z Inventory Management Terms
z Inventory Management Purposes
z Definition and Objectives for Inventory Management
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z Organizational Hierarchy of Inventory Management

z Inventory Management Planning
z Inventory Management Controls for Inventory
z Determining Inventory Management Stock Levels
Logistics Strategy
120 Inventory management is the process of efficiently overseeing the

Notes constant flow of units into and out of an existing inventory. This
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___________________ process usually involves controlling the transfer in of units in order
to prevent the inventory from becoming too high, or dwindling to
___________________
levels that could put the operation of the company into jeopardy.
___________________
Competent inventory management also seeks to control the costs
___________________ associated with the inventory, both from the perspective of the
___________________ total value of the goods included and the tax burden generated by
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the cumulative value of the inventory.
___________________
___________________ Purpose of Inventory Management

___________________ Inventory management must tie together the following objectives,
___________________ to ensure that there is continuity between functions:
___________________ 1. Company’s Strategic Goals

2. Sales Forecasting
3. Sales and Operations Planning
4. Production and Materials Requirement Planning.
Objectives of Inventory Planning and Control

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Generally the operations objectives of managing the company’s
inventories include the following:
1. Quality – products need to be maintained in as good a
condition as possible while they are being stored. For
perishable products this means not storing them for very long.
2. Speed – inventories must be in the right place to ensure fast
response to customer requests.
3. Dependability – the right stock must be in the right place at
the right time to satisfy customer demand. There is no point
having the wrong products in stock.
4. Flexibility – stock should be managed to allow the operation
to be flexible. For example, that may mean keeping sufficient
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stock to allow the operations processes to switch to producing

something else and yet being able to satisfy customers during
that period from existing stock levels.
5. Cost – if possible the total cost of managing stock levels should
be minimised.
121
Check Your Progress
Notes
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Fill in the blanks:
___________________
1. ................ is an area within operations where retailers
___________________
can find an edge to beat the competition and meet
___________________
customer needs.
___________________
2. ................ model is used when the demand is highly
variable over time, and we assume can monitor the ___________________
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inventory level to properly reorder on time. ___________________
___________________
Summary
___________________
In this unit we have discussed about the ideal inventory process ___________________
consists of manufacturing a product to a customer’s specifications
___________________
once an order is placed. This is called a make-to-order operation
and is characteristic of customized equipment. Further we have
discussed about Raw material form a major input into the
organization. They are required to carry out production activities
uninterruptedly. The quantity of raw materials required will be
determined by the rate of consumption and the time required for
replenishing the supplies. The factors like the availability of raw
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materials and government regulations, etc. too affect the stock of
raw materials.
Lesson End Activity

Illustrate how fine-line inventory classification can be used with
product and market segments. What are the benefits and
considerations when classifying inventory by product, market, and
product/market?
Keywords
Time Series Lot Sizing: The fundamental objective of time-series
lot sizing is to combine requirements over several periods to arrive
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at procurement logic. The time-series approach is dynamic because

the order quantity is adjusted to meet current requirement
estimates.
Obsolescence: It is the deterioration of product in storage and is
not covered by insurance. The cost calculations are based on past
experience in terms of the amount of product that must be marked
down, given away, or destroyed.
Logistics Strategy
122 Period Order Quantity: The Period Order Quantity (POQ)

Notes technique builds on the EOQ logic. Here, three steps are performed
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___________________ to accomplish component procurement. First, the standard EOQ is
calculated. Second, the EOQ quantity is divided into forecasted
___________________
annual usage to determine order frequency.
___________________
___________________
___________________
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1. What are inventory performance measures?
___________________
2. Define inventory turnover.
___________________
3. Explain IP & PM Process.
___________________
4. Explain forecasting.
___________________
___________________
5. What are replenishment schemes?
6. Explain inventory management.
Further Readings
Books
Reji Ismail, Logistics Management, Excel Books, Delhi.
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Ailawadi C Sathish & Rakesh Singh, Logistics Management,
Prentice Hall India, 2005.
Agrawal DK, Textbook of Logistics and Supply Chain Management,
MacMillan India Limited, 2003.
Web Readings
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UNIT 9: Efficient Warehousing
Unit 9
123
Notes
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Efficient Warehousing
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
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\ Concept of Efficient Warehousing ___________________
\ Assessment ___________________
\ Export of Goods
___________________
\ Licensing of Warehouse in India
___________________
___________________
Introduction
Manufacturers were able to recognize the fact that the customer
needs are required to be fulfilled as soon as he is asking for the
product in order to retain him. This perspective of storage created
a tendency to consider warehouses "a necessary evil" that added
costs to the distribution process and that resulted in creation of
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operating expenses with little appreciation of the broader logistical
spectrum in which warehousing played a vital role. Warehousing
capability used to group products into assortments desired by
customers was given little emphasis. Internal control and
maximum inventory turnover received little managerial attention.
Literature of the early era correctly described the situation. Firms
seeking to operate effectively between points of procurement,
manufacturing, and consumption gave little attention to internal
warehouse operations. The establishment of warehouses was
essential for survival, but little emphasis was placed on improving
storage and handling effectiveness. Engineering efforts were
centred on manufacturing problems.
Operation of early warehouses illustrated the lack of concern with
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material handling principles. The typical warehouse received

merchandise by rail car or truck. The items were moved manually
to a storage area within the warehouse and hand-piled in stacks on
the floor. When different products were stored in the same
warehouse, merchandise was continually lost. Stock rotation was
handled poorly. When customer orders were received, products
were handpicked for placement on wagons. The wagons or carts
Logistics Strategy
124 were then pushed to the shipping area where the merchandise was
Notes reassembled and hand-loaded onto delivery trucks. Because labour
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Activity
Do ___________________
a research on the basic was relatively inexpensive, human resources were used freely.
service benefits that are Little consideration was given to efficiency in space utilization,
___________________
achieved through
warehousing. work methods, or material handling. Despite their shortcomings,
___________________
these early warehouses provided the necessary bridge between
___________________ production and marketing.
___________________
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___________________ Concept of Efficient Warehousing
___________________ A warehouse is typically viewed as a place to store inventory.
___________________
However, in modern logistical system designs, the role of the
warehouse is more properly viewed as a switching facility as
___________________
contrasted to a storage facility. Warehouses, in fact, are the nodes
___________________ of the supply chain network that extend the operational reach of
the firm and provide a strategic thrust to its objectives.
Nearly all industries use warehouses to store goods. It would be
inconceivable to move goods such as agricultural commodities,
lumber and wood products, and aluminium, etc., from one location
to another, without warehouse facilities. Warehouses are also
essential to importers. A large number of jobs are dependent on
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such trade. Warehouses are utilized by retailers and wholesalers
for the goods that they buy and sell. Manufacturers also use
warehouses to store raw materials and finished products.
By locating warehouse facilities in different parts of the world,
firms can expand beyond their own local markets. The use of
warehouse facilities gives small firms the opportunity to grow
without large capital investments and one warehouse can service
many small firms. Warehouse activities are significant in a variety
of industries involving transportation services, wholesaling,
agriculture and retailing. In 2004, the money that was spent on
the different components of logistics was estimated to be about $
1130 billion in the United States. Out of this, nearly 10 percent
was spent on warehousing. Though the value of money spent on
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warehousing is declining, yet this amounts to a significant amount.

In the context, warehousing becomes very important.
Definitions as per the Bombay Warehouse Act, 1959

1. “Warehouse” means any building structure or other protected
enclosure which is used or may be used for the purpose of
storing goods on behalf of the depositors but doesn’t include
cloakroom attached to hotels, railway stations and the 125

premises of other public carriers alike. Notes
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2. “Depositor” means a person who deposits goods with a ___________________
warehouseman for storing in his warehouse and includes any ___________________
person who lawfully holds the receipt issued by the
___________________
warehouseman in respect of the goods and derives title too by
endorsement or transfer from the depositor or his lawful ___________________
transferee. ___________________
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___________________
Receiving and Put-Away
___________________
A highly integrated warehouse solution begins with receiving and
___________________
put-away. With SphereWMS, you can streamline your entire
receiving and put-away functions. SphereWMS speeds the ___________________
movement of received goods from your shipping dock into your ___________________
storage location based on your unique business rules and
warehouse flow. With Sphere WMS, you see it, receive it, process
it, and put it away – in the most efficient way possible.
Receipt Processing functions include:
z Advance Receipt Notice (ARN) Handling including File Upload
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z Web-based Supplier Advance Ship Notice (ASN) Entry
z Receipt Info Entry
z Put Away Entry/Edit
z Receipt Document Print
z Receipt Label Print
z Receipt Confirmation Notifications by Email
z Displays and Inquiries
Storage Systems
Benefits realized from strategic warehousing are classified on the
basis of economics and service. From a conceptual perspective, no
warehouse should be included in a logistical system unless it is
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fully justified on a cost-benefit basis. While there is some overlap,

the major warehouse benefits are reviewed individually.
Economic Benefits
Economic benefits of warehousing materialise when overall
logistical costs are directly reduced by utilizing one or more
Logistics Strategy
126 facilities. It is not difficult to quantify the return on investment of

Notes an economic benefit because it is reflected in a direct cost-to-cost
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___________________ trade-off. For example, if adding a warehouse to a logistical system
will reduce overall transportation cost by an amount greater than
___________________
the fixed and variable cost of the warehouse, then total cost will be
___________________
reduced. Whenever total-cost reductions are attainable, the
___________________ warehouse is economically justified. Four basic economic benefits
___________________ are consolidation, break bulk and cross-dock, processing/
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postponement, and stockpiling.
___________________
1. Consolidation: Shipment consolidation is an economic benefit
___________________
of warehousing. With this arrangement, the consolidating
___________________
warehouse receives and consolidates materials from a number
___________________ of manufacturing plants destined to a specific customer on a
___________________ single transportation shipment. The benefits are the
realization of the lowest possible transportation rate and
reduced congestion at a customer’s receiving dock. The
warehouse allows both the inbound movement from the
manufacturer to the warehouse and the outbound movement
from the warehouse to the customer to be consolidated into
larger shipments. In order to provide effective consolidation,
each manufacturing plant must use the warehouse as a
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forward stock location or as a sorting and assembly facility.
The primary benefit of consolidation is that it combines the
logistical flow of several small shipments to a specific market
area. Consolidation warehousing may be used by a single firm,
or a number of firms may join together and use a for-hire
consolidation service. Through the use of such a programme,
each individual manufacturer or shipper can enjoy lower total
distribution cost than could be realized on a direct shipment
basis individually.
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Figure 9.1: Consolidation
2. Break Bulk and Cross Dock: Break bulk and cross-dock

warehouse operations are similar to consolidation except that
no storage is performed. A break bulk operation receives 127

combined customer orders from manufacturers and ships them Notes
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to individual customers Figure 9.2 illustrates the break bulk ___________________
flow. The break-bulk warehouse or terminal sorts or splits
___________________
individual orders and arranges for local delivery. Because the
long-distance transportation movement is a large shipment, ___________________
transport costs are lower and there is less difficulty in ___________________

tracking.
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 9.2: Break bulk and cross-dock warehouse operations
A cross-dock facility is similar except that it involves multiple

manufacturers. Retail chains make extensive use of cross-dock
operations to replenish fast-moving store inventories. For
example, full trailer loads of product arrive from multiple
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manufacturers. As the product is received, customer sorts it; if
it is labelled or allocated to customers. If it has not been
labelled, the product is then literally moved “across the dock”
to be loaded into the trailer destined for the appropriate
customer. The trailer is released for transport to the retail
store once it has been filled with mixed product from multiple
manufacturers. The economic benefits of cross docking include
full trailer movements from manufacturers to the warehouse
and from the warehouse to retailers, reduced handling cost at
the cross-dock facility since product is not stored, and more
effective use of dock facilities because all vehicles are fully
loaded, thus maximizing loading dock utilization.
3. Processing/Postponement: Warehouses can also be used to
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postpone, or delay, production by performing processing and

light manufacturing activities. A warehouse with packaging or
labelling capability allows postponement of final production
until actual demand is known. For example, vegetables can be
processed and canned in “Brights” at the manufacturer.
Brights are cans with no pre-attached labels. The use of
Brights for a private label product means that the item does
Logistics Strategy
128 not have to be committed to a specific customer or package

Notes configuration at the manufacturer’s plant. Once a specific
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___________________ customer order is received, the warehouse can complete final
processing by adding the label and finalizing the packaging.
___________________
Processing and postponement provide two economic benefits.
___________________
First, risk is minimized because final packaging is not
___________________ completed until an order for a specific label and package has
___________________ been received. Second, the required level of total inventory can
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be reduced by using the basic product (brights) for a variety of
___________________
labelling and packaging configurations. The combination of
___________________ lower risk and inventory level often reduces total system cost
___________________ even if the cost of packaging at the warehouse is more
___________________
expensive than it would be at the manufacturer’s facility.
___________________ 4. Stockpiling: The direct economic benefit of this warehousing

service is secondary to the fact that seasonal storage is
essential to select businesses. For example, lawn furniture and
toys are produced year-round and primarily sold during a very
short marketing period. In contrast, agricultural products are
harvested at specific times with subsequent consumption
occurring throughout the year. Both situations require
warehouse stockpiling to support marketing efforts.
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Stockpiling provides an inventory buffer, which allows
production efficiencies within the constraints imposed by
material sources and the customer.
Service Benefits
Service benefits gained through warehouses in a logistical system
may or may not reduce costs. When a warehouse is primarily
justified on the basis of service, the supporting rationale is an
improvement in the time and place capability of the overall
logistical system. For example, placing a warehouse in a logistical
system to service a specific market segment may increase cost but
might also increase market share, revenue and gross margin. At a
conceptual level, a service-justified warehouse would be added if
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the net effect was profit-justified. At an operational level, the

problem is how to measure the direct revenue impact.
Five basic service benefits are achieved through warehousing: spot
stock, assortment, mixing, product support, and market presence.
Each is discussed and illustrated.
1. Spot Stock: Stock spotting is most often used in physical 129

distribution. In particular, manufacturers with limited or Notes
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highly seasonal product lines are partial to this service. Rather ___________________
than placing inventories in warehouse facilities on a year-
___________________
round basis or shipping directly from manufacturing plants,
delivery time can be substantially reduced by advanced ___________________
inventory commitment to strategic markets. Under this ___________________

concept, a selected amount of a firm’s product line is placed or
___________________
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“spot stocked” in a warehouse to fill customer orders during a
___________________
critical marketing period. Utilizing warehouse facilities for
stock spotting allows inventories to be placed in a variety of ___________________
markets adjacent to key customers just prior to a maximum ___________________
period of seasonal sales.
___________________
Suppliers of agricultural products to farmers often use spot
___________________
stocking to position their products closer to a service-sensitive
market during the growing season. Following the sales season,
the remaining inventory is withdrawn to a central warehouse.
2. Assortment: An assortment warehouse, which may be utilized
by a manufacturer, wholesaler, or retailer stocks product
combinations in anticipation of customer orders. The
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assortments may represent multiple products from different
manufacturers or special assortments as specified by
customers. In the first case, for example, an athletic
wholesaler would stock products from a number of clothing
suppliers so that customers can be offered assortments. In the
second case, the wholesaler would create a specific team
uniform including shirt, pants, and shoes.
The differential between stock spotting and complete line
assortment is the degree and duration of warehouse
utilization. A firm following a stock spotting strategy would
typically warehouse a narrow product assortment and place
stocks in a large number of small warehouses dedicated to
specific markets for a limited time period. The distribution
assortment warehouse usually has a broad product line, is
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limited to a few strategic locations, and is functional year-

round.
Assortment warehouses improve service by reducing the
number of suppliers that a customer must deal with. The
combined assortments also allow larger shipment quantities,
which in turn reduce transportation cost.
Logistics Strategy
130 3. Mixing: Warehouse mixing is similar to the break bulk

Notes process except that several different manufacturer shipments
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___________________ may be involved. When plants are geographically separated,
overall transportation charges and warehouse requirements
___________________
can be reduced by in-transit mixing. In a typical mixing
___________________
situation, carloads or truckloads of products are shipped from
___________________ manufacturing plants to warehouses. Each large shipment
___________________ enjoys the lowest possible transportation rate. Upon arrival at
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the mixing warehouse, factory shipments are unloaded and the
___________________
desired combination of each product for each customer or
___________________ market is selected.
___________________
The economies of in-transit mixing have been traditionally
___________________ supported by special transportation tariffs that are variations
___________________ of in-transit privileges. Under the mixing warehouse concept,
inbound products may also be combined with products
regularly stored in the warehouse. Warehouses that provide
in-transit mixing have the net effect of reducing overall
product storage in a logistical system. Mixing is classified as a
service benefit because inventory is sorted to precise customer
specifications.
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4. Production Support: The economics of manufacturing may
justify relatively long production runs of specific components.
Production support warehousing provides a steady supply of
components and materials to assembly plants. Safety stocks on
items purchased from outside vendors may be justified because
of long lead times or significant variations in usage. In these,
as well as a variety of other situations, the most economical
total-cost solution may be the operation of a production
support warehouse to supply or “feed” processed materials,
components, and sub-assemblies into the assembly plant in an
economic and timely manner.
5. Market Presence: While a market presence benefit may not
be as obvious as other service benefits, it is often cited by
marketing managers as a major advantage of local
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warehouses. The market presence factor is based on the

perception or belief that local warehouses (and presumably
local inventory) can be more responsive to customer needs and
offer quicker delivery than more distant warehouses. As a
result, it is also thought that a local warehouse will enhance
market share and potentially increase profitability. While the
market presence factor is a frequently discussed strategy, little 131

solid research exists to confirm its actual benefit impact. Notes
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In international trade, Customs plays a critical role not only in ___________________
providing expedited clearing processes but also in ___________________
implementing effective controls that secure revenue, ensure
___________________
compliance with national laws, and ensure security and
protection of society. The efficiency and effectiveness of ___________________
Customs procedures has a significant influence on the ___________________
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economic competitiveness of nations and in the growth of ___________________
international trade and the development of the global
___________________
marketplace.
___________________
Customs duty is an indirect tax, which is realized on goods of
international trade. Duties that are levied by the government ___________________
in relation to imported items are referred to as import duty. ___________________

Duties levied on export consignments are called export duty.
The tariff is actually a list of commodities along with the
leviable rate of duty, popularly understood as customs duty.
The World Customs Organization (WCO) works in areas
covering the development of global standards, the
simplification and harmonization of Customs procedures,
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public-private partnerships, etc. The WTO Agreement on
Rules of Origin, concluded as part of the Uruguay Round in
1994, has created a global model for the determination of
origin, which is one of the cornerstones of trade policy. The
WTO provides for the Harmonization of Non-Preferential
Rules of Origin. WCO maintains the international Harmonized
System goods nomenclature.
The “Harmonized System” generally referred simply as “HS” is a
multipurpose international product nomenclature. It is governed
by “The International Convention on the Harmonized Commodity
Description and Coding System”. It comprises about 5,000
commodity groups; each identified by a six digit code, arranged in a
legal and logical structure and is supported by well-defined rules to
achieve uniform classification. The system is used by more than
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200 countries and economies as a basis for their Customs tariffs.

India is one of the countries that has accepted HS.
Customs Tariffs
India’s customs tariff rates have been declining since 1991.
The peak rate has come down from 150 percent in 1991-92 to
Logistics Strategy
132 35 percent in 2001-02 reducing along with it the entire set of rates
Notes that once exceeded 35 percent. The average tariff rate has
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___________________ therefore declined over the 1990s. The customs duty collection rate
(import duty revenue divided by value of imports) has
___________________
consequently declined from about 47 percent in 1990-91 to about
___________________
24 percent in 1999-2000 according to the Economic Survey.
___________________
Goods are normally classified under a number of categories. The
___________________ most common categories are (a) Capital Goods, (b) Intermediate
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___________________ Goods, and (c) Consumer Goods. Both capital and intermediate
goods are used in the production of other goods. The tariff rates
___________________
on both determine the effective protection of user industries.
___________________
In contrast to producer goods, consumer goods are used only by
___________________ individuals for their consumption. Consumer goods by definition
___________________ have to be ‘finished’. If they have to undergo any further
production process, then they are not classified as consumer goods
but as intermediate goods. This classification is generally the basis
for customs tariffs.
The levy and the rate of customs duty in India are governed by the
Customs Act 1962 and the Customs Tariff Act, 1975. There are
three levies on imported goods, attract basic customs duty,
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additional customs duty and education cess. The rates are different
for different items and are specified under the Tariff Act and are
calculated on the transaction value of the goods.
In the recent past, the peak rate of basic customs duty has been
reduced to 15 percent for industrial goods. The additional customs
duty that is applicable is the same as the excise duty payable on
similar goods manufactured in India. As in the case of excise,
education cess at 2 percent is leviable on the aggregate of customs
duties. There are special rates of customs duty for goods imported
from countries with whom India has entered into free trade
agreements such as Thailand, Sri Lanka, BIMSTEC, South Asian
countries and MERCOSUR countries. These rates are provided on
the website of CBEC.
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Similar to excise duty, bonded warehouses are permitted for

certain categories of goods. Taxes are paid when the goods are
released from the bonded warehouses.
Bonded Warehouses
The facility of warehousing of imported goods in Customs Bonded
Warehouses, without payment of Customs duty otherwise leviable
on import, is permitted under the Customs Act, 1962. Basically, 133

goods after landing are permitted to be removed to a warehouse Notes
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without payment of duty and duty is collected at the time of ___________________
clearance from the warehouse. The law lays down the time period
___________________
up to which the goods may remain in a warehouse, without
incurring any interest liability and with interest liability. ___________________
The warehouses are to be appointed/licensed at particular places ___________________
only which have been so declared by Central Board of Excise and ___________________
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Customs. The Board has delegated its power for declaring places to ___________________
be Warehousing Stations to the Chief Commissioners of Customs.
___________________
In respect of 100 percent EOUs, the powers to declare places to be
Warehousing Stations have been delegated to the Commissioners ___________________
of Customs. ___________________
Licences are issued by Customs and are classified into two ___________________
categories viz., storage of sensitive goods such as liquor, cigarettes,
foodstuffs, consumables, etc. and other non-sensitive goods. All
warehoused goods are subject to the control of the Customs
officers. The owner of the warehoused goods may inspect, sort,
show for sale, and take samples, etc. from the bonded goods with
the permission of the proper officer. The owner of the bonded goods
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has also to pay warehouse-keeper rent and warehouse charges at
the rates fixed under law.
In addition to bonded warehouses for imported items, bonded
warehouses are also used for items that are subject to excise.
Excise duty is a tax on manufacture or production of goods. Excise
duty on alcohol, alcoholic preparations, and narcotic substances is
collected by the State Government and is called “State Excise”
duty. The Excise duty on rest of goods is called “Central Excise”
duty. Manufacturers can have holding bonded warehouses for
storing non-duty paid goods. While different procedures have been
prescribed for levy and collection of Central Excise Duties keeping
in view the needs of different industries sectors, Self-Assessment
Procedure covers major portion of excisable items. However, for
state excise, each state has its own procedures.
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Shipping and Clearance Procedures

Goods imported in a vessel/aircraft attract customs duty. The
exceptions are goods that are intended for transit by the same
vessel/aircraft or trans-shipment to another customs station or to
any place outside India. For other goods, detailed customs
Logistics Strategy
134 clearance formalities have to be followed by the importers after

Notes arrival of the goods at the other customs station. These goods can
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___________________ be cleared after payment of the duties or can be warehoused in
terms of the warehousing provisions built in the Customs Act. In
___________________
either option, the importer is required to file an entry, which is
___________________
called Bill of Entry. If the goods are cleared through the EDI
___________________ system, the bill of entry is generated in the computer system. But
___________________ in this case, the importer is required to file a cargo declaration
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having prescribed particulars required for processing of the entry
___________________
for customs clearance.
___________________
The first stage for processing a bill of entry is termed as the noting
___________________
of the bill of entry. In the non-EDI system, along with the bill of
___________________ entry, the following documents are also generally required:
___________________ z Signed invoice
z Packing list
z Bill of Lading or Delivery Order/Airway Bill
z GATT declaration form duly filled in
z Importers/CHA’s declaration
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z License wherever necessary
z Letter of Credit/Bank Draft/wherever necessary
z Insurance document
z Import license
z Industrial License, if required
z Test report in case of chemicals
z Ado exemption order
z DEEC Book/DEPB in original
z Catalogue, technical write up, literature in case of
machineries, spares or chemicals as may be applicable
z Separately split up value of spares, components machineries
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z Certificate of Origin, if preferential rate of duty is claimed

z No Commission declaration.
The correctness of the information given has to be certified by the
importer in the form of a declaration at the foot of the bill of entry
and any wrong or incorrect declaration has legal consequences.
The bill of entry is noted in the concerned unit, which checks the 135
consignment. After noting, the bill of entry gets sent to the Notes
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appraising section of the Custom House for assessment functions, ___________________
payment of duty etc.
___________________
Under the EDI system, the steamer agents get the manifest filed,
___________________
which also generates bill of entry number. The importer submits
declarations in electronic format containing all the relevant ___________________
information to the service centre. A signed paper copy of the ___________________
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declaration is taken by the service centre operator for non- ___________________
repudiability of the declaration. A checklist is generated for
___________________
verification of data by the importer/CHA.
___________________
After verification, the system then generates a B/E Number, which
is endorsed on the printed checklist. This is returned to the ___________________
importer or the clearing house agent (CHA). Original documents ___________________

are to be produced at the time of examination. The importer/CHA
also needs to sign on the final document after Customs clearance.
The noting aspect is checked by the system itself.
After noting/registration of the bill of entry, it is forwarded either
manually or electronically to the concerned Appraising Group in
the Custom House dealing with the commodity sought to be
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cleared. The Appraising Wing of the Custom House has a number
of groups dealing with earmarked commodities falling under
different Chapter Headings of the Customs Tariff and they take up
further scrutiny for assessment, import permissibility, etc.
Assessment
Assessment of duty essentially involves proper classification of the
goods imported in the customs tariff having due regard to the rules
of interpretations, chapter and sections notes etc., and determining
the duty liability. It also involves correct determination of value
where the goods are assessable on ad valorem basis. The assessing
officer has to take note of the invoice and other declarations
submitted along with the bill of entry to support the valuation
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claim, and adjudge whether the transaction value method and the
invoice value claimed for the basis of assessment is acceptable, or
value needs to be re-determined. Where the appraising officer is
not very clear about the description of the goods from the
document or as some doubts about the proper classification, he
may give an examination order for detailed examination of the
nature of the goods or testing of its samples.
Logistics Strategy
136 After the assessment and calculation of the duty liability the
Notes importer’s representative has to deposit the duty calculated with
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___________________ the treasury or the nominated banks, whereafter he can go and
seek delivery of the goods from the custodians. Wherever the
___________________
importer is not satisfied with the classification, rate of duty or
___________________
valuation as may be determined by the appraising officer, he can
___________________ seek an assessment order. An appeal against the assessment order
___________________ can be made to appropriate appellate authority within the time
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limits and in the manner prescribed.
___________________
In the EDI system of the documents/declarations for taking import
___________________
clearances are transferred to the assessing officer in the groups
___________________
electronically. The assessing officer processes the cargo declaration
___________________ on screen with regard to all the parameters as given above for
___________________ manual process. However, in the EDI system, all the calculations
are done by the system itself. After assessment, a copy of the
assessed bill of entry is printed in the service centre. Under EDI,
documents are normally examined at the time of examination of
the goods. Final bill of entry is printed after ‘out of charge’ is given
by the Custom Officer. In EDI system, in certain cases, the facility
of system appraisal is available. Under this process, the
declaration of importer is taken as correct and the system itself
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calculates duty that is paid by the importer. In such case, no
assessing officer is involved.
Also, a facility of tele-enquiry is provided in certain major Customs
stations through which the status of documents filed through EDI
systems could be ascertained through the telephone. If nay query
is raised, the same may be got printed through fax in the office of
importer/exporter/CHA.
z Green Channel Facility: Some major importers have been
given the green channel clearance facility. It means clearance
of goods is done without routine examination of the goods.
They have to make a declaration in the declaration form at the
time of filing of bill of entry. The appraisement is done as per
normal procedure except that there would be no physical
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examination of the goods. Only marks and number are to be

checked in such cases. However, in rare cases, if there are
specific doubts regarding description or quantity of the goods,
physical examination may be ordered by the senior
officers/investigation wing like SIIB.
z Execution of Bonds: Wherever necessary, for availing duty 137

free assessment or concessional assessment under different Notes
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schemes and notifications, execution of end use bonds with ___________________
bank guarantee or other surety is required to be furnished.
___________________
These have to be executed in prescribed forms before the
assessing appraiser. ___________________
z Payment of Duty: The duty can be paid in the designated ___________________
banks or through TR-6 challans. Different Custom Houses ___________________
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have authorised different banks for payment of duty. It is ___________________
necessary to check the name of the bank and the branch before
___________________
depositing the duty. Bank endorses the payment particulars in
challan, which is submitted to the Customs. ___________________
z Amendment of Bill of Entry: Whenever mistakes are noticed ___________________
after submission of documents, amendments to the entry is ___________________

carried out with the approval of Deputy/Assistant
Commissioner. The request for amendment may be submitted
with the supporting documents. For example, if the
amendment of container number is required, a letter from
shipping agent is required. Amendment in document may be
permitted after the goods have been given out of charge i.e.
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goods have been cleared on sufficient proof being shown to the
Deputy/Assistant Commissioner.
z Prior Entry for Bill of Entry: For faster clearance of the
goods, provision has been made in Section 46 of the Act, to
allow filing of bill of entry prior to arrival of goods. This bill of
entry is valid if vessel/aircraft carrying the goods arrive within
30 days from the date of presentation of bill of entry.
The importer is to file 5 copies of the bill of entry and the fifth copy
is called Advance Noting copy. The importer has to declare that the
vessel/aircraft is due within 30 days and has to present the bill of
entry for final noting as soon as the IGM is filed. Advance noting is
available to all imports except for into bond bill of entry and also
during the special period.
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Bill of Entry for Bond/Warehousing

A separate form of bill of entry is used for clearance of goods for
warehousing. All documents as required to be attached with a bill
of entry for home consumption are also required to be filed with
bill of entry for warehousing. The bill of entry is assessed in the
same manner and duty payable is determined. However, since duty
Logistics Strategy
138 is not required to be paid at the time of warehousing of the goods,

Notes
Activity the purpose of assessing the goods at this stage is to secure the
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What formalities do the
___________________ duty in case the goods do not reach the warehouse. The duty is
exporters have to undertake
for clearance of export goods? paid at the time of ex-bond clearance of goods for which an ex-bond
___________________
bill of entry is filed. The rate of duty applicable to imported goods
___________________
cleared from a warehouse is the rate in-force on the date on which
___________________ the goods are actually removed from the warehouse.
___________________
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Check Your Progress
___________________
Fill in the blanks:
___________________
1. A .................. is typically viewed as a place to store
___________________
inventory.
___________________
2. With .................. arrangement, the consolidating
___________________
warehouse receives and consolidates materials from a
number of manufacturing plants destined to a specific
customer on a single transportation shipment.
Export of Goods
For clearance of export goods, the exporter or his agents have to
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undertake the following formalities:
Registration
The exporters have to obtain PAN based Business Identification
Number (BIN) from the Directorate General of Foreign Trade prior
to filing of shipping bill for clearance of export goods. Under the
EDI System, PAN-based BIN is received by the Customs System
from the DGFT online. The exporters are also required to register
authorised foreign exchange dealer code (through which export
proceeds are expected to be realised) and open a current account in
the designated bank for credit of any drawback incentive.
Whenever a new airline, shipping line, steamer agent, port or
airport comes into operation, they are required to be registered
into the Customs System. Whenever, electronic processing of
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shipping bill etc. is held up on account of non-registration of these

entities, the same is to be brought to the notice of Assistant/Deputy
Commissioner in-charge of EDI System for registering the new
entity in the system.
Registration in the Case of Export under Export Promotion 139

Schemes Notes
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z All the exporters intending to export under the export ___________________
promotion scheme need to get their licences/DEEC book etc. ___________________

registered at the Customs Station. For such registration, ___________________
original documents are required.
___________________
Processing of Shipping Bill – Non-EDI ___________________
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z Under manual system, shipping bills or, as the case may be, ___________________
bills of export are required to be filed in format as prescribed ___________________
in the Shipping Bill and Bill of Export (Form) regulations,
___________________
1991. The bills of export are being used if clearance of export
goods is taken at the Land Customs Stations. Different forms ___________________
of shipping bill/bill of export have been prescribed for export of ___________________

duty free goods, export of dutiable goods and export under
drawback etc.
z Shipping bills are required to be filed along with all original
documents such as invoice, AR-4, packing list etc. The
assessing officer in the Export Department checks the value of
the goods, classification under Drawback schedule in case of
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Drawback Shipping Bills, rate of duty/cess where applicable,
exportability of goods under EXIM policy and other laws
enforce. The DEEC/DEPB shipping bills are processed in the
DEEC group. In case of DEEC shipping bills, the assessing
officer verifies that the description of the goods declared in the
shipping bill and invoice match with the description of the
resultant product as given in the DEEC book. If the assessing
officer has any doubts regarding value, description of goods, he
may call for samples of the goods from the docks. He may also
call for any other information required by him for processing of
shipping bill. He may assess the shipping bill after visual
inspection of the sample or may send it for test and pass the
shipping bill provisionally.
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z Once, the shipping bill is passed by the Export Department,

the exporter or his agent present the goods to the shed
appraiser (export) in docks for examination. The shed
appraiser may mark the document to a Custom officer (usually
an examiner) for examining the goods. The examination is
carried out under the supervision of the shed appraiser
(export). If the description and other particulars of the goods
Logistics Strategy
140 are found to be as declared, the shed appraiser gives a ‘let

Notes export’ order, after which the exporter may contact the
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___________________ preventive superintendent for supervising the loading of goods
on to the vessel.
___________________
___________________ z In case the examining staff in the docks finds some

discrepancy in the goods, they may mark the shipping bill back
___________________
to export department/DEEC group with their observations as
___________________ well as sample of goods, if needed. The export department re-
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___________________ considers the case and decide whether export can be allowed,
or amendment in description, value etc. is required before
___________________
export and whether any other action is required to be taken
___________________
under the Customs Act, 1962 for mis-declaration of description
___________________ of value, etc.
___________________
Processing of Shipping Bill - EDI
z Under EDI System, declarations in prescribed format are to be
filed through the Service Centres of Customs. A checklist is
generated for verification of data by the exporter/CHA. After
verification, the data is submitted to the system by the Service
Centre operator and the System generates a Shipping Bill
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Number, which is endorsed on the printed checklist and
returned to the exporter/CHA. For export items, which are
subject to export cess, the TR-6 challans for cess is printed and
given by the Service Centre to the exporter/CHA immediately
after submission of shipping bill. The cess can be paid on the
strength of the challan at the designated bank. No copy of
shipping bill is made available to exporter/CHA at this stage.
Octroi Procedure, Quota Allocation and other Certification for

Export Goods
z The quota allocation label is required to be pasted on the
export invoice. The allocation number of AEPC is to be entered
in the system at the time of shipping bill entry. The quota
certification of export invoice needs to be submitted to
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Customs along with other original documents at the time of

examination of the export cargo. For determining the validity
date of the quota, the relevant date needs to be the date on
which the full consignment is presented to the Customs for
examination and duly recorded in the Computer System. In
EDI System at Delhi Air cargo, the quota information is
automatically verified from the AEPC/TEXPROCIL system.
z Since the shipping bill is generated only after the ‘let export 141
order’ is given by Customs, the exporter may make use of Notes
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export invoice or such other document as required by the ___________________
Octroi authorities for the purpose of Octroi exemption.
___________________
Arrival of Goods at Docks ___________________
z The goods brought for the purpose of examination and ___________________

subsequent ‘let export’ is allowed entry to the dock on the ___________________
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strength of the checklist and other declarations filed by the
___________________
exporter in the Service Centre. The port authorities have to
endorse the quantity of goods actually received on the reverse ___________________
of the check list. ___________________
___________________
System Appraisal of Shipping Bills
___________________
z In many cases, the shipping bill is processed by the system on
the basis of declarations made by the exporters without any
human intervention. In other cases where the shipping bill is
processed on screen by the Customs Officer, he may call for the
samples, if required for confirming the declared value or for
checking classification under the Drawback Schedule. He may
also give any special instructions for examination of goods, if
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felt necessary.
Status of Shipping Bill

z The exporter/CHA can check up with the query counter at the
Service Centre whether the shipping bill submitted by them in
the system has been cleared or not, before the goods are
brought into the docks for examination and export. In case any
query is raised, the same is required to be replied through the
service centre or in case of CHAs having EDI connectivity
through their respective terminals. The Customs officer may
pass the shipping bill after all the queries have been
satisfactorily replied to.
(c
Customs Examination of Export Cargo

After the receipt of the goods in the dock, the exporter/CHA may
contact the Customs Officer designated for the purpose present the
check list with the endorsement of Port Authority and other
declarations as aforesaid along with all original documents such
as, Invoice and Packing list, AR-4, etc. The Customs Officer may
verify the quantity of the goods actually received and enter into the
Logistics Strategy
142 system and thereafter mark the electronic shipping bill and also
Notes hand over all original documents to the Dock Appraiser of the
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___________________ dock, who many assign a Customs Officer for the examination and
intimate the officers’ name and the packages to be examined, if
___________________
any, on the check list and return it to the exporter or his agent.
___________________
The Customs Officer may inspect/examine the shipment along with
___________________
the Dock Appraiser. The Customs Officer enters the examination
___________________ report in the system. He then marks the electronic bill along with
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___________________ all original documents and check list to the Dock Appraiser. If the
Dock Appraiser is satisfied that the particulars entered in the
___________________
system conform to the description given in the original documents
___________________
and as seen in the physical examination, he may proceed to allow
___________________ “let export” for the shipment and inform the exporter or his agent.
___________________
Variation between the Declaration and Physical Examination
The check list and the declaration along with all original
documents is retained by the appraiser concerned. In case of any
variation between the declaration in the shipping bill and physical
documents/examination report, the appraiser may mark the
electronic shipping bill to the Assistant Commissioner/Deputy
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Commissioner of Customs (Exports). He may also forward the
physical documents to Assistant Commissioner/Deputy
Commissioner of Customs (Exports) and instruct the exporter or
his agent to meet the Assistant Commissioner/Deputy
Commissioner of Customs (Exports) for settlement of dispute. In
case the exporter agrees with the views of the Department, the
Shipping Bill needs to be processed accordingly. Where, however,
the exporter disputes the view of the Department principles of
natural justice is required to be followed before finalization of the
issue.
Stuffing/Loading of Goods in Containers

The exporter or his agent should hand over the exporter copy of the
shipping bill duly signed by the appraiser permitting “let export” to
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the steamer agent who may then approach the proper officer
(Preventive Officer) for allowing the shipment. In case of container
cargo the stuffing of container at dock is dome under Preventive
Supervision. Loading of both containerised and bulk cargo is done
under Preventive Supervision. The Customs Preventive
Superintendent (Docks) may enter the particulars of packages
actually stuffed into the container, the bottle seal number
particulars of loading of cargo container on board into the system 143

and endorse these details on the exporter copy of the shipping bill Notes
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presented to him by the steamer agent. If there is a difference in ___________________
the quantity/number of packages stuffed in the containers/goods
___________________
loaded on vessel the Superintendent (Docks) may put a remark on
the shipping bill in the system and that shipping bill requires ___________________
amendment or changed quantity. Such shipping bill also may not ___________________
be taken up for the purpose of sanction of Drawback/DEEC
___________________
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logging, till the shipping bill is suitably amended for the changed
___________________
quantity. The Customs Preventive Officer supervising the loading
of container and general cargo in to the vessel may give “Shipped ___________________
on Board” endorsement on the exporter’s copy of the shipping bill. ___________________
Drawal of Samples ___________________
___________________
Where the Appraiser Dock (export) orders for samples to be drawn
and tested, the Customs Officer may proceed to draw two samples
from the consignment and enter the particulars thereof along with
details of the testing agency in the ICES/E system. There is no
separate register for recording dates of samples drawn. Three
copies of the test memo are prepared by the Customs Officer and
are signed by the Customs Officer and Appraising Officer on behalf
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of Customs and the exporter or his agent. The disposal of the three
copies of the test memo are as follows:
z Original – to be sent along with the sample to the test agency.
z Duplicate – Customs copy to be retained with the 2nd sample.
z Triplicate – Exporter’s copy.
The Assistant Commissioner/Deputy Commissioner, if he considers
necessary, may also order for sample to be drawn for purpose other
than testing such as visual inspection and verification of
description, market value inquiry, etc.
Export General Manifest

All the shipping lines/agents need to furnish the Export General
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Manifests, Shipping Bill wise, to the Customs electronically within

7 days from the date of sailing of the vessel. Apart from lodging the
EGM electronically, the shipping lines need to continue to file
manual EGMs along with the exporter copy of the shipping bills as
per the present practice in the export department. The manual
EGMs need to be entered in the register at the Export Department
and the shipping lines may obtain acknowledgements indicating
Logistics Strategy
144 the date and time at which the EGMs were received by the Export
Notes Department.
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___________________
The above is the general procedure for export under EDI Systems.
___________________ However, special procedures exist for specified schemes, details of
___________________ which may be obtained from the Public Notice/Standing Orders
issued by the respective Commission rates.
___________________
___________________ Private Warehousing
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___________________ A firm producing or owning the goods owns private warehouses.
___________________
Advantages and Disadvantages of Private Warehousing
___________________
1. Advantages:
___________________
Better control over the movement and storage of products
___________________
Less occurrence of error
2. Disadvantages:
Higher operation cost than public warehouse
Public Warehousing
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A public warehouse which is owned by government, rents space to
individuals or firm for storage of goods.
Advantages
z Less expensive and more efficient.
z Easily available and strategically located.
z Flexibility.
z The overall cost of warehousing per unit works out to a lower
figure.
z Quick facilities.
z User pays only for the space and services he use.
(c
Contract Warehouse
Contract warehousing is a specialized form of public warehousing.
Warehouse Layout & Design 145

Notes
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z A good warehouse layout increases output, improve product
flow, reduced cost, improve service to customer, and provide ___________________
better employee working condition. ___________________
z Good warehouse layout design involve the use of automated ___________________

equipment such as conveyor system to handle large product ___________________
packed in a carton
___________________
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Warehouse Layout Product ___________________
In warehouse layout product are grouped according to: ___________________
1. Compatibility ___________________
2. Complimentary ___________________
___________________
3. Popularity
The Square Root Law states that “The total safety stock
inventories in the future number of facilities can be approximated
by multiplying the total amount of inventory at existing facilities
by the square/root of the number of future facilities divided by
number of existing facilities”.
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3 Major agencies in India
There are three agencies in the public sector which are engaged in
building large scale storage/warehousing capacity namely, Food
Corporation of India (FCI), Central warehousing Corporation
(CWC), and 17 State Warehousing Corporation (SWCs). Over a
period of time, sizeable scientific storage/warehousing capacity has
been developed by these public sector agencies and they are
implementing plans to increase it further. While the capacity
available with FCI is used mainly for storage of food grains as also
certain other notified items.
Licensing of Warehouse in India

(c
Suitable for proper storage of the class of goods intended to be

stored.
z The applicant must be competent to conduct such a
warehouse.
z Fulfil any other conditions that the state government may
notify from time to time.
Logistics Strategy
146 z Pay the fees prescribed for the issue of a license and also
Notes furnish security.
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___________________
z Under the state warehouses acts, a warehouseman takes such
___________________ care of the goods stored with him as a man of normal prudence
___________________ would take of his own goods.
___________________ z Warehouseman must keep his warehouse clean and in a

hygienic condition, and take all the necessary precautions
___________________
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against rats, pests, etc.
___________________
z Compulsorily insured against damage by fire, floods, theft or
___________________
any other Accident.
___________________
Warehouse Management Systems (WMS) are best described as the
___________________ advanced technology and operating processes that optimize all
___________________ warehousing functions. These functions typically begin with
receipts from suppliers and end with shipments to customers, and
include all inventory movements and information flows in between.
Warehouse management systems have typically been associated
with larger, more complex distribution operations. Small, non-
complex distribution facilities have historically not been viewed as
candidates to significantly streamline operations and reduce costs.
However, even smaller and midsize companies are increasingly
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recognizing the significance of warehouse management systems in
today’s environment of integrated logistics, just-in-time delivery,
and e-commerce fulfilment.
In practice, successful WMS solutions are generally designed to
merge computer hardware, software, and peripheral equipment
with improved operating practices for managing inventory, space,
labour, and capital equipment in warehouses and distribution
centres. Implementation of a WMS allows a company to increase
its competitive advantage by reducing labour costs, improving
customer service, increasing inventory accuracy, and improving
flexibility and responsiveness. A WMS enables a company to
manage inventory in real time, with information as current as the
most recent order, shipment, or receipt and any movement in
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between.
WMS (Warehouse Management Systems) Benefits

z Faster Inventory Turns: A WMS can reduce lead times by
limiting inventory movement and improving the accuracy of
inventory records, thereby supporting a JIT environment. As a
result, the need for safety stock is reduced, which increases 147
inventory turnover and working capital utilization. Notes
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z More Efficient Use of Available Warehouse Space: In ___________________
addition to reducing safety-stock requirements, a WMS can ___________________
often increase available warehouse space by more efficiently
___________________
locating items in relation to receiving, assembly, packing, and
shipping points. This increased efficiency can both improve ___________________
productivity and lower inventory holding costs significantly. ___________________
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z Reduction in Inventory Paperwork: Implementation of a ___________________
real time WMS can significantly reduce the paperwork ___________________
traditionally associated with warehouse operations, as well as
___________________
ensure timely and accurate flow of inventory and information.
Receiving reports, pick tickets, move tickets, packing lists, etc., ___________________
which are typically maintained as hard copies, can all be ___________________
maintained electronically.
z Improved Cycle Counting: Companies can use WMS to
capture relevant data (e.g., frequency of movement, specific
locations, etc.) to systematically schedule personnel for cycle
counts. Such cycle counts not only can improve the accuracy of
inventory records for planning purposes, but also can
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eliminate or reduce the need for complete, costly physical
inventories.
z Reduced Dependency on Warehouse Personnel:
Implementing a comprehensive WMS facilitates
standardization of inventory movements, picking methods, and
inventory locations. This standardization helps to minimize
reliance on informal practices, resulting in reduced training
costs and lower error rates.
z Enhanced Customer Service: By streamlining processes
from order to delivery, companies can more accurately
determine product availability and realistic delivery dates. A
WMS can automatically identify and release back-ordered
inventory and also can reduce returns as a result of increased
shipment accuracy.
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z Improved Labour Productivity: A WMS helps optimize

material flow, typically by incorporating several inventory
picks into one or by “cross docking”. Cross docking is a process
that routes incoming shipments to the location closest to the
outbound shipping dock, thereby reducing warehouse
handling.
Logistics Strategy
148
Advantages for WMS Users
Notes
S
For Management: WMS can help management to access an
___________________
instant picture of
___________________
z How much inventory exists in the warehouse
___________________
z How many orders are currently being shipped
___________________
z What are the stages of processing of pending orders
___________________
PE
z Staff productivity details
___________________
z Goods shipped by the warehouse over any given period of time.
___________________
The warehouse management can determine how much inventory
___________________
exists in the various stages of processing unlike in non-automated
___________________ warehouse management.
___________________
Sales people can determine how much inventory is available and
can relate better to the warehouse staff thus bettering their
Customer Relationship levels. Customer Managers can reserve
inventory for a customer thereby ensuring that it will not be
shipped to anyone else. Inventory Managers can track transactions
at a very fine detail to diagnose unexpected sudden changes in
inventory. For example, if we had thousands of pieces of some SKU
)U
yesterday and today we don’t have any, then where did they go?
Were they shipped to some other customer? Were they sent to
some other warehouse of the company to be shipped from there? Or
did they get lost or were picked away? WMS helps answering such
problems. The reports generated during checking processes enable
policy decision to be taken about the reliability of the suppliers.
WMS is designed to be flexible i.e., the process flow of the
DC/Warehouse can now be modified easily as business needs
change.
1. For Warehouse Supervisors: Productivity reports for each
operator can now be generated and used to implement
productivity based remuneration schemes or to fire
unproductive employees. For those warehouses that have to
cope up with Union problems these reports can help the
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company tremendously. Efficient tracking of warehouses

activities are possible with WMS as it provides a
comprehensive set of web-enabled reports detailing all the
activities happening in the warehouse and their effect on the
inventory management. WMS also helps to detect bottlenecks
in operations, which can increase the overall throughput of the
warehouse.
2. For Warehouse Operators: WMS provides Graphical User 149

Interfaces (GUIs) wherein most of the time the operator has to Notes
S
just scan the barcodes. Default navigation of cursor on the ___________________
screen mimics the standard business rule. Thus WMS eases
___________________
the operator’s task and makes the data input process fast,
increasing the overall efficiency of the operator. Some ___________________
programs like Locating and Pulling are especially designed to ___________________

run on hand-held radio frequency terminals. These terminals
___________________
PE
make the task of pickers and locators easy, as these are easy to
___________________
carry. Modern WMS programs have been coded with extra
emphasis on scanner based data input to minimize the need ___________________
for keyboard or mouse input. ___________________
Check Your Progress ___________________
___________________
Fill in the blanks:
1. The exporters have to obtain PAN based ....................
from the Directorate General of Foreign Trade prior to
filing of shipping bill for clearance of export goods.
2. .................... are best described as the advanced
technology and operating processes that optimize all
)U
warehousing functions.
Summary
Thus warehousing refers to storing of the goods on large scale in a
systematic and orderly manner from the time they are produced
until they are consumed. Warehouse operations are becoming more
and more complex The Warehouse Control System integrates the
various functions and enables a better product flow.
The managerial question to consider is whether a specific handling
system should be designed on a mechanized, semi automated, or
information-directed basis. The initial cost of an automated system
will be higher than for one that is mechanized. An automated
system will require less building space, but the equipment
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investment will be greater. The key benefit from automation is

reduced operating cost. An automated handling system, if properly
designed and controlled, should outperform a mechanized system
in terms of labour, damage, accuracy, product protection, and
rotation. In the final analysis, the design to be used must be
evaluated on the basis of return on investment.
Logistics Strategy
150
Lesson End Activity
Notes
S
Find out the relationship between the size and shape of a
___________________
distribution warehouse and the materials handling system. Why
___________________ do some warehouses have square design while others are
___________________ rectangular?
___________________
___________________ Keywords
PE
___________________ Public Warehouse: The space that can be leased to solve short-
term distribution needs.
___________________
___________________ Distribution Centre: Warehouses where product storage is

considered a very temporary activity.
___________________
Economic Benefits: Economic benefits of warehousing
___________________
materialise when overall logistical costs are directly reduced by
utilizing one or more facilities. It is not difficult to quantify the
return on investment of an economic benefit because it is reflected
in a direct cost-to-cost trade-off.
Private Warehouse: A private warehouse is operated by the firm
owning the product. The actual facility, however, may be owned or
)U
leased. The decision as to which strategy best fits an individual
firm is essentially.

1. Define warehousing. What are the different benefits of
warehousing?
2. What are the different warehousing operating principles?
3. What are the different steps in making a warehousing
strategy?
4. Explain about different types of warehouses.
Further Readings
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Books
Agrawal DK, Textbook of Logistics and Supply Chain.
Web Readings 151

Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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Logistics Strategy
152
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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UNIT 10: Case Study
Unit 10
153
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: TATA Motors CVBU
___________________
TATA Motors Commercial Vehicle Business Unit enhances
___________________
balanced scorecard with COVENARK® Strategist.
Tata Motors is the largest and most prominent market leader in ___________________
the manufacture of commercial business vehicles in India. In the
___________________
year 2000, its Commercial Vehicles Business Unit (CVBU)
suffered its first loss in its more than fifty years history. This loss
was massive. It was in the tune of ` 108.62 million. This
prompted Tata Motors to take a profound look into itself; to find
reason in this debacle.
Subsequently, the executive director of CBVU, Mr. Ravi Kant,
called for stringent cost cutting across unit operations, supported
by more effective formulation and execution of strategy. To
)U
augment this process, the management of Tata Motors resolved to
adopt the Balanced Scorecard and Performance Framework as the
key tool in the endeavour to rebuild the Organisational
Performance Chart. The challenge here was to undertake
deployment of the Balanced Scorecard across all the functional
units and departments of the CBVU.
Soon, however, with the process underway, the real problem
revealed itself. It turned out that the manual nature of the review
procedures of such a huge structure was well neigh impossible,
being, at best, extremely difficult to implement and incredibly
time consuming. A watertight solution was needed quickly. After
further examination of the situation, a decision was taken to
implement a Balanced Scorecard Automation Tool that would
centralise, integrate and collate the data, providing rapid review
and analytical functionality and presenting a rapid and
comprehensive one-view picture of organisational performance.
Commencing this process, the CVBU management reviewed many
solution providers and evaluated each of them upon the basis of a
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variety of diverse factors. At the end of this exhaustive process, a

solution was decided in the form of COVENARK® Strategist, a
prominent Balanced Score Card Automation Tool developed by
MPOWER Information Systems to integrate with the existing
ERP and legacy systems with the help of data integration suite.
The results were immediate and spectacular. Within two years of
this, CVBU had turned over to register a profit of ` 107 million
from the loss of ` 108.62 million, accounting for a whopping 60%
Contd…
Logistics Strategy
154 of TATA Motors inventory turnover. The success path of Balanced

Notes Score Card did not stop here. In the beginning, CVBU has started
S
the Balanced Scorecard with only Corporate Level Scorecard; at
___________________ this time, they have expanded it to six Hierarchical Levels with
three hundred and thirty one Scorecards, additionally looking
___________________
forward to proliferate it to the lowest level of organisational
___________________ structure. In this way, MPOWER, through COVENARK®
Strategist played a vital role in the success story of TATA Motors
___________________ CVBU.
___________________ Question:
PE
Analyse the case and write down the case facts.
___________________
Source: www.mpower.com
___________________
___________________
___________________
___________________
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UNIT 11: Packaging Strategy
155
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-III
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156
Notes
S
UNIT 11: PACKAGING STRATEGY
___________________ UNIT 13: SUPPLY CHAIN ENGINEERING
___________________
z Concept of Packaging Strategy z Supply Chain Scoreboard
___________________
z Packaging as a Differentiating Factor z Sourcing
z ___________________
Functions of Packaging z Procurement Logistics
___________________ z Supply Chain Management System
PE
UNIT 12: GREEN LOGISTICS
z
___________________
Introduction UNIT 14: TRANSPORTATION PLANNING
z Concept of Green Logistics
___________________ z Introduction
z Carbon Footprint Modelling
___________________ z Efficient Networks
z Green Purchasing z Modes and Carrier Selections
___________________
z Transportation Management System
___________________
UNIT 15: CASE STUDY
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Unit 11
157
Notes
S
Activity
Packaging Strategy
___________________
Research on the factors
involved in the selection of the
___________________
packaging materials.
___________________
Objectives
___________________
topics: ___________________
PE
\ Concept of Packaging Strategy ___________________
\ Packaging as a Differentiating Factor ___________________
\ Functions of Packaging
___________________
___________________
Introduction
___________________
If produce is packed for ease of handling, heavily waxed cartons,
wooden crates or rigid plastic containers are preferable to bags or
open baskets, since bags and baskets provide no protection to the
produce when stacked. Sometimes locally constructed containers
can be strengthened or lined to provide added protection to
produce. Waxed cartons, wooden crates and plastic containers,
)U
while more expensive, are reusable and can stand up to the high
relative humidity found in the storage environment. Containers
should not be filled either too loosely or too tightly for best results.
Loose products may vibrate against others and cause bruising,
while over packing results in compression bruising. Shredded
newspaper is inexpensive and lightweight filler for shipping
containers.
Concept of Packaging Strategy

Packaging is the science, art and technology of protecting products
for the purposes of containment, protection, transportation, storage
and information display. In addition, packaging is an integral part
of product distribution, sale, and use. For physical products, the
(c
package label or wrapper may represent the product’s entire

business positioning, list of features and benefits, advertising, and
promotion.
Packaging also refers to the process of design, evaluation, and
production of packages, from the determination of materials and
sizing to layout concepts to final printed packaging. Package
design is more than just the look of the physical wrapper or outer
Logistics Strategy
158 container that a product comes in. Packaging is often the way in
Notes which services are bundled together for an intermediate buyer or
S
___________________ end user.
___________________ Traditional packaging is usually considered as a cost-driven centre
___________________ rather than a value added component throughout the
manufacturing and distribution processes. If we reconsider the
___________________
packaging design in a systematic approach, it is easy to develop
___________________ more cost effective solutions that can support handling and
PE
___________________ distribution as well as providing protection of the product and
bring additional values to a company because of the improvement
___________________
in manufacturing and distribution efficiency.
___________________
Developments in packaging include disposable, recyclable and
___________________
reusable packaging. These are discussed here including returnable
___________________ logistical systems. Finally, we will discuss the concept of
integrated logistical pack-aging systems and new developments in
packaging.
Selection of Packaging Materials

There are various types of materials available for packaging of the
goods. These materials are paper, plastics, wood, cardboard etc.
)U
Selection of the packaging materials should be made keeping in
view primarily the specifications given by the importer because he
has to plan further for consumer packaging of the goods. Broadly,
the selection of the packaging materials would depend upon the
following factors:
1. Product characteristics,
2. Transportation and storage methods,
3. Climate and culture,
4. Standards and environmental considerations,
5. Market position
The type and quality of the packaging is specific to the given
product. For example, certain products such as garments, shoes,
(c
textiles etc. are sold to the consumers without any packaging. They
are usually displayed without any packaging at the retail stores.
Such goods do not require very expensive packaging. The exporters
have to ensure that the packaging used by them should be such
that it prevents the products from getting dirty. These goods are
often packaged in polyethylene bags.
Cardboard boxes are used for the packaging of items such as sets of 159
glasses or tableware, decoration with several delicate parts, pairs Notes
S
of candle holders, glass vases, delicate statuettes, etc., to ensure ___________________
that they are not damaged and their appearance is not spoiled
___________________
during handling and display.
___________________
Expensive products and gift items such as jewellery require a high
standard of packaging. In fact, the more expensive or exclusive the ___________________
product, the more justified high quality and more expensive ___________________
PE
packaging is. ___________________
Kinds of Packaging ___________________
___________________
Depending on the use of packaging materials, the packaging for
export products can be classified into the following categories: ___________________
(i) Plastic packaging, (ii) Paper based packaging, (iii) Combined ___________________
plastic and cardboard packaging, and (iv) Miscellaneous packaging

1. Plastic Packaging: Various kinds of plastic materials are
used for packaging of the export products. The most common
plastic materials used for packaging are polyethylene (PE) and
polypropylene (PP). Polyethylene film has two main varieties
of consumer packaging namely, low density polyethylene (PE-
)U
LD) film and high-density polyethylene (PE-HD).
PE-LD film is used for making plastic bags, shrink wrapping
and stretch wrapping. This film is very useful to provide
protection against moisture and dirt. It does not however,
provide any mechanical protection. The exporters can use the
plastic bags made of PE-LD films for wrapping articles to
package products like T-shirts, table cloths, napkins, leather
hand bags etc. These products are placed inside the plastic
bags, which are transparent and are suited for retail display.
In shrink-wrapping, a specially treated film is loosely wrapped
around the product(s) and then shrunk with heat to form a
tight package. This kind of wrapping is suitable for solid
products like sets of drinking glasses, a group of egg-cups, sets
(c
of table mates and so on.

In stretch wrapping, a thin film is tightly wound around the
product, often in several layers. When the wrap is completed,
the stretched film tries to return to its original size, thereby
holding the product or group of products tightly in place.
Logistics Strategy
160 PE-HD also used for making plastic bags because it provides
Notes better resistance against moisture and fats than PE-LD. PE-
S
___________________ HD is more expensive than the PE-LD. Both the forms of
plastic films are environment friendly as they are easy to
___________________
recycle.
___________________
The PP films are stronger than the PE films. It is better to use
___________________
bags made of PP films for packaging textiles and garments as
___________________ these can be printed or can be used in plain form as well. PP
PE
___________________ films are better than PE films in terms of providing better
moisture protection but these films are more expensive.
___________________
Another alternative to PP films is polyvinyl chloride (PVC)
___________________ material. But from environmental point of view, PVE
___________________ materials should not be used, as these are not recyclable.
___________________ Plastic boxes can be used especially as retail packages for

jewellery and other small, precious products. They are also
well suited to add appeal to products such as embroidered
handkerchiefs or tablecloths, souvenir dolls, etc. They come in
square, oval or round shapes, printed or plain.
2. Paper Based Packaging: Paper-based materials are used as
wrapping, as paperboard cartons or corrugated fibreboard
)U
boxes. The various types of paper can be coated with plastics,
waxed or treated with anti-corrosion agents. Paper is either
produced from virgin wood fibres or recycled fibres. The former
is stronger than the latter.
Paper wrappings provide protection against dust and light, but
do not provide mechanical protection.
Paper absorbs moisture when the surrounding air is more
humid than the paper, and it gives up moisture when the
surroundings are drier. Thus, paper wrappings can be used to
some extent as moisture protection inside the packages as well
to slow down the harmful effect of moisture in the air. One
should use tissue paper instead of newspaper to protect the
surface of products.
(c
Paperboard Folding Cartons: Folding cartons made of

different paperboard qualities can be used as retail
packaging for variety of reasons. Folding cartons are
economical; they can be shaped in almost unlimited
number of ways; they can be printed very decoratively;
properly designed cartons provide mechanical protection
to products; they protect products against dust and light,
and are easy to handle in retail shops. The most important 161
property of such cartons is their stiffness. Notes
S
Paperboard Cans: The paperboard can is a form of paper ___________________
based retail packaging, which is quite inexpensive and is ___________________
used to pack different types of products. These cans can be
___________________
lined inside with aluminium foil or plastic films to provide
additional protection against humidity. Such cans are ___________________
used for packaging toys, puzzles, games, tennis balls and ___________________
PE
other sports goods. ___________________
3. Combined Plastic and Card Board Packaging: There are ___________________
three main types of packaging that combine paperboard and
___________________
plastic materials. These are as follows:
___________________
1. Skin packaging, 2. Blister packaging, and 3. Plastic bags
with a paperboard card. ___________________
These packages are used mainly for retail packaging of pens,

small toys, gift items lightweight souvenir articles. This type
of packaging has several advantages: the product is visible
through the plastic; the paperboard card can be printed to
provide information and to add sales appeal; especially small
products are not lost or stolen easily.
)U
Skin Packaging: Skin packaging is a form of packaging
where the product is first placed on a paperboard card
with heat seal coating. It is suitable for products that need
protection against moisture and are not very heavy or
expensive. It is however, not suitable for products that are
sensitive to heat.
Blister Packaging: In this form of packaging, the product
is first placed into a pre-formed plastic blister. Then a
paperboard card is attached to it. Blister packaging can be
used for a variety of products such as toys, pens, textile
articles and decorations, etc. It should not be used for
those products, which are too delicate as there is always
some space for movement inside the blister. This might
(c
damage the delicate product.

Plastic Bag with Paperboard Card: In this form of
packaging, a paperboard card is attached to the plastic
bags through a hole in the bag. This adds sales appeal to
plain plastic bags and is always very cost-effective. The
paperboard card can be printed on adding information and
Logistics Strategy
162 attraction. The plastic bags can be made of any materials

Notes but PP film should be preferred in the interest of better
S
___________________ product presentation.
___________________ 4. Miscellaneous Packaging: Exporters can make use of wood,
___________________ textiles, straw, leaves or any other locally available materials
for packaging of the goods. Specially made wooden boxes can
___________________
be used to package traditional ceramics, wood carvings,
___________________ various gift items, pieces of jewellery etc. If wooden packaging
PE
___________________ is used as a gift or retail package, it has to be made with as
much care as the product itself. This means that it should be
___________________
smooth, clean, and dry, with any hinges or locks well-made
___________________
and functioning. It is also important to pack the product with
___________________ sufficient cushioning material into a wooden package, so that
___________________ the product is not damaged during transport. Before using
wood as packaging material, one should always check whether
there are any regulations concerning the treatment or
certification of wooden materials.
Paperboard cartons or boxes can be covered or lined with cloth to
give them a more decent appearance. Bags made of jute, cotton,
velvet or other fabric could be used for the packaging of products,
)U
which do not need much protection. Baskets made of local
materials can also provide very attractive packaging for handicraft
products.
Selection of Logistical Packaging System

Logistical packaging consists of the shipping container, dunnage
and a unit load and can be of either one-way or reusable character.
A one-way packaging is only used once for its original purpose,
whereas the reusable packaging is constructed for re-utilisation,
i.e. to be used more than once. Hence, when referring to logistical
packaging systems, they are either one-way packaging systems or
reusable packaging systems.
Traditionally, the main focus of logistical packaging in all
industries has been on the implementation of one-way, disposable
(c
packaging systems. However, in many cases, expendable packages

are not the most cost-effective alternative. Purchase and disposal
costs of logistical packaging systems can be substantial, especially
for products regularly shipped in larger volumes.
One way packaging systems are either disposable or recyclable.
Recyclable materials like paper, board and plastics account for
nearly 88 percent of all goods are packaged, with a 53 percent 163

contribution of plastics. Because of its low weight and relative Notes
S
strength, plastic is one of the most energy efficient, robust and ___________________
economic delivery methods available.
___________________
Even though plastics can be recycled, there are few recycling
___________________
facilities for its packaging waste. This is partially because plastic
has a high volume to weight ratio, which makes recycling ___________________
collections of plastic packaging waste inefficient. The lack of end- ___________________
PE
markets for mixed and single stream plastics also forms a barrier ___________________
to increased plastics recycling. Recycling activities also have an
___________________
environmental impact, mainly in terms of energy consumption,
because recyclables need to be transported, cleaned and ___________________
reprocessed before they can be turned into new products. ___________________
___________________
Waste Hierarchy
The waste hierarchy is explained as under. The most favoured
option in this hierarchy is ‘prevention’ and the least favoured
option is ‘disposal’.
z Prevention: Waste prevention is a primary goal. In simple
terms, packaging should be used only where needed and
)U
should be proper packaging to prevent loss or damage to the
contents. The logic behind this argument is that the energy
content and material usage of the product being packaged are
much greater than that of the package, therefore, if the
product is damaged or degraded, its entire energy and
material content may be lost.
z Minimisation: Minimisation of the mass and volume of
packaging (per unit of contents) should be used as one of the
criteria during the package design process. Usually ‘reduced’
packaging, in addition to reducing the use of material and
energy, also helps minimise costs.
z Reuse: The reuse of a package or component for other
purposes is beneficial to the environment. This type of reuse
(c
has been in use for closed loop logistics systems for a long
time. This system uses returnable packaging, which is
inspected, cleaned, repaired and then reused.
z Recycling: Recycling is the reprocessing of materials (pre- and
post-consumer) into new products. Many packaging materials
e.g. steel, aluminium, papers, plastics, etc. are generally
recycled, especially in India. Small factories can be found in
Logistics Strategy
164 most localities whose owner’s livelihood is based on recycling.

Notes However, it is important to choose only those packaging
S
___________________ materials which are not difficult to separate and do not
contaminate recycling operations.
___________________
___________________
z Energy recovery: A large amount of organic products are used
in packaging. It is possible to convert these wastes to energy.
___________________
In many countries, refuse-derived fuel is used in approved
___________________ facilities to generate heat from the packaging components.
PE
___________________ z Disposal: Packaging materials should be bio-degradable so
___________________ that they can be disposed of by incineration and sanitary
___________________
landfill. Such materials should be checked for potential
hazards from emissions and ash from incineration and
___________________
leachate from landfill.
___________________
The environmental movement drove many companies to
investigate new ways of packaging and transporting their
products. This concern has resulted initially in the use of many
new packaging materials that were recyclable and finally to
reusable packaging, as it became increasingly clear that, in many
cases, there are economic benefits of moving towards reusable
packaging. Generally, based on the waste hierarchy, the options
)U
before a firm are: Reusable – Recyclable – Disposable, in this
order. The first, being the most desirable, and the last, the least.
Figure 11.1: Basis of Choice

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Basis for Choice of Logistical Packaging System

As mentioned earlier, the most direct way to recover packaging is
by reusing it in its original form. However, reusable packaging has
to be sturdier to withstand cleaning processes, increased
transportation and handling.
Packaging Cost 165

Notes
S
Activity
The process of engineering more environmentally acceptable
“Packaging plays a very
___________________
packages can include consideration of the costs. Some companies important role in the marketing
claim that their environmental packaging program is cost effective. of ___________________
a product.” Give your
comments with reasons and
Some alternative materials that are recycled/recyclable and/or less examples.
___________________
damaging to the environment can lead to companies incurring
___________________
increased costs. Though this is common when any product begins
to carry the true cost of its production (producer pays, producer ___________________
PE
responsibility laws, take-back laws). There may be an expensive ___________________
and lengthy process before the new forms of packaging are deemed
safe to the public, and approval may take up to two years. It is ___________________
important to note here, that for most of the developed world, ___________________
tightening legislation, and changes in major retailer demand.
___________________
True or False:
1. Packaging also refers to the process of design,
evaluation, and production of packages, from the
determination of materials and sizing to layout
concepts to final printed packaging.
)U
2. The paperboard can is a form of paper based retail
packaging, which is quite inexpensive and is used to
pack different types of products.
Packaging as a Differentiating Factor

Packaging is an integral and differentiating factor in the flow of
raw material to finished product and essential to optimising the
logistical flows. It is a part of the daily life of every consumer and
every supply chain that handles goods. The need for packaging
pervades all segment of the economy, as any kind of conservation
or transportation of products requires packaging.
Improving product packaging operations by minimising the volume
of material used and rationalising the number and types of
(c
packaging operations, the costs associated with logistics can be

significantly reduced. It is increasingly being recognised that
packaging is the last frontier for in-factory productivity
improvement.
How can ‘packaging be defined’? There are many definitions, but
for our purposes, we will use ‘The EU Packaging and Packaging
Logistics Strategy
166 Waste Directive (94/62/EC)’ definition, which states: “Packaging

Notes shall mean all products made of any materials of any nature to be
S
___________________ used for the containment, protection, handling, delivery, and
presentation of goods, from raw materials to processed goods, from
___________________
the producer to the user or the consumer.”
___________________
Packaging is generally categorized into three main types:
___________________
1. Primary or Consumer Packaging: Packaging containing
___________________
PE
one sales unit that is meant for the end-user or consumer.
___________________
2. Secondary or Multi-unit Packaging: Packaging designed to
___________________
contain a number of primary packages for shipment to a
___________________ retailer/store.
___________________ 3. Tertiary or Transport Packaging: Packaging that
___________________ facilitates transport and handling of a number of primary or
secondary packages with the aim of preventing damage to the
product (also called logistical packaging).
Primary packaging has a marketing emphasis. From the consumer
perspective, packaging plays a major role when products are
purchased: packaging is crucial, given that it is the first thing that
the public sees before making the final decision to buy. This
)U
function has increased in importance with the arrival and
popularisation of self-service sales systems, which have caused
packaging to move to the foreground in attracting attention and
causing a purchase. Consumer packaging design focuses on
customer convenience, market appeal, retail shelf utilisation, and
product protection. For marketing, the primary package sells the
product by attracting attention and communicating.
Tertiary as well as secondary packaging is generally used in
industrial packaging. These are also called logistical packaging. In
general, what is considered as ideal in consumer packaging (e.g.,
large containers and odd sizes that increase consumer visibility)
makes very poor logistical packaging. For logistics, the tertiary
package allows the product to be contained, apportioned, unitised
and communicated.
(c
Logistical packaging has various functions. There are six general

functions that packaging performs:
1. Protection: Products must be protected from outside
environmental effects. The packaging therefore has to be made
to stand harsh climatic conditions.
2. Containment: Products must be contained before they can be 167

moved from one place to another. Notes
S
3. Unitisation: Permitting primary packages to be unitised into ___________________
secondary packages, and then for secondary packages to be ___________________
unitized into tertiary packages.
___________________
4. Apportionment: Reducing the output from industrial
___________________
production to a manageable, desirable ‘consumer’ size.
___________________
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5. Convenience: Allowing products to be used conveniently.
___________________
6. Communication: The use of unambiguous, easily understood
___________________
symbols.
___________________
The primary functions are generally viewed as protection, utility,
___________________
and communication by the traditional school of thought, but the
emerging school of thought sees the primary packaging functions ___________________
to originate from the flow, the market, and the environment.
)U
Figure 11.2: Functions of Packaging
Functions of Packaging
(c
The flow function is related to the logistical flows, and aims at

rendering more efficiency in the logistics channel. There are three
objectives of the flow function. These can be described as:
The packaging should protect the product against stresses in the
distribution,
Logistics Strategy
168 It should identify the product with respect to contents, areas of

Notes application, quality and receiver, and
S
___________________
The packaging should facilitate product handling in the entire
___________________ flow, including provision of packaging, packing, distribution,
___________________ unpacking, disposal and return handling.
___________________ The market function consists of the revenue generating aspects;

these relate most directly to sales packaging: as well as attracting
___________________
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attention to a product and reinforcing a product’s image.
___________________ Packaging provides an attractive method to convey the virtues of
___________________ the product. This function is reinforced when one considers that
___________________
packaging is the single most important factor in purchasing
decisions made at the point of sale. Therefore, packaging has a
___________________
strategic purpose also since it helps a product stand out from
___________________ competition.
The environmental function is aimed at facilitating recycling of
packaging material, lessening the strains on the environment by
reducing consumption of packaging materials, and advocating
usage of reusable packages where appropriate. This function has
gained importance since the 1990s. Consumers are increasingly
demanding more environment friendly packaging in terms of
)U
reduced packaging, or packaging that is able to be recycled or
reused. Pressure for environment friendly packaging is not only
coming from consumers but also from governments in the form of
various directives.
Convenience and Communication

The convenience function of packaging simplifies the use of
products by the customer. Examples are numerous in food
packaging functions. Many products are packaged with requisite
protection against oxygen, moisture and microbiological
contamination, in other products the packaging also serves as a
dispensing device, heating vessel and/or serving dish. Examples of
this include classical TV dinner platters which are now in dual
ovenable crystallized polyester trays replacing aluminium trays
(c
used previously; high gas permeation packaging replacing

polyethylene packaging for fresh cut vegetable trays to protect
against anaerobic respiration; and multilayer plastic beer bottles
intended to be lightweight and overcome fears of breakage of glass.
These examples illustrate the development of convenience
packaging focused on satisfying the special needs of consumers.
In general, there are four aspects of user convenience of packaging. 169

These are: Notes
S
z Openability, ___________________
___________________
z Reclosability,
___________________
z Carrying convenience, and
___________________
z Dispensing facilities.
___________________
PE
A consumer should find it easy to open the package. Some
___________________
packages require certain protection items that may make a
___________________
package harder to open; however, protection should not be at the
cost of ease of opening convenience. After opening, the package ___________________
must have the ability to be closed so that the freshness or ___________________
containment characteristics are maintained for further use. The
___________________
package should also facilitate the ease with which the product can
be carried whether it is taking the product from the store or
transporting the product at a later date. Another aspect is the
effective use of dispensing facilities; the product has to be easy to
access. Examples are the blister packs for pills, and aerosol for
deodorants, or pump action packages for tooth pastes. With time
becoming more important in recent years, people are looking for
)U
packages that will save them time and are easily and most efficient
to handle.
The pack design is also an opportunity to persuade at point of sale

by communicating the right product and brand values on an
apportioned pack. A typical pack design brief will clarify the
following:
What it needs to hold and in what form;
z The amount;
z Shelf life required and under what conditions;
z Point of sale communication requirements;
z Branding requirements;
(c
z Conditions for accessing/dispensing contents;
z Copy/illustrations needed to encourage optimum use.
In all instances, an understanding of the consumer is central to

the success of the communication decision. Decisions regarding
Logistics Strategy
170 convenience and communication directly affect packaging design,

Notes packaging material, promotion and recycling costs.
S
___________________
Intangible product/service quality attributes such as ease of use,
___________________ brand identification, and perceived value are directly influenced by
___________________ convenience and communication decisions. With increasing
consumer demands, many market segments find that intangible
___________________
product service attributes are also becoming increasingly
___________________ important. Therefore, firms require making packaging decisions
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___________________ that enhance intangible quality attributes.
___________________ In the case of field service of durable products, these must be

___________________
repackaged by the end-user for reshipment to a field service centre
or by the manufacturer for repair or replacement. The ease of
___________________
repackaging the product for reshipment can help to facilitate
___________________ lasting customer satisfaction for such products. In addition, the
ease of identifying the proper address for reshipment (from the
container or internal packaging materials) can play a major role in
long-term customer satisfaction, resulting in a competitive
advantage in many market segments. The communication function
allows consumers to instantly recognize products through
distinctive branding and labelling.
)U
Figure 11.3: Bar Code
Bar code representing Wikipedia in Code 128

The role of communications in identifying package contents for all
channel members is a critical requirement. Typical information
includes manufacturer, product, type of container (can versus
bottle), count, and Universal Product Code (UPC). The carton
information is used to identify product for receiving, order
(c
selection, and shipment verification.

Many types of symbols for package labelling are nationally and
internationally standardised. There are symbols for consumer
packaging which are indicative of product certifications,
trademarks, proof of purchase, etc.
With transport packages, standardised symbols are also used to 171

aid in handling. Some common ones are shown below in the Figure: Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 11.4: Standardised Symbols used to Aid in Handling
Handling during Transport Symbols

Consumer use and safety is another category. Some requirements
)U
and symbols exist to communicate these aspects. Figure 11.4
shows some international symbols related to safety used on
packaging product for receiving, order selection, and shipment
verification.
Many types of symbols for package labelling are nationally and
internationally standardised. There are symbols for consumer
packaging which are indicative of product certifications,
trademarks, proof of purchase, etc.
Labels for Dangerous Goods

Tracking has many applications, starting from marketing to
warehousing. For example, a well-controlled material-handling
system tracks product as it is received, stored, retrieved, and
(c
shipped. This reduces product loss and pilferage. It is also a

positive control of all movement including monitoring employee
productivity. Detailed tracking has been made affordable by the
developments in portable bar code scanners and RF
communication. Low-cost scanning equipment and coding
standardisation increase tracking capabilities and effectiveness.
Logistics Strategy
172 Visibility is the major consideration, and material handlers should

Notes be able to see the label from reasonable distances in all directions.
S
___________________ The only exception is for high-value products, which often have
small labels to minimise the temptation of theft.
___________________
___________________ This ability of the package to provide information can reduce

logistics-related costs. Along with advances in packaging
___________________
technology, these attributes can be used to develop competitive
___________________ edges in specific market segments. Competitive edges provided
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___________________ through information retrieval and new packaging technologies can
provide product or service characteristics leading to increased
___________________
market share and profitability. As competitiveness becomes more
___________________
global in scope, it becomes increasingly important for organisations
___________________ to view packaging from a strategic perspective.
___________________
Check Your Progress
Fill in the blanks:
1. ................. packaging that facilitates transport and
handling of a number of primary or secondary
packages with the aim of preventing damage to the
product (also called logistical packaging).
)U
2. The ................. function of packaging simplifies the
use of products by the customer.
Summary
In this unit, we have discussed about Packaging. It refers to a
container in which the product reaches the end use consumer. It is
a part of the presentation of the product and stays right until the
customer takes it from the retail store. It should not be confused
with packing. Packing refers to the external protective covering
used for the safe transportation of the goods to the importer.
Further, we have discussed about functions of packaging. The
primary functions are generally viewed as protection, utility, and
communication by the traditional school of thought, but the
(c
emerging school of thought sees the primary packaging functions

to originate from the flow, the market, and the environment.
Lesson End Activity

Prepare an assignment on packaging as a differentiating factor
giving relevant examples.
Keywords 173
Notes
S
Logistics: Logistics is that part of the supply chain process that
___________________
plans, implements and controls the effective forward and reverse
flow and storage of goods, services, and related information ___________________
between the point of origin and the point of consumption, in order ___________________
to meet the customer’s requirements.
___________________
Rapid Response: Rapid response is concerned with a firm’s ability
___________________
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to satisfy customer service requirements in a timely manner.
___________________
Variance: Variance is an unexpected event that disrupts
___________________
performance of the system.
___________________
Questions for Discussion ___________________
___________________
1. What do you understand by the concept of logistics?
2. How does logistics help in improving customer satisfaction?
3. How can the level of logistical service be measured?
Further Readings
)U
Books
Education.
Web Readings
(c
Logistics Strategy
174
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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(c
UNIT 12: Green Logistics
Unit 12
175
Notes
S
Activity
Green Logistics
___________________
Prepare a presentation
explaining the concept of
___________________
reverse logistics.
___________________
Objectives
___________________
topics: ___________________
PE
\ Concept of Green Logistics ___________________
\ Carbon Footprint Modelling ___________________
\ Green Purchasing
___________________
___________________
Introduction
___________________
The concept of ‘greenness’ came to be discussed in relation to the
transportation industry during the eighties and nineties, especially
after the World Commission on Environment and Development
Report, 1987 announced environmental sustainability as a goal for
international action. The transportation industry was identified as
one of the culprits contributing to environmental degradation.
)U
Studies and reports had also suggested that environment ought to
be incorporated in the logistics framework or supply chain
paradigm. The term ‘green logistics’ has since then become a
catchword.
Concept of Green Logistics

Traditionally, logistics takes care of the forward distribution of
products, which includes transport, warehousing, packaging,
inventory management and information processing starting from
the producer to the retailer and end user. Environmental
considerations require that, as a corollary, care has also to be
taken of ‘reverse logistics’ which involves recycling and disposal of
waste and used materials. Reverse flow logistics have, the focus is
on maintaining a continuous flow of desired velocity by
(c
synchronizing all the activities, which form part of the supply

chain.
The key benefit of establishing an effective connectivity is the
minimization of transport costs incurred by firms. The logistics
expenditure is comprised of following elements:
(a) In-bound logistics cost (operations),
Logistics Strategy
176 (b) Out-bound logistics cost (marketing and sales),

Notes
S
(c) Service cost, and
___________________
(d) Management profit.
___________________
The hallmark of an effective integration in supply chain is
___________________
(a) Transit time compression, (b) Reliability of service, (c) Just in
___________________
time (JIT) delivery, (d) Good information systems support,
___________________
(e) flexibility in operations, (f) Customization, and (g) Minimization
PE
___________________ of ‘back haul’ or empty trucks in return journey. The same criteria
___________________ apply to reverse logistics, which require management of products
returned by customers, their recycling or reuse, repair or removal
___________________
of products and finding alternate channels to sell impaired assets.
___________________ All these have environmental implications.
___________________ Transport administration, as part of supply chain is also of great
significance. It involves expertise in vehicles and equipment
scheduling, load planning, routing of freight, advance shipment
notification, consolidation of cargo, tracing the movement of cargo
as part of control and an efficient information system. It also
involves documentation in terms of bill of lading and shipment
manifest and what is quite important, a competitive pricing
)U
strategy.
In modern times, international trade has become a bigger part of
world’s economic activity. The role of transportation in the global
supply chain is now all the more important. Transporters may use
a combination of modes like air, road, rail, water, pipelines and
inter-modal. Trucking is normally more expensive than rail or
water but it provides the advantage of door-to-door shipment and
shorter delivery times. It also eliminates the need for transfer or
transshipment between pick-up and delivery points. Shippers
therefore often prefer road transport over rail for all short distance
movements within the country. When it comes to global trade,
water transport becomes the dominant mode, although air
transport is also preferred for light-weight and perishable cargo.
(c
Air Quality Management – Measures

It is obvious that we need to act without delay through effective
intervention in the transport sector. Green transport through
green logistics should be our goal. Maintenance of air quality
standards is possible through setting an ambient air quality
monitoring network for vehicular emissions and simultaneously
helping motorists to make the transition. The variety of measures 177

that need to be undertaken can be on following lines: Notes
S
(a) Diesel engines emit carbon particles TSP, heavy hydrocarbons, ___________________
sulphate and other by-products of combustion, and petrol ___________________
engines also emit CO, NO and other volatile compounds.
___________________
However, diesel engines are considered as relatively dirtier
and government should discourage their use through suitable ___________________
policy measures including differential pricing. ___________________
PE
(b) The government should promote the use of alternative cleaner ___________________
fuels like Liquefied Petroleum Gas (LPG) and Compressed ___________________
Natural Gas (CNG). The air quality in Delhi and Mumbai has
___________________
certainly improved after their use in public transport buses
and autorikshaws. It should also take care to establish CNG ___________________
filling stations along all major roads. Another good news, ___________________
according to a Research Report by Frost and Sullivan is that
car makers in India are soon likely to roll out models that run
on alternative fuels like CNG and LNG. They are also
developing a converter kit, which will transform an existing
petrol and diesel vehicle into a CNG/LPG driven vehicle. Such
converter kits for three-wheelers are already in the market.
)U
After this conversion India will actually need 10,000 CNG
pump stations whereas today their number is less than 5000
across 15 cities.
(c) Use of old vehicles should be effectively curbed. Shortage of
finance or fear of unemployment should not come in the way of
enforcement of government directives. Petitions for judicial
intervention should be quickly dealt with. Obsolete models,
except those used for vintage car rallies, ought to be made to
retire.
(d) Improvement in fuel quality in terms of lower sulphur content
in diesel and lower benzene and aromatics in petrol should be
enforced. The Department of Road Transport of the
Government of India has rightly promulgated Rules in April
(c
1995 regarding use of unleaded petrol and fitting of catalytic

converters in new petrol-driven cars. Similarly, the norms for
sulphur content in petrol have been fixed at 0.1% and for
diesel at 0.25%.
(e) Setting up of emission standards for all kinds of motor vehicles
is necessary. Happily, the next generation emission norms for
two-wheelers and three-wheelers have been made effective
Logistics Strategy
178 from April 2005. If feasible, the government may start

Notes conducting emission testing of motor vehicles prior to their
S
___________________ registration. It may be stated that the automotive sector of
Indian industry is quite sensitive to environmental risks and
___________________
safeguards.
___________________
(f) The local enforcement agencies should launch sustained drives
___________________
against smoke-belching vehicles, which abound in small and
___________________ medium sized Indian cities. For this purpose, they should
PE
___________________ bring emission testers to roadsides for inspection of vehicles.
Forced retirement of older high-polluting vehicles may be
___________________
resorted to. The government should also bring in pedestrian
___________________
safety laws and clear footpaths of all encroachments to allow
___________________ pedestrians their right to walk safely.
___________________ (g) Better integration between rail transport systems and other
‘feeder’ bus services and water transport facilities should be
brought about by linking them together. Common ticketing
and information systems to offer seamless connections
between different transport modes can also be thought of.
Elevated railways integrating LRT and MRT lines may be
constructed to discourage private car ownership.
)U
Modal Shift
The question of changing the modal split in favour of railways and
waterways also needs to be addressed seriously. It is a well-
established fact that road freight vehicle movements give out
greater carbon emissions per tonne kilometre than rail or water
borne freight. The road arteries in India these days are getting
more and more congested affecting climate change. The share of
rail transport in freight movements, not in absolute but relative
terms, has been declining relative to road transport, because of the
accessibility and door-to-door delivery advantage enjoyed by road
transport. This however does not augur well from the environment
and sustainability viewpoint. There is no doubt that Indian rail
freight traffic during the last decade has increased in absolute
(c
terms thanks to the Container Corporation of India – a subsidiary

of Indian Railways- playing a more customer-friendly role in
providing ISO containers both at port terminals and inland
container depots (ISDs). However, for logistics providers road
transport still continues to be the favoured mode for the reason
that their criterion of measuring transportation costs differs from
that of the government. The costs of environmental degradation for 179

them are external and do not need internalization for business Notes
S
accounting purposes. ___________________
It is here that policymakers should use their ingenuity in evolving ___________________
such fiscal, regulatory and organizational measures, which will
___________________
bring about a modal shift from road to rail and water transport.
Unfortunately, there is no evidence yet of serious thinking on the ___________________
part of policymakers to bring about such environmentally desirable ___________________
PE
modal shift from road to rail and water. The reason is not far to ___________________
seek. The decision about mode choice by shippers of freight
___________________
involves many complex issues. It depends upon a variety of factors
influencing performance of rail freight movements and the costs in ___________________
terms of money and time that is to be borne ultimately. It is ___________________
therefore necessary to identify the barriers that prevent the
___________________
desired modal shift and evolve suitable measures to achieve the
objective. It is the logistics managers who can really enlighten us
on the eco-friendly way of influencing mode choice.
Due to soaring prices in the world oil market during the last few
decades, need arose to break free from oil and use alternative
energy sources like bio-fuels which would cut oil demand, provide
)U
energy security and prevent climate changes. Simultaneously,
efforts were begun to promote research and development in clean
alternative energy options like wind, water, solar and hydrogen
resources. However, a switch to bio-fuels – specifically ethanol –
was looked upon as the easier way to achieve the objective.
The question often being asked is whether reliance on bio-fuels
would prove a good strategy. Researches undertaken by
International Food Policy Research Institute (IFPRI) reveal a
different story. During the period 2000-2007, there was a boom in
ethanol production. Brazil and USA controlled the market
producing 90% of ethanol. European Union (EU) also followed suit.
Large tracts of land were diverted towards production of palm and
soya-bean to produce bio-diesel and towards corn and sugarcane to
produce ethanol. This led to a surge in commodity prices
(c
throughout the period. According to IFPRI, if this trend continues,

by 2020 prices of corn are estimated to rise from present 26% to
72%, of sugar from 12% to 277% and of oilseeds from 18% to 44%.
This scenario is bound to have a serious impact on the poor strata
of society with diet quality getting reduced and malnutrition
spreading to large parts of Asia and Africa.
Logistics Strategy
180 In this situation, rich countries may continue to emit majority of

Notes greenhouse gases (GHGs) and the poor countries will bear the
S
___________________ burden of climate change in terms of hotter climate, lesser rain,
and deforestation, and also low incomes, malnutrition and greater
___________________
dependence on agriculture and natural resources for living.
___________________
It is feared that the risks in switching to agro-based fuels are real.
___________________
The switch may trigger further deforestation and destruction of the
___________________ ecosystem. Warnings are therefore being given that agro-fuel
PE
___________________ policies should not be pursued further without a proper risk
analysis. According to a UNIDO document, “the key concern here
___________________
is the competition between land use for bio-energy production and
___________________
food and animal food production.” The fuel versus food issue is
___________________ really enigmatic. The document further states that “the coupling of
___________________ energy market with food market can increase food prices and hence
worsen the access to affordable food for many” .This warning can
be ignored only at our peril.
It should be clearly understood that increased prices may result in
increased incomes for farmers and give them their food security,
but the overall effect would depend upon the distribution of
increased incomes. In the opinion of the Food and Agriculture
)U
Organization (2006), the food versus fuel issue needs detailed
analysis of the possible outcomes of bio-fuels policy. The Stanford
University’s Wood’s Institute for Environment claims that reliance
on bio-fuels as part of America’s new energy plan is not a good
strategy. It is a fact that USA’s Ethanol-from-Corn Program has
led to a rise in prices of food crops due to farmland diversion. This
can happen anywhere and in India too. Lands can be diverted for
production of soya-bean and sugarcane. The decision to switch
from fossil fuels to crop-based fuels has therefore to be taken with
extreme caution. Scientists state that agro-fuels production from
oilseeds and corn has the potential to damage our climate
catastrophically.
Researches are being carried out to produce liquid bio-fuels for
transport as such. Here the ‘first generation fuels refer to bio-
(c
energies made from sugar, starch, vegetable oils or animal fats

using conventional technologies. ‘Second generation’ fuels refer to
those from lingo-cellulose biomass feedback using advanced
technologies. In India, we have resorted to gasification of solid bio-
mass through setting up small scale plants mainly in rural areas,
which produce heat and energy. We should upgrade the technology
so as to feed the gases into pipelines or alternatively compress 181

them for use in transport vehicles. In this respect Brazil has a Notes
S
success story to report. The production of sugarcane ethanol has ___________________
reduced that country’s dependence on fossil fuels and also ‘cleaned’
___________________
the industry.
___________________
In fine, as long as the thrust is on producing ‘clean’ energy and on
scaling down petroleum consumption, bio-fuels can be considered ___________________
as welcome. However, we must carefully assess the fall outs of ___________________
PE
switching to bio-fuels. President Obama’s New Energy Plan for ___________________
USA supports greater use of ethanol produced from maize. This
___________________
has led to increase in food prices, especially of wheat. If we in the
same way produce sugar ethanol in India, it may deplete our water ___________________
levels and degrade soil quality. Bio-fuels may not prove to be so ___________________
‘green’ after all. The sustainability of bio-fuels does not seem to be
___________________
as strong as it appeared earlier.
)U
Figure 12.1: Major Initiatives for Green Logistics
Check Your Progress

True or False:
1. It involves expertise in vehicles and equipment
scheduling, load planning, routing of freight, advance
(c
shipment notification, consolidation of cargo, tracing

the movement of cargo as part of control and an
efficient information system.
2. The key benefit of establishing an effective
connectivity is the minimization of transport costs
incurred by firms.
Logistics Strategy
182
Carbon Footprint Modelling
Notes
S
Activity
The carbon footprint is a method of accounting for the total amount
___________________
Research on the Problems
that can exist with of carbon dioxide and other greenhouse gas (GHG) emissions for
___________________
departmental carbon foot- which an individual and/or organisation is responsible.
printing.
___________________
The measure of accounting for a carbon footprint is based on
___________________ carbon dioxide emissions (CO2e). All greenhouse emissions
___________________ associated with the five remaining GHGs are reported in terms of
PE
CO2e. Use of a single measurement value in this way simplifies its
___________________
calculation and usage for management and reporting purposes
___________________
The carbon footprint is generally calculated based on a set of
___________________
principles known as the GHG Protocol, which are consistent with
___________________ those proposed by the Intergovernmental Panel on Climate Change
___________________ (IPCC) for compilation of emissions at the national level. However,
although strong international standards are emerging, they are
not mandatory and some companies may prefer to develop their
own methods of calculation.
Carbon footprint calculations consists of two main components
know as direct and indirect emissions. This distinction is
important as it allows for emissions to be calculated for a specific
)U
entity, or company and provides a mechanism to ensure that
double accounting does not occur.
When calculating the carbon footprint it is important to ensure the
boundaries of the calculation are established. It is possible to
visualise the scope of the carbon footprint as having several
different boundaries.
The definition of a boundary is an important concept when
calculating the carbon footprint, but for simplicity we can consider
the following scenarios. An organisation or company has many
different functional roles, which can be separated into groups,
departments, divisions, or any other unit of organisation that
makes business sense. Creating a boundary at this boundary level
makes it is possible to measure the carbon footprint within the
(c
unit. This approach enables each business unit to be measured and

locally-oriented solutions can be devised and applied as deemed
suitable.
Problems can exist with departmental carbon foot printing such as
achieving economies of scale that may only be possible when the
solutions are applied across multiple business units. Often
accruing cross-business unit benefits can be difficult and
approaching the carbon footprint on a company-wide basis can help 183

resolve this issue. However, assuming that the same calculation Notes
S
processes are used it is possible to complete departmental-based ___________________
footprints and consolidate them at a corporate level, effectively
___________________
achieving the same result. In each case it is necessary, indeed
mandatory, to have the agreement and support of the ___________________
organisation’s executive office, which inevitably means the ___________________

sponsorship of any project at a Director level.
___________________
PE
However, the ultimate approach is to view the carbon footprint ___________________
across the entire supply chain. This is the most complex and
___________________
difficult model to implement and is unlikely to be within the direct
remit of any one company’s carbon management initiative. The ___________________
most likely scenario is that pressure will be applied through the ___________________
supply chain by purchasing managers for their suppliers to be
___________________
conducting similar carbon emission-based initiatives.
The EU is already applying this principle through its “Green
Public Procurement” initiative. With European Public authorities
having control of 16% spend within the EU’s GDP, it is thought
that using green-based principles for driving purchasing decisions
can substantially influence behaviour throughout the EU.
)U
Other approaches include full Life-Cycle Assessment (LCA) on a
product or service based model. LCA is an ideal approach to
establishing a business-focused carbon footprint model, but as with
the supply chain model, for completeness it should cover the entire
supply chain. Again a difficult approach for a company to adopt but
LCA of business processes is now a well-established methodology
with relevant and well proven BSI and ISO standards. To
complement business accounting processes, combining the LCA
and organisational level models may prove to be a worthwhile
compromise for many businesses.
Calculating the carbon footprint is a practical business-oriented
activity and more than just an interesting academic exercise. It is
important to calculate the carbon footprint using a set of
(c
standardised approaches and principles that apply to business

processes and accounting practices.
There are many reasons for calculating the carbon footprint but
they can be summarised as follows:
z To establish a true and fair account of CO2e.
z To simplify and reduce the costs of associated with CO2e.
Logistics Strategy
184 z To provide Management with information that can be used to

Notes build an effective strategy to enable the preparation of a
S
___________________ carbon management programme.
___________________ z To provide information that facilitates participation in
___________________ voluntary and mandatory CO2e reduction programmes.
___________________
Green Purchasing
___________________
PE
___________________
In simple words, green purchasing is adding environmental
aspects to price and performance criteria when making purchasing
___________________
decisions. Ultimate goal is to reduce environmental impacts of
___________________ sourcing and to increase resource efficiency. Green purchasing is
___________________ the practice of applying environmental criteria to the selection of
products or services. It takes a number of forms, from relatively
___________________
simple to relatively complex. Green purchasing is now relatively
common among larger companies and appears to be increasingly
used as a corporate practice. For example, a 1995 survey of 1000
buyers of office equipment and supplies showed that 80% of
respondents were taking part in environmental initiatives within
their organizations.
In 1993, just 40% of respondents responded this way Green
)U
purchasing practices are being increasingly documented in the
academic literature as well as in numerous case studies and books
on environmental management, The U.K. organization, Business
in the Environment, have published a training kit for promoting
environmental management to suppliers. The U.S. National
Association of Purchasing Managers has a committee on
environmental purchasing, and the topic is a regular feature of
their conferences. A survey of 256 U.S. manufacturing firms, which
asked the firms to identify the key players in their pollution
prevention strategies, revealed that nearly half identified suppliers
as key players.
Green Purchasing Network India (GPNI)

(c
GPNI is an evolving network of professionals interested and active

in the general area of sustainable consumption and production-
more specifically: Green Purchasing and Public Procurement. It is
currently a loose informal network of professionals primarily
operating as an internet based electronic forum.
The objectives of the GPNI are: 185

Notes
S
1. To create awareness amongst Indian industry and other
stakeholders about Green Purchasing and Procurement (GPP). ___________________
2. To encourage and facilitate implementation of GPP and ___________________
Greening Supply Chains (GSC) projects to enhance the ___________________

competitiveness of the Indian industries.
___________________
Green Packaging ___________________
PE
___________________
Eco-friendly, sustainable, biodegradable, or natural, companies are
looking for ways to “go green” with their packaging. ___________________
While helping the environment is one benefit of eco-friendly ___________________

packaging, packing products using fewer and more sustainable ___________________
materials reaps additional rewards:
___________________
z Saving Money: Reducing excess packaging results in lighter
and smaller shipments that cost less to transport. In addition,
greater quantities can fit on pallets, in shipping containers, in
warehouses, and on retail shelves.
z Maintaining Business: Switching to green materials can
help meet or anticipate customer demands for eco-friendly
)U
suppliers.
z Attracting Consumers: Many shoppers will choose an
environmentally friendly product over a conventional package.
“While eco-friendly packaging is a recent phenomenon, it is already
a large and rapidly growing trend,” observes Susan Selke, Ph.D.,
acting and associate director of the School of Packaging at
Michigan State University, East Lansing.
Source reduction in packaging has been going on for decades as a
way to reduce costs. Until recently, however, few companies were
doing it to increase sustainability.
Appliance manufacturers, for example, are reducing or even
eliminating the amount of corrugated cardboard they use in
(c
packaging, replacing it with foam blocks at corners and shrink

wrap around the product. The foam is lighter than the corrugate
and reduces shipping costs and damage that can occur during
loading/unloading and transportation.
Logistics Strategy
186 “Reducing damage by using foam is a huge cost saver for all supply
Notes chain partners,” explains Esther Palevsky, an industry analyst for
S
___________________ Cleveland, Ohio-based market research company Freedonia Group.
___________________ Packaging specialists are also investigating new ways to recover
___________________ materials. Shopping centres and strip malls that group grocery
stores and other retailers of different sizes in close proximity, for
___________________
example, offer a great opportunity.
___________________
PE
“Individual stores may not have a lot of discarded material,” she
___________________ states. “Collectively, however, they end up with high volumes and
___________________ frequent deliveries.” In these situations, the economics of
___________________
recovering materials for recycling are very efficient.
___________________ Packaging should be designed to optimize materials and energy

consumption, while maximizing the use of renewable or recycled
___________________
materials, according to a 2007 survey by the SPC and Packaging
Digest magazine. Seventy-three percent of respondents report that
their companies have increased their emphasis on packaging
sustainability over the past year
Example of Unilever: Washing Away Waste

Consumer goods manufacturer and SPC member Unilever looks at
)U
packaging in the context of the total product lifecycle.
“We want to reduce packaging and make it more sustainable, but
always consider the impact on the product,” explains Humberto
Garcia, packaging manager for environmental sustainability for
North America.
To date, the Greenwich, Conn.-based company is making excellent
progress in packaging reduction and removal. In 2007, for
example, Unilever was named Wal-Mart’s Supplier of the Year for
Sustainable Engagement. One element of the award was related to
eco-friendly packaging.
The Unilever product that has received the most publicity to date
is “all small and mighty,” a laundry detergent introduced in 2006
(c
that is three times more concentrated than regular detergents.

“Laundry liquids are perfect candidates for concentration,” says
Garcia. We reformulated the liquid so consumers can wash the
same volume of clothing with one-third the product—reducing the
package from 100 ounces to 32 ounces. This allowed us to cut the
amount of plastic by 55 percent.
“We were also able to reduce the amount of corrugate by 45 187

percent, which allows more products to fit on pallets and store Notes
S
shelves.” This means that retailers do not have to restock shelves ___________________
as often.
___________________
“All small and mighty” is just the tip of the iceberg for Unilever,
___________________
however. With products on sale in more than 150 countries, the
company realized that it needed a coherent and sophisticated ___________________
packaging strategy. Its approach to responsible packaging takes ___________________
PE
into account environmental, social, and economic considerations. ___________________
In 2007, the company formed a Responsible Packaging Steering ___________________
Team to create a new strategy. The team focuses on five packaging
___________________
principles:
___________________
1. Remove: Eliminate, where possible, unnecessary packaging
___________________
layers, such as outer cartons and shrink-wrap film. “By
changing the shipping case of Wishbone salad dressing, for
example, we were able to save 2,100 metric tons of corrugate
each year,” says Garcia.
2. Reduce: Shrink packages to the optimal size and weight for
their contents. Unilever has redesigned Suave shampoo and
conditioner bottle is 16 percent lighter with a 12-percent
)U
lighter cap, reducing the amount of resin each year by 670 tons
in the United States alone.
3. Reuse: Reuse packaging from the materials Unilever receives
at its factories. “Some cap suppliers ship product in reusable
totes,” says Garcia. “When we are done, we return the totes to
the suppliers to reuse.”
4. Renew: Maximize the proportion of packaging from renewable
resources, and investigate the technical feasibility of
biodegradable and compostable material.
5. Recycle: Increase the use of recycled, recyclable, and single-
material components in packaging for easy sorting and
recycling at the end of its use. “We transitioned Hellman’s
(c
Real Mayonnaise from glass to a recyclable plastic jar,” says

Garcia.
Unilever cites numerous other examples of eco-friendly packaging:
z It redesigned bottles of Vaseline hand lotion, reducing pack
weights between four percent and 15 percent since 2003,
depending on pack size. This is equivalent to 45 tons of plastic.
Logistics Strategy
188 z It reduced the width of Lipton soup cartons, cutting material

Notes use by almost 16 percent, leading to 6,437 fewer pallets and
S
___________________ 132 fewer trucks per year.
___________________ z It introduced Ragu and Bertolli pasta sauces in flexible
___________________ pouches, which is a first for the category. The pouch weighs
13.5 ounces—less than just the metal lid on the 26-ounce glass
___________________
jar.
___________________
PE
___________________
Check Your Progress
___________________ 1. The .................... is a method of accounting for the

total amount of carbon dioxide and other Greenhouse
___________________
Gas (GHG) emissions for which an individual and/or
___________________
organisation is responsible.
2. .................... is adding environmental aspects to price
and performance criteria when making purchasing
decisions.
Summary
)U
Logistics takes care of the forward distribution of products, which
includes transport, warehousing, packaging, inventory
management and information processing starting from the
producer to the retailer and end user. Environmental
considerations require that, as a corollary, care has also to be
taken of ‘reverse logistics’ which involves recycling and disposal of
waste and used materials. Reverse flow logistics have the focus on
maintaining a continuous flow of desired velocity by synchronizing
all the activities, which form part of the supply chain.
Lesson End Activity

Visit and research few logistics organisations and study the
concept of green logistics, based on your research prepare an
(c
assignment on it.
Keywords
Green Purchasing: Green purchasing is adding environmental
aspects to price and performance criteria when making purchasing
decisions.
Carbon Footprint: Carbon footprint is a method of accounting for 189

the total amount of carbon dioxide and other Greenhouse Gas Notes
S
(GHG) emissions for which an individual and/or organisation is ___________________
responsible.
___________________
___________________
___________________
1. Explain Bio fuel and CNG.
___________________
PE
2. Explain fuel economics.
___________________
3. What is green packaging?
___________________
___________________
Further Readings
___________________
Books ___________________

Education.
)U
Web Readings
(c
Logistics Strategy
190
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 13: Supply Chain Engineering
Unit 13
191
Notes
S
Activity
Research on the factors to
Supply Chain Engineering
___________________
consider in a make-or-buy
decision.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Supply Chain Scoreboard ___________________
\ Sourcing ___________________
\ Procurement Logistics
___________________
\ Supply Chain Management System
___________________
___________________
Introduction
Supply Chain Engineering (SCE) describes a method for the
conceptual construction and realization of logistic and product
oriented supply chains within a company and beyond its borders.
According to SCE, the focus should not be limited to optimizing the
parts of supply chain for effective and efficient functioning, but the
)U
complete value chain needs to be considered in a holistic fashion to
yield the desired efficiency and effectiveness. The most essential
ingredient of SCE is its integral view embodying.
Supply Chain Scoreboard

The Supply Chain Scoreboard tracks a limited number of key
metrics. These metrics should be closely aligned to the company’s
strategic objectives. The measurements usually cover 4 areas:
1 Financial Example: The cost of manufacturing,
warehousing, transportation, etc.
2. Customer Example: Order Fill Rate, Backorder Levels, On
Time Delivery.
(c
3. Internal Business Example: Adherence-to-Plan, Forecast

Error.
4. Training Example: In house Training Hours, APICS
Membership/Certification.
While the scoreboard approach was not specifically designed for
the Supply Chain, it does give a good guidance for your core
Logistics Strategy
192 measures. The central idea is to focus on key metrics that have
Notes real meaning to your company. You do not want to get lost in a sea
S
___________________ of numbers that don’t really mean anything. The Balance
Scorecard approach helps you to keep your measures aligned with
___________________
your objectives. These measures should be tracked over time
___________________
(usually monthly) with specific targets for each.
___________________
Make, Buy and Sourcing Analysis
___________________
PE
___________________ The make-or-buy decision is the act of making a strategic choice
between producing an item internally (in-house) or buying it
___________________
externally (from an outside supplier). The buy side of the decision
___________________ also is referred to as outsourcing. Make-or-buy decisions usually
___________________ arise when a firm that has developed a product or part—or
significantly modified a product or part—is having trouble with
___________________
current suppliers, or has diminishing capacity or changing
demand.
Make-or-buy analysis is conducted at the strategic and operational
level. Obviously, the strategic level is the more long-range of the
two. Variables considered at the strategic level include analysis of
the future, as well as the current environment. Issues like
)U
government regulation, competing firms, and market trends all
have a strategic impact on the make-or-buy decision. Of course,
firms should make items that reinforce or are in-line with their
core competencies. These are areas in which the firm is strongest
and which give the firm a competitive advantage.
The increased existence of firms that utilize the concept of lean
manufacturing has prompted an increase in outsourcing.
Manufacturers are tending to purchase subassemblies rather than
piece parts, and are outsourcing activities ranging from logistics to
administrative services. In their 2003 book World Class Supply
Management, David Burt, Donald Dobler, and Stephen Starling
present a rule of thumb for out-sourcing. It prescribes that a firm
should outsource all items that do not fit one of the following three
categories: (1) the item is critical to the success of the product,
(c
including customer perception of important product attributes;

(2) the item requires specialized design and manufacturing skills
or equipment, and the number of capable and reliable suppliers is
extremely limited; and (3) the item fits well within the firm’s core
competencies, or within those the firm must develop to fulfil future
plans. Items that fit under one of these three categories are
considered strategic in nature and should be produced internally if 193

at all possible. Notes
S
Make-or-buy decisions also occur at the operational level. Analysis ___________________
in separate texts by Burt, Dobler, and Starling, as well as Joel ___________________
Wisner, G. Keong Leong, and Keah-Choon Tan, suggest these
___________________
considerations that favour making a part in-house:
___________________
z Cost considerations (less expensive to make the part)
___________________
PE
z Desire to integrate plant operations
___________________
z Productive use of excess plant capacity to help absorb fixed
___________________
overhead (using existing idle capacity)
___________________
z Need to exert direct control over production and/or quality
___________________
z Better quality control
___________________
z Design secrecy is required to protect proprietary technology
z Unreliable suppliers
z No competent suppliers
z Desire to maintain a stable workforce (in periods of declining
sales)
)U
z Quantity too small to interest a supplier
z Control of lead time, transportation, and warehousing costs
z Greater assurance of continual supply
z Provision of a second source
z Political, social or environmental reasons (union pressure)
z Emotion (e.g., pride)
Factors that may influence firms to buy a part externally include:
z Lack of expertise
z Suppliers’ research and specialized know-how exceeds that of
the buyer
(c
z Cost considerations (less expensive to buy the item)

z Small-volume requirements
z Limited production facilities or insufficient capacity
z Desire to maintain a multiple-source policy
z Indirect managerial control considerations
Logistics Strategy
194 z Procurement and inventory considerations

Notes
S
z Brand preference
___________________
z Item not essential to the firm’s strategy
___________________
The two most important factors to consider in a make-or-buy
___________________
decision are cost and the availability of production capacity. Burt,
___________________ Dobler, and Starling warn that “no other factor is subject to more
___________________ varied interpretation and to greater misunderstanding”. Cost
PE
considerations should include all relevant costs and be long-term
___________________
in nature. Obviously, the buying firm will compare production and
___________________
purchase costs. Burt, Dobler, and Starling provide the major
___________________ elements included in this comparison. Elements of the “make”
___________________ analysis include:
___________________ z Incremental inventory-carrying costs

z Direct labour costs
z Incremental factory overhead costs
z Delivered purchased material costs
z Incremental managerial costs
Any follow-on costs stemming from quality and related
)U
z
problems
z Incremental purchasing costs
z Incremental capital costs
Cost considerations for the “buy” analysis include:
z Purchase price of the part
z Transportation costs
z Receiving and inspection costs
z Incremental purchasing costs
z Any follow-on costs related to quality or service
One will note that six of the costs to consider are incremental. By
(c
definition, incremental costs would not be incurred if the part were

purchased from an outside source. If a firm does not currently have
the capacity to make the part, incremental costs will include
variable costs plus the full portion of fixed overhead allocable to
the part’s manufacture. If the firm has excess capacity that can be
used to produce the part in question, only the variable overhead
caused by production of the parts are considered incremental.
That is, fixed costs, under conditions of sufficient idle capacity, are 195
not incremental and should not be considered as part of the cost to Notes
S
make the part. ___________________
Firms have started to realize the importance of the make-or-buy ___________________
decision to overall manufacturing strategy and the implication it
___________________
can have for employment levels, asset levels, and core
competencies. In response to this, some firms have adopted Total ___________________
Cost of Ownership (TCO) procedures for incorporating non-price ___________________
PE
considerations into the make-or-buy decision. ___________________
___________________
Sourcing
___________________
Companies turn to outsourcing and consulting for many reasons.
___________________
They look to reduce costs, shorten cycle time, improve shareholder
___________________
value, decrease inventory, and focus on core competencies, gain
information technology, increase expertise and more. Likewise,
transport, warehouse, forwarder and other logistics service
providers want to provide outsource services. They want to
improve profits, transition from being a commodity service
provider, gain volumes and throughput by leveraging existing core
logistics service, increase revenues and more. This creates a
)U
mutual need between the two parties. Yet despite this common
interest, half of the outsourcing relationships end unsatisfactorily
within three years. Half are not able to go beyond a buyer-seller
relationship.
The responsibility for the failure often resides with both parties.
Reasons for the failures run the gamut and include:
z Poor project design
z Lack of metrics or Key Performance Indicators (KPIs)
z Use of improper metrics or KPIs
z Not fulfilling expectations of either or both parties
z No clear lines of responsibility and accountability
(c
z Inability to evolve the relationship from short term to long

term and from static to dynamic
Some reasons for failure reflect symptoms, not causes. Failures are
not unique to outsourcing; but outsourcing is unique. Outsourcing
goes beyond transport or warehouse agreements and service.
Supply chain management is one of largest costs and has
Logistics Strategy
196 significant service impact to companies. Some contract logistics

Notes projects are critical to a company’s supply chain and operating
S
___________________ success. Therefore, outsourcing should be designed not to fail,
especially with supply chain management. The impact can be
___________________
significant to the company doing the outsourcing.
___________________
Much is discussed about metrics and Service Level Agreements
___________________
(SLAs) in defining the outsourcing relationship. These should be
___________________ after-the-fact and matter-of-fact results of the project definition
PE
___________________ and design.
___________________ Whether the two parties are trying to develop the contract logistics
___________________
relationship or are striving to make an existing outsourced
program succeed, there are three fundamental issues that must be
___________________
addressed.
___________________
Define what is being outsourced. This may seem obvious. However,
the matter may go much deeper and may obscure the real project
and program. Both parties need to fully understand it that
minimum, discussion should include:
z Is it Transaction or Process? Transactions reflect
assignment of work; process reflects delegation of
responsibility. If the topic is using a forwarder to help with
)U
supplier ocean transport or having a warehouse pick and pack
products and deliver them, then those are transactions. Supply
chain management should be a process. Therefore, if the
contract logistics need is for transactions, then it must be clear
as to what the transactions are, what triggers them, how they
must be performed and, more importantly, how they fit into
the process. However if the topic is managing the import
supply or managing store inventory and replenishment, then
those are processes. When supply chain process is being
outsourced, then very clear definitions of the process must be
developed.
z What is the Condition of the Transaction or Process?
Whether the outsourcing involves transactions or process, it
(c
should be assessed. The logistics activity must be understood.

Outsource providers need to understand how the activity
operates, both as its function and how it fits in the overall
supply chain and company operation. They need to assess as to
process, technology and people. Assessment should address
internal and external gaps and redundancies, interactions,
objectives, performance results—both real and perceived–and
time requirements and demands. Strengths and weaknesses 197

must be identified. Not knowing whether the process is flawed Notes
S
can contribute to the risk of failure. Identifying a flawed ___________________
process up front changes the project dynamics to include
___________________
reengineering to make it work properly.
___________________
Mutual question of “why”. There is a “why” question. Why
does one party want to outsource part of its supply chain ___________________
responsibility? Why does the other party want to take on ___________________
PE
that activity and accountability? Each needs to define its ___________________
motives and more exactly define any hidden reasons. A
___________________
clear explanation is needed and should go beyond
“improve business performance”, “improve productivity”, ___________________
“improve delivery” or similar, abstract reasons. ___________________
Unfulfilled expectations by one or both parties can have ___________________

dramatic impact on sustaining the program. Each needs to
know the desired results and how the outsourcing will
achieve the desired result because the answer can directly
and indirectly affect the project design and operation.
z What is the Desired Outcome? Each party wants something
tactical or perhaps strategic. This has to be clearly expressed.
)U
Both parties need to be clear to each other. This helps set the
implementation plan, timing and direction. At the same time,
expectations should be reasonable. Otherwise the seeds of
outsourcing failure may be sown.
For the company looking to outsource, it can be an attempt to
reduce costs or achieve other benefits that it is unable to
realize internally. A 15% cost reduction goal may be
attainable; while a 40% may be more difficult and require a
different approach as to design, implementation and timing.
Alternatively, the desired outcome could be very different,
such as an effort to transform the business. The company may
want to create a value proposition and capability for customers
that it does not perform now. Or it may be seeking to
(c
transition away from one business into another or other

business transformation. Outsourcing may present the means
to make a significant shift to lean supply chain management.
So the intent goes beyond having a third party perform the
existing activity. It means creating a new operating model,
including change management. The “why” can change the type
Logistics Strategy
198 of outsourcing service provider that the company should be

Notes talking with, such as a 4PL instead of a 3PL.
S
___________________
The firm wanting to perform the outsource activity may be
___________________ looking to increase revenues or profits. It could want a certain
___________________ volume of ocean containers or square feet of warehouse usage
for economies of scale. The provider could also be looking to
___________________
shift into other industries or logistics service niches that have
___________________ greater growth potential. So the intent goes beyond performing
PE
___________________ the existing activity. The provider wants to reposition itself as
an outsource service company.
___________________
___________________
z Are the Risks Identified? There are inherent risks with any
change; and there are risks created with the type of change.
___________________
Outsourcing involves change; so there are risks. Supply chain
___________________ management has more experience with outsourcing than other
business functions. Historically using outside transaction-
activity service providers—trucking companies, public
warehouses, freight forwarders and freight bill payment
services—has occurred in logistics. Experience can change risk
sensitivity; but it should not diminish risk recognition. Also
risk assessment and mitigation should be done for Sarbanes
)U
Oxley Section 404 and for Committee of Sponsoring
Organizations.
Potential for risks can be hidden. These can include:
z Expectations are not Reasonable. The litmus test of
reasonableness should be used to identify risks for each party.
Expectations must be known as to where they are and why.
They must be tangible. The timing of occurrence and impact
should reflect transition, ramp up and learning curve.
z Potential Conflict may Exist Initially between Buyer and
Seller. This means incompatibility with goal congruence. The
basic foundation is between buyer and seller. Moving to
mutual beneficial development and direction can be hindered-
or not with this basic issue.
(c
z Supply Chain Management is a Process that Crosses the

Company. This can put outsourcing and contract logistics
provider in conflict with the traditional organization silos.
z Corporate culture and other differences may exist between the
two parties as to risk aversion that can stifle risk sharing and
project success.
Look beyond the initial twelve months. Outsourcing can 199

start well; keeping it going well can be difficult. Today’s Notes
S
metrics can become outdated. Mutual interests must stay ___________________
aligned even as needs and business can change. Otherwise
___________________
atrophy can set in as the relationship struggles to go from
static, doing the same things repetitively, to dynamic, ___________________
doing it differently. Change is a fact; the rate of change is ___________________

at issue. How to handle change can be a delineator as to
___________________
PE
the end of the arrangement or moving beyond buyer-seller
___________________
to relationship management. The outsourcing must be
able to adapt, to be agile. ___________________
___________________
Manufacturing Logistics
___________________
The area of manufacturing logistics concentrates on managing an
___________________
orderly and economic flow of materials and work-in-process
inventory between the different stages of manufacturing. This
constitutes movement and storage of product, materials, semi-
finished parts and materials between the firm’s facilities.
Manufacturing support is treated as a distinct operating area. This
is because manufacturing support represents the most complex
)U
internal support operations and has one significant difference
when compared with physical distribution. Unlike physical
distribution, which attempts to service the desires of customers
and therefore must accommodate the uncertainty of consumer and
industrial demand, manufacturing support involves supply and
movement requirements that are under the control of the
manufacturing enterprise.
Supply chain capabilities are stretched by the requirements of
quick manufacturing switchover and shorter production runs. This
requires numerous handlings and transfers of materials and
economies of scale have often to be discarded. As the number of
plants with specific production activities of the firm increase, the
manufacturing support system gets to become more complex.
(c
Procurement Logistics
Procurement is concerned with purchasing and arranging in-bound
movement of materials, parts, and/or finished inventory from
suppliers to manufacturing or assembly plants, warehouses, or
retail stores. Whereas physical distribution is concerned with
Logistics Strategy
200 outbound product shipments, it is inbound movement to the buyer

Notes of the product.
S
___________________
Inbound logistics or the process of acquisition of materials is
___________________ typically called purchasing. Materials are involved in the process of
___________________ adding value through manufacturing. Purchasing is concerned
with availability of the desired material assortments where and
___________________
when needed.
___________________
PE
On the operational side, inventory turns is a key performance
___________________ measure that be watched very closely. Let us take an example.
___________________ There are two companies, ‘A’ and ‘B’, who have identical sales and
___________________
profit margins over a one-year period. ‘A’ buys one crore worth of
parts at the beginning of the year. It sells the finished products by
___________________
year’s end at a 10 percent profit, which generates ` 1.1 crore in
___________________ total revenues. ‘B’ uses a more aggressive inventory management
strategy. It buys parts four times during the year, spending only
` 25 lac at a time, and reordering just before running out of
components. Essentially, the company reinvests the same ` 25 lac
to replace sold inventory. By year’s end, ‘B’ generates the same
` 1.1 crore.
However, since ‘B’ is only investing ` 25 lac at a time, it is

)U
spending ` 75 lac less on inventory than ‘A’. Considering an
interest rate of 15 percent, ‘B’ pays an interest of ` 5 lac for
inventory, while ‘A’ pays ` 20 lac. If ‘A’ makes a profit of ` 10 lac,
then ‘B’ has made a profit of ` 25 lac. ‘B’ has also reduced his
capital risk for the year compared to ‘A’. This example shows that
simply by increasing inventory turnover, the company generates
more profit and more free cash flow. The procurement system has
the ability to control inventory turnover as it initiates orders.
Procurement Activities
Materials and parts are often purchased directly from either the
original manufacturer or a specialized industrial wholesaler. The
utilization of direct channels is an important factor in the design of
a supply chain system for procurement. The ability to determine
(c
when and where products are purchased serves to substantially

reduce operational variance compared to purchasing where
operational variances are much lower.
Active Assembly – Maquiladora 201

Notes
S
A maquiladora is a concept often referred to as an operation that
involves manufacturing in a country that is not the client’s and as ___________________
such has an interesting duty or tariff treatment. It normally ___________________

requires a factory, which may import materials and equipment on
___________________
a duty-free and tariff-free basis for assembly or manufacturing and
___________________
then “re-exports” the assembled or manufactured product,
sometimes back to the originating country. ___________________
PE
During the latter half of the sixties, Maquiladora industries ___________________
rapidly expanded both geographically and economically and by ___________________

1985, had become Mexico’s second largest source of income from
___________________
foreign exports, behind oil. Since 1973, Maquiladoras have also
___________________
accounted for nearly half of Mexico’s export assembly. Between
1995 and 2000, exports of assembled products in Mexico tripled, ___________________
and the rate of the industry’s growth amounted to about one new
factory per day. By the late twentieth century, the industry
accounted for approximately 25 percent of Mexico’s gross domestic
product, and 17 percent of total Mexican employment.
Since globalization and physical restructuring have contributed to
the competition and advent of low-cost offshore assembly in places
)U
like China, and countries in Central America, maquiladoras in
Mexico have been on the decline since 2000: According to federal
sources, approximately 529 maquiladoras shut down and
investment in assembly plants decreased by 8.2 percent in 2002.
Despite the decline, there still exist over 3,000 maquiladoras along
the 2,000 mile-long United States – Mexico border, providing
employment for approximately one million workers, and importing
more than $51 billion in supplies into Mexico. As of 2006,
maquiladoras still account for 45 percent of Mexico’s exports.
Maquiladoras, in general, are best represented among operations
that are particularly assembly intensive.
Environmental Degradation
(c
The maquiladora industry contributes indirectly and directly to

environmental degradation in the Mexican-United States
Borderlands. Indirectly, the program forms part of a larger
panoply of influences pulling migrants from central and southern
Mexico to the Borderlands, creating an overload on the region’s
urban infrastructure and its fragile ecology. Directly, the assembly
plants blight the Borderlands environment through undisciplined
Logistics Strategy
202 and illegal disposal of their waste material. Irregular dumping of

Notes hazardous and toxic wastes defines the most egregious example of
S
___________________ the transgression.
___________________ Population has burgeoned in the binational Borderlands,
___________________ particularly on the Mexican side. While Mexico’s rate of growth
equalled 22 percent in the 1980-1990 decenio, the eight most
___________________
important Borderlands cities almost doubled that rate at 43
___________________ percent. Tijuana may well be the world’s most rapidly burgeoning
PE
___________________ large city, having grown 61 percent in the 1980-90 period.
___________________ A number of influences have pushed and pulled central and

___________________
southern Mexicans to the region, most importantly its relative
wealth compared with the rest of the country. In turn, the Mexican
___________________
Borderland’s relative wealth derives from several influences, most
___________________ importantly economic spill over from the United States. The
maquiladora program forms the richest (save the drug industry?)
manifestation of U. S. economic spill over. Potential employment in
the maquiladoras defines a significant pull factor encouraging
Mexican migrants to crowd the Borderlands. In that sense, the
assembly plants explain an indirect contribution to the area’s
environmental problems. They contribute to a situation composed
)U
of too many people massing into a fragile area in a poor country
whose government has neither the financial nor the human
resources to construct and maintain sufficient infrastructure and
services.
More directly, the maquiladora industry’s production and irregular
disposal of waste material blights the region. The assembly plants
dump everything from raw sewage through toxic metals into the
local environment. Numerous reports document the industry’s
unsafe and illegal disposal practices. They include a case of
children being intoxicated at a dump in Ciudad Juárez by sniffing
green rocks covered with a solvent containing toluene; and a
maquiladora that closed and left in an abandoned building a dozen
55-gallon drums of hazardous material. In 1991, the Texas Water
Commission claimed that only sixty percent of the hazardous
(c
wastes going from the U. S. to Mexico were being accounted for

and returned to the U. S. The other 40 percent may be stored on
the Mexican side or disposed of illegally. In 1995, the Mexican
Federal Attorney for Environmental Protection asserted that the
final disposition of 25 percent, or 13,000 tonnes of hazardous and
toxic wastes produced by the Maquiladora industry were not 203

accounted for. Notes
S
A study conducted by an environmental action group in several ___________________
Borderlands cities provides additional evidence. In 1990-91, the ___________________
National Toxics Campaign Fund – Citizens’ Environmental
___________________
Laboratory sampled waterways in several Borderlands cities
adjacent to or near suspected assembly plants. ___________________
___________________
PE
Chronologically, the most serious problems with hazardous and
toxic wastes derive from relatively recent times. The composition ___________________
(quality) of the industry has changed and the numbers of plants ___________________
(quantity) have multiplied, thereby creating new conditions giving
___________________
rise to new problems dating from the mid-1980s. The apparel
industry defined the single major component of the maquiladora ___________________
industry from its foundation in 1965 through the mid-1970s. A ___________________

problem with jean washing contributing to water pollution
surfaced in El Paso/Ciudad Juarez in the late 1970s, but the
apparel industry never constituted a serious threat to the physical
environment of the Borderlands.
Beginning in the 1980s, however, electronics, chemical, and
furniture industries moved to the area, posing the threat of
)U
environmental pollution. The electronics plants multiplied rapidly,
and by the early 1980s electronics eclipsed apparels as the largest
component of the industry. From 1979 through 1985, the number
of apparel plants in the industry shrunk by 10 percent to 108,
while the numbers of electronic equipment and electronic
component plants increased by 40 and 60 percent, respectively, to a
combined total of 274. By the early 1990s, the electronics industry
came to dominate the Borderlands assembly plants. In a study of
Tijuana, Ciudad Juárez, and Monterrey, electronics installations
accounted for 65 percent of all maquiladoras and fully 80 percent of
all assembly plant employment in those three important cities.6
The electronics component of the maquiladora industry introduced
significant new threats of environmental degradation. The
industry employs large volumes of industrial solvents in its
(c
productive process, the most serious menace to surface and ground

water in the binational Borderlands.
Though never looming so large as electronics, the chemical
industry also moved to the Borderlands in the late 1980s. Only
three plants existed in 1985, growing to 51 by 1989 and more than
doubling to 110 by 1992 and continuing to grow thereafter. From
Logistics Strategy
204 January 1992 to January 1995, employment in the chemical plants

Notes
Activity grew from just over 8000 to more than 11,600. The chemical
S
Study a case example of
___________________ industry poses obvious environmental dangers, eliciting damnation
managing supply chain global
competitiveness and prepare and vigilance from environmental activists in the Borderlands.8
___________________
a brief report on it. Finally, significant segments of California’s furniture industry
___________________
moved to the Mexican Borderlands. The U.S.-owned furniture
___________________ plants fled newly enacted restrictions on the use of solvent-based
___________________ paints and requirements to install spray chambers to contain
PE
fumes.
___________________

___________________ 1. .................. is a concept often referred to as an
___________________ operation that involves manufacturing in a country
that is not the client’s and as such has an interesting
duty or tariff treatment.
2. .................. logistics or the process of acquisition of
materials is typically called purchasing.
Supply Chain Management System

)U
In the context of intensifying global competitiveness, only those
companies are going to be successful that are able to provide goods
and services to customer in time and in a cost effective manner.
The customer is focus and customer satisfaction is the objective for
competitive advantage. There is significant evidence that as
organisations work together for a common goal and forge
themselves into a chain, every link in supply chain adds to
competitive advantage.
Historically built on Procurement, Operations and Logistics
foundations; Supply Chain Management exceeds these traditional
concepts. The conceptual basis of the supply chain is based on two
core ideas.
(c
The first is that practically every product that reaches an end user
represents the cumulative effort of multiple organizations. These
organisations are referred to collectively as the supply chain.
The second idea is that organisations have to pay attention to what
is happening outside their “four walls” and manage the entire
chain of activities that ultimately delivers products to the final
customer in order to maximise profits.
205
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
Figure 13.1: Value vs Time
___________________
SCM maximises profit by integrating three key flows across the
boundaries of the companies that form the supply chain: flow of ___________________
value (product/materials), information, and funds. It starts with ___________________
the raw material and goes through to the end user or customer.
___________________
Successful integration or coordination of these three flows produces
improved efficiency and effectiveness for business organizations.
Supply Chain Flows

The figure shows the flows in a supply chain. While the
product/service flows outwards from the manufacturer to the
customer, both information and funds flow from the customer to
)U
the manufacturer.
Product/Material Flow
The product/material flow in a supply chain is concerned with the
procurement, movement and storage of materials and finished
products. For a large manufacturer, these operations may consist
of thousands of components, raw materials and parts and their
movements, which ultimately culminate in the delivery of products
to an industrial user, retailer, wholesaler, dealer, or other
customer. For a large retailer, supply chain operations may
commence with the procurement of products from the
manufacturer and may terminate with consumer pickup or
delivery of the product.
(c
For better understanding, it is useful to divide product/service

flows into three areas: procurement, manufacturing support, and
physical distribution.
Procurement
Procurement is concerned with purchasing and arranging in-bound
movement of materials, parts, and/or finished inventory from
Logistics Strategy
206 suppliers to manufacturing or assembly plants, warehouses, or

Notes retail stores. Whereas physical distribution is concerned with
S
___________________ outbound product shipments, it is inbound movement to the buyer
of the product.
___________________
___________________ Inbound logistics or the process of acquisition of materials is

typically called purchasing. Materials are involved in the process of
___________________
adding value through manufacturing. Purchasing is concerned
___________________ with availability of the desired material assortments where and
PE
___________________ when needed.
___________________ On the operational side, inventory turns is a key performance

___________________
measure that be watched very closely. Let us take an example.
There are two companies, ‘A’ and ‘B’, who have identical sales and
___________________
profit margins over a one-year period. ‘A’ buys one crore worth of
___________________ parts at the beginning of the year. It sells the finished products by
year’s end at a 10 percent profit, which generates ` 1.1 crore in
total revenues. ‘B’ uses a more aggressive inventory management
strategy. It buys parts four times during the year, spending only
` 25 lac at a time, and reordering just before running out of
components. Essentially, the company reinvests the same ` 25 lac
to replace sold inventory. By year’s end, ‘B’ generates the same
)U
` 1.1 crore.
However, since ‘B’ is only investing ` 25 lac at a time, it is

spending ` 75 lac less on inventory than ‘A’. Considering an
interest rate of 15 percent, ‘B’ pays an interest of ` 5 lac for
inventory, while ‘A’ pays ` 20 lac. If ‘A’ makes a profit of ` 10 lac,
then ‘B’ has made a profit of ` 25 lac. ‘B’ has also reduced his
capital risk for the year compared to ‘A’. This example shows that
simply by increasing inventory turnover, the company generates
more profit and more free cash flow. The procurement system has
the ability to control inventory turnover as it initiates orders.
Procurement Activities
Materials and parts are often purchased directly from either the
original manufacturer or a specialized industrial wholesaler. The
(c
utilization of direct channels is an important factor in the design of

a supply chain system for procurement. The ability to determine
when and where products are purchased serves to substantially
reduce operational variance compared to purchasing where
operational variances are much lower.
Physical Distribution 207

Notes
S
The area of physical distribution concerns movement of a finished
product to customers. In its physical distribution operations, each ___________________
firm is only one of many participants in an overall supply chain. ___________________
A unique characteristic of outbound logistics is that the customer ___________________

base it services is typically more than the number of suppliers a ___________________
firm uses. It is more complex than inbound logistics, since
___________________
PE
customer order processing handles orders in response to customers’
requirements; random ordering must be accommodated by the ___________________
physical distribution system. ___________________
In retailing and wholesaling, buying is the most widely used term ___________________
for procurement. It is also called outbound logistics. Products ___________________
(inventory that is available for consumer purchase) are ready for
___________________
consumption. The customer is the final destination of a marketing
channel. It is through the physical distribution process that the
time and space of customer service become an integral part of
marketing, linking marketing channels with its customers.
The interface between these two, marketing and the supply chain,
is critical. Very often there is a potential for conflict in this
)U
relationship. In a typical organization, marketing tries to
accommodate customer requirements, while manufacturing
requires long stable production runs to control costs. Inventory is
used to reconcile the difference in perspectives of marketing and
manufacturing. This compels supplies to use forward deployment
throughout the system on the basis of forecasted sales.
This is often the reason for the confrontation with marketing as
there is always the possibility that inventories are moved to the
wrong markets and at the wrong time. The key to understanding
physical distribution dynamics is to realize that customers initiate
the process by placing an order. Although similar or even identical
requirements may be involved, the degree of managerial control
and risk related to performance failure varies substantially
between physical distribution and procurement.
(c
Typical physical distribution involves five activities: order

transmission, order processing, order selection, order
transportation and customer delivery. These activities have been
shown in the Figure 13.2.
Logistics Strategy
208
Notes
S
___________________
___________________
___________________
___________________ Figure 13.2: Typical Physical Distribution

___________________
PE
Physical Distribution Cycle Activities
___________________
Analysis of how customers order products is necessary to minimize
___________________
operational variance and simplify transactions. This requires
___________________
improving forecast accuracy. There should be proper coordination
___________________ between customers and order management to reduce uncertainties.
___________________ And finally, the physical distribution system should be designed to
be as flexible as possible.
Supply chain management encompasses both physical distribution
and supply management. It is intricately involved in the design
and operation of the physical, managerial, informational and
financial systems needed to transfer goods and services from
vendor to customer (point of production to point of consumption) in
)U
an effective and efficient manner.
In a sense, the supply chain concept transcends the single company
concept. With customers more demanding and competition
escalating, a single company cannot successfully compete by itself.
Therefore, firms seek to secure higher performance through inter-
firm linkages to perform better than it would be possible by firms
operating individually. This is the strategic role of SCM. This is
why firms enter into inter-firm collaborative arrangements
through the supply chain and share risks and rewards.
The relationship of Logistics Management and SCM is reflected in
the definition of Supply Chain Management adopted by the
Council of Logistics Management. It states:
Supply Chain Management encompasses the planning and
(c
management of all activities involved in sourcing and

procurement, conversion, and all logistics management activities.
Importantly, it also includes coordination and collaboration with
channel partners, which can be suppliers, intermediaries, third-
party service providers, and customers. In essence, supply chain
management integrates supply and demand management within
and across companies.
The Council of Logistics Management position links the two 209

functions. Theoretically, the natural linkage between the concepts Notes
S
can be found in the value chain framework. Within each ___________________
organization, such as a manufacturer, the supply chain includes all
___________________
functions involved in receiving and filling a customer request. The
functions that are involved include, but are not limited to, new ___________________
product development, marketing, operations, distribution, finance, ___________________

and customer service. The decisions are trade-off between price,
___________________
PE
inventory, and responsiveness.
___________________
A typical supply chain may involve a variety of stages. These
___________________
supply chain stages include:
___________________
z Customers
___________________
z Retailers
___________________
z Wholesalers/Distributors
z Manufacturers
z Component/Raw material suppliers
)U
Figure 13.3: Physical Distribution Cycle
The Supply Chain

The concept of a supply chain is shown in the figure. Though many
stages are shown in the figure, each stage need not be present in a
supply chain. The number of stages included should meet the
primary purpose for the existence of the supply chain, i.e., is to
satisfy customer needs. It is in the process that the organization
generates profits for itself.
(c
Its activities begin with a customer order and ends when a

satisfied customer has paid for his or her purchase. Generally,
more than one player is involved at each stage. A manufacturer
may receive materials from several suppliers and then supply
several distributors. Thus, most supply chains are actually
networks and form an integral part of the value chain.
Logistics Strategy
210 In order to consider the concepts between, we need to look at the

Notes differences between logistics and SCM. Logistics deals with the
S
___________________ efficient management of the demand and supply function within
the firm. In contrast, SCM tries to capture the dynamic nature of
___________________
the value creation itself, and therefore aims for an effective
___________________
management response in the demand and supply chain over the
___________________ longer run.
___________________ The key objective in SCM is profit maximization over the long run,
PE
___________________ while logistics is supply driven and is focused on cost minimization
within a limited context. However, the relationship is reflected in
___________________
the implementation of SCM programs – these generally lead to
___________________
improved logistics performance, understandably because cost
___________________ minimization is one of the factors contributing to profit
___________________ maximization.
)U
Figure 13.4: Supply Chain
The value a supply chain generates is the difference between what

the final product is worth to the customer and the effort the supply
chain expends in filling the customer’s request. The supply chain
profitability is based on the effort involved in the appropriate
management of the flows between and among stages in a supply
chain. Unlike the traditional measure of organizational success in
terms of the profits at an individual stage, supply chain success is
measured in terms of supply chain profitability. The figure shows
the supply chain as a network and also as a part of the value
chain.
Supply Chain is Part of the Value chain

(c
The difference between the two is reflected in how logistics and

SCM have evolved. Specifically, the basic differences between the
two areas lie along the following dimensions:
The financial system is implicit in SCM decisions such as in
pricing, procurement, collaborations etc. However, the financial
system is explicitly added to logistics in the control and 211

informational aspects of logistical systems and is focused on cash Notes
S
flow, in particular, the mechanism of credit and advance payments, ___________________
and cash transactions associated with dispatches or purchases.
___________________
Logistics is deeply involved in the delivery aspect of service while
___________________
the supply chain is more customer-focused and involved in other
service functions as well such as installation, providing ___________________
information about product features and availability, after sales ___________________
PE
service, etc. The perspective of a total service function is important ___________________
here.
___________________
The physical scope of SCM covers the entire length and breadth of
___________________
activities from vendor to customer i.e., the stream of activities from
raw material to consumption (including conversion), while the ___________________
logistics function is typically restricted to movement and storage of ___________________

goods.
Finally, while the concern of logistics is geared towards efficiency
to achieve the goals of service at minimum cost, the SCM concern
is wider with the primary focus to enhance the effectiveness of
delivery to the customer. Value is delivered through the defined
business activity of the organisation in the form of flow of goods
)U
and services. Apart from the value flow, there are two associated
flows in a supply chain: information flow and fund flow.
One can identify a number of drivers for a paradigm shift from
logistics to SCM. These include the expectations of customer for
increased value addition which reflects in response time
sensitivity, need for reliability, cost consciousness and information
sensitivity; the competitive advantage firms enjoy due to lower
lead times and operational costs; the revolution in the field of
information technology, which has enabled firms to initiate
changes in distribution management; the recognition by
managements for continuous improvement and integrating all
activities and processes involved, from sourcing to consumption, in
marketing; and finally the perception of firms that inventories are
(c
money locked up in poor use of working capital, and lead to higher

lead times for procurement, manufacture and distribution.
Some authors stress the fact that these disciplines have gone
through several evolutionary stages starting with traditional
procurement and materials management in the 1970s, which
evolved into logistics management in the 1980s and then supply
chain management in the 1990s. According to this school of
Logistics Strategy
212 thought, logistics is a function, whereas SCM reflects the process

Notes oriented view of the business activity. In many organisations, a
S
___________________ supply chain management function has replaced a logistics
function, in a way signalling the natural evolution of the two
___________________
concepts.
___________________

PE
___________________ 1. The ................... a supply chain generates is the
___________________ difference between what the final product is worth to
the customer and the effort the supply chain expends
___________________
in filling the customer’s request.
___________________
2. The area of physical distribution concerns .................
___________________
of a finished product to customers.
Summary
Firms have started to realize the importance of the supply chain
re-engineering to overall manufacturing strategy and the
implication it can have for employment levels, asset levels, and
)U
core competencies. In response to this, some firms have adopted
Total Cost of Ownership (TCO) procedures for incorporating non-
price considerations into the make-or-buy decision.
Lesson End Activity

Prepare a project report on the issues and challenges of supply
chain management in India.
Keywords
Make-or-buy Decision: Make-or-buy decision is the act of making
a strategic choice between producing an item internally (in-house)
or buying it externally.
(c
Procurement: Procurement is concerned with purchasing and

arranging in-bound movement of materials, parts, and/or finished
inventory from suppliers to manufacturing or assembly plants,
warehouses, or retail stores.
Purchasing: Purchasing is concerned with availability of the
desired material assortments where and when needed.
Maquiladora: Maquiladora is a concept often referred to as an 213

operation that involves manufacturing in a country that is not the Notes
S
client’s and as such has an interesting duty or tariff treatment. ___________________
___________________
___________________
1. Explain supply chain scoreboard. ___________________
2. What is manufacturing logistics? ___________________
PE
3. Explain procurement logistics. ___________________
4. What is supply chain management systems? ___________________
___________________
Further Readings ___________________
___________________
Books
Education.
)U
Web Readings
(c
Logistics Strategy
214
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 14: Transportation Planning
Unit 14
215
Notes
S
Transportation Planning
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Efficient Networks ___________________
\ Modes and Carrier Selections ___________________
\ Transportation Management System
___________________
___________________
Introduction
___________________
The transportation system is the physical link connecting a
company with the customers, raw material suppliers, plants,
warehouses and distribution channel members. It is interesting to
note that all these elements of logistic system are fixed points,
transportation is the connecting medium. The better is the
performance and efficiency of transportation system the better will
)U
be organisational performance in terms of cost and customer’s
satisfaction. Knowledge of logistics and transportation is
fundamental to the operations of any business. Transportation
adds value to the goods by providing time and place utility, by
ensuring availability of items when they are needed, and where
they are needed. For most companies there is a geographical
spread between the source and market of goods produced because
of economies of scale and mass production, specialization of labour,
infrastructural facilities, etc. Transportation is the connecting link.
In any organisation involved in manufacturing or production of
goods and services, management of logistics assumes significance.
Appropriate planning, implementing and controlling the flow of
goods, its storage and the effectiveness with which several
activities follow, from the point of origin, to the point of
(c
consumption, occupies a significant place in modern business. The

function of logistics includes sourcing, procurement, production
planning, scheduling, packaging, assembly and customer services.
Each one of these activities is very important. The developments in
the field of transportation and communication are resulting in
emergence of global supply chains and logistics processes.
Technology is also having impact on logistics management.
Logistics Strategy
216
Efficient Networks
Notes
Activity
S
Research on the contribution
System efficiency can be improved by increasing the use of energy-
___________________
of various types of efficient modes of transportation. Further, increasing the efficiency
transportation facilities
___________________ in
India’s GDP. of particular modes, and increasing accessibility through denser
___________________ land use patterns that facilitate alternative modes such as
___________________
walking, biking, and transit can also improve system efficiency.
___________________ Despite very large differences in the energy intensities of freight
PE
modes, attempts to shift to more energy-efficient modes, such as
___________________
from truck to rail or from rail to water, run counter to increasing
___________________ requirements for speed and reliability. The greatest opportunity
___________________ for improving freight efficiency may lie in providing infrastructure
___________________
that allows freight to be quickly, efficiently, and inexpensively
transferred among modes.
___________________
For passenger travel within the United States, energy use per
passenger is similar across modes in large part because transit
occupancy rates are low. A suite of policies could promote the use
of transit and ease inter-modal transfers.
Transportation demand is influenced by the geographic
distribution of people and places, especially the density of
)U
development and zoning. Studies have shown that a combination of
land use and transit policies might succeed in reducing vehicle
miles in large urban areas by 5 to 10 percent over thirty years, if
combined with policies to charge for parking and for use of
congested roads. Vehicle travel might be reduced by 10 to 25
percent by changing the design of subdivision development to
accommodate walking and cycling and mixed land uses to reduce
the need for motorized trips.
Land use and transportation infrastructure policies will have little
immediate impact on GHG emissions, but could be among the most
important policies in the long run. Investments in transit
infrastructure and land use policies favouring transit-oriented
development not only reduce automobile trips, but also increase
transit occupancy rates and density of development. Moreover,
(c
there are other benefits from more efficient land use, including
reducing traffic congestion, protecting habitats, and improving air
quality.
Policy options for increasing transportation system efficiency
include:
Investment and incentives for more efficient transportation modes. 217

For instance, funding could be increased for highly efficient rail Notes
S
systems or Bus Rapid Transit (BRT). Another way to encourage ___________________
more-efficient modes would be to increase the amount employers
___________________
provide to their employees for transit fare on a tax-free basis, and
to extend the benefit to commuters who walk or bike. This would ___________________
balance the untaxed parking benefits many employers provide. It ___________________

would also save the employers money since they do not have to pay
___________________
PE
payroll taxes on the amount of employee income excluded under
___________________
such benefit plans.
___________________
Investment in intermodal infrastructure. This would provide
funding for infrastructure that facilitates the transfer of freight ___________________
and passengers between modes of transportation, such as rail lines ___________________
to ports, transit lines to airports, and better parking facilities and
___________________
car-sharing services at transit stations. Providing alternative
revenue sources for airports might be especially important, given
that many airports now derive half of their revenue from their
parking garages.
Allowing highly efficient vehicles on HOV lanes. Highly efficient
vehicles could be granted special access to High Occupancy Vehicle
)U
lanes.
“Smart growth” policies. Integrating land-use and transportation
planning would help to minimize sprawl and promote easy access
to public transit.
Intelligent Transportation Systems. Computers and global
positioning satellites are already being used to route long-haul
trucks more efficiently. Intelligent transportation systems may
save both time and energy by finding the most efficient routes for
auto and transit users as well.
Use of climate-friendly materials. Using recycled materials in
roadbeds or for road surfacing could reduce GHG emissions. For
example, substituting coal fly ash for cement can significantly
reduce greenhouse gas emissions. Every tonne of coal fly ash
(c
substituted for cement reduces life-cycle GHG emissions by almost

a tonne. The adoption of performance measures for pavement, for
example under the Interstate Maintenance and Bridge program,
would be one policy option. Requiring the use of longer-lasting
pavement could also reduce congestion caused by work zones for
repaving roads and filling potholes.
Logistics Strategy
218
Shipment Planning
Notes
S
Indian shipping tonnage, which was only 1.92 lakh Gross
___________________
Registered Tonnage (GRT) on the eve of independence, now stands
___________________ at 7.70 million GT with 669 vessels as on 31.12.2004. The average
___________________ age of the Indian fleet is 15 years, which compares favourably with
the average age of the world fleet. There are about 670 Indian
___________________
vessels totalling 8.5 million GRT. The position of the Indian
___________________ tonnage as on 31.12.2004 is as under:
PE
___________________
Table 14.1: Indian Shipping Tonnage as on 31.12.2005
___________________
Coastal Overseas Total
No. of No. of No. of
___________________ Vessels
GRT
Vessels
GRT
Vessels
GRT
Net
___________________ operating 454 808392 215 6892568 609 7700960
Tonnage
___________________
The importance of shipping planning is due to the fact that 95
percent of Indian exports and imports by volume are by sea.
However, about 70 percent of the cargo is moved by foreign
shipping companies. While availability of shipping per se is not a
problem for the trade, the policy on promoting Indian shipping is
ambiguous.
)U
There is a growth of nearly 15 percent in container traffic. There is
also a large growth potential in coastal shipping, especially after
the completion of the Sethusamudram Ship Canal Project. Even
now, there is greater interest in coastal shipping as road and rail
modes are quite congested and expensive. For example, Gujarat
Ambuja moves cement as clinkers through coastal shipping to
Cochin, where it has established a grinding unit for its markets in
South India, saving nearly 50 percent of its logistics costs. The
issues facing the shipping industry are technology upgradation,
increased container carrying capacity and focus on coastal
shipping.
Pipeline Operators
In India, we have an impressive list of crude oil, product and gas
(c
pipelines installation, both on shore as well as off shore. Currently,

all the existing oil product pipelines, totalling about 4,000 km in
length, are owned by the Indian Oil Corporation and the total
transport of oil product is about 16 MTPA. Gas Authority of India
has 4,600 km of gas pipelines and 1,260 km of LPG pipelines. The
company has already submitted plans for setting up eight trunk
lines to complete a nationwide gas grid involving ` 5,887 crore
investments over the next five years. Recently (1997), a new 219
petroleum product pipeline company, Petronet India, has been Notes
S
formed by three major public sector petroleum companies. Petronet ___________________
has plans to lay nearly 1,700 km of pipelines in the near future to
___________________
transport initially 18 MTPA of petroleum products initially.
Reliance Industries is also constructing a 3,000 km pipeline ___________________
network, cutting across seven states to carry petroleum products ___________________

from Jamnagar to Hyderabad.
___________________
PE
It is believed that pipeline technology will play an increasing role ___________________
in freight transport in India in the 21st century. India has unveiled
___________________
an ambitious $22.4 billion pan-Asian gas grid and oil security
pipeline system. ___________________
The grid has four principal elements. The first would extend the ___________________
existing Baku-Tbilisi-Ceyhan pipeline system down to the Red Sea ___________________

via Syria, Jordan, and Saudi Arabia, allowing Caspian crudes to be
exported easily to the Indian Ocean littoral.
Second is the Iran-Pakistan-India pipeline, with the possibility of
two additional sourcing spurs, one from the Caspian-Turkmenistan
region to Iran, the other from Turkmenistan via Afghanistan.
The third element would be a pipeline system connecting eastern
)U
India to Myanmar and Southwestern China with one connection
running from Sittwe on the Burmese Bay of Bengal coast to
Mizoram, Manipur, and Assam into China, eventually connecting
up to the West-East China gas pipeline near Shaanxi, the other
from Yangon to Kunming.
The fourth element would involve the laying of pipelines that
would connect the Sakhalin deposits in Russia to Japan, China,
and South Korea.
Check Your Progress

Fill in the blanks:
1. ..................... demand is influenced by the geographic
(c
distribution of people and places, especially the

density of development and zoning.
2. Investments in ........................ infrastructure and land
use policies favouring transit-oriented development
not only reduce automobile trips, but also increase
transit occupancy rates and density of development.
Logistics Strategy
220
Modes and Carrier Selections
Notes
Activity
S
Explain briefly about modes
Transportation infrastructure can broadly be classified as
___________________
and carries selections. hardware and software. Hardware consists of physical assets that
___________________ comprise terminals, storage facilities, right of way for movement
___________________ and vehicles/equipment. Software, which is essentially the service
___________________
superstructure, consists primarily of maintenance, operations and
value-added services.
___________________
PE
The nature of the infrastructure also determines a variety of
___________________
economic and legal characteristics for each mode or inter-modal
___________________ (multimodal) system. A mode identifies the basic transportation
___________________ method or form. Bulk goods are typically transported in large
___________________
shipment sizes. Therefore, dedicated vehicles and specialised
modes of transport and handling are important. Industrial goods
___________________
have high value and are often critical. Therefore, there is a need
for speedier transport of goods. The selection of the mode of
transportation is based on these criteria.
Carriers
The carrier, as the intermediary, takes a somewhat different
perspective. Carriers desire to maximize their revenue associated
)U
with the transaction while minimizing the costs necessary to
complete the transaction. The perspective suggests that a carrier
wants to charge the highest rate that the shipper (or consignee)
will accept and minimize the labour, fuel, and vehicle costs
required to move the goods. To achieve this objective, the carrier
desires flexibility in pickup and delivery times to allow individual
loads to be consolidated into economic moves.
Road Network
Road freight has the advantage of transporting cargo from point to
point without stopovers. As road networks improve, road freight is
stated to play a more significant role in the transportation of
goods.
(c
India has one of the largest road networks in the world (over 3.3
million km in 2002). The road network has expanded from 0.4
million km to 3.3 million km, over an eight-fold increase in terms
of length during 1951 to 2002. However, the upgrading of roads by
way of widening of carriage ways, improved surface quality, and
strengthening/reconstruction of old/weak bridges and culverts has
not matched this phenomenal growth in traffic.
Table 14.2: Total and Surfaced Road Infrastructure 221

Notes
S
Total/
India/Category 1998 1999 2000 2001(P) 2002(P)
Surfaced
1 2 3 4 5 6 7
___________________
A. Highways T 1822874 1888261 1953843 1967005 1981409 ___________________

S 1079020 1124064 1146232 1166209 1175353
B. Urban Roads T 236055 237866 248408 252001 250122
___________________
S 178877 180558 188325 191797 190102
___________________
C. Project Roads T 269427 270523 213827 223665 225116
S 50523 50758 56041 56541 55034 ___________________
PE
D. Rural Roads T --- --- --- 3996 26697
S --- --- --- --- ---
___________________
INDIA T (3228356)# (3296650)# (3316078)# (3346667)# (3383344)#
___________________
S (1491622)# (1538582)# (1573800)# (1597749)# (1603691)#
___________________
National Highways constitute 65,569 km and State Highways
___________________
constitute 135,546 km of surfaced roads.
___________________
The classification of roads and the system network is shown in
Table 14.2. Around 50 percent of the roads are surfaced. However,
only 20 percent of the surfaced roads are estimated to be in good
condition. This compares unfavourably with other countries
(Indonesia and Brazil 30 percent, Korea 70 percent, Japan and
U.S. more than 85 percent).
)U
National Highways (NHs) are the main arterial roads connecting
ports, state capitals, industrial and tourist centres, and
neighbouring countries. NHs constitute 65,569 kilometres, less
than 2 percent of the total road network, but carry nearly 40
percent of the total road traffic. Their growth in quantitative terms
has been rather gradual, from 22,255 km in 1951, to the present
figure of around 58,000 km. Out of the total 195,00 km. of National
and State Highways, only 2 percent of their length is four-lane, 34
percent two-lane and 64 percent single-lane. As far as NHs are
concerned, only 5 percent of their length is four-lane, 80 percent
two-lane and 15 percent continues to be single-lane. As per present
estimate, road network carry nearly 65% of freight and 85% of
passenger traffic.
However, the industry is coping with an inadequate and poor
(c
quality of road network. It suffers from a near absence of

technological improvements in the design and manufacture of
vehicles. The industry also suffers from the problems of structure,
proper legislative measures to regulate and control, financing,
problems of inter-state barriers, technological up grade, lack of
traffic education and awareness.
Logistics Strategy
222 The deficiencies in the road network are causing huge economic
Notes losses because of slow transportation. These deficiencies also
S
___________________ contribute to a high rate of road accidents. The delay on the roads
also results in high inventory costs for the industry, thus affecting
___________________
its competitiveness vis-à-vis international industry operating on
___________________
JIT (just-in-time) inventory principles. There is a need to create
___________________ expressways to allow for rapid, unhindered and safe movement of
___________________ fast moving vehicles. For medium traffic density corridors,
PE
widening to two lanes and strengthening of pavement and support
___________________
infrastructure would be essential. For low traffic density roads,
___________________ construction of missing links and improvement of riding quality
___________________ and safety need to be taken up.
___________________ In order to cover these deficiencies, the government had embarked
___________________ upon a massive National Highways Development Project (NHDP)
in the country. Under the first two phases of the project i.e. NHDP
Phase-I and NHDP Phase-II, about 14,279 km length of National
Highways are proposed to be upgraded to 4 or 6 lane at a total
estimated cost of `64,639 crore.
Railways
)U
Handling of bulk products like steel, iron ore or cement etc. is quite
different from handling packaged products like baby food,
cosmetics, etc. In the case of bulk products, shipment size is an
important decision. Such bulk products are generally transported
through the Railways.
The characteristics of Railways as a transportation mode are as
follows:
1. Rail network has a capability to transport large shipments
economically with more frequency.
2. Railroad operations incur high fixed costs because of expensive
equipment, right-of-way (Railways maintain their own track),
switching yards and terminals.
3. Railways have relatively low variable operating costs.
(c
4. The replacement of steam by diesel power has considerably

reduced the variable cost per kg/km and electrification has
further provided for more reductions.
5. Bulk industries and heavy manufacturing use Railways more
frequently.
6. Railways can improve the effectiveness of transportation by 223

having alliances with other modes. Notes
S
India’s railroad system is the government’s largest public ___________________
enterprise. Its route length extends 62,458 kilometres. The ___________________
railroads of India are the fourth most heavily used system in the
___________________
world, which suggests the large investment made in rail
transportation. The railroad system employs around 1.7 million ___________________
people and carries around 66 percent of India’s goods traffic (The ___________________
PE
freight traffic in 2005-06 was estimated to be around 660-670 ___________________
million tonnes i.e. around 450 billion Net Tonne Kilometres) and
___________________
40 percent of passenger traffic (5.5 billion passenger journeys in
FY 2004). 89% of its freight traffic is contributed by eight major ___________________
commodities, viz. coal, fertiliser, cement, petroleum products, food ___________________
grain, finished steel, iron ore and raw material to steel plants,
___________________
which constitute the core sector of the economy. The balance 11%
is ‘other’ commodities moving in bulk and in containers.
Successive policy statements and the Plan documents have
recommended that the Railways should be given the lead role in
the transport sector because of their greater energy efficiency,
eco-friendliness and relative safety. However, the Railways have
)U
continued to yield their dominant position to the road transport.
The main reason for this continual slide in the Railways share has
been the inability of the system to cope with the traffic growth of
the growing economy. Faced with capacity constraints, the Railway
system chose to concentrate on the movement of bulk materials for
the core sectors like power, steel and cement.
Railways has lost its place in the consumer goods and durables
markets, which often recorded higher growth rates than the bulk
sectors. In the bulk segment, it is a major player, but it could be
pricing itself out because of consistent fare increases and delays in
delivering consignments. Indian Railways loss of custom is also
attributable to poor qualitative performance, e.g. customer
orientation. This is reflected in wagon availability, for example.
Although wagon utilisation is going up, the time taken for the
(c
customer to get a wagon is increasing, with attendant uncertainty.

Though the Railways has shown a turnaround in the recent past, it
remains to be seen how this reflects in bringing back its lost
custom in the near future.
Logistics Strategy
224
Ports and Inland River Transport
Notes
S
Water-based transport is effective as, operating costs of fuel are
___________________
low and environmental pollution is lower than for corresponding
___________________ volumes of movement by road, rail or air. A major advantage is
___________________ that the main infrastructure – the waterway – is often naturally
available.
___________________
The major ports handled a total traffic of 344.8 million tonnes
___________________
PE
during the financial 2003-04 and 276 million tonnes in the
___________________
financial year 2004-05 in the period of April to December, 2004.
___________________ The aggregate capacity of the major ports has been 389.50 million
___________________ tonnes per annum as compared to 344.80 million tonnes handled
during 2003-04.
___________________
The predominant commodities handled at these ports are POL (42
___________________
percent), iron ore (18 percent), coal (15 percent), containers (8
percent), fertilizers (5 percent) others (12 percent). Major increases
in traffic were observed in food grains (26.7 percent), other liquids
(33.3 percent) and containerized cargo (19.1 percent). The
composition of traffic has undergone significant changes in recent
years. Berths in India, very often, are occupied 100 percent leaving
no time for maintenance.
)U
The major performance indicators for the ports during the year
show the average turnaround time of 3.38 days, during 2004 and
the average output per ship berth day for all Major Ports taken
together is 8838 tonnes. Though this shows an improvement over
previous years, Indian ports are characterised by the following:
z Ships have to wait long in the channel for berthing, and
productivity in loading and unloading is low. The national
average turn-around time of vessels is much higher than
international ports in the neighbourhood, e.g. Singapore,
Dubai, etc.
z It is labour-intensive, and mechanisation process is non-
existent or slow.
(c
z Night navigation is not available, and ships have to wait for

daylight.
z Equipment used is outdated and obsolete.
z Restrictions in navigation channels do not allow bigger vessels
to be berthed.
z Handing vessels and feeder vessels in container berths is time 225

consuming. Notes
S
z The road links to ports are insufficient and badly maintained. ___________________
z Lack of coordination between ports and the custom authorities ___________________
delays quicker dispensation of documentation and goods. ___________________
Table 14.3: Operational Efficiency of some Major Ports in 2004-05 ___________________
Port Average Percentage of Average ___________________
PE
Turnaround Time Non Working Output per
(days) Time to Total Ship Berth Day ___________________
Stay at Berth (in tonnes)
___________________
Kolkata 2.66 37% 3,771
___________________
Haldia 2.39 34% 8,359
Paradip 2.72 31% 11,048 ___________________
Visakhapatnam 2.12 21% 12,241 ___________________
The efficiency of some major ports in India is shown in the table
above. These are extremely poor compared to international
standards. It is, therefore, imperative that ports improve and they
are developed to provide more efficient stacking, loading,
unloading and evacuating of cargo. Considering the competition in
the geographical vicinity, there are moves to simplify and
)U
rationalise port tariffs and restructure ports to ensure a lean and
responsive organisation.
There are also efforts afoot for attracting private sector
participation in major ports. At present, 37 private sector/captive
port projects involving capacity addition of about 137 million
tonnes per annum (MTPA) and an investment of about ` 9756 crore
are in various stages of evaluation and implementation. Out of
these, 13 projects with capacity addition of about 47.40 MTPA
involving an investment of about ` 2597 crore have been
completed.
Other deregulatory steps, like those in the petroleum products
imports industry, have released bottlenecks in infrastructure in
terms of addition of new terminals and petroleum handling
(c
facilities. These have been financed entirely with private capital as

in the case of TISCO’s leased berths at Haldia.
In order to encourage coastal shipping, the government is also
considering the Sethusamudram Ship Canal Project, which
envisages cutting of a ship channel to connect the Gulf of Mannar
to Bay of Bengal through Palk Bay. This will save up to 366
Logistics Strategy
226 nautical miles and up to 34 hours sailing time for ships moving
Notes between East and West Coasts of India.
S
___________________
Inland Waterways
___________________
Inland waterways comprising of rivers, lakes, canals, creeks,
___________________
backwaters etc. extend to about 14500 km in the country. In India,
___________________
inland water transport on the Ganga provided among the earliest
___________________ organized transport movements over significant distances, well
PE
___________________ before rail and road networks developed. Movement and exports of
commodities like tea, jute, spices in the eastern sector, connected
___________________
to the riverine port in Kolkata have been among the early
___________________ commercial drivers of the pre-independence sub-continent.
___________________ Legally, there are separate Acts covering inland waterways, the
___________________ vessels that can ply on them and the setting up of the Inland
Waterways Authority of India. Currently three waterways in the
country have been designated as National Waterways, the Ganga,
Bhagirathi, Hooghly system from Allahabad to Haldia (NW-1), the
Brahmaputra system in Assam (NW-2), and the West Coast canal
system in Kerala (NW-3). Commercially, the most important
system is the small tidal riverine system in Goa consisting of the
)U
Zuari and Mandovi rivers and the Cumpbarjua canal.
The viability of goods movement using IWT is to be analysed from
the perspectives of technological and physical viability, commercial
potential and operating policy of carriers and associated agencies.
As in any mode of transport, some factors that affect the economics
and operation of a transport are the availability of the channel or
right-of-way, facilities at the ends of travel and the carriers or
vessels, together with all the managerial and supporting
infrastructural systems to manage the flows. In IWT, these
translate to the availability of the waterway, terminal facilities
like jetties and ports, barges and other vessels capable of
navigation and finally the management component.
The aggregate statistics show that the sector has been growing
only very slowly in the National Waterways and other major
(c
waterways. The glaring exception is the tidal river-canal system in

Goa, which saw unprecedented growth and where some 30 million
tons of iron ore moved by barges on the Mandovi-Zuari-Cumbarjua
system in 2003-04. This solitary example is enough to demonstrate
the economic potential per se of this mode of transportation.
However, the potential of this important mode of transport has not 227
been exploited so far. Inadequate infrastructural facilities such as Notes
S
depth and width required for movement of IWT vessels for round ___________________
the year operation, terminals for loading and unloading of cargo,
___________________
navigational aids for safe and unhindered navigation during day
and night and IWT fleet for carriage of cargo and passengers are ___________________
the constraints faced by the inland waterways sector. ___________________
___________________
PE
Pipelines
___________________
Pipelines form a unique mode of transportation. They can move
large quantities of certain types of commodities, mainly fluids, over ___________________
long distances at relatively low cost. The operations are ___________________

environmentally friendly, dependable and continuous. The ___________________
pipelines can be laid on a wide variety of terrains without much
___________________
difficulty. They operate on twenty-four-hours basis, seven days per
week and are limited only by commodity changeover and
maintenance.
Compared to normal surface mode like railways and road vehicles,
the following advantages are particularly attractive:
1. They do not require the return of ‘empties’ to the starting point
)U
and as such are ideal for unidirectional traffic.
2. They are insensitive to surface conditions such as storms,
inclement weather, etc.
3. Operating costs are low.
4. Capital cost being the major cost of transportation;
inflationary influences have a small effect on transport cost.
5. They are environment-friendly.
Pipelines have the highest fixed cost and lowest variable cost
among transport modes. High fixed costs result from right-of-way,
construction and requirements for control station and pumping
capacity. Since pipelines are not labour-intensive, the variable
operating cost is extremely low once the pipeline is constructed.
(c
The current status of pipeline technology is being discussed

relating to two categories:
z Conventional or ‘energy’ pipelines, and
z Slurry pipelining
Logistics Strategy
228 1. Conventional or Energy Pipelines: Use of pipelines to

Notes transport water, oil, natural gas (viz. single-phase fluids) is a
S
___________________ well-known technology and is known as conventional pipelines.
Since the transport of energy is the prime objective in most of
___________________
these pipelines, they are also known as energy pipelines. The
___________________
mechanics of such single-phase fluid flow has been studied in
___________________ detail and the design and operational phases have been
___________________ particularly perfected. The result is that this form of transport
PE
has been acknowledged as the most economical form for bulk
___________________
and long distance transport of certain energy items like
___________________ natural gas and oil.
___________________
2. Slurry Pipelining: In this mode, the solids are first ground to
___________________ fine grain size and made into slurry with a liquid medium. The
___________________ slurry is then pumped through the pipes to a desired
destination. Even though the concept of slurry pipelining was
known at the turn of the century, it was only in 1957 that it
became a practical reality. The first long distance pipeline to
be established was in Arizona, USA, to transport 0.4 MTPA of
gilsonite over a distance of 115 km. Since then the applications
are growing. Slurry pipeline transportation is particularly
advantageous in those processes where the raw material is to
)U
be first pulverized for further processing. Thus, iron ores
meant for pelletisation, coal for firing thermal stations, lime
stone for cement industry, wood chips for paper industry are
some examples of the situations where transportation by
slurry pipelines can be a viable alternative mode.
India’s existing pipeline network is grossly inadequate for
transporting petroleum products, whose demand is expected to
reach 115 million tonnes by 2011-12. The Government of India has
also noted that coal slurry pipelines are more suitable to meet the
fuel requirement of thermal stations (which is fairly large and
regular), however the requisite R&D efforts towards general use of
slurry pipelining in the country is inadequate.
With improved techniques, changes in economic conditions and
(c
environmental pressures and concern about surface waste disposal

in the near future are likely to make pipeline technology a viable
mode of transport for petroleum products, coal slurry, and a large
number of industrial and infrastructure development activities.
Air Transport 229

Notes
S
Air freight is the newest but least utilized mode of transport.
Its significant advantage lies in the speed with which a shipment ___________________
can be transported. The prohibitive aspect of air transport is its ___________________

high cost. The trade-off is its high speed, which allows other
___________________
elements of logistical design, such as warehousing or inventory, to
___________________
be reduced or eliminated. Air transport still remains more of a
potential opportunity than a reality. ___________________
PE
In the case of perishable products like fruits and vegetables, the ___________________
total time from production to consumption is critical and needs to ___________________

be minimised. In emergency products, the speed of delivery is
___________________
crucial. High value premium products require minimising
___________________
inventory costs. Therefore, perishable goods, limited marketing
period, high value premium products and emergency products are ___________________
the major customers of air transportation.
There are more than 20 international airports located within
India. Besides these airports, several other domestic airports are
located in India. In total, there are more than 334 (2002 est.)
civilian airports in India – 238 with paved runways and 108 with
unpaved runways. The Indira Gandhi International Airport at
)U
Delhi and the Chatrapati Shivaji International Airport at Mumbai
handle more than half of the air traffic in South Asia.
In the express and small package market, acquisition of aircraft
and expansion of services, and a stream of new air eligible
commodities have played significant roles in the growth of air
cargo. There has facilitated by government’s policy of ‘open skies’.
The first segment to be liberalised under this was the air cargo
service.
The demand for air cargo is a result of a need for an efficient and
speedy door-to-door cargo delivery requirement. Growth in this
sector is primarily due to private operators and air express and
courier companies. However, airport operations are often a
bottleneck. Recently, airports have been opened up for
(c
privatisation starting with the privatisation of the Delhi and

Mumbai Airports. As these two airports carry the bulk of the
traffic into India, the future growth of this transportation mode is
very encouraging.
Logistics Strategy
230
Animal-drawn Transport
Notes
S
The importance of Rural Transport (RT) to economic and social
___________________
development where three fourth of India’s 1 billion plus population
___________________ live in six lakh villages, which vary in population between 800 and
___________________ 5000, is obvious. RT is concerned with transporting goods and
people within the village, between villages and urban areas,
___________________
linking village roads with district roads, state highways and
___________________ national highways. Where there are no motorable roads, carts play
PE
___________________ an important role in freight movement.
___________________ Under the present conditions, where 50% of villages are not
___________________ connected by motorable roads, use of bullock carts is inevitable for
many years. The number of carts have remained almost the same
___________________
during the last two decades, estimated to be about 15 million in the
___________________ whole country.
Out of 15 million carts, 12 million are estimated to be in rural
areas, which may be transporting about six billion tonne km of
freight per year. Camel carts operate in Rajasthan and Gujarat in
both urban and rural sectors. In Haryana, Punjab and Western
UP, buffaloes are also used for carting. Bullocks are becoming
costly and, therefore, use of buffaloes and donkeys is gaining
)U
acceptance.
During the last three decades, Improved Carts (ICs) using
pneumatic tyres, fitted with smooth bearings, steel wheels and
axles have become popular in semi-urban areas and for sugarcane
transport. ICs eliminate damage to roads, move faster and bring in
increased income from higher carrying capacity. Further, animals
need to exert less; and therefore can pull normal loads without
goading and beatings, i.e. less suffering. Further, productive life of
the animals increases and these carts carry three times more load.
It has been estimated that one million ICs are in operation now,
plying mostly in Haryana and Punjab, Western UP, parts of Tamil
Nadu, Pondicherry and most sugarcane-growing areas. Table 14.4
summarises the nature of traffic utilizing the different modes of
(c
transportation.
Table 14.4: Summary of Nature of Traffic and Mode Selection 231

Mode Nature of Traffic Notes
S
Rail Extracting industries, heavy manufacturing, and agricultural ___________________
commodities.
Road Medium and light manufacturing, distribution between ___________________
wholesalers and retailers.
___________________
Water Mining and basic bulk commodities, chemicals, cement, some
agricultural products ___________________
Pipeline Petroleum, natural gas, coal slurry
___________________
PE
Air Emergency, perishable goods, limited marketing period, high
value premium products ___________________
Animal- Rural distribution ___________________
drawn
___________________
The basic modes of transportation are reviewed in terms of
operating characteristics with respect to speed, availability, ___________________
dependability, capability and frequency in Table 14.5. Speed refers ___________________

to elapsed movement time. Availability is the ability of a mode to
service any given pair of locations. Dependability is the potential
variance from expected delivery schedules. Capability is the ability
of a mode to handle any transport requirement, such as load size.
Frequency relates to the quantity of scheduled movements.
As Table 14.5 shows, the appeal of road transport is in part
)U
explained by its high ranking across all five characteristics. A
special feature of the Indian scenario is the high ranking of
animal-drawn transportation. Considering that over 50 percent of
the market for FMCG and consumer durable products is in the
rural sector, this should not come as a surprise. This ranking also
reflects the limitations of rail and road transport connectivity into
the hinterland.
Table 14.5: Relative Operating Characteristics of Transportation Modes
Operating Rail Road Water Pipeline Air Animal

Characteristics Drawn
Speed 3 2 4 5 1 6
Availability 3 2 5 6 4 1
Dependability 4 3 5 1 6 2
(c
Capability 2 3 1 5 4 6
Frequency 4 3 6 1 5 2
Composite score 16 13 21 18 20 17
The percentage of logistics cost to the total value added signifies

the importance of logistics related activities from the cost
perspective. It is high for bulk goods manufacturers, while it is low
for consumer goods manufacturers. For bulk goods, total logistics
Logistics Strategy
232 cost as a proportion of value addition is about 70 percent, out of

Notes which transportation costs constitute nearly two-thirds. Such
S
___________________ customers are very price-sensitive. For consumer goods and
durables, total logistics costs as a proportion of value addition does
___________________
not exceed 10 percent, out of which transportation costs constitute
___________________
less than a third. Such customers are very service sensitive. The
___________________ logistic strategy has to keep these considerations in mind. To
___________________ facilitate this type of analysis, the cost characteristics of different
PE
modes of transportation are shown in Table 14.6.
___________________
Table 14.6: Cost Characteristics of Different Transportation Modes
___________________
___________________ Mode Fixed Cost Variable Cost

Rail High fixed costs due to cost of Low
___________________ equipment, terminals, tracks, etc.
___________________ Highway Low fixed costs, Equipment is not Medium – fuel, maintenance,
so expensive and highways and wages
provided and maintained by public
funds
Water Medium Fixed Cost – ships and Low – Large unit capacity
equipment are carrier owned but provides capability to
ports are provided by public funds transport large amount of
tonnage
Pipeline Highest – rights-of-way, Low – labour cost of no
construction, requirements for significance, maintenance and
)U
control stations, pumping capacity energy costs not high
Air Low – Costs limited to aircraft, High – fuel, labour and
handling and cargo systems maintenance costs are
significant
Animal Low – all infrastructure costs Lowest
drawn provided by public funds
Transportation Management System

Transportation management system (TMS) is a subset of supply
chain management concerning transportation operations and may
be part of an enterprise resource planning system.
Transportation management systems manage three key processes
of transportation management:
(c
1. Planning and decision making: TMS will define the most

efficient transport schemes according to given parameters,
which have a lower or higher importance according to the user
policy: transport cost, shorter lead-time, fewer stops possible to
ensure quality, flows regrouping coefficient, etc.
2. Transport follow-up: TMS will allow following any physical
or administrative operation regarding transportation:
traceability of transport event by event (shipping from A, 233

arrival at B, customs clearance, etc.), editing of reception, Notes
S
custom clearance, invoicing and booking documents, sending of ___________________
transport alerts (delay, accident, non-forecast stops…)
___________________
3. Measurement: TMS have or need to have a logistics Key
___________________
Performance Indicator (KPI) reporting function for transport.
___________________
PE
Fill in the blanks: ___________________
1. .................. can move large quantities of certain types ___________________

of commodities, mainly fluids, over long distances at ___________________
relatively low cost.
___________________
2. In .................. mode, the solids are first ground to fine
___________________
grain size and made into slurry with a liquid medium.
Summary
Transportation happens to be the most fundamental part of
strategic logistic management. Transport costs include all costs
associated with movement of products from one location to
)U
another. The average transport costs ranges from 5 to 6% of the
recommended retail price of the product. Transportation is the
movement of products, materials and services from one area to
another, both inbound and outbound. It can also be said as
movement from one node of the supply chain to the other.
Lesson End Activity

Critically analyse and prepare a report on the condition of
transportation system of our country.
Keywords
Transportation Cost: This includes rates, minimum weight,
(c
loading and unloading charges.

Transit Time: It is the total time that elapses from the time the
consigner makes the goods available for dispatch until carrier
delivers same to the consignee.
Reliability: It refers the consistency of the transit time a carrier
provides.
Logistics Strategy
234 Capability: It refers to the carrier’s ability to provide the

Notes equipment and facilities that is required for the movement of
S
___________________ particular commodity.
___________________ Obsolescence and Deterioration Costs: There are certain
___________________ categories of products, which are perishable and delicate in nature,
whose physical attributes deteriorate over a period of time,
___________________
gradually resulting into devaluation of the product.
___________________
PE
Protective Packaging Costs: For many products, there may be
___________________ requirements of special packaging. This cost is also a part of the
___________________ total transport cost. For instance, if a product is shipped using a
___________________
container, it may require less protective packaging for safe
shipment in comparison being shipped in a truck.
___________________
Insurance Cost: Goods in transit insurance cover property
___________________
against loss or damage while it is in transit from one place to
another or being stored during a journey.

1. What do you know by transport Economics?
2. Describe the concept of Transportation.
)U
3. Discuss Transportation Functionality and Principles.
Further Readings
Books
(c

Education.
Web Readings 235

Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
Logistics Strategy
236
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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UNIT 15: Case Study
Unit 15
237
Notes
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Case Study
___________________
___________________
___________________
Objectives
___________________
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___________________
Case Study: Deutsche Post
___________________
Deutsche Post has integrated traditional air and ocean
___________________
forwarding, express parcel delivery, and mail services in a 2-year
buying spree. Germany will eliminate Deutsche Post's monopoly ___________________
on mail delivery in 2003, which will inevitably lead to a loss of
significant revenue. It hopes to replace lost sales with ___________________
international transport business. Customer demand, more than
postal deregulation, is driving Deutsche Post's vision. "More and
more customers are seeing the advantage of directly working with
their suppliers," says Klaus Zumwinkel, CEO of Deutsche Post.
'They will not use only one supplier, but they will choose from a
few suppliers. To be one of those suppliers, one has to be global.
One cannot say, 'Well, in Africa business is so complicated.
Please, mister customer, we would love to have United States and
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Europe, but in Africa we do not have any facilities."' To some
extent, Deutsche Post is creating a consolidation trend more than
following one. More than just reacting to competition, the largest
transport firms want to position themselves as premium
providers of global logistics services to multinational clients.
Deutsche Post and Lufthansa have merged their respective 25
percent voting stakes in DHL International into a joint venture
called Aerologic, which will seek out areas of cooperation for the
three partners.
Deutsche Post will take management control over Aerologic
because DHL sits closer to the German post office's core interest-
pickup and delivery. DHL is a key part of Deutsche Post's
international expansion plans. DHL offers a world mail delivery
product of which Deutsche Post is a heavy supporter. Deutsche
Post's Global Mail division has been expanding aggressively,
particularly in South America. DHL provides cross-border express
transport services, but also offers Deutsche Post a valuable global
pickup and delivery network. "All of the global shippers – and also
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more and more of the local and smaller ones – are demanding
transparency," said Jean-Peter Jansen, the new chairman of
Lufthansa Cargo. "They want to have a continuous flow of
information and a continuous flow of the goods themselves."
Lufthansa's core deliverable product will always be international
air freight capacity.
Lufthansa wants to strengthen its leading position through
alliances with other freight carriers. Lufthansa describes its
Contd...
Logistics Strategy
238 alliance strategy geometrically. It will partner with airlines in

Notes horizontal alliances and with forwarders in vertical industry
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partnerships. 'Through its deal with Deutsche Post, the airline
___________________ added a diagonal line to its chart, representing new initiatives in
electronic commerce. Deutsche Post and Lufthansa have formed a
___________________
joint venture called e-logic to pursue mutual interests in e-
___________________ commerce logistics. The new company will make investments in
new technology and startup ventures and also work to develop
___________________ joint fulfilment solutions for e-commerce shippers. Jansen states,
"We believe that putting us more closely together, not in a way
___________________
that we integrate, but in a way that we support each other, will
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___________________ make a lot of difference for the future. What we are looking for
really is growth and stabilization of our market position."
___________________
Question:
___________________ Analyse the case and write down the case facts.
___________________ Source: Gordan Forsyth, 'The New Integrators," American Shipper, July 2000, pp. 284.5.
___________________
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UNIT 16: Logistics Information System
239
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-IV
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240
Notes
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UNIT 16: LOGISTICS INFORMATION SYSTEM
___________________ UNIT 18: MANUFACTURING LOGISTICS
STRATEGY
z Introduction
___________________ z Introduction
z Concept of Logistics Information System
___________________ z Global Manufacturing
z Logistics Information System Architecture
___________________ z Agile Manufacturing Strategy
UNIT 17: SCOR MODELLING z Leagile Strategy
___________________
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z Introduction
___________________ UNIT 19: RETAIL STRATEGY AND SUPPLY CHAIN
z Supply Chain Integration
z Introduction
z The Seamless Concept
___________________
z Retail Strategy and Supply Chain/Logistics
z Performance Measurement Systems
___________________
z Retail Supply Chain
z SCOR Model
___________________ z Supply Chain Management
z Future Directions
___________________
UNIT 20: CASE STUDY
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Unit 16
241
Notes
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Activity
Logistics Information System

___________________
Logistics information systems
are the threads that link
___________________
logistics activities into an
integrated process. Discuss
with___________________
relevant examples.
Objectives
___________________
topics: ___________________
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\ Concept of Logistics Information System ___________________
\ Logistics Information System Architecture ___________________
\ Logistics Information System Flow
___________________
___________________
Introduction
___________________
Network of three of the functional areas of logistics – information,
transportation, and inventory – can be engineered into variety of
operational arrangements.
Logistics is viewed as the competency that links an enterprise with
its customer and suppliers. Information from and about customer
flows through the enterprise in form of sales activity, forecasts,
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and order. The whole process is viewed in terms of two interrelated
efforts, inventory flow and information flow.
Information flow is the key elements of logistics operation. Paper-
based information flow increases both operating cost and decreases
customer satisfaction. Electronic information movement and
management provide the opportunity to reduce logistics expense
through increased coordination and to enhance service by offering
better information to customers.
Information was often overlooked because it was not viewed as
being important to customer. The Council of Logistics Management
recognized this change in 1998 when it incorporated material, in
process, finished goods and information into definition of logistics.
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Concept of Logistics Information System

Logistics information systems are the threads that link logistics
activities into an integrated process. The integration builds on four
levels of functionality: transaction, management control, decision
analysis, and strategic planning systems.
Logistics Strategy
242 The most basic level, the transaction system, initiates and records
Notes individual logistics activities. Transaction activities include order
S
___________________ entry, inventory assignment, order, selection, shipping, pricing,
invoicing, and customer inquiry. For example, customer order
___________________
receipt initiates a transaction as the order is entered into the
___________________
information system. The order entry transaction initiates a second
___________________ transaction as inventory is assigned to the order. A third
___________________ transaction is then generated to direct the material handlers to
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select the order. A fourth transaction directs the movement,
___________________
loading, and delivery of the order.
___________________
The final transaction prints or transmits the invoice for payment.
___________________
Throughout the process, order status information must be
___________________ available when customers desire such information. Thus, the
___________________ customer order performance cycle is completed through a series of
information system transactions. The transaction system is
characterized by formalized rules, intrafunctional communications,
a large volume of transactions, and an operational day-to-day
focus.
The second level, management control, focuses on performance
measurement and reporting. Performance measurement is
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necessary to provide management feedback regarding service level
and resource utilization. Thus, management control is
characterized by an evaluative, tactical, intermediate-term focus
that evaluates past performance and identifies alternatives.
Common performance measures include financial, customer
service, productivity, and quality indicators.
The third level, decision analysis, focuses on decision applications
to assist managers in identifying, evaluating, and comparing
logistics strategic and tactical alternatives. Typical analyses
include vehicle routing and scheduling, inventory management,
facility location, and cost-benefit analysis of operational trade-offs
and arrangements. Decision analysis LIS must include database
maintenance, modelling and analysis, and reporting components
for a wide range of potential alternatives. Similar to the
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management control level, decision analysis is characterized by a

tactical, evaluative focus. Unlike management control, decision
analysis focuses on evaluating future tactical alternatives, and it
needs to be relatively unstructured and flexible to allow
consideration of a wide range of options.
The final-level, strategic planning, focuses on information support 243

to develop and refine logistics strategy. These decisions are often Notes
S
extensions of the decision analysis level but are typically more ___________________
abstract, less structured, and long-term in focus. Examples of
___________________
strategic planning decisions include synergies made possible
through strategic alliances, development and refinement, of firm ___________________
capabilities and market opportunities, as well as customer ___________________

responsiveness to improved service.
___________________
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Principles of Logistics Information ___________________
Logistics information systems must incorporate six principles to ___________________
meet management information needs and adequately support ___________________

enterprise planning and operations. ___________________
Availability ___________________
First, logistics information must be readily and consistently

available. Examples of information required include order and
inventory status. While enterprises may have substantial data
regarding logistics activities, these data are often paper-based or
very difficult to retrieve from computer systems. Rapid availability
is necessary to respond to customers and improve management
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decisions. This is critical since customers frequently need quick
access to inventory and order status information. Another aspect of
availability is the ability to access required information, such as
order status, regardless of managerial, customer, or product order
location.
Accuracy
Second, logistics information must accurately reflect both current
status and periodic activity for measures such as customer orders
and inventory levels. Accuracy is defined as the degree to which
LIS reports match actual physical counts or status.
Timeliness
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Third, logistics information must be timely to provide quick

management feedback. Timeliness refers to the delay between
when an activity occurs and when the activity is visible in the
information system. For example, in some situations, it takes
hours or days for the system to recognize a new order as actual
demand, since the order is not always directly entered into an
active demand database. Information system timeliness refers to
Logistics Strategy
244 system status, such as inventory levels, as well as management

Notes controls, such as daily or weekly performance reports. Timely
S
___________________ management controls provide information when there is still time
to take corrective action or to minimize the loss. In summary,
___________________
timely information reduces uncertainty and identifies problems,
___________________
thus reducing inventory requirements and increasing decision
___________________ accuracy.
___________________
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Exception
___________________
Based LIS Fourth, LIS must be exception-based to highlight
___________________
problems and opportunities. Logistics operations typically contend
___________________ with a large number of customers, products, suppliers, and service
___________________ companies. For example, the inventory status for each product-
location combination must be reviewed regularly to schedule
___________________
replenishment orders. Another repetitive activity is the status
review of outstanding replenishment orders. In both cases, a large
number of products or replenishment orders typically require
review. Often times, the review process requires asking two
questions. The first question concerns whether any action should
be taken for product or replenishment orders. If the first answer is
yes, the second question concerns the type of action that should be
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taken. Many LIS require that reviews be completed manually,
although they are increasingly being automated. The rationale for
still using manual procedures is that many of the decisions are
unstructured and require judgment on the part of the user. State-
of-the-art LIS incorporate decision rules to identify these exception
situations that require management attention and/or decision-
making.
Flexibility
Fifth, logistics information systems must contain the capability to
be flexible in order to meet the needs of both system users and
customers. Information systems must be able to provide data
tailored to specific customer requirements. For example, some
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customers may want order invoices aggregated across certain

geographic or divisional boundaries. A flexible LIS must be able to
accommodate both types of requirements. Internally, information
systems must be upgradable to meet future enterprise needs
without incurring debilitating costs in terms of financial
investment and/or programming time.
Appropriate Format 245

Notes
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Finally, logistics reports and screens should be appropriately
formatted, meaning that they contain the right information in the ___________________
right structure and sequence. For example, LIS often include a ___________________
distribution centre inventory status screen, with one product and
___________________
distribution centre listed per screen. This format requires that a
___________________
customer service representative check inventory status at each
distribution centre when attempting to locate inventory to satisfy a ___________________
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specific customer order. In other words, if there are five ___________________
distribution centres, it requires a review and comparison of five
___________________
computer screens. Appropriate format would provide a single
screen with the inventory status for all five-distribution centres. ___________________
The combined screen makes it much easier for a customer ___________________

representative to identify the best source for the product. Another
___________________
example of an appropriate format is a screen or report that
contains and effectively presents all relevant information for a
decision maker. The screen integrates past and future information
regarding on-hand inventory, minimum inventory, and demand
forecast, and planned receipts for a single item at a distribution
centre.
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The another example of an appropriate format is a screen or report
that contains and effectively presents all relevant information for a
decision maker. The screen integrates past and future information
regarding on-hand inventory, minimum inventory, and demand
forecast, and planned receipts for a single item at a distribution
centre. The graphical presentation, which integrates inventory
flows and level, facilitates inventory planning and ordering by
focusing the planner on the weeks when projected on-hand
inventory may drop below minimum levels.
Check Your Progress

Fill in the blanks:
1. Logistics reports and screens should be appropriately
(c
..................., meaning that they contain the right

information in the right structure and sequence.
2. ............................. must contain the capability to be
flexible in order to meet the needs of both system
users and customers.
Logistics Strategy
246
Logistics Information System Architecture
Notes
Activity
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Prepare a presentation on the
Logistics information systems combine hardware and software to
___________________
logistics information system manage, control, and measure the logistics activities discussed in
flow.___________________
the previous section. Hardware includes computers, input/output
___________________ devices, and storage media. Software includes system and
___________________
application programs used for processing transactions,
management control, decision analysis, and strategic planning.
___________________
The architecture includes both the information base to maintain
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___________________ the data warehouse and the execution components. The
___________________ information base contains purchase orders, inventory status, and
customer orders. The data warehouse contains information
___________________
describing the past activity levels and the current status, and is
___________________
the basis for planning future requirements.
___________________
Planning and coordination include the activities necessary to
schedule procurement, production, and logistics resource allocation
throughout the enterprise. Specific components include definition
of strategic objectives, rationalization of capacity constraints, and
determination of logistics, manufacturing, and procurement
requirements.
Operations include the transaction activities necessary to manage
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and process orders, operate distribution facilities, schedule
transportation, and integrate procurement resources. This process
is completed for both customer and enterprise replenishment
orders.
Customer orders reflect demands placed by enterprise customers.
Replenishment orders control finished good movement between
manufacturing and distribution facilities.
Planning and Coordination

Logistics system planning/coordination components form the
information system backbone for manufacturers and
merchandisers. These components define core activities that guide
enterprise resource allocation and performance from procurement
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to product delivery. The specific components are:

1. Strategic Objectives: Primary information drivers for many
enterprises are strategic objectives that define marketing and
financial goals. These strategic objectives are typically
developed for a multiyear planning horizon that often includes
quarterly updates. Marketing’s strategic objectives define
target markets, products, marketing mix plans, and the role of 247
logistics value-added activities such as service levels or Notes
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capabilities. The objectives include customer base, breadth of ___________________
products and services, planned promotions, and desired
___________________
performance levels. Marketing goals are the customer service
policies and objectives that define logistics activity and ___________________
performance targets. The performance targets include service ___________________

availability, capability, and the quality elements discussed
___________________
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under customer service. Financial strategic objectives define
___________________
revenue, sales and production levels, and corresponding
expense, as well as capital and human resource constraints. ___________________
The combination of marketing and financial objectives defines ___________________

the markets, products, services, and activity levels that ___________________
logistics managers must accommodate during the planning
___________________
horizon. Specific goals include projected annual or quarterly
activity levels such as shipments, dollar volume, and total
cases. Specific events that must be considered include product
promotions, new-product introductions, market rollouts, and
acquisitions. Ideally, the marketing and financial plans should
be integrated and consistent. Inconsistencies will result in
poor service, excess inventory, or failure to meet financial
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goals.
The combination of marketing and financial strategic
objectives provides direction for other enterprise plans. While
the process of establishing strategic objectives is, by nature,
unstructured and wide ranging, it must develop and
communicate a plan detailed enough to be operationalized.
2. Capacity Constraints: Capacity constraints and logistics,
manufacturing, and procurement requirements evolve from
the strategic objectives. Internal and external manufacturing,
warehousing, and transportation resources determine capacity
constraints. Using activity levels defined by the strategic
objectives, capacity constraints identify material bottlenecks
and effectively manage resources to meet market demands.
(c
For each product, capacity constraints determine the “where,”

“when,” and “how much” for production, storage, and
movement. The constraints consider aggregate production and
throughput limitations such as annual or monthly capacity.
Capacity problems can be resolved by resource acquisition,
speculation, or postponement of production or delivery.
Logistics Strategy
248 Capacity adjustments can be made by acquisition or alliances

Notes such as contract manufacturing or facility leasing. Speculation
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___________________ reduces bottlenecks by anticipating production capacity
requirements through prior scheduling or contract
___________________
manufacturing. Postponement delays production and shipment
___________________
until specific requirements are known and capacity can be
___________________ allocated. It may be necessary to offer customer incentives
___________________ such as discounts or allowances in order to postpone delivery.
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The capacity constraints introduce the time dimension into the
___________________
enterprise’s strategic objectives by considering facility,
___________________ financial, and human resource limitations. These constraints
___________________ have a major influence on logistics, manufacturing, and
___________________
procurement schedules.
___________________ Capacity constraints link the enterprise’s aggregate operating

plan to weekly or daily logistics requirements. These
constraints are a major influence on monthly or weekly
production for each manufacturing location. Capacity
flexibility depends on the nature of the product and lead-time.
For the long term, there is usually substantial flexibility, since
a full range of postponement, speculation, and acquisition
strategies may be used. However, in the short term, such as
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within the current week, there is limited flexibility, since
resources are generally committed. Capacity constraint
integration with the remaining enterprise requirement
systems varies across organizations. The best enterprises
typically demonstrate a high level of integration across all
planning/coordination components.
3. Logistics Requirements: Logistics requirements coordinate
the facility, equipment, labour, and inventory resources
necessary to accomplish the logistics mission. For example, the
logistics requirement component schedules shipments of
finished product from manufacturing plants to distribution
centres and retailers. The shipment quantity is calculated as
the difference between customer requirements and inventory
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level. Logistics requirements are often implemented using

Distribution Requirements Planning (DRP) as an inventory
management and process control tool. Future requirements
are based on forecasts, customer orders, and promotions.
Forecasts are based on sales and marketing input in
conjunction with historical activity levels. Customer orders
include current orders, future committed orders, and
contracts. Promotional activity is particularly important when 249

planning logistics requirements, since it often represents a Notes
S
large percentage of total volume and has a large impact on ___________________
capacity. Current inventory status is product available to ship.
___________________
Specifically, for each planning period (e.g., weekly or monthly),
the sum of forecast plus future customer orders plus ___________________
promotional volume represents period demand. It is not easy ___________________

to determine the percentage of the forecasted volume that is
___________________
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accounted for by the known customer orders, so some
___________________
judgment must be made. Typically, period demand is actually
a combination of the three, since current forecasts may ___________________
incorporate some future orders and promotional volume. When ___________________
determining period demand, it is important that the overlap
___________________
between forecast, future customer orders, and promotions be
considered. Period logistics requirements then equal period ___________________
demand less inventory-on-hand less planned receipts. Using

this form, each period would ideally end with zero inventory
available so that planned receipts would exactly equal period
demand. While perfect coordination of demand and supply is
ideal from an inventory management perspective, it may not
be the best strategy for the firm.
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Logistics requirements must be integrated with both capacity
constraints (up-stream) and manufacturing requirements
(downstream) to obtain optimal system performance. Poorly
integrated logistics and manufacturing components typically
result in finished goods inventory at the end of the production
line that is not visible when logistics requirements are
determined.
Logistics Requirements are as follows:
+ Forecasts (Sales, Marketing, Input, Histories, Accounts)
+ Customer Orders (Current Orders, Future Committed
Orders, Contracts)
+ Promotions (Promotion, Advertising Plans)
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= Period Demand
– Inventory-on-Hand
– Planned Receipts
= Period Logistics Requirement
Logistics Strategy
250 4. Manufacturing Requirements: Manufacturing

Notes requirements schedule production resources and attempt to
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___________________ resolve day-to-day capacity bottlenecks within the materials
management system. Primary bottlenecks result from raw
___________________
material shortages or daily capacity limitations.
___________________
Manufacturing requirements determine the Master Production
___________________ Schedule (MPS) and Manufacturing Requirements Plan
___________________ (MRP). The MPS defines weekly or daily production and
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machine schedules. Given the MPS, the MRP coordinates the
___________________
purchase and arrival of materials and components to support
___________________ the desired manufacturing plan. Although this discussion
___________________ presents logistics requirements and manufacturing
___________________
requirements serially, they actually must operate in parallel.
This is particularly true for enterprises utilizing demand flow
___________________
or market paced manufacturing strategies. These strategies
coordinate production schedules directly with market demands
or orders and reduce the need to forecast or plan. In a sense,
demand flow or market-paced manufacturing strategies design
all production as “make to order” and thus totally integrate
logistics and manufacturing requirements.
5. Procurement Requirements: Procurement requirements
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schedule material releases, shipments, and receipts.
Procurement requirements build on capacity constraints,
logistics requirements, and manufacturing requirements to
demonstrate long-term material requirements and release
schedules. The requirement and release schedule is then used
for purchasing negotiation and contracting.
Operations
Operations include the information activities required to receive,
process, and ship customer orders and to coordinate the receipt of
purchase orders. Operations components are:
1. Order management
2. Order processing
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3. Distribution operations
4. Transportation and shipping
5. Procurement
Each component is described below including a review of key 251

functions and interfaces. Notes
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1. Order Management: Order management is the entry point ___________________
for customer orders and inquiries. It allows entry and ___________________
maintenance of customer orders using communication
___________________
technologies such as mail, phone, fax, or EDI. As orders or
inquiries are received, order management enters and retrieves ___________________
required information, edits for appropriate values, and then ___________________
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retains acceptable orders for processing. Order management ___________________
can also offer information regarding inventory availability and
___________________
delivery dates to establish and confirm customer expectations.
Order management, in conjunction with customer service ___________________
representatives, forms the primary interface between the ___________________
customer and the enterprise LIS. Primary order management
___________________
functionality includes entry for blanket, electronic, and
manual orders. Blanket orders are large orders that reflect
demand for a merchandiser over an extended time period such
as a quarter or a year. Future shipments against blanket
orders are triggered by individual order releases. Order
management creates and maintains the customer and
replenishment order base that affects the remaining
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operations components.
2. Order Processing: Order processing assigns or allocates
available inventory to open customer and replenishment
orders. Allocation may take place on a real-time (i.e.,
immediate) basis as orders ate received or in a batch mode.
Batch mode means that orders are grouped for periodic
processing, such as by day or shift. While real-time allocation
is more responsive, a batch process provides the firm with
more control over situations when inventory is low. For
example, in a batch process, order processing can be designed
to assign stock from current inventory only, or from scheduled
production capacity. A LIS is more responsive if it allows
inventory assignment from scheduled production capacity.
(c
However, there is a trade-off since assigning scheduled

production capacity reduces the firm’s ability to reschedule
production. The ‘best’ order processing applications operate
interactively in conjunction with order management to
generate an order solution that satisfies both customer
requirements and enterprise resource constraints. In this type
of operational environment, the customer service
Logistics Strategy
252 representative and the customer interact to determine the

Notes combination of products, quantities, and performance-cycle
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___________________ length that is acceptable to both parties. When there is conflict
in order processing, possible solutions include delivery date
___________________
adjustments, product substitutions, or shipment from an
___________________
alternative source.
___________________
The lists typical order processing functionality, which includes
___________________ inventory assignment, back-order creation and processing,
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___________________ order selection document generation, and order verification.
Order selection documents, in paper or electronic form, direct
___________________
distribution operations to select an order from the distribution
___________________
centre or warehouse and pack it for shipment. The customer or
___________________ replenishment order, with its allocated inventory and
___________________ corresponding order selection material, links order processing
with distribution centre physical operations.
3. Distribution Operations: Distribution operations
incorporate LIS functions to guide distribution centre physical
activities including product receipt, material movement, and
storage and order selection. Distribution operations are often
termed inventory control or warehousing systems. Distribution
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operations direct all activities within distribution centres
using a combination of batch and real-time assignments. In a
batch environment, the LIS develops a list of instructions or
tasks to guide each material handler in the warehouse.
Material handlers are the individuals who operate material-
handling equipment such as fork trucks and pallet jacks
(material-handling technology is discussed in detail in
upcoming chapter). In a sense, this list is the handler’s “to do”
list for the hour or shift. In a real-time environment,
information-directed technologies such as bar coding, radio
frequency communication, and automated handling equipment
operate interactively with LIS to reduce the elapsed time
between decision and action. The real-time information-
directed technologies, discussed in detail later in the chapter,
(c
provide more operation flexibility and reduce internal

performance-cycle time requirements.
Historically, distribution operations have focused on directing
warehouse operations and activities including guiding product
movement and storage. A state-of-the-art distribution
operation LIS must also plan operating requirements and
measure performance. Operations planning include personnel 253

and resource scheduling. Performance measurement includes Notes
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developing personnel and equipment productivity reports and ___________________
exception-based LIS that can reduce errors and identify cost
___________________
savings.
___________________
4. Transportation and Shipping: With the increased
opportunity to reduce cost through better transport ___________________
management, contemporary LIS transportation and shipping ___________________
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functionality emphasizes performance monitoring, rate ___________________
auditing, routing and scheduling, invoicing, reporting, and
___________________
decision analyses. A state-of-the-art transportation and
shipping LIS incorporates increased planning and performance ___________________
measurement capability. ___________________
5. Procurement: Procurement manages purchase order ___________________

preparation, modification, and release, in addition to tracking
vendor performance and compliance. Although procurement
systems have not traditionally been considered part of LIS, the
importance of integrating procurement is obvious when
managing the entire supply chain. Integration of procurement
and logistics schedules and activities allows coordination of
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material receipt, facility capacity, and transportation back-
haul.
For integrated logistics, procurement LIS must track and
coordinate receiving and shipping activities to optimize
scheduling of facility, transport, and personnel resources. For
example, since loading and unloading docks are often a critical
facility resource, effective procurement LIS should coordinate
the use of the same carrier for both deliveries and shipments.
This capability requires LIS to have both receipt and shipment
visibility. Logistic system integration can be further enhanced
through electronic integration with suppliers. A state-of-the-
art procurement LIS provides plans, directs activities, and
measures performance, coordinating inbound and outbound
activity movement.
(c
Thus, at conclusion we can say that coordinated, integrated

operations LIS is the minimum standard for logistics
competitiveness today. Coordination and integration allow smooth
and consistent customer and replenishment order information
throughout the enterprise and offer current order status visibility.
Also, integrated information sharing reduces delays, errors, and
Logistics Strategy
254 personal requirements. While operations LIS is typically well

Notes integrated, it is necessary to continuously review the system to
S
___________________ ensure that no bottlenecks develop and customer flexibility is
maintained. Best practice firms are improving operational
___________________
performance by integrating operations LIS across firm boundaries
___________________
with suppliers and customers.
___________________
Logistics Information System Flow
___________________
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___________________ The schematic contains the major system elements including:
___________________ 1. Modules: Modules are the actual routines that process data or
information, such as entering orders or assigning inventory.
___________________
Data, files are the information structures that store task-
___________________ specific data such as orders or inventory records. The data files
___________________ replace the file cabinets of the past. Management and data
entry activities represent the interfaces where the LIS must
obtain input from an external environment such as a decision
maker or another firm. Reports provide information regarding
logistics activity and performance links. Communication links
are the internal and external interfaces between LIS
components and the outside environment.
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The logistics information system flow should incorporate the
following five modules:
(i) Order entry
(ii) Order processing
(iii) Transportation and shipping
(iv) Distribution operations
(v) Inventory management
2. Data Files: The files contain the data and information base to
support the communications activities. The major database
structures that are required for supporting distribution
communications are:
(c
(i) Order file

(ii) Inventory and warehouse files
(iii) Accounts receivable file
(iv) Distribution requirements file.
3. Management and Data Entry Activities: The management 255

and data entry activities occur when data must be entered into Notes
S
the system or when management must enter a decision. The ___________________
general instances for this intervention include:
___________________
(i) Order entry
___________________
(ii) Order inquiry
___________________
(iii) Forecast development and reconciliation ___________________
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(iv) Freight rating ___________________
(v) Warehouse receipts and adjustments. ___________________
4. Reports: The reports consist of numerous summary, detail, ___________________

and exception listings to provide hard-copy information ___________________
documenting system activities and performance. The links
___________________
identify the information flow between the subsystems, files,
entry activities, and reports.
Check Your Progress

Fill in the blanks:
1. .................... goals are the customer service policies
)U
and objectives that define logistics activity and
performance targets.
2. .................... and .................... include the activities
necessary to schedule procurement, production, and
logistics resource allocation throughout the enterprise.
Summary
Logistics is viewed as the competency that links an enterprise with
its customer and suppliers. Information from and about customer
flows through the enterprise in form of sales activity, forecasts,
and order. The whole process is viewed in terms of two interrelated
efforts, inventory flow and information flow.
(c
Thus, at conclusion we can state that LIS is the backbone of

modem logistics operations. In the past, this infrastructure has
focused on initiating and controlling activities required taking,
process, and shipping customer orders. For today’s enterprises to
remain competitive, the role of information infrastructure must be
extended to include requirements planning, management control,
decision analysis, and integration with other members of the
Logistics Strategy
256 channel. This section has identified major components of the

Notes logistics information infrastructure, reviewed individual roles, and
S
___________________ discussed the importance of integration and flexibility. Many firms
are reviewing both inter and intra-enterprise information flow to
___________________
incorporate more integration and flexibility while minimizing cost.
___________________
___________________
Lesson End Activity
___________________
PE
Operations include the information activities required to receive,
___________________ process, and ship customer orders and to coordinate the receipt of
___________________ purchase orders. With reference to the statement, discuss with the
___________________
help of examples the operations components.
___________________
Keywords
___________________
Procurement: Procurement manages purchase order preparation,
modification, and release, in addition to tracking vendor
performance and compliance.
Order Processing: Order processing assigns or allocates available
inventory to open customer and replenishment orders.
Order Management: Order management is the entry point for
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customer orders and inquiries It allows entry and maintenance of
customer orders using communication technologies such as mail,
phone, fax, or EDI.

1. Describe the different level of functionality of supply chain
information.
2. Why is timely and accurate information critical to integrating
logistical activities?
3. Explain operation in logistics. Why is it critical to corporate
planning and operations?
4. How and why does inventory deployment and management act
(c
as the primary interface between planning and coordination

and operations in the supply chain information flow?
Further Readings 257

Notes
S
Books ___________________
Physica-Verlag HD, Logistics Outsourcing Relationships, 1st ___________________

edition.
___________________
Douglas Long, International Logistics: Global Supply Chain ___________________
Management, Springer-Verlag New York, LLC; 2004.
___________________
PE
Philippe-Pierre Dornier, Panos Kouvelis, Michel Fender, Global
___________________
Operations and Logistics: Text and Cases, Wiley, John & Sons,
Incorporated 1998. ___________________
___________________
Kent N. Gourdin, Global Logistics Management: A Competitive
Advantage for the New Millennium, Blackwell Publishing 2006. ___________________
Sridhar R. Tayur (Editor), Michael J. Magazine (Editor), RAM ___________________
Ganeshan (Editor) Quantitative Models for Supply Chain

Management, Kluwer Academic Publishers 1998.
Web Readings
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(c
Logistics Strategy
258
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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UNIT 17: SCOR Modelling
Unit 17
259
Notes
S
Activity
SCOR Modelling
___________________
Prepare a chart to show the
Seamless Supply Chain with
the ___________________
help of figure.
___________________
Objectives
___________________
topics: ___________________
PE
\ Supply Chain Integration ___________________
\ The Seamless Concept ___________________
\ Performance Measurement Systems
___________________
\ Balanced Scorecard Model
___________________
\ SCOR Model
\ Future Directions ___________________
Introduction
Although the value of managing each component of the supply
chain in order to maximize customer service and profits is clear to
most firms, the value of taking an integrated approach to
)U
managing the entire supply chain is not so obvious. The Beer
Game is a role-playing simulation that tries to illustrate the
disadvantages of not taking an integrated approach to supply
chain management.
In the unit, we will discuss the coordination issue as represented
by the beer game and its consequence, bullwhip effect. We will see
how to minimize its impact. We will then look at supply chain
integration and the seamless concept. We will also discuss the
different models used in determining performance in supply chains
and the SCOR model. We will examine some of the performance
measurements that individual companies can use in estimating
how they have performed. Finally, we will look at supply chains
and future challenges.
(c
Supply Chain Integration

The Supply Chain (SC) begins with the sourcing of raw materials
and extends through to the delivery of end items to the final
customer. It links the set of resources and processes that make this
possible. The separation of SC activities among different
companies enables specialization and economies of scale to be
Logistics Strategy
260 exploited, but to do so successfully, many important issues and

Notes problems need to be resolved – the resolution of these issues is the
S
___________________ main purpose of Supply Chain Management (SCM).
___________________
___________________
The Seamless Concept
___________________ The ultimate objective of an integrated supply chain is a supply
chain, which is seamless. The seamless supply chain is an
___________________
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idealized concept of perfect information flow and perfect material
___________________ flow, facilitated by all supply chain players thinking and acting as
___________________ one. Yet, although it is an idealized concept, the seamless supply
___________________
chain is not beyond reach in reality.
___________________
___________________
)U
Figure 17.1: The Seamless Supply Chain
Today, supply chains consist of potentially hundreds, or even

thousands, of independently owned enterprises. For example,
Maruti Udyog has hundreds of suppliers from MRF to Motorola,
and this number increases as number of tiers of the supply chain
increases. It also makes the supply chain more complex. The
integration of supply chain processes through investment in
cooperative arrangement and technologies is difficult to separate
from, or consider independently of, the strategic positioning of
organizations.
Effective supply chain integration requires effective
implementation, and implementation must be a part of the firm’s
strategy. Uninformed by strategy, it will at best produce little in
(c
the way of tangible benefits for the parties involved. It might be

counter-productive and erode competitive advantage. The way to
go about it is first to adopt it as the firm’s strategy and consolidate
it around the following practices:
z Simplicity: Start with those ideas that have already been
proven, such as inventory reduction, simplified processes and
products, flexibility, and commitment to continuous and 261

incremental improvement. Notes
S
z Smooth Material Flow: Progressively move on to tasks along ___________________
the value stream so that a product proceeds from design to ___________________
launch, from order to delivery, and from raw materials to a
___________________
finished product in the hands of the customer with no
stoppages, scrap, or backflows. ___________________
___________________
PE
z Value Stream Management: Value stream management
makes sure that products move, in a more effective fashion, ___________________
from concept to launch, from order to delivery, and from ___________________
sourcing of raw materials to delivery to the customer. Focus on
___________________
managing the specific activities required to design, order, and
provide a specific product. ___________________
z Lean Thinking: Lean is a philosophy for adapting to change ___________________
and continuous improvement. It seeks to shorten the time

between customer order and product delivery by eliminating
sources of waste and delay. It provides a structure and a
philosophy that ensures that tasks are performed and value-
added activities are linked in the most effective way possible.
All of these concepts focus on the basic principles that guide supply
)U
chain thinking: reduce friction, eliminate waste, and drive velocity
through the supply chain. If these concepts are deployed across the
extended supply chain, they will carry the enterprise toward
establishing a true seamless supply chain. Supply chain
performance also improves as all stages of the chain take actions
that together increase total supply chain profits.
Supply Chain Uncertainty

A logical extension of these concepts i.e. simplicity, smooth
material flow, value stream management, and lean thinking,
ultimately have to reduce uncertainty in the supply chain. There
are four different types of supply chain uncertainty. These are
discussed below:
(c
z Process Uncertainty: The organization’s internal ability to

meet a production delivery target reflects process uncertainty.
Process uncertainty can be established by understanding each
work process’s yield ratios and lead time estimates for
operations. Also, if the particular product delivery process is
competing against others for resources, then the interaction
between these must be studied and codified.
Logistics Strategy
262 z Supply Uncertainty: Supply uncertainty results from poorly

Notes performing suppliers’ not meeting an organization’s
S
___________________ requirements and affecting value-added processes. It can be
measured through the supplier’s delivery performance, time
___________________
series of orders placed or call-offs and deliveries from
___________________
customers, actual lead times, supplier quality reports, and raw
___________________ material stock time series.
___________________ z Demand Uncertainty: Demand uncertainty can be quantified
PE
___________________ by measuring how well companies meet customer demand.
___________________ z Control Uncertainty: Control uncertainty is associated with

___________________
information flow. It is the way a firm carries out customer
orders, from production targets and supplier raw material
___________________
requests. The level of control uncertainty can be determined by
___________________ comparing customer requirements, supplier requests to
deliver, and production targets over the same time periods. In
a pure demand-pull environment, the linkage between supply
and demand is clear and control uncertainty is eliminated.
However, companies typically use order batching and lot
sizing, which often makes it difficult to understand the linkage
between demands placed and true requirements.
)U
Each of these uncertainties is a handicap to operational
performance. The issue is complicated even further as the company
not only has to confront the uncertainty generated by activities
within the operational domain of the organization, but must also
manage uncertainty across a host of supply chain participants.
(c
Figure 17.2: Uncertainty Reduction

This makes it important now to understand how the supply chain 263
can handle this uncertainty. The first step in supply chain Notes
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integration is to look internally, because a company’s own ___________________
processes are the most visible and accessible area to influence. Full
___________________
supply chain integration is achieved by extending the scope of
management outside the company to embrace the suppliers and ___________________
customers. This is shown in Figure 17.2. ___________________
First, the firm has to identify the supply chain level of integration. ___________________
PE
There are a number of techniques available to make this ___________________
assessment. The goal of the organization should be to move to the
___________________
next level of integration. This can be accomplished by developing
re-engineering programmes that address the problems that are ___________________
causing high levels of uncertainty. For example, moving from the ___________________
baseline level to the functional integration level requires reducing
___________________
process and control uncertainty. A company can introduce process
performance measures, proactive maintenance, more frequent
Materials Resource Planning (MRP) runs, and better stock
auditing, to accomplish this. This process of supply chain
reengineering continues until external integration is reached.
Inherently, it embodies a change of orientation away from product
)U
to customer. A high level of integration with the customer
organization is involved in order to understand the products,
culture, market, and organization. It also involves integration back
down the supply chain to include all supplier partners. The stated
aims of full integration are thus seen to be entirely consistent with
the establishment of our concept of the seamless supply chain.
Performance Measurement Systems

Each stage of the supply chain trying to maximize its own profits,
disregarding the benefits of the SC as a whole (local instead of
global optimization), does not necessarily result in the
maximization of supply chain surplus. The maximum efficiency of
each chain also does not necessarily lead to global optimization.
(c
Supply chain surplus is maximized only when all supply chain

stages coordinate strategy together.
Another problem is more and more companies are succeeding
because they are able to respond quickly to market needs and get
the right product to the right customer at the right time. This shift
toward speed has forced companies to ask what creates the level of
speed that customers are demanding. The answer for most
Logistics Strategy
264 companies is that the most significant delays, however, are created
Notes at the interface between the boundaries of different stages of a
S
___________________ supply chain. Thus, managing these interfaces becomes a key to
providing speed to customers.
___________________
___________________ In addition, one should consider human factors. Decision-makers

at various points along the SC do not usually make perfect
___________________
decisions. This may be due to the lack of information, their
___________________ personal hindrances, or sometimes, the decision may be influenced
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___________________ by employee reward systems.
___________________ Regardless of the number of difficulties and problems, the core

___________________
concept for the success in SCM, is efficient information
transfer/information sharing. Taking this view requires that each
___________________
company evaluate its actions in the context of the entire supply
___________________ chain. This means treating stages in the supply chain that a
company does not own as belonging ‘to the company. This creates a
problem in performance measures. An example is the inventory
reduction effort of many companies. Many companies strive to
reduce their own inventories by changing ownership of inventory
to downstream stages in the supply chain. Do they achieve any
real reduction in overall inventory? Firms may feel they will not
)U
have to finance this inventory and therefore their costs will go
down. But they forget that holding this inventory increases the
suppliers’ costs, and the supplier is charging higher prices so in the
end, there is no real reduction in total cost because the supply
chain merely shifts costs back and forth between its links.
As the example above shows, measurements of performance in a
supply chain do not follow historic and traditional conventions
used until now. In measuring performance in the supply chain,
where control is no longer based on ownership only, but rather on
networking across interfaces, the measurement system may reflect
a system of measuring the immeasurable.
Companies are discovering new ways of working together to
achieve the ultimate supply chain goal: the ability to fill customer
(c
orders faster and more efficiently than the competition. This is

changing traditional company boundaries. To achieve that goal,
organizations need performance measures, or ‘metrics’, which are
formal, well defined processes that can be documented and
measured to facilitate supply chain improvements.
Activities not under the direct control of an individual company
have to be measured and controlled by the firm and its supply
chain partners. This requires making the supply chain transparent 265
to a level not experienced before. For example, if the cost of Notes
S
transportation and the cost of inventory in a firm are managed ___________________
separately instead of jointly, we would not be able to discuss the
___________________
trade-off between the two cost components. The entity “total cost”
encompassing both components would not exist unless there is ___________________
total transparency. An important opportunity for improvement will ___________________

be lost.
___________________
PE
Developing and maintaining a supply chain performance ___________________
measurement system represents one of the more significant
___________________
challenges faced in supply chains. Thus, performance
improvements require different measurements. The supply chain ___________________
generally consists of a number of departments each; perhaps, ___________________
reporting to different supervisors or a number of firms each having
___________________
its own top management. Given the cross-functional and cross-
organizational nature of many supply chain improvements, metrics
must be based on transparency that assists supply chain
performance, as shown schematically in the Figure 17.3 below:
)U
Figure 17.3: Traditional and Supply Chain Performance Measurements
The use of financial accounting information is another problem in

(c
measuring supply chain performance, as it promotes a functional

perspective within an organization. This is because resources are
allocated from the top down, in contrast to goods and services,
which flow horizontally through the firm. Matching top-down flow
to horizontal flow becomes a challenging problem.
Top management is often affected by external stakeholders to
assess the performance of the firm using financial information.
Logistics Strategy
266 Though the top management uses this information, people on the
Notes shop floor prefer other kinds of information. Therefore, what
S
___________________ follows is that the concept of performance clearly varies between
different levels in an organization. This often becomes a major
___________________
cause of difficulties in integrating measurements across the
___________________ operational, tactical and strategic levels.
___________________
As the success of an SCM initiative largely rests on performance,
___________________ one consequence of these arguments is that a supply chain must be
PE
___________________ viewed as one entity. The structure of the measurement system
should span the entire supply chain. Figure 17.4 presents the
___________________
structural view of the measurement system applicable to supply
___________________ chains. What is important is that, each of the components outlined
___________________ in the figure, must be considered throughout the entirety of the
supply chain, if relevant measurement criteria are to be obtained.
___________________
)U
Figure 17.4: A Structural View of the Measurement System
During the Performance Measurement Revolution, many

Performance Measurement Systems (PMSs) have been developed
to overcome the drawbacks of traditional performance
measurements systems. We will examine some influential PMSs,
and assess their suitability as performance measurement system
for the supply chain: the Balanced Scorecard, the Performance
Prism, and the Productivity Measurement and Enhancement
System.
Balanced Scorecard Model

(c
A well-known model showing important relationships within the

firm is the balanced scorecard. This model was created by Kaplan
and Norton (1992) of the Harvard Business School. It introduces
the concept of balancing four different dimensions of performance,
and also uses cause-and-effect relationships to describe how the
four dimensions of performance are connected.
The model is not only a measurement tool; it is also a management 267

system that translates strategy and vision into strategic objectives. Notes
S
The model communicates and links strategic objectives and ___________________
measures in the organization. It is used in the process of planning,
___________________
setting targets and aligning strategic initiatives. Ultimately, its
aim is to enhance strategic feedback and learning. ___________________
Figure 17.5 illustrates how the four different dimensions of ___________________
performance can be linked by cause-and-effect relationships. The ___________________
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dimensions used are financial, customer, business processes, and ___________________
learning and growth.
___________________
The balanced scorecard provides an enterprise view of an
___________________
organization’s overall performance: it complements the traditional
financial performance measures with Key Performance Indicators ___________________
(KPIs) in three non-financial areas. The four building blocks of the ___________________
BSC are:
z Financial Perspective: The financial perspective answers
the question: “To succeed financially, how should we appear to
our shareholders?” and is typically related to profitability.
Some measures are, for example, the Return on Investment
(ROI), Return on Capital Employed (ROCE), and Economic
)U
Value Added (EVA), etc.
z Customer Perspective: The customer perspective addresses
the question: “To achieve our vision, how should we appear to
our customers?” It includes several measures like, customer
satisfaction, and market share in targeted segments, etc.
z Internal Processes: The internal perspective answers the
following question: “To satisfy our shareholders and customers,
what business processes must we excel at?” It focuses on the
internal processes that will have the greatest impact on
customer satisfaction and on achieving the organization’s
financial perspectives.
z Learning and Growth: The ‘learning and growth’
perspective looks at the organization to answer the question:
(c
“To achieve our vision, how will we sustain our ability to

change and improve?” It measures the infrastructure the
organization has to build and manage to create long-term
growth and improvement through people, systems and
organizational procedures, is identified in this perspective.
Logistics Strategy
268
Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
Figure 17.5: Balanced Scorecard Model
___________________
___________________
The BSC is a logical framework for implementing and aligning
complex programs of change. Kaplan and Norton use a linear
___________________
cause-and-effect relationship in their model. Though each
organization is unique and can follow its own path for building a
scorecard, this procedure can be used with modifications by
different organizations.
Following are examples of financial goals, (including supply chain
performance), appropriate for consideration on the balanced
scorecard:
)U
z 5 percent Increase in sales for the current year to reach 15
percent overall increase for next three years.
z Inventory reduction to ` 50 crore in the current year and to
` 40 crore in the next three years.
z Increase current profit margins from 20 to 25 percent.

z Increase inventory turnover from 1.9 to 2.6 in the current year
to 4.3 times within three years.
The examples of non-financial goals are not directly reported on
traditional financial statements. The metrics for these are,
however, related to process and execution issues. Many of these
can substantially impact and influence the financial metrics.
Examples might include the following:
(c
z Improve customer satisfaction levels to 4.5 from 4.8 (on a 5

point scale)
z Improve on-time delivery to 99 percent from 95 percent
z Reduce obsolete inventory from 3 percent of sales turnover to 1
percent
z Reduce the number of stock keeping units by 10 percent 269

Notes
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z Reduce employee turnover by 10 percent
___________________
z Create a positive working environment through continuous
education, job stability, and competent management so that ___________________
employees can grow professionally and financially (measure ___________________

through employee surveys).
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
)U
Figure 17.6: Linking Measurements to Supply Chain Strategy
The model tries to uncover the “mechanisms” of the business. It

makes possible to connect different phenomena and describe how
they interact. In many cases, the number of links is high, and the
model needs for simplification. However, the model does provide a
means of communicating the ideas about adopting non-obvious
solutions for such things like increased sales or improved overall
productivity, etc. A criticism is that it fails to answer one of the
most important questions of all: what are the competitors doing?
Though BSC is highly regarded, it should be kept in mind when
using the model for inter-firm evaluation the problems of designing
and implementing the BSC may be no different from those
associated with any major change in performance-measurement
(c
systems.
The Performance Prism (PPR)

The Performance Prism (PPR) developed by Neely and Adams
(2000), is organized around five distinct but linked perspectives of
performance: stakeholder satisfaction, strategies, processes,
Logistics Strategy
270 capabilities, and stakeholder contributions. Neely visualized these

Notes perspectives by a three dimensional model in the shape of a prism,
S
___________________ which can be seen in Figure 17.7.
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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(c
Figure 17.7: Performance Prism of Neely
The top and bottom faces of the prism reflect stakeholder

satisfaction and stakeholder contribution respectively. The three
vertical side faces represent strategies, processes and capabilities.
The model looks at these five distinct, but logically interlinked,
perspectives on performance together with five key questions for
measurement design.
z Stakeholder Satisfaction: The key question in this 271

perspective is: who are the key stakeholders and what do they Notes
S
want and need? This perspective is broader than the BSC view ___________________
of stakeholders, which is limited to shareholders and
___________________
customers.
___________________
z Strategies: What strategies do we have to put in place to
satisfy the wants and needs of these key stakeholders—is the ___________________
key question here? The Performance Prism’s strategy ___________________
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measures monitor the success of the organization in meeting
___________________
its goals.
___________________
z Processes: The question defines, “What critical processes do
___________________
we require if we are to execute these strategies?”
___________________
z Capabilities: The main question in this perspective is: what
capabilities do we need to operate and enhance these ___________________
processes? Capabilities are fundamental building blocks of a

corporation’s ability to compete. This includes people,
practices, technology and infrastructure that together enable
the execution of the organization’s business processes (both
now and in the future).
Stakeholder Contribution: What contributions do we
)U
z
require from our stakeholders, if we are to maintain and
develop these capabilities? This facet recognizes the fact that
not only organizations have to deliver value to their
stakeholders, but also that organizations enter into a
relationship with their stakeholders, which should involve the
stakeholders contributing to the organization. Organizations
should have a clear understanding of what constitutes and
drives good performance.
The PPR distinguishes itself from other models by taking a more
holistic view of essential stakeholder groups to consider.
Especially, suppliers are important because companies become
more and more dependent on their suppliers since they outsource
non-core business. PPR’s principal appeal lies in the logical
(c
interrelationships between the five perspectives; its

comprehensiveness and adaptability.
Productivity Measurement and Enhancement System (ProMES)

The Productivity Measurement and Enhancement System
(ProMES) was developed by Pritchard (1990). ProMES is a
participative development method for performance management
Logistics Strategy
272 systems. It is a formal, step-by-step process that identifies

Notes organizational objectives, develops a measurement system to
S
___________________ assess how well the unit is meeting those objectives, and develops
a feedback system that gives management information on how well
___________________
the unit is performing.
___________________
ProMES system is built up around the theory of work behaviour.
___________________
Motivation is seen as a resource allocation process, which is
___________________ allocated across possible actions or tasks. Motivational force is
PE
___________________ defined as the degree to which a person believes that changes in
the amount of personal resources in the form of time and energy
___________________
(effort) devoted to different acts (tasks) over time will result in a
___________________
change in anticipated need satisfaction.
___________________
ProMES system is shown as Figure 17.8. According to Pritchard,
___________________ motivational force of a person is the result of his acts, products,
evaluations, outcomes and need satisfaction.
z An act is the ‘doing’ of something, which is characterized by
amplitude and direction. An example is eating.
z Products are the results of acts and are a consequence of the
person’s output.
)U
z When products are observed and evaluated, this results in
evaluations where an evaluator places the measured product
on a good to bad evaluative continuum.
z Outcomes follow evaluations. These are intrinsic such as a
feeling of accomplishment from getting a pat on the back from
the boss, or some intrinsic satisfaction.
z Outcomes get their motivating power because of their ties to
need satisfaction.
(c
Figure 17.8: The Productivity Measurement and Enhancement System
Positive affect occurs when needs are satisfied and negative affect
occurs when needs are not satisfied. The relationship between each
of these elements determining motivational force, are called 273

contingencies. These contingencies can be linear as well as Notes
S
non-linear. ___________________
Let us see how the ProMES system is developed and implemented. ___________________
There are a number of steps involved:
___________________
z A design team is formed, which is composed of those who will
___________________
be measured, one or two supervisors, and one or two
facilitators. ___________________
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___________________
z The team identifies objectives for the unit.
___________________
z For each objective, one of more quantitative measures, called
indicators that measure how well these objectives are being ___________________
met, are selected. Indicators have to be largely under control of ___________________
the people being measured.
___________________
z The indicator is defined in terms of contingencies. A
contingency is a function that defines how much of an
indicator is how good for the organization.
z Design a system to obtain feedback.
z Give and respond to feedback.
)U
z Monitor the project over time and adjust if needed.
The most interesting feature of ProMES is the bottom-up
approach. People are really involved in the design of the system,
which increases the acceptance of the system. Also, by using
contingencies and accepting non-linearity, priorities for
improvement are more flexible as the amount of contribution that
level of indicator makes to the overall functioning of the
organization is set.
However, these contingencies make the system more difficult to
develop. Also, ProMES does not necessarily require the
contingencies to be balanced. The fact that objectives are not
balanced is often seen as a disadvantage, as it could result in a
business unit’s PMS being not in line with the company’s PMS.
(c
Evaluating these Performance Measurement Systems for the

Supply Chain
How do these performance measurement systems help develop a
performance measurement system for the supply chain? On a
strategic level, supply chain performance is determined by the
extent to which it is able to contribute to the organization’s desired
objectives.
Logistics Strategy
274 On an operational level, supply chain performance is determined

Notes by the extent to which it achieves the demands and needs of three
S
___________________ principal sets of stakeholders: customers, suppliers and senior
management. Typical performance measures may include inbound
___________________
delivery performance, quality of incoming goods, total cost of
___________________
ownership of purchased goods, spend per employee, amount of non-
___________________ contractual spend, and exposure to supply risks, etc.
___________________ The scores of the performance measurement systems, we have
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___________________ discussed, on different dimensions are summarized in Table 17.1.
These factors include both strategic and operational factors.
___________________
___________________ Table 17.1: Assessment of Performance Measurement Systems
___________________ BSC PPR ProMES
___________________ Strategic and operational + + +

measures
All stakeholders considered - + +/-
Lead and lag indicators ++ ++ +/-
Individual-level performance +/- - ++
measured
Effectiveness and efficiency + + +/-
measures
)U
All of the performance management systems claim to include
performance measures that range from the strategic to the
operational level. However, these systems are basically with a
strategic focus, except for ProMES, which is focused at the level of
the individual. It needs to be remembered that none of these
systems was developed specifically for the supply chain function.
It may be possible to use the following approach for developing a
supply chain performance measurement system using these
systems. It will require the following steps:
1. Define the purpose(s) of the supply chain performance
management system. The purpose could be accountability to
the board, motivation of individual purchasing employees,
(c
and/or a tool for continuous improvement.

2. Seek a close fit between the supply chain performance
management system and the organization-wide performance
management system. Pursue opportunities to adapt the
organization-wide system to include supply chain performance
parameters such as suppliers and/or sourcing inputs as
performance areas for total business performance 275

measurement. Notes
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3. Supply chain performance indicators should be linked to the ___________________
supply chain strategy, which in turn, should be derived from ___________________
overall organization goals and strategy.
___________________
4. Ensure that the final list of performance indicators is balanced
___________________
in terms of financial vs. non-financial indicators, lead vs. lag
___________________
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indicators, indicators of operational vs. strategic performance,
and indicators related to effectiveness vs. indicators related to ___________________
efficiency. ___________________
5. Involve supply chain personnel in developing the performance ___________________

indicators and connect the performance indicators to the job
___________________
descriptions of all employees.
___________________
6. Review the system and its supply chain performance
indicators periodically to make sure it stays in line with
changes in strategies and context in which the systems
operates.
Using the above six steps, a purchasing manager can develop a
purchasing performance measurement system that is well-
)U
connected to the rest of the organization, is balanced in terms of
measuring short-term and long-term performance, and which helps
motivate and guide purchasing employees.
However, it must be accepted though, that this approach can be
used to integrate supply chain performance management system
with the overall performance management system of the
organization, the end result needs improvement.
Check Your Progress

Fill in the blanks:
1. The ................. supply chain is an idealized concept of
perfect information flow and perfect material flow,
facilitated by all supply chain players thinking and
(c
acting as one.
2. ................. is associated with information flow. It is
the way a firm carries out customer orders, from
production targets and supplier raw material
requests.
Logistics Strategy
276
SCOR Model
Notes
Activity
S
With___________________
the help of a figure,
One of the early attempts to develop such a model specifically for
explain integrated SCOR the supply chain was taken up by the Swedish firm IKEA. It
model on a chart paper.
___________________ developed a performance model called “the product management
___________________ model”. This model consists of measures within five different
___________________
areas:
___________________ (1) Product range;
PE
___________________ (2) Cost;
___________________ (3) Quality;
___________________ (4) Availability; and
___________________ (5) Service.
___________________ These areas of measurement were identified by consumers during
the buying process, who were asked to assess whether the products
offered value for money or not, and whether the product was
available in stock. As the model did not develop a standard cause-
and-effect relationship, it was based on each manager developing
his/her own idea of what created business success based on the
customer information on these measures.
)U
IKEA’s desire to make explicit the priorities of the supply chain is
illustrated in the product management model. It viewed
performance to be interrelated; the different dimensions of
performance were considered part of a greater whole, which is
fundamental in systems thinking. Though the model was not
intended to make explicit the relationships between the different
dimensions of performance, its scope of measurement activities
encompassed several organizations.
Since the IKEA model, a lot of water has passed under the bridge.
The Supply Chain Operations Reference (SCOR) model has been
developed by the Supply-Chain Council as the cross-industry
standard for supply-chain management. The SCOR model is based
on a benchmarking process and used to measure the performance
of an existing supply chain and its related pro-cesses. It covers
(c
customer interactions starting from order entry through paid

invoice. It also covers product transactions and market
interactions from helping understand demand to fulfilling
individual orders.
The SCOR model, whose conceptual framework and linkages are
shown in Figure 17.9, is a process reference model that expands to
analyse processes involving cross-functional activities. It looks at 277

five distinct management processes that constitute the basic Notes
S
elements of a value chain: ___________________
z Plan: Processes that balance aggregate demand and supply to ___________________
develop a course of action which best meets sourcing,
___________________
production and delivery requirements.
___________________
z Source: Processes that procure goods and services to meet
___________________
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planned or actual demand.
___________________
z Make: Processes that transform product to a finished state to
meet planned or actual demand. ___________________
z Deliver: Processes that provide finished goods and services to ___________________
meet planned or actual demand, typically including order ___________________

management, transportation management, and distribution ___________________
management.
z Return: Processes associated with returning or receiving
returned products for any reason. These processes extend into
post-delivery customer support.
)U
Figure 17.9: The SCOR Model
The model uses a four-level pyramid; Process-Type Level;

Configuration Level; Process Element Level; and Implementation
(c
Level—that defines the steps a company needs to take to measure

and improve supply chain performance. Table 17.2 gives the
configuration toolkit for determining the process type.
Logistics Strategy
278 Table 17.2: The SCOR Model Configuration Toolkit

Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
The process involves comparing practices and procedures to those
___________________
of the ‘best’ to identify ways in which an organization (or
___________________ organizations) can make improvements. This is accomplished
___________________ through benchmarking.
___________________ The SCOR Model endorses twelve performance metrics. The level 2
and 3 are key to these twelve level 1 metrics. Metrics can include a
wide variety of performance measures. A list of the commonly used
metrics is given below:
z Delivery (in-full, on-time, in-specification),
z Order fulfilment,
)U
z Fill rate (for make-to-stock),
z Lead time or supply-chain response time,
z Production flexibility,
z Total cost,
z Realized margin,
z Warranty costs, and
z Returns processing costs and more.
At level 3, different suppliers under consideration are added and
compared on the criteria laid out in level 2. Benchmarking is an
effective means of determining the supply chain’s performance
relative to those of other organizations. A data bank of
(c
benchmarking studies is provided with the SCOR model to make

relevant comparisons. A company is not likely to meet best practice
norms in all metrics, but the metrics it should focus on, should
reflect its customer needs and market realities.
The model draws attention to process gaps rather pointing to
specific departments’ performance. This is meant to help the
company communicate without ambiguity and help measure,
manage and refine processes. Based on a data bank on different 279

industries, it helps the organization quantify operational Notes
S
performance and set improvement targets using best practices in ___________________
similar companies. Organizations have to devise means to relate
___________________
departmental performance metrics to the SCOR model.
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
Figure 17.10: Integrated SCOR Model ___________________
The challenge is in SCM is to integrate the functional performance

measures into overall measures that will reflect the performance of
the entire supply chain. The performance measures must show not
only how well you are providing for your customers (service
metrics) and how you are handling your business (speed,
asset/inventory, and financial metrics), but also for the supply
)U
chain as a whole. Measurement is also an ideal way to
communicate requirements to other members of the supply chain
and to promote continuous improvement and change.
Many organizations are willing to receive information from other
supply chain members, but are reluctant to share their information
with other members. The issue of the organization’s willingness to
share information with other supply chain members is something
that needs management attention and a solution to make the SCM
initiative successful. Working together, organizations can better
satisfy the customer’s requirements for quality, cost, product and
service.
By providing a complete set of supply chain metrics, industry best
practices and enabling systems’ functionality, the SCOR model
(c
allows firms to conduct a thorough fact-based analysis of all

aspects of the supply chain.
Performance Measurements in the Service Industry

Historically, measurement of service industry has focused on
financial and operational metrics comparable to that of traditional
Logistics Strategy
280 industries. However, these measures are generally lagging in

Notes nature and effective performance measurements also have to look
S
___________________ at intangibles. Some of the models that we discussed in the last
section e.g. BSC, Performance Prism of Neely, and Productivity
___________________
Measurement and Enhancement System have been successfully
___________________
used, but as mentioned earlier they have to be specifically designed
___________________ for such measurements.
___________________ Parasuraman and Johnston et al. have independently developed a
PE
___________________ way of describing service quality measures, which specifically focus
on the characteristics of the service industry. These models have
___________________
also been successfully implemented in a number of service
___________________
organizations. For example, Jet Airways has adopted the
___________________ Parsuraman model.
___________________ Parsuraman identified these as service dimensions while Johnston
et al identified these as quality factors. These can be called service
determinants and can be used to measure perceived as well as
delivered quality. Performance measurements for service
industries based on both these classifications are shown in Table
17.3.
Table 17.3: Service Dimensions and Quality Factors

)U
Service dimensions Service quality factors
Reliability (ability to perform the z Access
promised service)
Appearance of physical facilities z Aesthetics/Appearance
(personnel, equipment, z Availability
communication materials)
Responsiveness (willingness to help z Cleanliness/Tidiness
customers promptly) z Comfort
Assurance (knowledge, courtesy of z Communication
employees) z Competence
Empathy (of employees) z Courtesy
z Friendliness
z Reliability
z Responsiveness
z Security
(c
Defining service quality is a complex and ambiguous task.

Therefore, it is important to specify this service quality definition
before trying to build an information and measurement system
regarding service quality.
Models like the ones described above differentiate between soft
skills and hard skills. Different elements can be included in the
different definitions: perceived or delivered service quality, quality 281

of process, inputs or outputs, service quality characteristics such as Notes
S
reliability, comfort, responsiveness, quality of core or peripheral ___________________
services, etc.
___________________
Other Performance Measures ___________________
Measurement systems that measure inter-firm and inter- ___________________

functional performance are already in force in the area of logistics ___________________
PE
and have been used for quite some time. These have to be extended
___________________
in supply chain management also. Based on this experience, some
functional performance measures are given in this section. ___________________
___________________
Purchasing Metrics
___________________
Measuring performance of the purchasing function continues to be
___________________
a vexing problem. The performance metrics in purchasing and
supply are not necessarily tied directly to economic value add.
Some of the strategic areas that encompass the measures in
purchasing and supply:
1. Purchase cost savings/avoidance
2. Managing supplier base. This includes time to market,
)U
supplier satisfaction, partnerships, supplier health (financial
and/or management stability),
3. Internal customer satisfaction
4. Purchasing cost
5. Resource utilization
Each organization is unique and requires measures tailored to its
current environment and people. However, In addition some other
areas of focus can be:
z Savings versus Purchase Expenditure Plan (PEP): The
cost savings goal is in addition to the yearly PEP cost saving
goal.
(c
z Design for Cost (DFC) Savings: Cost savings initiated by

purchasing/supply in the product design stages.
z Return on Enabling: Getting value from suppliers beyond
cost reduction.
z Cost of Inventory: The cost of inventory holding and
obsolescence.
Logistics Strategy
282 The measures in the organization, managing supplier base, and

Notes overall performance evaluation areas simply are not receiving the
S
___________________ same relative attention as those in developing supplier base, cost
effectiveness, and systems utilization.
___________________
___________________ Logistics Metrics

___________________
The objective of logistics performance measurement is to determine
___________________ whether or not the organization has improved customer service at
PE
___________________ lower logistics costs and a reduction in the cost of services. Some of
the common measures are:
___________________
z Overhead as % of Total Costs
___________________
z Overhead to Cost of Goods Sold Ratio
___________________
___________________ z Order Fulfilment Costs

z Order Fulfilment Costs as a % of Order Management Costs
z Process Costs
z Total Supply Chain Costs as a % of Revenue
z Total Supply Chain Costs as a % of Total Costs
The basic business goals in logistics are to improve customer
)U
service and provide better service levels that reflect in improved
quality and with increased accuracy. In addition, volatile consumer
demand situation requires increased speed and efficiency. Many
organizations are automating processes to eliminate errors due to
manual processes. They are also increasing collaboration
(internally and externally) to reducing operating costs and increase
efficiency.
Collaborating on performance measurements is only possible when
partner firms in the supply chain are getting closer to each other.
It means that the borders are becoming less distinct. This is a
great achievement because trust and cooperation are required to
get access to information beyond a single firm. Obtaining access
makes it possible for firms to develop and act in accordance with
(c
wider objectives e.g. that of an integrated supply chain.
Future Directions
In today’s world, it is not the strongest or biggest companies that
win. It is the most adaptable companies equipped with the best
technology that do well. Many companies assume that competitive
advantage will come from economies of scale, fixed supply chains, 283
predictable consumer markets and static operations optimized for Notes
S
efficiency and asset utilization. This is no longer true for the ___________________
future.
___________________
The twenty-first century has changed the way companies operate.
___________________
With the coming of the information age, firms are being
increasingly forced to transform their domestic and international ___________________
supply chains at a rapid pace, driven by both the suppliers and the ___________________
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customers, both expecting that companies will provide standards ___________________
acceptable in this globalized world.
___________________
With such changes in the air, logistics will ultimately yield a
___________________
sustainable advantage in the market when implemented through
changes in the corporate infrastructure—people, technology, ___________________
facilities and/or strategic corporate relationships. These impacts of ___________________

these changes are visible in the trends projected for the logistic
industry worldwide—and are described in the remaining part of
this section.
Agility, Efficiency and Supply Chain Responsiveness

The future scenario requires companies to handle constantly
)U
changing multi-channel, regional, and customer specific
requirements while reducing costs. It also requires leveraging
economies of scale, streamlining operations, and reducing cycle
time. For this, you require a high degree of automation. But at the
same time, you cannot handle these issues unless you are agile and
responsive.
A high degree of automation, which is the trend in many logistics
companies of today, restricts the agility of the process. It becomes
more difficult to quickly identify and react to changes in supply,
demand, and execution threats/opportunities. For this, you have to
establish logical decoupling points in the system.
Logical decoupling points occur when the amount of coordination
and information between two operations are minimal. A logical
(c
decoupling point may occur between inbound shipment to a

distribution centre and specific customer requirements. For
example, Gillette has been able to drive down finished product
inventory and improve customer service by having final assembly
executed in the distribution network.
Logistics Strategy
284 These kinds of capabilities are critical as the future portends to

Notes show significant demand volatility. In addition, many customer
S
___________________ specific requirements, may be packaging or simple configuration
related, or extremely short customer lead times, are adversely
___________________
impacted by long delivery lead times. As firms face greater
___________________
competitive threats from competitors or customers they will need
___________________ to place greater emphasis on market strategies enhanced with
___________________ information strategies to augment logistics system efficiency.
PE
___________________ An increased focus on efficiency does not imply that the other
dimensions like market responsiveness, channel coordination can
___________________
be neglected. This means that efficiency must be tailored to meet
___________________
the customer and channel needs of the organization’s strategy. The
___________________ failure to adequately optimize material flow, coordinate it, and
___________________ improve it, will limit the ability for organizational transformation.
To remain responsive and efficient at the same time creates
conflicts. It is difficult to simultaneously manage the conflicts
among cost effectiveness, market responsiveness, and inter- and
intra-organizational coordination. Firms can improve their ability
to this conflict by maintaining a dynamic balance through the use
of logistics leverage. Logistics leverage, shown in Figure 17.11, is
)U
achieved when implemented through a successful marketing
strategy that creates recognizable value for customers.
Figure 17.11: Logistics Leverage
Supply chain efficiency and agility are both required to improve

(c
market share profitability. Firms face a balancing act between cost

reduction and agility. Success in leveraging logistics reduces costs
and increases customer satisfaction and, therefore, positively
influences the firm’s profitability. Even for commodity products,
the potential exists to differentiate the product/service offering in
the eyes of the customer by leveraging the delivery aspect of the
mix.
Companies with service-based competitiveness strategies will not 285

be just looking at improving their complete and on-time delivery Notes
S
performance; they will have to leverage their performance to help ___________________
them become the supplier of choice.
___________________
Competitors wanting to copy logistics leverage attained by another
___________________
firm will find it difficult because it requires unique, experienced,
and well-coordinated relationships between multiple parties ___________________
[sources] in the channel. Thus, a superior logistics channel ___________________
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structure generally leads to competitive advantage. ___________________
To become the supplier of choice, firms will have to provide an ___________________
“order of magnitude” difference in customer service, in the future.
___________________
This means that organizations will have to dramatically shorten
order lead times, measurably increase perfect orders, and develop ___________________
customer unique fulfilment capabilities. Firms will have to shift ___________________

their focus from competitors to customers. They will have to
become increasingly agile and both supply chain responsiveness
and efficiency will become critical factors in their achieving these
goals.
Information Technology
)U
Information technology developments over the past decade have
enabled companies to make a quantum leap in their logistics
strategies. Data management is fast becoming the competitive
edge that a company needs to win customers. Data management
creates the intimacy in the customer relationship necessary for
strong client relationships.
The appropriate combination of information technologies,
processes, and people is critical to generating the data
management capability necessary to win customers. This is also
required to facilitate the speed and continuity of innovation that
will be expected by the marketplace; as well as the growth,
revenues, and profits that are constantly demanded by the
shareholders.
(c
Today, companies are looking beyond just monitoring to decision

making. The role of IT in decision-making is shown in Figure
17.12. The ability to use IT for decision making in the developing
circumstances will require organizations to access information
quickly enough, in a real time environment, to be able to use it - a
necessary requirement as competition will increase.
Logistics Strategy
286
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
Figure 17.12: Role of IT in Decision-making
___________________
Creating and managing an agile supply chain requires the right IT
___________________
infrastructure with modularity of information technology that is
essential to providing enterprises with flexibility. Logistics
information will become more and more important for supporting
an agile enterprise’s decision-making, including forecasting and
demand planning. In order to compete successfully for the future,
such systems with real time environment will play an important
part.
)U
Logistics information is necessary in making good decisions,
optimizing logistics costs and lowering the need for excess
inventory in the supply chain. Good supply chain management is
reflected when information becomes the substitute for inventory.
With increasing competition, more and more companies will be
moving in this direction, substituting information for inventory.
This will also require that companies will have to provide timely
visibility into the critical processes involved in supply chain
management. Today’s web-based environment can provide access
to information on a company’s orders as they move from the factory
floor to the customers’ door. New, more reliable infrastructure for
tracking and monitoring supply chain events will have to be put in
place for the future.
(c
Firms will have to move from merely tracking their supply chain
events to performing advanced analysis in a real-time environment
in order to drive changes in their supply chains. Real-time
visibility and access to information requires that they must also
understand how they collect, validate, clean and manage their
data. This will be a critical step in implementing such systems.
The ultimate in IT integration is the creation of a virtual 287

enterprise. A virtual enterprise can be thought of connecting and Notes
S
integrating key intellectual capital across the enterprise or supply ___________________
chain. This model offers the advantages of a vertically coordinated
___________________
supply chain and the benefits from the focus and specialization
that drives virtual corporations. Virtual integration has the ___________________
potential to achieve both coordination and focus. It has the ___________________

potential to become a new organizational model for the information
___________________
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age.
___________________
Collaboration with Partners ___________________
Closely related to the topic of virtualization is that of collaboration. ___________________

Collaboration is a fundamental shift from price driven, arm’s ___________________
length transactions to efficiency focused relationships.
___________________
Collaborative management propels buyers and their service
providers toward stronger, mutually beneficial relationships. With
each group adopting a long range, cooperative perspective, it takes
out additional time, inventory, and cost of the pipeline.
The primary facilitators for such collaborations are: corporate
compatibility, similar management philosophies and techniques;
)U
mutuality; and symmetry. Situation specific facilitators like;
exclusivity, share competitors, physical proximity, a prior history
of partnering, and a shared end user; strengthen the partnership
when present.
However, companies will need a different approach to
collaborations as change becomes more rapid. With rapid change,
longer supply chains become increasingly subject to business
disruptions from volatile markets, fast-changing consumer tastes
and unexpected political and economic events. The critical success
factors for effective collaborations under these conditions are
expected to be based on Internet-based technology tools,
collaborative planning, and synchronization of information.
In the logistics and supply chain arenas of the future, the ability to
develop effective collaborations will become a key to success.
(c
Integrating end-to-end supply chain processes, including real-time

collaboration with trading partners, will continue to be a critical
element in extending the supply chain and leveraging the core
domain expertise of each player, particularly, since many logistics
and supply chain innovations are multi-organizational by
definition. The knowledge and skill sets relating to the formation,
Logistics Strategy
288 sustainability, and evolution of collaborative relation-ships will

Notes emerge as essential capabilities.
S
___________________
Collaborative logistics provides gains to all its members through
___________________ forward visibility of the supply chain, as well as the efficiencies
___________________ that are created. Firms partnering and aligning their business
with others differentiate themselves by performance and continue
___________________
to make better capital asset investments in processes, technology,
___________________ and intellectual capital. Forward-looking organisations will
PE
___________________ increasingly adopt changes to collaborate with customers,
suppliers, and even competitors to create value for the end-use
___________________
customer or consumer.
___________________
___________________ Asset Utilization

___________________ Related to collaboration is the concept of asset utilization. With
increasing financial, customer service and environmental
demands, many transportation companies have started gathering
equipment asset information through web portals, community
systems and location-tracking technologies. This search, though at
its early stages, is an effort to connect and run their equipment
networks more effectively. This focus has validity and is now being
)U
practiced by some transportation companies.
The future seems to indicate the successful implementation of this
concept. With increasing financial, customer service and
environmental demands, this has the potential to become an
enabler to manage the supply and demand of equipment. By
interchanging equipment with any transportation provider, on
demand, anywhere in the world, there will be optimization in the
use of enterprise resources while improving customer satisfaction.
As this fructifies, transport providers will offer higher value end-
to-end services, increase their appeal to customers and enjoy the
multi-fold economic benefits from greater asset utilization.
Cross-functional Approach
A greater emphasis on efficiency has been shown to be a key to
(c
supply chain coordination. Efficiency is gained through a cross-

functional approach and strategic alignment. Most supply chains
encompass multiple types of organisations and resources that must
work together to create value for the end user or customer. The
importance of a cross-functional approach to processes for the
smooth functioning supply chain is obvious.
The dramatic increase in global sourcing and global marketing has 289
made decision making for growth in areas like offshore Notes
S
manufacturing locations, market opportunities, and vendor ___________________
selection etc., more complex. To make these decisions in today’s
___________________
world, access to detailed logistics information is essential.
___________________
If you want to change a vendor or a manufacturing location, you
need to understand how that move will affect your logistics costs. If ___________________
new overseas market opportunities need to be exploited, you need ___________________
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to know where to set up manufacturing within the distribution ___________________
region that can offset logistics costs. You want to assess which
___________________
sourcing locations best balance factors related to cost, customer
service, working capital and risk. ___________________
Until you reach the point where all of the involved organizations ___________________
and needed resources are working together as effectively as ___________________

possible, the markets for the resulting products and services will
remain unfulfilled.
It is here that you find that even though certain supply chain
resources are significantly ‘upstream’ from the end user or
consumer, a far-reaching, comprehensive perspective on the overall
supply chain becomes essential. It means direct involvement on
)U
cross-functional teams at different levels, within the organization
and the “upstream” organizational resources. This approach is
becoming more and more important and will become increasingly
common in the future for organizations to set realistic goals and
overcome constraints.
Cross-function processes are designed to support and drive
business objectives. They will also being increasingly used, based
on accurate information about direct and indirect logistics costs, to
provide what-if analyses of sourcing information. In cross-
functional approach, all team members can contribute, review
results, contribute feedback and track project progress. Employees
and suppliers feel satisfied and they get an opportunity to express
their idea and discuss pros and cons of their idea. It also promotes
(c
cordial relationship among team members and their functional

departments or organizations and adds to employee’s motivation
and satisfaction.
With increasing demand uncertainty and increasing competition in
the future, a supply chain that is able to achieve efficiency,
through the cross-functional approach, has a strategic weapon in
the marketplace. Not only does a cross-functional approach makes
Logistics Strategy
290 logistics strategy more efficient, it also makes it easier to optimize

Notes material flow, coordinate it, and improve it and meet customer and
S
___________________ channel needs more effectively.
___________________
Gaining Sustainability through Green Initiatives
___________________
The concept of having a green supply chain is moving from being a
___________________
public-relations strategy to a means of improving compliance and
___________________ economic value. This is making sustainability and green
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___________________ imperatives for effective supply chain design and execution
essential. Companies that learn to lower costs and improve
___________________
performance through green initiatives will have a competitive
___________________ advantage in the marketplace in the future.
___________________ As companies focus on supply chain and product lifecycle
___________________ management initiatives in the light of the transformation that is
taking place, environmental concepts will include the designing of
products derived from recycled materials; reducing the waste of
products from natural resources; ensuring “zero waste” from a
product at end-of-life. It will also impact sourcing and fulfilment
strategies as these will increasingly be based on less fuel
consumption and the environmental practices of supply chain
)U
partners.
Check Your Progress

Fill in the blanks:
1. The challenge is in SCM is to integrate the ...............
performance measures into overall measures that will
reflect the performance of the entire supply chain.
2. The objective of ............... is to determine whether or
not the organization has improved customer service at
lower logistics costs and a reduction in the cost of
services.
Summary
(c
Supply chain performance improves if all stages of the chain take

actions that together increase total supply chain profits. A lack of
coordination can impact the performance. This occurs either
because different stages of the supply chain have objectives that
conflict or because information moving between stages gets
delayed and distorted. Supply chain coordination requires each
stage of the supply chain to take into account the impact it actions 291
have on other stages. Notes
S
It is a formal, step-by-step process that identifies organizational ___________________
objectives, develops a measurement system to assess how well the ___________________
unit is meeting those objectives, and develops a feedback system,
___________________
which gives management information on how well the unit is
performing. ___________________
___________________
PE
These models are not specific to the supply chain operations. The
IKEA model and the SCOR model meet this need. The IKEA model ___________________
consists of measures within five different areas: product range; ___________________
cost; quality; availability; and service. The SCOR model looks at
___________________
five distinct management processes that constitute the basic
elements of a value chain: plan, source, make, deliver, and return. ___________________
The model uses a four-level pyramid; Process-Type Level; ___________________

Configuration Level; Process Element Level; and Implementation
Level. By providing a complete set of supply chain metrics,
industry best practices and enabling systems’ functionality, the
SCOR model allows firms to conduct a thorough fact based
analysis of all aspects of the supply chain.
Logistics performance measurements are overhead as percentage
)U
of total costs, overhead to cost of goods sold ratio, order fulfilment
costs, order fulfilment costs as a percentage of order management
costs, process costs, total supply chain costs as a percentage of
revenue and total supply chain costs as a percentage of total costs.
In today’s world, the most adaptable companies that are equipped
with the best technology will thrive. Companies are being
increasingly forced to transform their domestic and international
supply chains, driven by suppliers and customers, both expecting
that companies will provide standards acceptable in this globalized
world.
Lesson End Activity

Most logistics strategies attempt to simultaneously manage the
(c
conflicts among cost effectiveness, market responsiveness, and

inter-and intra-organizational coordination by maintaining a
dynamic balance. How can this strategy be successful?
Logistics Strategy
292
Keywords
Notes
S
Seamless Supply Chain: Seamless supply chain is an idealized
___________________
concept of perfect information flow and perfect material flow,
___________________ facilitated by all supply chain players thinking and acting as one.
___________________
Balanced Scorecard: It introduces the concept of balancing four
___________________ different dimensions of performance, and also uses cause-and-
___________________ effect relationships to describe how the four dimensions of
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performance are connected.
___________________
The Performance Prism (PPR): The Performance Prism (PPR)
___________________
is organized around five distinct but linked perspectives of
___________________
performance: stakeholder satisfaction, strategies, processes,
___________________ capabilities, and stakeholder contributions.
___________________ The Productivity Measurement and Enhancement System
(ProMES): It is a formal, step-by-step process that identifies
organizational objectives, develops a measurement system to
assess how well the unit is meeting those objectives, and develops
a feedback system that gives management information on how well
the unit is performing.
)U
1. What is the bullwhip effect and how does it relate to lack of
coordination in the supply chain?
2. What can happen in the supply chain if, (a) incentives are not
properly designed, or (b) demand forecast is based on orders?
3. How is building of strategic partnerships and trust valuable
within a supply chain?
4. What do you understand by a seamless supply chain? How
does it help in supply chain integration?
5. Give a brief description of the following models, (a) Balanced
Scorecard, (b) IKEA and (c) SCOR. What are the main
provisions of these models and their differences?
(c
6. How can the performance of supply-chain be measured? What

are the benefits and risks in supply-chain integration?
7. “In today’s world the most adaptable companies that are
equipped with the best technology will thrive”. Critically
discuss this statement.
8. “Logistics information will become more and more important 293

for supporting enterprise decision making”. Do you agree? Notes
S
Furnish reasons for your position in the matter. ___________________
___________________
Further Readings
___________________
Books ___________________
PE
Management, Springer-Verlag New York, LLC; 2004. ___________________
Philippe-Pierre Dornier, Panos Kouvelis, Michel Fender, Global ___________________

Operations and Logistics: Text and Cases, Wiley, John & Sons, ___________________
Incorporated 1998.
___________________
___________________
Advantage for the New Millennium, Blackwell Publishing 2006.
Sridhar R. Tayur (Editor), Michael J. Magazine (Editor), RAM
Web Readings
)U
http://supply-chain.org/scor
http://supply-chain.org/scor-overview
http://scm.ncsu.edu/scm-articles/article/the-scor-model-for-supply-
chain-strategic-decisions
(c
Logistics Strategy
294
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 18: Manufacturing Logistics Strategy
Unit 18
295
Notes
S
Activity
Traditionally, most companies
Manufacturing Logistics Strategy
___________________
utilized a “push” or Make-To-
Stock (MTS) system, holding
___________________
inventory at the end of the
supply chain. Give reasons.
___________________
Objectives
___________________
topics: ___________________
PE
\ Global Manufacturing ___________________
\ Agile Manufacturing Strategy ___________________
\ Leagile Strategy
___________________
___________________
Introduction
___________________
Logistics and Manufacturing Strategy is about supply-chain
integration, which involves strategic management of the value
chain from material to customer. Students discuss operations
strategy issues that are important to both manufacturing and
services including many social issues. These issues include waste
reduction, recycling, outsourcing, global logistics, plant site
)U
decisions, environmental concerns and global agribusiness. Other
social issues related to manufacturing strategy include design
issues like flexibility and mass customization, transportation
modes, environmental impact, and the economic importance of
supply chains. A simulation exercise, called “The Supply Chain
Game”, is conducted outside of class time. Each simulation is of a
somewhat sophisticated supply chain consisting of the
management of a single region or multiple regions, multiple
transportation modes, inventory decisions, etc.
Global Manufacturing
Add Real Value

(c
It is composed of a number of teams, ultimately responsible for the

effective and timely manufacture, assembly, repair and delivery of
the company’s products, supporting our customers around the
world. Using cutting-edge technology and equipment, our state-of-
the-art manufacturing facility is located in Waterloo, Canada, and
is fully carpeted and air-conditioned, features a cafeteria and uses
natural lighting.
Logistics Strategy
296 The key teams supporting Global Manufacturing are:

Notes
S
z Manufacturing Production
___________________
z Manufacturing Engineering Support
___________________
z Global Supply Chain
___________________
z New Product Introduction
___________________
___________________
z Global Repair Services
PE
___________________ z Manufacturing and Supplier Quality Engineering
___________________ Here are some of the positions that you will find within the
Manufacturing area:
___________________
___________________ Supply Chain, Materials and Inventory Management

___________________ These teams are responsible for managing the sourcing, planning,
tracking and distribution of all manufacturing parts and materials,
as well as managing vendor relationships, ensuring a cost-effective
and smooth manufacturing process globally. Positions in this area
include: Commodity Manager, Production Planner, Master
Scheduler, Buyer/Planner, Warehouse Manager, and Materials
Operator.
)U
Engineering
These teams are responsible for developing, implementing, and
maintaining the methods, equipment and processes for the
manufacture and testing of our products. Positions include:
Manufacturing Engineer, Test Systems Development Engineer,
SMT Process Engineer, Software Developer, and Product.
Production and Repair Services

These teams are responsible for the operation of equipment and
processes to manufacture, assemble and repair RIM products.
Positions include: Manufacturing Management, RF Technician,
Board Repair Operator, SMT Operator, Electronic Assembler, Test
Engineering Technician and Production Engineering Technician
(c
Make to Order and Make to Stock Strategy

Inventory costs make up a large portion of total costs in many
supply chains, so effective inventory management is one of the
most important issues facing supply chain managers.
Traditionally, most companies utilized a “push” or Make-To-Stock
(MTS) system, holding inventory at the end of the supply chain. 297
However, in an MTS system, firms need to be able to estimate Notes
S
demand to determine how much to produce and stock, and so these ___________________
systems rely heavily on forecasts, which in many cases are not very
___________________
accurate. Thus, many progressive companies have shifted to “pull”
or Make-To-Order (MTO) systems, holding no inventory at all and ___________________
producing to order. In these systems, companies produce based on ___________________

actual customer demand instead of forecasts. Inventories are
___________________
PE
eliminated, but customers must now wait for delivery, perhaps
___________________
leading to loss of competitiveness on the part of the firm. The
decision to use either a push strategy or a pull strategy for a ___________________
particular product therefore depends heavily on the characteristics ___________________
of the system. Indeed, in a supply chain, using a push strategy for
___________________
some products or components, and a pull strategy for others, might
be much more effective than using either system exclusively. ___________________
Because of this, firms are beginning to employ a hybrid approach,

a “push-pull” strategy, or combined MTO-MTS system, holding
inventory of some components, and producing others to order.
In addition to inventory decisions, the scheduling of the production
of orders and the approach to lead time quotation to customers also
have significant impact on the performance of supply chains,
)U
particularly in MTO supply chains. Companies need to quote short
and reliable lead times to their customers to remain competitive in
the market and to increase their profits. For a company that
produces multiple products with different characteristics, the
decision on when to produce each order affects the completion time
of manufacturing and thus the lead-time for that product. Thus,
firms need a policy or approach that will help them to decide which
items or components to produce to stock and which items or
components to produce to order, what inventory levels to maintain
for make-to-stock items, how to quote lead times to customers and
how to sequence orders to efficiently use limited resources. In this
paper, we explore approaches to these four interrelated decisions
for a two-stage supply chain.
(c
We have considered a variety of stylized models of a supply chain

with a single manufacturer and a single supplier in order to find
effective inventory values that should be carried at each facility
and to assess the impact of manufacturer-supplier relations on
inventory decisions and effective lead time quotation. In our
models, we consider several variations of inventory, scheduling and
lead time quotation problems in combined MTO-MTS supply
Logistics Strategy
298 chains in order to minimize a function of the total inventory, lead

Notes times and tardiness. We derive the conditions for both the
S
___________________ centralized and decentralized versions under which an MTO or
MTS system should be used for each product at each facility and
___________________
we present algorithms to find the optimal inventory levels. We also
___________________
present effective lead time quotation and scheduling algorithms for
___________________ centralized and decentralized versions of this model.
___________________ Computational tests demonstrate the effective-ness of these
PE
approaches.
___________________
Using our algorithms, we investigate the value of coordination
___________________
schemes involving information sharing between supply chain
___________________
members for this system. We see that costs can be cut dramatically
___________________ by using a combined system in-stead of pure MTO or MTS systems
___________________ and that information exchange between the supplier and the
manufacturers critical for effective lead time quotation. We also
discover that if centralization is not possible, information exchange
in the decentralized model can improve the level of performance
dramatically (particularly with respect to lead time quotation),
although not as significantly as centralized control. In addition, we
observe that when the manufacturer has significant information
about the status of the supplier, he/she can improve the
)U
performance of the decentralized system, and indeed move close to
the performance of a centralized system, by selecting the
appropriate long lead time penalty to charge the supplier. Of
course, these are stylized models, and real-world systems have
many more complex characteristics that are not captured by these
models. Nevertheless, this is to our knowledge one of the first
papers that analytically explores inventory decisions, scheduling
and lead time quotation together in the context of a supply chain,
and that explores the impact of the supplier-manufacturer
relationship in these systems. In the future, we hope to evaluate
more complex supply chain systems and assess how supply chain
architecture can impact scheduling and due date quotation
decisions. We also intend to expand this research to consider
(c
different functions of lead time in the objective function. In some

systems, the manufacturer does not have to accept all orders and
has the option to reject certain orders. Pricing and capacity
decisions canal so be in corporate into these models. In all of these
models and variants, the manufacturer needs to develop strategies
for system design, and for scheduling and due date quotation.
Lean Manufacturing 299

Notes
S
Lean Manufacturing, also called Lean Production, is a set of tools
and methodologies that aims for the continuous elimination of all ___________________
waste in the production process. The main benefits of this are ___________________
lower production costs, increased output and shorter production
___________________
lead times. More specifically, some of the goals include:
___________________
1. Defects and Wastage: Reduce defects and unnecessary
___________________
PE
physical wastage, including excess use of raw material inputs,
preventable defects, costs associated with reprocessing ___________________
defective items, and unnecessary product characteristics which ___________________

are not required by customers.
___________________
2. Cycle Times: Reduce manufacturing lead times and ___________________
production cycle times by reducing waiting times between
___________________
processing stages, as well as process preparation times and
product/model conversion times.
3. Inventory Levels: Minimize inventory levels at all stages of
production, particularly works-in-progress between production
stages. Lower inventories also mean lower working capital
requirements.
)U
4. Labour Productivity: Improve labour productivity, both by
reducing the idle time of workers and ensuring that when
workers are working, they are using their effort as
productively as possible (including not doing unnecessary
tasks or unnecessary motions).
5. Utilization of Equipment and Space: Use equipment and
manufacturing space more efficiently by eliminating
bottlenecks and maximizing the rate of production though
existing equipment, while minimizing machine downtime.
6. Flexibility: Have the ability to produce a more flexible range
of products with minimum changeover costs and changeover
time.
7. Output: Insofar as reduced cycle times, increased labour
(c
productivity and elimination of bottlenecks and machine

downtime can be achieved, companies can generally
significantly increased output from their existing facilities.
Most of these benefits lead to lower unit production costs – for
example, more effective use of equipment and space leads to lower
depreciation costs per unit produced, more effective use of labour
Logistics Strategy
300 results in lower labour costs per unit produced and lower defects
Notes lead to lower cost of goods sold.
S
___________________
In a 2004 survey by Industry Week Magazine, U.S. companies
___________________ implementing lean manufacturing reported a median savings of
___________________ 7% of Cost of Goods Sold (COGS) as a result of implementing lean2.
We believe that the savings may actually be higher for companies
___________________
in Vietnam, considering the higher levels of waste which they
___________________ typically have compared to U.S.-based manufacturers.
PE
___________________ Another way of looking at Lean Manufacturing is that it aims to
___________________ achieve the same output with less inputs – less time, less space,
___________________
less human effort, less machinery, less materials, less costs. When
a U.S. equipment manufacturing company, Lantech, completed the
___________________
implementation of lean in 1995, they reported the following
___________________ improvements compared to their batch-based system in 1991:
1. Manufacturing space per machine was reduced by 45%;
2. Defects were reduced by 90%;
3. Production cycle time was reduced from 16 weeks to 14 hours -
5 days; and
4. Product delivery lead time was reduced from 4-20 weeks to 1-4
)U
weeks.
Key Principles of Lean Manufacturing

Key principles behind Lean Manufacturing can be summarized as
follows:
1. Recognition of Waste: The first step is to recognize what
does and does not create value from the customer’s4
perspective. Any material, process or feature, which is not
required for creating value from the customer’s perspective, is
waste and should be eliminated. For example, transporting
materials between workstations is waste because it can
potentially be eliminated.
2. Standard Processes: Lean requires an the implementation of
(c
very detailed production guidelines, called Standard Work,

which clearly state the content, sequence, timing and outcome
of all actions by workers. This eliminates variation in the way
that workers perform their tasks.
3. Continuous Flow: Lean usually aims for the implementation
of a continuous production flow free of bottlenecks,
interruption, detours, backflows or waiting. When this is 301

successfully implemented, the production cycle time can be Notes
S
reduced by as much as 90%. ___________________
4. Pull-production: Also called Just-in-Time (JIT), Pull- ___________________
production aims to produce only what is needed, when it is
___________________
needed. Production is pulled by the downstream workstation
so that each workstation should only produce what is ___________________
requested by the next workstation. ___________________
PE
5. Quality at the Source: Lean aims for defects to be eliminated ___________________
at the source and for quality inspection to be done by the ___________________
workers as part of the in-line production process.
___________________
6. Continuous Improvement: Lean requires striving for
___________________
perfection by continually removing layers of waste as they are
___________________
uncovered. This in turn requires a high level of worker
involvement in the continuous improvement process.
History of Lean Manufacturing

Many of the concepts in Lean Manufacturing originate from the
Toyota Production System (TPS) and have been implemented
gradually throughout Toyota’s operations beginning in the 1950’s.
)U
By the 1980’s Toyota had increasingly become known for the
effectiveness with which it had implemented Just-In-Time (JIT)
manufacturing systems. Today, Toyota is often considered one of
the most efficient manufacturing companies in the world and the
company that sets the standard for best practices in Lean
Manufacturing. The term “Lean Manufacturing” or “Lean
Production” first appeared in the 1990 book The Machine that
Changed the World.
Lean Manufacturing has increasingly been applied by leading
manufacturing companies throughout the world, led by the major
automobile manufactures and their equipment suppliers. Lean
Manufacturing is becoming an increasingly important topic for
manufacturing companies in developed countries as they try to
(c
find ways to compete more effectively against competition from

Asia.
Logistics Strategy
302
Check Your Progress
Notes
Activity
S
Discuss for or against “Agility
is a business-wide capability
that___________________
embraces organisational 1. .................. is composed of a number of teams,
structures, information
ultimately responsible for the effective and timely
systems, logistics processes
___________________
and, in particular, mindsets. manufacture, assembly, repair and delivery of the
___________________
company’s products, supporting our customers around
___________________ the world.
PE
___________________ 2. .................. is a set of tools and methodologies that
___________________ aims for the continuous elimination of all waste in the
production process.
___________________
___________________
Agile Manufacturing Strategy
___________________
The importance of time as a competitive weapon has been
recognised for some time. The ability to be able to meet the
demands of customers for ever-shorter delivery times and to
ensure that supply can be synchronised to meet the peaks and
troughs of demand is clearly of critical importance in this era of
time-based competition.
)U
To become more responsive to the needs of the market requires
more than speed, it also requires a high level of manoeuvrability
that today has come to be termed agility.
What is Agility?
Agility is a business-wide capability that embraces organisational
structures, information systems, logistics processes and, in
particular, mindsets. A key characteristic of an agile organisation
is flexibility. Indeed the origin of agility as a business concept lies
in Flexible Manufacturing Systems (FMS). Initially it was thought
that the route to manufacturing flexibility was through automation
to enable rapid change (i.e. reduced set-up times) and thus a
greater responsiveness to changes in product mix or volume. Later
this idea of manufacturing flexibility was extended into the wider
(c
business context and the concept of agility as an organisational

orientation was born.
Agility should not be confused with “leanness”. Lean is about doing
more with less. The term is often used in connection with lean
manufacturing to imply a “zero inventory”, just-in-time approach.
Paradoxically, many companies that have adopted lean
manufacturing as a business practice are anything but agile in 303

their supply chain. The car industry in many ways illustrates this Notes
S
conundrum. The origins of lean manufacturing can be traced to the ___________________
Toyota Production System (TPS), with its focus on the reduction
___________________
and elimination of waste.
___________________
Whilst the lessons learned from the TPS principles have had a
profound impact on manufacturing practices in a wide range of ___________________
industries around the world, it seems that the tendency has been ___________________
PE
for the benefits of lean thinking to be restricted to the factory. ___________________
Thus we encounter the paradoxical situation where vehicle
___________________
manufacture is extremely efficient with throughput time in the
factory typically down to twelve hours or less, yet inventory of ___________________
finished vehicles can be as high as two months of sales œ and still ___________________
the customer has to wait for weeks or even months to get the car of
___________________
their choice!
)U
Figure 18.1: Agility
The Routes to Agility

To be truly agile a supply chain must possess a number of
distinguishing characteristics as Figure 18.2 suggests. Firstly, the
agile supply chain is market sensitive. By market sensitive is
meant that the supply chain is capable of reading and responding
(c
to real demand. Most organisations are forecast-driven rather than

demand-driven. In other words because they have little direct feed-
forward from the marketplace by way of data on actual customer
requirements they are forced to make forecasts based upon past
sales or shipments and convert these forecasts into inventory. The
breakthroughs of the last decade in the form of Efficient Consumer
Response (ECR) and the use of information technology to capture
Logistics Strategy
304 data on demand direct from the point-of-sale or point-of-use are

Notes now transforming the organisation’s ability to hear the voice of the
S
___________________ market and to respond directly to it.
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
Figure 18.2: Agile Supply Chain
The use of information technology to share data between buyers

and suppliers is, in effect, creating a virtual supply chain. Virtual
supply chains are information based rather than inventory based.
)U
Conventional logistics systems are based upon a paradigm that
seeks to identify the optimal quantities of inventory and its spatial
location. Complex formulae and algorithms exist to support this
inventory-based business model. Paradoxically, what we are now
learning is that once we have visibility of demand through shared
information, the premise upon which these formulae are based no
longer holds. Electronic Data Interchange (EDI) and now the
Internet have enabled partners in the supply chain to act upon the
same data i.e. real demand, rather than be dependent upon the
distorted and noisy picture that emerges when orders are
transmitted from one step to another in an extended chain.
Shared information between supply chain partners can only be
fully leveraged through process integration. By process integration
(c
is meant collaborative working between buyers and suppliers, joint

product development, common systems and shared information.
This form of co-operation in the supply chain is becoming ever
more prevalent as companies focus on managing their core
competencies and outsource all other activities. In this new world a
greater reliance on suppliers and alliance partners becomes
inevitable and, hence, a new style of relationship is essential. In 305

the “extended enterprise” as it is often called, there can be no Notes
S
boundaries and an ethos of trust and commitment must prevail. ___________________
Along with process integration comes joint strategy determination,
___________________
buyer-supplier teams, transparency of information and even open-
book accounting. ___________________
This idea of the supply chain as a confederation of partners linked ___________________
together as a network provides the fourth ingredient of agility. ___________________
PE
There is a growing recognition that individual businesses no longer ___________________
compete as stand-alone entities but rather as supply chains. We
___________________
are now entering the era of “network competition” where the prizes
will go to those organisations who can better structure, co-ordinate ___________________
and manage the relationships with their partners in a network ___________________
committed to better, closer and more agile relationships with their
___________________
final customers. It can be argued that in today’s challenging global
markets, the route to sustainable advantage lies in being able to
leverage the respective strengths and competencies of network
partners to achieve greater responsiveness to market needs.
Hybrid Strategies are Often Appropriate

)U
There will be occasions when either a “pure” agile or lean strategy
might be appropriate for a supply chain. However there will often
be situations where a combination of the two may be appropriate
i.e. a hybrid strategy.
Hybrid supply chain strategies recognise that within a mixed
portfolio of products and markets there will be some products
where demand is stable and predictable and some where the
converse is true. As Fisher has pointed out it is important that the
characteristics of demand are recognised in the design of supply
chains. However, it is not necessarily the case that a supply chain
should be either lean or agile. Instead a supply chain may need to
be lean for part of the time and agile for the rest.
Zara, the Spanish fashion company, provides a good example of
this hybrid supply chain strategy. Zara is one of Spain’s most
(c
successful and dynamic apparel companies, producing fashionable

clothing to appeal to an international target market of 18 to 35
year-olds. Zara’s international market positioning places it in
direct competition with some of the most skilled operations in the
business, including Italian fashion giant Benetton and US-based
The Gap and the Limited. Its rapid growth and on-going success in
Logistics Strategy
306 such a fiercely competitive environment is in fact a testament to its

Notes ability to establish an agile supply chain, which still incorporates
S
___________________ many “lean” characteristics. The pursuit of this hybrid strategy
has enabled Zara to develop one of the most effective quick-
___________________
response systems in its industry.
___________________
The whole process of supplying goods to the stores begins with
___________________
cross-functional teams comprising fashion, commercial and retail
___________________ specialists - working within Zara’s Design Department at the
PE
___________________ company’s headquarters in La Coruña. The designs reflect the
latest in international fashion trends, with inspiration gleaned
___________________
through visits to fashion shows, competitors’ stores, university
___________________
campuses, pubs, cafes and clubs, plus any other venues or events
___________________ deemed to be relevant to the lifestyles of the target customers. The
___________________ team’s understanding of fashion trends is further guided by
regular inflows of EPOS data and other information from all of the
company’s stores and sites around the world.
Raw materials are procured through the company’s buying offices
in the UK, China and The Netherlands, with most of the materials
themselves coming in from Mauritius, New Zealand, Australia,
Morocco, China, India, Turkey, Korea, Italy and Germany.
)U
Approximately 40% of garments - those with the broadest and least
transient appeal - are imported as finished goods from low-cost
manufacturing centres in the Far East. The rest are produced by
quick-response in Spain, using Zara’s own highly automated
factories and a network of smaller contractors. Material or fabric is
also held in ‘greige’ i.e. undyed and unprinted and if demand for a
particular garment turns out to be higher than expected then local
manufacturers can quickly manufacture additional product.
Zara’s manufacturing systems are similar in many ways to those
developed and employed so successfully by Benetton in Northern
Italy, but refined using ideas developed in conjunction with Toyota.
Only those operations, which enhance cost-efficiency through
economies of scale, are conducted in-house (such as dying, cutting,
labelling and packaging). All other manufacturing activities,
(c
including the labour-intensive finishing stages are completed by

networks of more than 300 small subcontractors, each specialising
in one particular part of the production process or garment type.
These subcontractors work exclusively for Zara’s parent, Inditex
SA. In return they receive the necessary technological, financial
and logistical support required to achieve stringent time and
quality targets. The system is flexible enough to cope with sudden 307
changes in demand, though production is always kept at a level Notes
S
slightly below expected sales, to keep stock moving. Zara has opted ___________________
for undersupply, viewing it as a lesser evil than holding slow-
___________________
moving or obsolete stock.
___________________
Leagile Strategy ___________________
___________________
PE
“Leagile” is a hybrid of lean and agile systems. However, this can
take one of several approaches: ___________________
z Using make-to-stock/lean strategies for high volume, stable ___________________
demand products, and make-to-order/agile for everything else. ___________________
z Have flexible production capacity to meet surges in demand or ___________________

unexpected requirements. ___________________
z Use of postponement strategies, where “platform” products are
made to forecast, and then final assembly and configuration
done upon final customer order.
The researchers note that Toyota itself uses a hybrid strategy for
its Scion line of cars, in which a base model is produced in Japan,
but with the addition of many customer options either at an
)U
operation near the port of Long Beach or at the dealer based on a
customer’s specific preferences.
Check Your Progress

Fill in the blanks:
1. ................. is a business-wide capability that embraces
organisational structures, information systems,
logistics processes and, in particular, mindsets.
2. ................. recognise that within a mixed portfolio of
products and markets there will be some products
where demand is stable and predictable and some
where the converse is true.
(c
Summary
It is composed of a number of teams, ultimately responsible for the
effective and timely manufacture, assembly, repair and delivery of
the company’s products, supporting our customers around the
world. These teams are responsible for managing the sourcing,
Logistics Strategy
308 planning, tracking and distribution of all manufacturing parts and

Notes materials, as well as managing vendor relationships, ensuring a
S
___________________ cost-effective and smooth manufacturing process globally.
Positions in this area include: Commodity Manager, Production
___________________
Planner, Master Scheduler, Buyer/Planner, Warehouse Manager,
___________________
and Materials Operator.
___________________
In an MTS system, firms need to be able to estimate demand to
___________________ determine how much to produce and stock, and so these systems
PE
___________________ rely heavily on forecasts, which in many cases are not very
accurate.
___________________
___________________
Lean Manufacturing, also called Lean Production, is a set of tools
and methodologies that aims for the continuous elimination of all
___________________
waste in the production process. The main benefits of this are
___________________ lower production costs, increased output and shorter production
lead times
Agility is a business-wide capability that embraces organisational
structures, information systems, logistics processes and, in
particular, mindsets. A key characteristic of an agile organisation
is flexibility. Indeed the origin of agility as a business concept lies
in flexible manufacturing systems (FMS).
)U
Lesson End Activity
Prepare an assignment giving examples on the hybrid system of
lean and agile.
Keywords
Leagile: “Leagile” is a hybrid of lean and agile systems.
MTS System: In an MTS system, firms need to be able to estimate
demand to determine how much to produce and stock, and so these
accurate.
(c
Lean Manufacturing: Lean Manufacturing, also called Lean

Production, is a set of tools and methodologies that aims for the
continuous elimination of all waste in the production process.
Agility: Agility is a business-wide capability that embraces
organisational structures, information systems, logistics processes
and, in particular, mindsets.
Questions for Discussion 309

Notes
S
1. What do you mean by global manufacturing?
___________________
2. Which items should be produced MTO and which ones MTS at
___________________
each step of the supply chain and what are the optimal levels
of inventory for MTS items? ___________________
3. Discuss the lean manufacturing. ___________________
___________________
PE
4. What is the benefit of a centralized supply chain as op-posed to
a decentralized system? ___________________
5. Explain agile manufacturing and also discuss benefits of it. ___________________
___________________
Further Readings ___________________
___________________
Books
Douglas Long, International Logistics: Global Supply Chain
Incorporated 1998.
)U
Web Readings
(c
Logistics Strategy
310
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 19: Retail Strategy and Supply Chain
Unit 19
311
Notes
S
Activity
Briefly sum up about retail
Retail Strategy and Supply Chain
___________________
strategy and supply chain/
logistics.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Retail Strategy and Supply Chain/Logistics ___________________
\ Retail Supply Chain ___________________
\ Supply Chain Management
___________________
\ Product Tracking Along Retail Supply Chain
___________________
___________________
Introduction
Retailing and logistics are concerned with product availability.
Many have described this as ‘getting the right products to the right
place at the right time’. Unfortunately, however that description
does not do justice to the amount of effort that has to go into a
logistics supply system and the multitude of ways that supply
)U
systems can go wrong. The very simplicity of the statement
suggests logistics is an easy process. As the boxed example shows,
problems and mistakes can be all too apparent. The real
management ‘trick’ is in making logistics look easy, day in and day
out, whilst reacting to quite volatile consumer demand.
Retail Strategy and Supply Chain/Logistics

Retailers were once effectively the passive recipients of products,
allocated to stores by manufacturers in anticipation of demand.
Today, retailers are the active designers and controllers of product
supply in reaction to known customer demand. They control,
organize and manage the supply chain from production to
consumption. This is the essence of the retail logistics and supply
(c
chain transformation that has taken place.

Times have changed and retail logistics has changed also. Retailers
are the channel captains and set the pace in logistics. Having
extended their channel control and focused on efficiency and
effectiveness, retailers are now attempting to engender a more
co-operative and collaborative stance in many aspects of logistics.
They are recognizing that there are still gains to be made on
Logistics Strategy
312 standards and efficiency, but that these are probably only obtained
Notes as channel gains (that is, in association with manufacturers and
S
___________________ logistics services providers) rather than at the single firm level. In
1996, Alan McKinnon reviewed and summarized the key
___________________
components of this retail logistics transformation. He identified six
___________________
closely related and mutually reinforcing trends:
___________________
1. Increased Control over Secondary Distribution: Retailers
___________________ have increased their control over secondary distribution
PE
___________________ (warehouse to shop) by channelling an increasing proportion of
their supplies through distribution centres (DCs). In some
___________________
sectors such as food, this process is now virtually complete.
___________________
British retailers exert much tighter control over the supply
___________________ chain than their counterparts in most other countries do.
___________________ Their logistical operations are heavily dependent on
information technology (IT), particularly the large integrated
stock replenishment systems that control the movement and
storage of an enormous number of separate products.
2. Restructured Logistical Systems: Retailers have reduced
inventory and generally improved efficiency through for
example the development of ‘composite distribution’ (the
)U
distribution of mixed temperature items through the same
distribution centre and on the same vehicle) and centralization
in specialist warehouses of slower moving stock. In the case of
mixed retail businesses common stock rooms have been
developed, where stock is shared across a number of stores,
with demand deciding to which store it is allocated.
3. Adoption of ‘Quick Response’ (QR): The aim has been to cut
inventory levels and improve the speed of product flow. This
has involved reducing order lead-time and moving to a more
frequent delivery of smaller consignments both internally
(between DC and shop) and externally (between supplier and
DC). This has greatly increased both the rate of stock-turn and
the amount of product being ‘cross-docked’, rather than stored
(c
at DCs.
QR (Lowson, King and Hunter, 1999) was made possible by
the development of EDI (Electronic Data Interchange) and
EPOS (Electronic Point of Sale), the latter driving the ‘Sales
Based Ordering’ (SBO) systems that most of the larger
retailers have installed. In other words as an item is sold and
scanned in a shop, this data is used to inform replenishment
and re-ordering systems and thus react quickly to demand. 313

Sharing such data with key suppliers further integrates Notes
S
production with the supply function. Major British retailers ___________________
have been faster to adopt these technologies than their
___________________
counterparts in other European countries, although they still
have to diffuse too many small retail businesses. ___________________
4. Rationalization of Primary Distribution (Factory to ___________________
Warehouse): Partly as a result of QR pressures and partly as ___________________
PE
a result of intensifying competition, retailers have extended ___________________
their control upstream of the DC (that is, from the DC to the
___________________
manufacturer). In an effort to improve the utilization of their
logistical assets, many have integrated their secondary and ___________________
primary distribution operations and run them as a single ___________________
‘network system’. This reduces waste and improves efficiency.
___________________
5 Increased return flow of packaged material and
handling equipment for recycling/reuse: Retailers have
become much more heavily involved in this ‘reverse logistics’
operation. This trend has been reinforced by the introduction
of the EU packaging directive. Although the United Kingdom
currently lags behind other European countries, particularly
)U
Germany, in this field, there remain opportunities to develop
new forms of reusable container and new reverse logistics
systems to manage their circulation.
6 Introduction of Supply Chain Management (SCM) and
Efficient Consumer Response (ECR): Having improved the
efficiency of their own logistics operations, many retailers have
begun to collaborate closely with suppliers to maximize the
efficiency of the retail supply chain as a whole. SCM (and
within this, ECR) provides a management framework within
which retailers and suppliers can more effectively coordinate
their activities. The under-pinning technologies for SCM and
ECR have been well established in the United Kingdom, so
conditions have been ripe for such developments.
(c
It is clear that many of these trends identified in McKinnon (1996)

have been the focus for retailers in the intervening years. Issues
such as primary distribution and factory gate pricing, consolidation
centres and stockless depots and Collaborative Planning
Forecasting and Replenishment (CPFR) have occupied much
attention. The overall focus in retail logistics has been altered from
an emphasis on the functional aspects of moving products to an
Logistics Strategy
314 integrative approach that attempts to develop end-to-end supply

Notes chains. This outcome is normally referred to as supply chain
S
___________________ management.
___________________
___________________
Retail Supply Chain
___________________ Retail spending shows that retailers are investing in capabilities to
help them better shape and fulfil consumer demand while
___________________
PE
delivering a superior shopping experience through flawless
___________________ execution across selling channels. Increasingly, retailers are
___________________ looking to third-party services firms to provide the expertise
___________________
necessary to support their business and technology investments
and help them cut costs. Indeed, third-party services firms get nine
___________________
percent of retail budgets, and 23 percent of retail companies
___________________ surveyed will increase their IT services budgets in 2006 (only four
percent plan to trim their budgets). Options abound for services
firms, ranging from boutique onshore providers to offshore and
global behemoths.
Retailers must sift through the multitude of choices to determine
which services firm offers them the right balance of domain
knowledge of retail process and technical capabilities at an
)U
appropriate cost.
Demand Driven Retail

Demand driven retailing is a system of technologies and processes
that senses and responds to real-time demand across a network of
customers, suppliers, and employees increase visibility of stocks
across the supply chain, conducts “what if” based analysis for
selecting a solution and reduces the days of inventory.
Scope for Improvement

One of the key imperatives facing retailers in India is to have a
robust and scalable supply chain that will facilitate rapid growth.
One measure of efficient operations is the inventory turns ratio.
(c
Many Indian retailers surveyed by KPMG have inventory turns

levels between four and ten. Another measure of efficient supply
chain management is stock availability on the retail shelves.
Global best-practice retailers can achieve more than 95 percent
availability of all SKUs on retail shelves (translating into a stock-
out level of less than five percent).
As per KPMG, the stock-out levels among Indian retailers range 315
from five to 15 percent. Looking at the inventory turns and stock Notes
S
availability measures, retailers in India need to improve their ___________________
operations.
___________________
An AMR Research report on retail supply chains informs that most
___________________
retailers lose sales around 41 percent of the time due to stock outs
and 29 percent due to the fact that consumers opt to buy competing ___________________
brands. The primary reason of this is that changes in the consumer ___________________
PE
demand do not reflect in the retail supply chain. ___________________
Informs Apurva Chamaria, Category Marketing Manager, HCL ___________________
Retail practice “Demand-driven retailers will replace or
___________________
supplement legacy merchandising and pricing systems. This will
enable merchants and category managers to accurately predict ___________________
their customer needs and provide enhanced services such as better ___________________
pricing, promotions, merchandising, assortment, allocation, space,
and replenishment functionality.”
Lead Time Optimisation (LTO)
Lead Time Optimisation is a recent supply chain management theory,

practice and software focused on trend-driven demand uncertainty and
products with short selling cycles. A LTO solution maximizes profits for
)U
volatile and short lifecycle products in addition to minimizing costs. The
leading solution provider on LTO currently is Infosys.
The potential benefits derived by retailers implementing a Lead Time

Optimisation solution include:
z Increase in full-price merchandise sales and subsequent revenues due

to reduced stock-outs and markdowns
z Cost savings from planned fulfilment versus ad hoc replenishment
z Increased supply chain efficiency and responsiveness ·
z Increased operating profits
ERP: What They Need

The Indian economy grew at about 8.1 percent in 2005-06. The
estimated retailer base in the country is 12 million, of which two to
three percent fall into the organised sector. The organised retail
(c
sector is growing at 25 to 30 percent per annum, and the combined

turnover of this portion of the retail market is forecast to touch
` 1, 00,000 crore by 2010.
Dynamic Vertical Solutions (DVS) has a suite called LS Retail that

sits atop the Microsoft Dynamics platform. It offers solutions from
POS to back-office on the same application, allowing seamless
Logistics Strategy
316 integration of all functional areas in all of the following activities—

Notes
Activity retail management, financials, sales, purchase, inventory, human
S
Prepare a presentation on
___________________ resources, payroll, CRM and production.
supply chain business
implications and challenges.
___________________ Table 19.1 Key Issues in the Retail Supply Chain
___________________ Supply chain Supply chains have started stretching across boundaries
complexity leading to greater variance and complexity
___________________
Longer lead times Offshore manufacturing leads to longer lead times,
___________________ thereby causing huge transit costs, delayed reaction to
PE
changes in demand, greater cycle times and piling
___________________ inventories
___________________ Intense pricing With big box retailers competing heavily on prices, the
competition need to retain customers and maintain margins requires
___________________ having an efficient supply chain network
___________________ Shortening product With big box retailers competing heavily on prices, the
life cycles need to retain customers and maintain margins requires
___________________ having an efficient supply chain network
Globalisation Globalisation of retailers has led to increased risks in the
supply chain
Outsourcing Retailers rely more on outsourcing to meet their product

needs
Check Your Progress

)U
Fill in the blanks:
1. Retail ..……….. shows that retailers are investing in
capabilities to help them better shape and fulfil
consumer demand while delivering a superior
shopping experience through flawless execution across
selling channels.
2. ..……….. is a recent supply chain management theory,
practice and software focused on trend-driven demand
uncertainty and products with short selling cycles.
Supply Chain Management

The roots of supply chain management are often attributed to
Peter Drucker and his seminal 1962 article. At this time he was
(c
discussing distribution as one of the key areas of business where

major efficiency gains could be achieved and costs saved. Then, and
through the next two decades, the supply chain was still viewed as
a series of disparate functions. Once the functions began to be
integrated and considered as a supply chain rather than
separately, several key themes emerged:
z a shift from a push to a pull: that is, a demand-driven supply 317

chain; customers gaining more power in the marketing Notes
S
channel; an enhanced role of information systems to gain ___________________
better control of the supply chain; the elimination of
___________________
unnecessary inventory in the supply chain;
___________________
z a focus upon core capabilities and increased outsourcing of
non-core activities to specialists. ___________________
___________________
PE
To achieve maximum effectiveness of supply chains, it became
clear that integration, or ‘the linking together of previously ___________________
separated activities within a single system’ (Slack et al, 1998: 303) ___________________
was required. Companies have had therefore to review their
___________________
internal organization to eliminate duplication and ensure that
total costs can be reduced, rather than allow separate functions to ___________________
control their costs in a sub-optimal manner. Similarly, supply ___________________

chain integration can be achieved by establishing on-going
relationships with trading partners throughout the supply chain.
In industrial markets supply chain integration focused upon the
changes promulgated by the processes involved in improving
efficiencies in manufacturing. Total quality management, business
process re-engineering and continuous improvement brought
)U
Japanese business thinking to western manufacturing operations.
The implementation of these practices was popularized by
Womack, Jones and Roos’s (1990) book, The Machine that Changed
the World, which focused on supply systems and buyer – seller
relationships in car manufacturing. In a retail context it is claimed
that food retailers such as TESCO are increasingly embracing such
lean principles for parts of their business.
Table 19.2 Alternative Supply Chain Processes
Innovative/
Efficient/ function (lean)
responsive (agile)
Primary purpose Supply predictable Respond quickly to

demand efficiently at unpredictable demand in order
lowest cost to minimize stock-outs, forced
mark-downs, and obsolete
inventory
(c
Manufacturing focus Maintain high average Deploy excess buffer

utilization rate capacity
Inventory strategy Generate high turns Deploy significant buffer stock
and minimize of parts
inventory
Lead time focus Shorten lead time as Invest aggressively in ways to
long as it doesn’t reduce lead time
increase cost
Approach to supplier Select primarily for Select primarily for speed,
selection cost and quality flexibility and quality
Logistics Strategy
318
The Demand Driven Supply Chain
Notes
S
Companies must apply new technologies and sophisticated
___________________
analytics not only to make their supply chains more responsive to
___________________ customer demand, but also actively to shape demand towards more
___________________ profitable business. Today’s demand-driven networks must enable
companies to be flexible in applying the full array of levers at their
___________________
disposal—including pricing, sales incentives, promotions and other
___________________ marketing tools—to stimulate demand for their highest margin
PE
___________________ products and to maximise business with their most profitable
___________________
customers.
___________________ This holistic approach to building demand-driven supply chain

operations requires:
___________________
z Improved demand forecasting tools that help to fine-tune base-
___________________
level forecasts—based on historical sales data—to eliminate
anomalies and other “noise”, before incorporating larger
deviations and less predictable variables.
z Integration of new forecasting and demand management tools
with existing supply chain and logistics systems to allow
visibility of supply and demand all along the network in real
)U
time.
z A collaborative approach to sales and operations planning that
brings sales and marketing together with supply chain
operations to develop a comprehensive plan.
z Profitability as the prime objective, above simple cost cutting
or revenue enhancement, in measuring supply chain
performance. Companies must target their most profitable
customers and promote their most profitable products and
services.
Historic changes are radically altering the competitive landscape
for all manufacturers. As Thomas Friedman describes in The
World Is flat, “if you want to grow and flourish in a flat world, you
better learn how to change and align yourself with it.” A wide
(c
range of factors are fundamentally changing supply chain

management, and the result is a new basis of competition.
Today, the customer is king. Many electronic products are driven
more by consumer than commercial purchases, which is making
them susceptible to the rapidly changing preferences and short-
lived trends of the market. Walk into a consumer electronics store
and look at RIM’s BlackBerry or Apple’s iPod. Colour, form factor, 319
and styling are more important to many consumers than the Notes
S
features and functions. And, consumers expect “what they want, ___________________
when they want it,” placing mounting hurdles to achieving and
___________________
maintaining brand loyalty. If a consumer is ready to buy and a
brand owner’s product is not on the shelf, they will buy something ___________________
else, increasing the pressure for companies to unfailingly meet ___________________

aggressive demands.
___________________
PE
Of course, commercial products are not immune to these same ___________________
trends. Expectations for customization, last-minute changes, and
___________________
aggressive pricing are not restricted to consumer purchases, but
also impact behaviours of individuals purchasing for business ___________________
needs. And the pressures faced get passed on to suppliers, creating ___________________
a vicious cycle that feeds on itself to further exacerbate the
___________________
consequence of these trends.
Business Implications and Challenges

Velocity-based competition, shortened product lifecycles, increased
demand variability, globalization and global sourcing, leaner
supply chains, more mass customization, cost volatility, and
)U
competitive pressures have altered the supply chain management
requirements in fundamental ways, causing organizations to
rethink how they operate or risk being left behind.
Responding to change has quickly become an imperative for today’s
manufacturer. While planning remains a core part of any business,
the faster pace of change multiplies the problems that planning
cannot prevent. The financial impact to a company unable to
respond to change can be crippling. Poor response can affect both
the top line (e.g., inability to win new business, loss of customers to
competitors) and bottom line (e.g., negative impact on margins,
write-off of excess and obsolete inventories) of a company. Short of
a strategic solution to responding to change, many companies have
institutionalized costly “just-in-case” measures such as buffer
inventories, expediting, and overtime in an attempt to compete.
(c
As companies establish a more global footprint, the execution

challenges to meeting changing demand escalate rapidly.
Understanding and anticipating consumer behaviour is no longer a
local issue, but is now global. And while the flat world ushers in a
new era of global competition that drives rapid innovation and
pricing pressure, demand sensing and responding become critical
Logistics Strategy
320 to the efficient operations of a supply network—yet are challenged

Notes by geographic dispersion.
S
___________________
Likewise, despite all the intended benefits of outsourcing
___________________ manufacturing operations, brand owners have found themselves
___________________ significantly challenged by the lack of supply network visibility
and the inability to respond to constant changes. This results from
___________________
the fact that most essential supply chain information now resides
___________________ with third parties.
PE
___________________ Today’s demand-driven networks must do more than shave costs;
___________________ they must enable companies to apply the full array of levers at
___________________
their disposal—including pricing, sales incentives, promotions and
other marketing vehicles—to shape and manage demand to
___________________
maximise profits. As the stunning retooling of the supply chain at
___________________ Dell has shown, it is no longer sufficient to maintain an efficient
supply chain that keeps inventory levels low and manufacturing
lean.
Truly demand-driven operations require organisational as well as
technical advancements at most companies. Real-time visibility
and accurate information are key, as is cross-functional
collaboration across the entire enterprise. Effective sales and
)U
operations planning should span product development through all
components of the supply chain—procurement, fulfilment,
manufacturing and distribution—to the customer through sales
and marketing. The demand-driven supply chain starts with
accurate, granular and flexible forecasts, includes real-time
sensing of actual demand, and incorporates collaborative sales and
operations planning that lets companies both react efficiently and
influence that demand towards its most profitable products,
services and channels.
Yet achieving such dramatic changes, particularly in global
organisations, is challenging. To survive and prosper in today’s
hyper-competitive and tumultuous economic climate, companies
should adopt the following best practices:
(c
z Create solid, base-level demand forecasting tools, fine-tuned to

eliminate anomalies and other “noise” before incorporating
larger deviations and less predictable variables.
z Integrate new forecasting and demand management tools with
existing supply chain and logistics systems to allow visibility
of supply and demand all along the network in real time.
z Develop a collaborative sales and operations planning process 321

that extends from customer-facing sales, marketing and Notes
S
service departments through fulfilment, procurement and ___________________
logistics all the way into product development, to allow
___________________
customer insight to inform all aspects of the business.
___________________
z Prepare a comprehensive change management plan to foresee
and deal with organisational, cultural and technological ___________________
obstacles. ___________________
PE
z Make profitability the prime objective, above simple cost ___________________
cutting or revenue enhancement. Effective demand shaping ___________________
helps companies to target their most profitable customers and
___________________
promote their most profitable products and services, boosting
the bottom line from both sides. ___________________
___________________
z Maintain real-time demand visibility. Companies can shape
demand towards more profitable business only if they have
timely and accurate information on customer behaviour.
Product Tracking Along Retail Supply Chain

A simple Supply Chain consists of end-customers or consumers
who buy goods or services from a retailer at a store or through
)U
other channels, such as an e-commerce website. The retailer may
stock the goods and tools to provide the services from a wholesaler
or a distributor. The distributor normally buys goods in large
quantities from a manufacturer who makes the goods in a factory
or a production facility. The manufacturer buys raw materials from
suppliers.
Figure 19.1: A Simple Retail Supply Chain
A typical supply chain has one or more of each of these entities.

(c
There could be multiple tiers of suppliers, manufacturers, and

distributors. As materials move from the initial supplier in the
chain to the end-customer, value and costs are added at each node.
As you get closer to the retailer, the supply chain becomes more
complex, with different products sourced from many different
Logistics Strategy
322 business partners; a retailer like Wal-Mart sells thousands of

Notes products sourced from thousands of direct suppliers.
S
___________________
Businesses strive to make their supply chains more efficient by
___________________ improving the information sharing throughout the supply chain. A
___________________ retailer has to constantly share its forecast, which is based on
many factors such as seasonality, price, promotions, and
___________________
advertising. At each node in the supply chain, forecast and actual
___________________ sales from the next node are collected, and planning may be done
PE
___________________ on what and how much to make, which drives what and how much
to buy from the previous node. Today large demands are placed on
___________________
manufacturers, distributors, and retailers along the chain to
___________________
maximize efficiency, minimize cost, and provide the best value to
___________________ the end-customer. These suppliers are all learning how to apply
___________________ new technologies within their sectors to improve business
earnings. One such technology is RFID.
Many large retailers have a complex and labour-intensive
receiving process. As products arrive from manufacturers, a
physical scan is required to read the barcode on the pallet and on
each case (box) on the pallet. What was received has to be checked
against the Advanced Ship Notice already sent by the supplier,
)U
and any discrepancies must be identified and resolved. The pallet
is then put away as is, or it is unloaded and individual cases are
stored away. As the distribution centre (DC) receives orders from
stores, new pallets may need to be assembled by loading the cases
from the storage facility and shipped to the stores. Large DCs have
huge conveyor belts on which cases from unloaded pallets are
placed and routed to appropriate store palletization areas. Many of
these retailers now require their selected suppliers to RFID-tag
pallets and cases. Their goal is to automate the receiving into DCs
and stores, to achieve significant labour savings, reduced data-
related errors, and improved product availability. However, for the
suppliers, this is simply a cost of doing business, unless the
retailers share detailed product movement information with
suppliers.
(c
While RFID can impact many different areas of the supply chain,
the following section presents fictitious scenarios between a
supplier, a manufacturer, and a retailer, and identifies various
processes that can benefit from enabling RFID.
323
Check Your Progress
Notes
S
Fill in the blanks:
___________________
1. A simple Supply Chain consists of ..................... who ___________________
buy goods or services from a retailer at a store or
___________________
through other channels, such as an e-commerce
website. ___________________
2. ..................... tools help to fine-tune base-level ___________________
PE
forecasts—based on historical sales data—to eliminate ___________________
anomalies and other “noise”, before incorporating
___________________
larger deviations and less predictable variables.
___________________
___________________
Summary
___________________
Retailing and logistics are concerned with product availability.
Many have described this as ‘getting the right products to the right
place at the right time’.
Retailers were once effectively the passive recipients of products,
allocated to stores by manufacturers in anticipation of demand.
Today, retailers are the active designers and controllers of product
)U
supply in reaction to known customer demand. They control,
organize and manage the supply chain from production to
consumption. A simple Supply Chain consists of end-customers or
consumers who buy goods or services from a retailer at a store or
through other channels, such as an e-commerce website. The
retailer may stock the goods and tools to provide the services from
a wholesaler or a distributor. The distributor normally buys goods
in large quantities from a manufacturer who makes the goods in a
factory or a production facility. The manufacturer buys raw
materials from suppliers.
Maintain real-time demand visibility. Companies can shape
demand towards more profitable business only if they have timely
and accurate information on customer behaviour.
(c
Lesson End Activity

Prepare an assignment on the type and structure of any two
supply chain companies.
Logistics Strategy
324
Keywords
Notes
S
Supply Chain Management: Supply chain management is the
___________________
systematic, strategic coordination of the traditional business
___________________ functions and the tactics across these business functions within a
___________________ particular company and across businesses within the supply chain,
___________________
for the purposes of improving the long-term performance.
___________________ Global Supply Chain Forum: Global supply chain forum -
PE
supply chain management is the integration of key business
___________________
processes across the supply chain for the purpose of creating value
___________________ for customers and stakeholders.
___________________
___________________
1. Explain Retail strategy and Supply chain/logistics.
___________________
2. Discuss the Retail supply chain.
3. Explain the concept of supply chain management.
4. Describe the demand driven supply chain.
5. Explain the business implications and challenges related to
demand driven supply chain.
)U
6. Discuss the Product tracking along retail supply chain.
Further Readings
Books
Physica-Verlag HD, Logistics Outsourcing Relationships, 1st
edition.
Incorporated 1998.
(c

Web Readings 325

Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
Logistics Strategy
326
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 20: Case Study
Unit 20
327
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Toyota Production Strategy
___________________
As you all know that the Toyota Production System (TPS) is an
___________________
integrated socio-technical system, developed by Toyota, which
comprises its management philosophy and practices. The TPS ___________________
organizes manufacturing and logistics for the automobile
manufacturer, including interaction with suppliers and ___________________
customers. The system is a major precursor of the more generic
Lean manufacturing. In between 1948 and 1975, TPS was
developed by Taiichi Ohno, Shigeo Shingo and Eiji Toyoda.
Toyota Production System
The Toyota production system was developed by Taiichi Ohno and
is now being implemented in many western companies, usually
under the names of Lean production or World Class
)U
Manufacturing program. Ohno identified seven categories of
Muda (Waste), which form the basis for process improvements:
Defects, including rework
Overproduction of goods not needed/wanted by customers
Inventories of goods awaiting further processing
Unnecessary processing
Unnecessary movement of people
Unnecessary transportation of goods
Waiting by employees for upstream activity
This resulted in important changes in the field of Operations
Management. Holistic systems of physical and human processes
that extended its reach into the whole firm in a cross-disciplinary
manner were introduced. Some of these that had a significant
impact on business practice and performance were Material
Requirements Planning (MRP) systems, then later concepts such
(c
as just-in-time (JIT), and Total Quality Management (TQM), etc.

By the end of the 1980s, researchers and practitioners were using
a broader set of paradigms in their quest to improve operations.
Researchers were beginning to examine higher-level issues in
manufacturing strategy using an empirical approach.
Toyota Production System – Autonomation
Although JIT systems control production quantities, defects
would stop the flow of parts to subsequent operations. Such a
Contd…
Logistics Strategy
328 situation is avoided by a concept called an Autonomation System.

Notes This is a Toyota coined word that means ‘autonomous defects
S
control’. It is a worker controlled quality program.
___________________
There are two versions of this. In mechanical equipment, this
___________________ system is called Bakayoke by Toyota. Machines in their factories
are equipped with automatic stopping devices that detect
___________________ defective parts. As soon as a defective part is detected, the
machine comes to a stop so as to prevent flow of defective parts to
___________________
the next operation. In manual systems, such as assembly
___________________ operations, the system is called Andon. It is implemented through
PE
the worker, who is required to press a stop button that interrupts
___________________ the line, when defective parts are detected. This prevents
defective items from being produced in any quantity. The line is
___________________
restarted when the problem has been solved.
___________________ In addition, the Yo-î-don system is used to extend the concept of
teamwork on the shop floor and ensure that work at the various
___________________
work stations is balanced. The system involves teamwork between
___________________ adjacent operations. As workers at each station complete their
work, they press a button. At the end of the cycle time, a red light
lights up at the work stations where the work is not completed.
The entire line stops and normally others nearby pitch in to help
workers having difficulty. The line starts again when all the red
lights are off again.
It includes aspects of Jidoka, just-in-time production, and kaizen,
reducing both inventories and defects. The system is used
worldwide, but is only one of the reasons for Toyota’s success. TPS
)U
is comprised of two pillars, Just-in-Time and jidoka, and is often
illustrated with the “house” shown in figure 1.
(c
Source: www.swmas.co.uk
Figure 1: Toyota Production System ‘House’
Jidoka is not letting a defect go from one machine to the next,

particularly in automated machinery; essentially, it adds the
Contd…
UNIT 20: Case Study
ability to detect unacceptable quality during the process of 329

production rather than waiting until the end, when it may be Notes
S
hidden. The name itself is a Japanese pun on the term
“automation,” adding the character for a person into the middle. ___________________
Jidoka was actually implemented by the Toyoda power looms
before Toyota was created. Jidoka both reduces costs and ___________________
increases reliability.
___________________
Just-in-time production is the principle of having parts ready just
as they are needed, rather than maintaining inventories across an ___________________
assembly plant and in warehouses. Most writers tend to focus on
___________________
PE
the cost savings from having less capital tied up in inventory
under this system, but there is another advantage: engineering ___________________
changes (to increase reliability or functionality, or to cut cost) can
take effect much more quickly, since stockpiles of parts do not ___________________
need to be cleared out; and problems with individual parts can be
___________________
detected much more quickly since they are used closer to the time
they are made. ___________________
Questions:
___________________
1. What is TPS? What is the purpose of TPS? Explain.
2. Name the important factors that influence choice of strategy
in TPS. Are these options also applicable to organisation?
3. How TPS is used by Toyota for production?
Source: Logistics Strategy

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Logistics Strategy
330
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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UNIT 21: Strategy for Logistics Providers
331
Notes
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___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-V
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332
Notes
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UNIT 21: STRATEGY FOR LOGISTICS
___________________ UNIT 23: INTERNATIONAL LOGISTICS
PROVIDERS
z Introduction
z ___________________
Introduction
z Logistics in an International Economy
z Need and Selection of Logistics Service Providers
___________________
z Service Providers UNIT 24: VIEWS OF INTERNATIONAL LOGISTICS
___________________
z Introduction
___________________
UNIT 22: LOGISTICS ORGANISATIONAL DESIGN
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z Importing and Exporting: A National Perspective
z Introduction
___________________
z Logistics as a Function in a Company UNIT 25: CASE STUDY
___________________
z Logistics Design
___________________
___________________
___________________
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Unit 21
333
Notes
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Activity
Strategy for Logistics Providers Give___________________

examples for the logistics
and supply chain alliances
with___________________
the service providers.
___________________
Objectives
___________________
topics: ___________________
PE
\ Need and Selection of Logistics Service Providers ___________________
\ Consumer Relationship Management ___________________
\ Service Providers
___________________
___________________
Introduction
___________________
One of the most important aspects of efficient logistics is a good
transportation, storage, handling and information infrastructure to
deal with the goods and information flows. The set of core services
includes warehousing, outbound transportation, customer’s
brokerage, customs clearance, cross docking/shipment
consolidation, in-bound transportation, freight bill auditing/
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payment, and freight forwarding.
There is a multitude of governmental charges, duties and other
fees associated with many of their inbound and outbound overseas
shipments. International trade is complex; shipments can get
delayed in customs. Estimates of duties and taxes are a very
manual and time-consuming process. International shippers have
to develop innovative online shipping solutions that make it easier
for them to seamlessly get their products to market, with the
confidence of knowing what the estimated inbound and outbound
costs in many locations will be.
Manufacturers and retailers want to develop “demand driven”
supply chains, in which suppliers manufacture products in the
shortest possible time with the least amount of inventory.
(c
Customers and organizations are demanding better service.
Need and Selection of Logistics Service Providers

Logistics Management activities characteristically include inbound
and outbound transportation management, fleet management,
warehousing, materials handling, order fulfilment, logistics
Logistics Strategy
334 network design, inventory administration of third party logistics

Notes services providers. To varying degrees, the logistics function also
S
___________________ includes sourcing and procurement, production planning and
scheduling, packaging plus assembly, and customer service. It is
___________________
involved in all levels of planning and execution—strategic,
___________________
operational and tactical. Logistics management is an assimilating
___________________ function, which coordinates and optimizes all logistics activities, as
___________________ well as integrates logistics activities with further functions
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including marketing, sales manufacturing, finance and
___________________
information technology.
___________________
Logistics is implicated every time you purchase a product, whether
___________________
it is food, medicine, or clothing. It does not matter how you shop –
___________________ at a store, by mail order, through direct sales, or by means of the
___________________ Internet – you are being served by the logistics pipeline outlined
below. The items you purchase have been transported from
manufacturers near and far to get to you—and logistics
professionals have managed all of these journeys.
1. Logistics has a Vast Impact on the Domestic and Global
Economy: Logistics facilitates market exchanges, provides a
major source of employment, and is a major purchaser of
)U
assets and materials.
Think about the last shirt that you purchased. The cotton may
have been grown and processed in India. Then it was shipped
to South Korea where it was spun into fabric. The bolts of
textile were sent to Guatemala for cutting and assembling.
The completed shirt was then transported to the U.S. retailer
that sold it to you. And, that’s not all! The buttons, thread,
packaging, and labels each and every one went through
similar international logistical paths to become part of your
shirt as well.
Universally, more than $1.4 trillion is spent annually on
logistics and the amount will grow with the continued
expansion of the global marketplace.
(c
2. Logistics is of Vital Importance to Human Survival: The

logistics system provides the continuous availability of food,
water, medicine, and other key materials that you need to
survive. A major example is the food you ate at your last meal.
It’s very likely that the materials used to prepare that meal
came from quite a distance – maybe from the other side of the
planet! In order for that meal to fulfil your needs, you were
dependent on logistics professionals to provide secure storage 335

and transportation of those items. Notes
S
3. Logistics Significantly Impacts our Quality of Life: The ___________________
logistics industry employs people worldwide, providing a cost- ___________________
effective means of distributing goods locally and globally.
___________________
Think about the last pair of jeans that you purchased. They
were probably manufactured in Hong Kong or Malaysia, yet ___________________
the exact pair (the right size, colour, and style) that you ___________________
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wanted was accessible for purchase the day you walked into
___________________
the store.
___________________
4. Logistics Affects our Victory in a Wide Variety of
___________________
Endeavours: Logistics greatly impacts activities other than
the flow of industrial and consumer products. Illustrations are ___________________
relief organizations like the American Red Cross Disaster ___________________
Service and the International Red Cross. They provide
logistics support in life-threatening circumstances such as
floods, hurricanes, and earthquakes. They operate like a huge
mobile warehouse, setting up temporary facilities and shelters
on a moment’s notice to competently distribute food, supplies,
and equipment to disaster victims.
)U
Logistics is significant to the success of every organization. Once
considered an important, behind-the-scenes operational activity,
logistics is now recognized as a strategic tool for creating customer
value and loyalty. Companies like Coca-Cola, and Nike attribute a
great deal of their success to their global logistics systems. They
realize that integrating activities within the business and across
the logistics pipeline, building strong relationships with product
suppliers, and working with customer-focused logistics service
providers are all decisive to building a competitive advantage
through logistics.
The range of opportunities for logistics professionals is expanding.
Logistics managers are involved in boundary and organization-
spanning teams, strategic planning, alliance building, and a
multitude of other activities that directly impact the success of
(c
their organizations worldwide. The excitement and newness of

logistics stem from a blend of traditional work areas into an
integrated strategic initiative. The successful senior logistics
executive serves as a cross-functional organizer of work both inside
and beyond his/her firm. Because these roles are expanding, a
career in logistics management can lead in many directions—
together with to the top of the company.
Logistics Strategy
336 The responsibilities and intricacy in logistics management is

Notes awesome. Consider the case in India, the structure of marketing
S
___________________ involves approximately 11 million retailers of FMCG goods and
over 1,000,000 wholesalers. These retailers offer employment to
___________________
around 41 million people—nearly 8 percent of the total workforce
___________________ in the country. To move products and materials to and from these
___________________ businesses, almost 1.5 million commercial trucks move goods on
___________________
the national highways each day. As 98 percent of the retailers are
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in the unorganized sector, in adding up to trucks, a complex
___________________
combination of other modes of transport including handcarts,
___________________ rickshaws, bullock carts, three wheelers, and mini vans are used to
___________________ attain the products to these retailers.
___________________ Logistics is as well a huge business opportunity. The complexity of

logistics is impacted with the highly fragmented nature of the
___________________
transportation industry with 67 percent of vehicle owners, through
a fleet of less than five vehicles.
Foundational on these discussions, the general conclusions one
could arrive at by broadly surveying the logistics scenario in India
are:
1. The probable for cost reduction and service level improvement
)U
in logistics is substantial. Infrastructure development and
reduction in regulation need to take place to a large extent.
The government is the main actor for this.
2. As complexities of coordination are large; logistics should
evolve as a function in industry. Shippers are the main actors
for this.
3. Communications tools, computing technology and problem-
solving technology are improving tremendously. This
opportunity should be exploited in logistics management. The
supply industry in logistics as well as shippers should act on
this.
Logistics and Supply Chain Alliances with Service Providers

(c
Third Party Provider (3PL) Logistics

“The services offered by a middleman in the Logistics Channel that
has specialized in providing, by contract, for a given period, all or a
considerable number of the logistics activities for other firms.”
A middleman could be a broker, a freight forwarder, shippers’
association, etc.
How is a 3PL distinguished from a Transportation Provider? 337

Notes
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Transportation provider gets product from point A to point B and
could be believed a 3PL. However, transportation provider carries ___________________
out just one function of logistics whereas a 3PL provider assists in ___________________
multiple functions.
___________________
I. Types of 3PL Providers
___________________
Types of 3PL providers are is follows: ___________________
PE
1. Transportation-Based: Here, the Services extend beyond ___________________
transportation to offer a comprehensive set of logistics
___________________
offerings. There can be two types of Transportation-based
service providers – leveraged and non-leveraged. ___________________
Leveraged 3PLs use assets of other firms whereas Non- ___________________
leveraged 3PLs use assets belonging solely to the parent firm. ___________________
Ryder, Schneider Logistics, FedEx Logistics, and UPS

Logistics are examples of 3PLs.
2. Warehouse/Distribution-Based: Many, but not all, have
former warehouse and/or distribution experience. Transition to
integrated logistics has been less complex than for the
transportation-based providers.
)U
DSC Logistics, USCO, Excel, Caterpillar Logistics, and IBM
are examples of warehouse/distribution-based 3PLs.
3. Forwarder-Based: These service providers are
fundamentally very independent middlemen extending
forwarder roles. These are Non-asset owners that capably
provide a wide range of logistics services. AEI, Kuehne &
Nagle, Fritz, Circle, C. H. Robinson, and the Hub Group are
examples of forwarder-based 3PLs.
4. Financial-Based: These Service providers offer freight
payment and auditing, cost accounting and control, and tools
for monitoring, booking, tracking, tracing, and managing
inventory. Cass Information Systems, CTC, GE Information
(c
Services, and Fleet Boston are examples of financial-based

3PLs.
5. Information-Based: Noteworthy growth and development in
this alternative category of Internet-based, business-to-
business, electronic markets for transportation and logistics
services. Trans place and Nistevo are examples of information-
based 3PLs.
Logistics Strategy
338 II. Characteristics of 3PL

Notes
S
They carry out outsourced logistics activities. They can handle
___________________
process management/multiple activities. They provide more
___________________ customized services. They believe in mutually beneficial and risk-
___________________ sharing relationship. Typically, such contracts need long-term
commitments (1~ 3 years).
___________________
III. Advantages of Outsourcing to 3PL
___________________
PE
The normal advantages are Reduction in workforce, Flexibility in
___________________
operations, Reduction in Cycle Time, Improved Responsiveness,
___________________
Reduction in Logistics Operations Cost, Reduction in Investment
___________________ on Infrastructure facilities and Hiring of the expertise at a
___________________ reasonable cost.
___________________ IV. Disadvantages

The Disadvantages are Loss of control and a negative impact on in-
house workforce.
V. Reported Problem Areas
1. Service level commitments are not realized.
2. Strategic management skills are lacking at the Service
)U
Provider’s firm.
3. Cost reduction goals are not realized, as the service provider
does not own the objectives.
4. Cost “creep” up and price increases occur due to lack of a
proper monitoring system at the service provider’s end.
5. Improvements and achievements too are lacking.
6. Control of outsourced functions has diminished.
7. Consultative, knowledge-based skills are lacking.
8. Technology capabilities are not being delivered.
9. Time and effort spent on logistics not reduced.
(c
Fourth Party Logistics Provider (4PL)

The Fourth Party Logistics Provider (4PL) is a new-fangled
concept in Outsourcing. A 4PL forms an alliance between multiple
3PL service providers, technology providers and management
consultants. A 4PL provider is a Supply Chain integrator who
assembles and manages the resources, capabilities and technology
of its own organization with those of complementary service 339

providers. Notes
S
___________________
LSCM Alliances 3PL+4PL=7PL
___________________
The progress of 4PL solutions leverages the capabilities of 3PL
___________________
providers, technology service providers and business process
managers to deliver a comprehensive supply chain solution all the ___________________
way through a centralized point of contact. The 4PL will integrate ___________________
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the client’s supply chain activities and supporting technologies
___________________
across these “best of breed” service providers with the potential of
its own organization. ___________________
___________________
3PL + 4PL = 7PL
___________________
The expression 7PL was coined by the Value Logistics Group and
is a concept describing the developing trend of 3PL and 4PL ___________________
combined. Through this service, the client has one service provider
that oversees the whole logistics chain.
The 7PL Concept

7PL is the combination of 3PL and 4PL into one (3PL + 4PL =
7PL). One service provider can now provide a client with both 3PL
)U
and 4PL services with a complete 7PL solution to clients and can
undertake turnkey projects for its clients where all services and
activities are provided for less than one roof.
One Contract, One Bill

7PL is a turnkey solution where in its place of dealing with several
people for various services like inbound, outbound and
warehousing, clients now are required to deal with one person
under the ‘one contract, one bill’ concept.
7PL companies will be key candidates for takeover by bigger
players and play the role of service providers within the larger
offer. Such consolidation will be seen in all areas from shipping,
trucking, and air cargo to couriers, ground handlers and IT
(c
services. A lot of others will drop out.

The future of Logistics Outsourcing in India is dependent on the
following criteria:
(a) Use of IT: The use and extend of IT, including ERP,
Warehouse Management System (WMS), tracking systems and
net-based data exchange – will be inevitable and rapid. India
Logistics Strategy
340 before now has a leading edge in IT, which will be leveraged
Notes for logistics.
S
___________________
(b) Alliances: Scale and reach are the fundamental ingredients
___________________ for success in 3PL. Indian companies will increasingly look to
___________________ alliances, joint ventures and mergers with multinationals or
bigger Indian logistics providers to attain critical mass. These
___________________
alliances will be dynamic: as and when required, companies
___________________ will form alliances and break away when no longer requisite.
PE
___________________ (c) Investment: A sustainable 7PL model will require money –
___________________ money for infrastructure, IT, people, fulfilling of liabilities
___________________
arising from failure to honour commitments and insurance
claims. Financial institutions and banks will play a key role in
___________________
this aspect. Logistics and supply chain today offer returns of
___________________ 15-20%, which only some investments give, and this is what
should draw Foreign Institutional Investors and banks.
(d) Regulation: India’s present labour laws, laws of customs,
excise, port formalities, service tax provisions etc. prevent
businesses from realizing a lot of value across the chain.
Cheap and easy accessibility of labour also hampers the
development of people on a long-term basis. There’s not
)U
enough time given to develop skills. Current labour laws bar
layoffs, making it complex to infuse fresh blood. However, all
these will change as regulations are relaxed and enterprises
hire people purely on the basis of necessitate and not any
social obligation. Logistics providers’ services will improve in
all aspects of business in India, as awareness of their profit
spreads.
Consumer Relationship Management

For logistics outsourcing arrangements to be flourishing, they
must include a strong emphasis on Customer Relationship
Management (CRM). This is different from what we typically think
of as customer service. Customer service proceedings are ‘passive’
and are initiated after customers present their requirements,
(c
whereas CRM is ‘active’. It not only solves problems but also

maintains close up contacts. CRM relies on the integration of
marketing and logistics customer service, and regards customer
service as another marketing mode. For that reason, customer
relationship management is sometimes referred to as “backstage
marketing.”
Links between the Components 341

Notes
S
Since services are customer-centred, the strategy, systems and
people in the operations of service should also focus on the ___________________
customer. Customers’ expectations are central to the design of ___________________

service strategy of the firm. The line connecting customer to people
___________________
(service providers) signifies that people are extremely important in
___________________
producing and delivering services to the consumer:
___________________
PE
1. The customer to systems link depicts that the service
operations/delivery system should also be designed with the ___________________
customer in mind. ___________________
2. The strategy to system link signifies that the systems and ___________________
procedures should follow from the service strategy. The ___________________
systems should support the strategy.
___________________
3. The strategy to people link signifies that all the service
providers (people in the service organization) should be well
aware of the organization’s strategy.
4. The system to people link means that the service operations
system and procedures ought to be people-friendly.
5. The solitary criterion that counts in evaluating a service
)U
quality is defined by the customers. Only customers can judge
quality. All other judgments are essentially irrelevant.
Ingredients of Logistics Partnership

The Service Providers have to invest lot of money in the acquisition
and utilization of various assets needed. In addition, the
requirements of a service provision can always be subjective. Also,
it is very difficult to clearly specify some of the service needs.
Hence, to maintain a cordial and smooth relationship, it is
essential that the contract is framed properly. Apart from the
usual aspects, some of the major points to be covered are:
1. Scope of the Service
(c
Geographical coverage
Logistical services
Management and usage of customer’s existing logistic
assets
2. Delivery Requirements
Logistics Strategy
342 3. Charges for services

Notes
S
4. Extra services required and their charges
___________________
5. Performance Measurement Criteria
___________________
6. Damage Liability
___________________
Loss due to fire, pilferage, rains, floods, accidents,
___________________
negligence, aging, etc.
___________________
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Insurance
___________________
Basis for damage calculations
___________________
Consequential damages
___________________
___________________
Demurrage due to delays in loading and unloading
___________________ 7. Risk Sharing

8. Responsibilities
Employees
Assets Management
Warehouse Management
Inventory Management
)U
Transportation
Communication
9. Notice Period
10. Governing Laws, etc.
Check Your Progress

Fill in the blanks:
1. In …………. “The services offered by a middleman in
the Logistics Channel that has specialized in
providing, by contract, for a given period, all or a
considerable number of the logistics activities for
(c
other firms.”
2. …………. relies on the integration of marketing and
logistics customer service, and regards customer
service as another marketing mode.
Service Providers 343

Notes
S
Activity
The Firms have to keep in mind their main objective of doing the
Research and prepare an
___________________
Business and that is “Customer Satisfaction.” This is possible only assignment on the critical
if the right Service Providers are chosen. Ultimately, if anything aspects to be considered
___________________
while selecting a Service
goes wrong, it is the Firm that loses business more than the Provider.
___________________
Service Provider.
___________________
Successful Implementation ___________________
PE
Why a firm would want to select the right provider the first time ___________________
itself is because only about 65% of companies believe their provider ___________________
is doing a “good” job. Also, about 55% of logistics outsourcing
___________________
contracts end in 3-5 years.
___________________
Some of the critical aspects to be considered while selecting a
___________________
Service Provider are:
z Switching Cost
z Degree of Control
z Human and Electronic Interface
z Degree of outsourcing
)U
z Tuning logistics services to the needs of channel partners
z Legal Aspects
Tips for Successful Implementation

Have an Outsourcing Strategy: Know what your outsourcing
strategy is. It needs to be well thought out and measured against
in house solutions and capabilities. Carry out a SWOT (Strengths,
Weaknesses, Opportunities and Threats) analysis. As a company,
you should understand the strengths, weaknesses, opportunities
and threats of outsourcing logistics, rather than keeping them in
house.
Do your Homework: Do a comprehensive study. Clearly
document advantages, challenges, costs and benefits. Document
(c
expectations set down expectations in clear terms and include

current costs. Create a robust selection process. Invite companies
in to give a formal presentation without giving requirements. This
can help document their strengths and weaknesses. Make a site
visit to the 3PL, and talk with its existing customer.
Logistics Strategy
344 Measure Performances and Review the Same: Have an

Notes efficient and accurate measurement system. Have qualitative
S
___________________ measures that focus on effectiveness and quantitative measures
that focus on efficient utilization. Have an efficient costing system.
___________________
This will help you to understand the costs involved in outsourcing.
___________________
Ask queries such as: “Are we making money doing this?” Create an
___________________ Implementation Strategy. Create a project plan road map. Be clear
___________________ who does what, create a project management team with members
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from both organizations and review progress vs. planned
___________________
milestones.
___________________
Nurture the Relationship: Both Parties must nurture the
___________________
relationship to make outsourcing successful. Create mutual trust,
___________________ respect and a sense of integrity.
___________________
LSCM related Outsource Services
Outsourcing can be at three levels.
1. Transactional Outsourcing: It is based on transactions,
with no long-standing contracts and no bonding between the
3PL and the outsourcing company.
2. Tactical Outsourcing: Outsourcing on a long-term
)U
foundation with negotiated contacts and integrated IT systems
to facilitate free information flow and create supply chain
visibility.
3. Strategic Outsourcing: Based on long-term relationships
with winning outcomes, 3PL companies become partners in
supply chain management and establish transactional
transparency.
Value Added Services
Definition of Value Added Services

All those Activities the Customer is willing to pay for! Rest is
Waste!! e.g., is the Customer willing to pay for?
(c
z Inventory
z Defects and Rework
z Transportation
z Waiting and Searching.
Value Added vs. Non-value Added Activities 345

Notes
S
Any Activity for which the customer is not willing to pay is a “Non-
value adding activity.” Normally, such activities are a result of ___________________
‘Just-in-case’ Attitudes. For example, Stand-by Handling ___________________

Equipment.
___________________
Logistics Providers help Organizations realize two goals: Reducing ___________________
Operating Cost and Increasing Revenue. They arrange the
___________________
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required assets and as a result, Firm’s Funds are free for use in
more productive activities. Similar is the case with other resources ___________________
like Manpower. The Company also gains knowledge through ___________________

exposure to the current best practices adopted by the Service
___________________
Provider.
___________________
5PL Logistics ___________________
A third-party logistics provider (in short 3PL) is a firm that

provides outsourced or ‘third party’ logistics services to companies
for part or sometimes all of their supply chain management
function. Fourth party logistics is an integrator that brings
together the resources, capabilities, and technology of its own
organization and other organizations to design build and run
)U
comprehensive supply chain solutions. Seeing as the advent of the
4PL service, the international logistics industry has been
researching on the development of the fifth-party logistics service
i.e. the apprehension of full-scale operation of e-procurement. A
key function of the 5PL is to aggregate the demands of the 3PL
into a bulky volume for negotiating more encouraging rates with
airlines and shipping companies regardless of which generation of
logistics solution belongs to all.
A functioning party investigating the concept of fifth party logistics
has been launched in the East Midlands.
The group cultivate out of an event organised by the Food and
Drink innovation Network (iNet) at Lincoln University’s Holbeach
National Centre of Excellence for Food Manufacturing on May 8.
(c
Speakers at the conference coined the expression ‘fifth party

logistics’ to refer to a web-based system that multiple retailers and
processors could tap into to manage product shipments. Firms
athwart the supply chain would be able to pinpoint freight space
on vehicles such as trucks, trains, or cargo ships and re-route
products on to them to cut down on vehicle trips.
Logistics Strategy
346 The group is scheduled to convene again on July 30 to discuss

Notes launching a formal study into the issue and food and drink
S
___________________ manufacturers from the East Midlands are being invited to add.
___________________
3PL+ 4PL= 7PL concept
___________________
The rising global economy and the resulting increased competition
___________________
are driving more manufacturing and retail companies to outsource
___________________ their logistics functions. Obviously, logistics has not been their
PE
___________________ nucleus function due to the expensive assets involved like vehicles,
warehouses, IT infrastructure and time, cost and efforts required
___________________
to build the platforms, resources and infrastructure that in spin
___________________ contributing too many risks with no advantages at all. Yet it is
___________________ very critical to sustain their business. This has made viable
alternative for any company to outsource the logistics to a 3rd
___________________
party service provider and leverage on their assets and capabilities
to efficiently manage these requirements by getting fixed and
working capital down. Whichever good comes and goes of the
company, needs expensive planning, supervision, movement,
customs clearance, storage etc., which make companies spend the
majority of their time into them.
)U
3PL: The desperate require for an outside logistics provider
triggered the evolution of 3PL services which is been the most
dominant and arguably the largest market in the world. 3PLs
offered great return to the companies in terms of:
1. Economies of scale (merits from large truck fleets, warehouses,
etc.)
2. Admittance to world class processes and technologies
3. Access to the resources not available in-house
4. Risk sharing
5. Adaptability to business amendments
With all these advantages, companies had enhanced focus on their
core competencies. However, competition further intensified when
(c
they had all the time to focus on better competing.

4PL: When competition strengthened, globalization reached the
peak and world looked so flat the services provided by 3PLs
seemed just not enough. This created an opportunity for the rise of
4PLs, a non-asset-based service provider help out companies by
integrating resources, capabilities and technology of its own and
coordinate with various 3PLs (Transportation, warehousing, air 347

freight, shipping, customs clearing, etc.) alongside with load Notes
S
planning, tracking, shipment consolidating, carrier performance ___________________
management, billing and payments, etc. 4PL provides a wide-
___________________
ranging supply chain solution in package that in turn helps
companies manage complexity and time too. ___________________
While companies prosper for better results in the bottom line and ___________________
more value and better impact on the entire supply chain, a new ___________________
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thought is taking birth and it’s called 7PL! ___________________
Its 3PL+4PL=7PL. Yes it is the amalgamation of 3PLs with 4PL ___________________
i.e. one service provider can provide a client with both 3PL and the
___________________
services of 4PL. 7PL overseas the entire logistics system, where the
entire services are provided under one roof. This gives customers ___________________
an easy way to deal with 7PL under one contract, one bill and ___________________
single point of contact to administer entire logistics.
Many industry experts believe this is going to be the next evolution
where large players play a role of logistics services and service
providers with the large offer. Top players in the market will pilot
the race and rest will drop out. This concept provides lots of
excitement to all the manufacturers.
)U
Risks in Logistics Outsourcing
This work out is aimed at determining where the company’s
exposures stand vis-a-vis market forecasts.
The following Risks will be judged.
1. Risk to the Exposure or else Value at Risk (VAR): Given a
particular vision or forecast, VAR tries to determine by how
much the company’s underlying cash flows are affected. The
VAR is the response to the question, “If the Rate actually
moves to xx.xxxx, how much Profit/Loss the company makes?”
2. Forecast Risk: What is the probability of the rate actually
moving to xx.xxxx and what is the likelihood of a forecast
(c
going wrong. It is imperative to know this before choosing on a

Benchmark and devising a hedging strategy.
3. Market and Transaction Risk: This will take into concern
the risks attached with each particular market and the
likelihood of a transaction not going through smoothly. For
example,
Logistics Strategy
348 (i) The Rupee is given to unexpected swings in sentiment,

Notes whereas the Deutschemark is generally more predictable.
S
___________________
(ii) The monetary and time costs of hedging with a
___________________ nationalised bank are usually higher than with a
___________________ private/foreign bank.
___________________ 4. Systems Risk: The risks that happen through gaps or

weaknesses in the Exposure Management system. For
___________________
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example:
___________________
(i) Reporting Gap: Where there are stoppages/errors in
___________________
reporting exposures to the Exposure Management cell.
___________________
(ii) Implementation Gap: Where there is a gap among the
___________________ decision to hedge and the implementation of such hedge
___________________ decision.
The company will endeavour to decrease the non-market risk or
Systems Risk over time.
Risk Reduction Measures

Risk Reduction Measures are as follows:
)U
Benchmarking
This exercise aims to affirm where the company would like its
exposures to reach.
1. The company will position a Benchmark for its Exposure
Management practices.
2. The Benchmark will be position for 6 months periods.
3. The Benchmark will replicate and incorporate the following:
(i) The aim of Exposure Management, or in other words,
“Should Exposure Management is conducted on a Profit
Centre or Cost Centre basis?”
(ii) The Forecasts discussed and agreed upon previously.
Mathematically, the Benchmark should be the
(c
Probabilistic Expectation of the rate in question.

(iii) The Forecast risk, Market and Transaction risk, and
Systems risk as determined previously.
Scope for error in keeping with the Stop Loss Policy to be decided.
Hedging 349
Notes
S
This is the mainly visible and glamourised part of the Exposure
Management function. However, the Trader is similar to the ___________________
Driver in a car rally, who needs to follow the general directions of ___________________
the Navigator.
___________________
1. Hedging strategies will be designed to meet up the Exposure ___________________
Management objectives, as represented by the Benchmarks.
___________________
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2. The Exposure Management Cell will be accorded full
___________________
operational liberty to carry out the hedging function on a day
to day basis. ___________________
___________________
3. Hedges will be undertaken simply after appropriate Stop-Loss
and Take-Profit levels have been predetermined. ___________________
4. The company will employ all hedging techniques available to ___________________
it, as per need and requirement. In this regard, it will pass a

Board Resolution authorising the use of the following:
(i) Rupee-Foreign Currency Forward Contracts.
(ii) Cross Currency Forward Contracts.
(iii) Forward-to-Forward Contracts.
)U
(iv) FRAs.
(v) Currency Swaps.
(vi) Interest Rate Swaps.
(vii) Currency Options.
(viii) Interest Rate Options.
(ix) Others, as may be required.
Stop Loss
Exposure Management should not be carried out without having a
Stop-Loss policy in place. A Stop-Loss policy is based on the
following two fundamental principles:
(c
1. To err is human
2. A stitch in time saves nine
It is suitable to recount here some words from a speech Dr Alan
Greenspan, Chairman of the US Federal Reserve, delivered in
December 1997, on the Asian financial crisis. He says, “There is an
important bias in political systems of all varieties to substitute
Logistics Strategy
350 hope (read, wishful thinking) for possibly difficult pre-emptive

Notes policy moves. There is often denial and delay in instituting
S
___________________ appropriate adjustments Reality eventually replaces hope and the
cost of the delay is a more abrupt and disruptive adjustment than
___________________
would have been required if action had been more anticipatory.”
___________________
Whether an Exposure is hedged or not, it is understood that the
___________________
decision to hedge/not to hedge is backed by a view or forecast,
___________________ whether implicit or explicit. As such, Stop Loss is nothing but a
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___________________ commitment to overturn a decision when the view is proven to be
wrong.
___________________
___________________ Reporting and Review

___________________ There needs to be nonstop monitoring whether the Exposures are
___________________ headed where they are intended to reach. As such, the Exposure
Management activities call for to be reported and reviewed.
Customer Relationships Management and Overall Trends

An organisation’s ideology comprises its purpose (Why are we
here?) and values (What do we stand for?). One usual answer is “to
make money”, but I don’t think that is right. It is unsatisfying to
)U
be in business and have money-making as the only reason for
existence. A company needs profits to continue, but profits are not
what the business is for. Organisations exist to provide a service
that is needed. It needs to increase its efficiency and effectiveness
in the service that it offers by providing satisfaction to its
customers. That is the reason for being in business; it provides
profit to the organization, and increases the stock’s value.
Customer service is a central concern of logistics academics and
practitioners. Logistics has to provide customers what they need
and when they need it. All other aspects of logistics are conditioned
by this mission. Improving customer service is the focus of all
logistical studies, it views satisfying customer needs as the
motivation behind all its activities.
(c
In logistics, the customer is any delivery destination. Destinations

are places to which somebody or something is going or must go.
They involve or relate to establishments ranging from consumers’
homes to the distributor/wholesaler channels. There is a wide
variety of destinations; it could be the receiving docks of a firm’s
manufacturing plants and warehouses or an individual who is
taking ownership of the product or service being delivered. In
many other situations, the customer is a different facility of the 351

same firm or a business partner at some other location in the Notes
S
supply chain. ___________________
As mentioned earlier, logistics from the marketing perspective ___________________
augments the value to the customer. According to classical
___________________
marketing theory, the four Ps – product/service, promotion, price,
and place – constitute a generic marketing mix. Logistics satisfies ___________________
the broad requirements of time and place utility in this mix. It has ___________________
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to deliver the product or service when and where promised, to ___________________
provide customer satisfaction.
___________________
Regardless of the marketing mix emphasis, logistical performance
___________________
is an integral part of all marketing strategies because no
ownership transfer can occur without fulfilling the time and place ___________________
requirements. Logistics ensures that customer requirements ___________________

involved in timing and product location are satisfactorily
performed.
Although most firms agree that customer service is important,
they often find it difficult to explain exactly what it is and what it
does. Let us explore this thought. Depending on the philosophy of
the firm, the output of logistical performance can be viewed as:
)U
1. An activity,
2. Performance levels, and
3. Management philosophy.
All three dimensions are important to understand what is involved
in successful customer service. Viewing customer service as an
activity suggests that it is capable of being managed. It is seen to
contribute to an organization’s success by providing customers
with timely and accurate product delivery.
Thinking of customer service in terms of performance levels has
relevancy, providing it can be accurately measured. Traditionally,
customer service was measured by inventory availability and order
cycle time. In the 1980s, a broader definition of customer service
(c
was proposed. With changing competition and increasing customer

expectations, these quantitative measures were not considered to
completely explain service levels. The newer concept, in view of
these changes, encompassed the supplier’s ability to respond to
specific customer requests and changes in market conditions.
Logistics Strategy
352 Traditional service measures, inventory availability and time-

Notes based measures are usually available from impersonal sources—
S
___________________ receipts, orders, bills of lading and so on, which constitute objective
or ‘hard’ service measures.
___________________
___________________ 1. Inventory capability refers to success in having inventory

available to fill customer orders. Typical measures of such
___________________
capability are order completeness (percentage of requested
___________________ product actually shipped), fill rate (percentage of items
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___________________ available for picking), or both.
___________________ 2. Order cycle time refers to the time elapsed between receipt
___________________
and delivery of a customer’s order. Measures include both the
length and the reliability of the order cycle.
___________________
The newer concept of supplier responsiveness is usually gauged
___________________
through reports of customer—these are perceptual or “soft”
measures. The measures of these ‘soft’ requirements
(responsiveness) include emphasis on error correction, after-sales
service, effective handling of information requests, flexibility,
provision of emergency services, and ability to handle change.
These are difficult to measure because they relate to the ability to
respond to specific customer requests and feedback is either
)U
difficult or very often, if collected, very subjective.
The ability to provide such ‘soft’ services, therefore, has to begin
with understanding what customers want. And this understanding
begins with the understanding that they do not always know what
they want, or why they want it. In fact, customer expectations keep
changing. With customers becoming more demanding, the
confronting the firm is a shrinking service window—making it
more difficult to meet expectations.
The notion of customer service as a philosophy of management
exemplifies the importance of customer-focused marketing. If
logistics is basically consumer focused marketing, the focus is not
on sales volume but on value. The measure of value is reflected in
profitability to the firm. Therefore, as long as the firm makes
(c
profit, it is flexible in varying all four basic utilities—form,

possession, place and time.
As logistic services become more value-added services and
customer-specific, the challenge is—how do you match value-added
services to unique customer requirements? What are the dynamics
involved in moving a business relationship from customer service
to satisfaction and beyond. The challenge here is to match 353

product/service offerings to the unique needs of specific segments Notes
S
and maintain profitability at the same time. In addition, the firm ___________________
has to have the flexibility to modify its offering as required by the
___________________
market. These concepts are critical for a full understanding of
forces that shape logistical strategy. ___________________
Basic customer service is the service rendering on which a firm ___________________
builds its fundamental business relationships. All customers are ___________________
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treated equally with the objective to build and maintain overall ___________________
customer loyalty.
___________________
An important consideration in determining a firm’s basic service
___________________
programme depends on customer expectations. In almost every
industry, logistics is used as core strategy to gain customer loyalty. ___________________
Firms must commit resources to achieve high levels of basic service ___________________
competency that are difficult for competitors to duplicate.
Value-added services represent an addition to basic customer
services by providing customisation with a view to build customer
solidarity and enhance established channel relationships. The
notion refers to unique or specific activities that firms can work out
to increase their effectiveness and efficiency in terms of the value
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the customer adds to the desirability of acquiring the product.
Though value-added services are relatively easy to illustrate, it is
difficult to generalise the characteristics of these services as they
are customer specific and significantly different from basic
customer services. Examples of such services are price marking,
special packaging, vendor-managed inventory and special
shipments, etc. In effect, the firm is doing unique things to help
specific customers achieve their expectations.
A large number of the day-to-day value-added options are
outsourced to service specialists such as carriers, warehousing
firms, and companies that specialise in such operations. For
example, in the case of warehousing companies, value-added
service goes beyond the provision of basic storage space and may
(c
incorporate additional services ranging from vendor managed

inventory and kitting/pick/pack services to light
manufacturing/assembly, hazmat services and reverse logistics.
Logistics Strategy
354 Segregation of Value Added Services

Notes
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These value-added services can be segregated into four primary
___________________
areas:
___________________
1. Customer-focused Services: Customer-focused value-added
___________________ services offer buyers and sellers alternative ways to distribute
___________________ products. Many firms develop alternative logistics
arrangements to supplement their ability to meet customer
___________________
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requirements through an assortment of services often using
___________________
third-party specialists. These types of services are best
___________________ described through examples.
___________________ An example is DHL. It offers the following core services to
___________________ many of its customers: warehouse management, transport,
reverse logistics and replenishment, which involves storage,
___________________
inventory, transportation to retail outlets, supplier
management, stock maintenance and reordering.
Another example is Caterpillar Logistics Services, Inc. (Cat
Logistics). In 2002, Volvo decided to shut down its 40,000 sq.
ft. service parts Distribution Centre (DC) in Azuqueca, Spain.
The operation was outsourced to “Cat Logistics” who took over
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the operation to service some 85 Volvo dealers throughout
Spain.
A special type of customer-focused value-added services is
fulfilment. Fulfilment consists of processing customer orders
for manufacturers, delivering directly to stores or homes. One
such service manages the promotional gift supply process from
initial gift selection to final delivery and provides customers
with a valuable differentiating service, which includes:
Collating promotional gifts with individual packs – for
example, collating pads with pens into conference folders;
Insertion of client materials in the folders – welcome
letters, agendas, training notes;
Bundling into location specific packs;
(c
Delivery to locations at set times and dates.

The options seem limited by the imagination and implantation
capability of the organizations involved. However, challenges
remain in balancing cost and service level objectives while
meeting profitability targets.
2. Promotion-focused Services: Promotion-focused value-added 355

services involve the assembly of unique point-of-sale display Notes
S
modules coupled with a wide variety of other related services ___________________
aimed at stimulating sales. The following example illustrates
___________________
such a value-added service performed by a warehouse
specialist. The warehouse operator agreed to repackage soap ___________________
and toothpaste into a combined promotional package. Though ___________________

the task seems simple, it involved:
___________________
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Separating the soap from a bulk carton container ___________________
Separating the toothpaste from the bulk container ___________________
Placing the soap and the toothpaste packages together ___________________
Shrink wrapping soap and the toothpaste; and ___________________
Placing six completed units into a master carton, labelling ___________________

and sealing.
The end product of the value-added service was the unique
creation of a customized point-of-sale promotional package to
support the customer’s product marketing strategy.
Such a service could also have included logistical support of
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point-of-sale advertising and promotion materials for the
products. Promotion-focused value-added services include a
large gamut of options like special presentations for in-store
product sampling, direct-mail promotion, handling and
shipping of gifts and premium merchandise.
3. Manufacturing-focused Services: Manufacturing-focused
value-added services involve unique product assortment and
delivery to support manufacturing. This reflects the
philosophy that rather produces unique products than based
on forecast requirements. Basic products can be modified to
accommodate specific customer requirements for improved
customer service.
For example, a third party logistics provider cuts and installs
(c
various lengths and sizes of pipes and fittings for different

water pumping applications to suit individual customer
specifications. Still another example is of a firm that
repackages a popular consumer toilet soap in twelve different
packaging and carton configurations to support the trade
requirements of different regions in the country.
Logistics Strategy
356 Instead of using specialists, other organisations can be roped

Notes in to provide such value-added services. Maruti, for example,
S
___________________ uses its dealers to custom fit the interiors of different models
of their automobiles with a number of accessories providing
___________________
customers a variety of choices in the internal décor of the
___________________
product.
___________________
These selected examples of value—added services show how
___________________ specialists and others are able to reduce risk and cost as well
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___________________ as extend the market reach of their clients by providing
services that postpone product finalization and provide
___________________
customized products to the final customer by using a ‘pull’
___________________
strategy. This provides a saving to the company, a profit to the
___________________ executor and an addition of value to the final customer.
___________________ 4. Time-focused Services: Time-focused value-added services
involve using specialists to sort, mix, and sequence inventory
that add value to the product, prior to delivery. A popular form
of time-based value-added service is the just-in-time (JIT)
warehousing.
Maruti is again the example. The company uses this concept to
control its inventory. A number of feeder warehouses have
)U
been established around its plant in Gurgaon. The feeder
warehouse sorts multiple vendor components into exact
quantities that are sequenced for delivery to the assembly line
when and where required. By encouraging the use of these
services in the supply chain, Maruti has been able to limit its
inventory level to a little more than 1 percent of total
purchases.
The key feature of time-focused services is that they eliminate
unnecessary work and facilitate maximum speed of service.
Logistics time-based strategies provide a primary form of
competitive superiority to the firm, which is difficult to copy.
However, such value-added services also require extremely
good planning and execution of the strategy.
(c
The focus to provide unique solutions at economical costs is a

fundamental reason for a growing trend toward using
specialized service providers to perform value-added
operations. Such providers can achieve economy of scale and
retain essential flexibility while allowing the marketing
companies involved focusing on their core business
requirements.
357
Check Your Progress
Notes
S
Fill in the blanks:
___________________
1. ………….. is based on transactions, with no long- ___________________
standing contracts and no bonding between the 3PL
___________________
and the outsourcing company.
___________________
2. Exposure Management should not be carried out
without having a ………….. policy in place. ___________________
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___________________
Summary ___________________
Logistics management is an assimilating function, which ___________________

coordinates and optimizes all logistics activities, as well as ___________________
integrates logistics activities with further functions including
___________________
marketing, sales manufacturing, finance and information
technology. Logistics is implicated every time you purchase a
product, whether it’s food, medicine, or clothing. Logistics has a
vast impact on the domestic and global economy. Logistics is of
vital importance to human survival. Logistics significantly impacts
our quality of life. Logistics affects our victory in a wide variety of
endeavours.
)U
Third Party Logistics Provider (3PL) is defined as “The services
offered by a middleman in the Logistics Channel that has
specialized in providing, by contract, for a given period, all or a
considerable number of the logistics activities for other firms.”
Types of 3PL Providers are Transportation-Based,
Warehouse/Distribution-Based, Forwarder-Based, Financial-Based
and Information-Based
The Fourth Party Logistics Provider (4PL) is a new-fangled concept
in Outsourcing. A 4PL forms an alliance between multiple 3PL
service providers, technology providers and management
consultants. A 4PL provider is a Supply Chain integrator who
assembles and manages the resources, capabilities and technology of
its own organization with those of complementary service providers.
(c
The Service Providers have to invest lot of money in the acquisition

and utilization of various assets needed. In addition, the
requirements of a service provision can always be subjective. Also,
it is very difficult to clearly specify some of the service needs.
Outsourcing can be at three levels, which are Transactional
Outsourcing, Tactical Outsourcing and Strategic Outsourcing.
Logistics Strategy
358 In logistics, the customer is any delivery destination. Destinations

Notes are places to which somebody or something is going or must go.
S
___________________ They involve or relate to establishments ranging from consumers’
homes to the distributor/wholesaler channels. There is a wide
___________________
variety of destinations; it could be the receiving docks of a firm’s
___________________ manufacturing plants and warehouses or an individual who is
___________________ taking ownership of the product or service being delivered.
___________________
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___________________
Lesson End Activity
___________________ Prepare a project report on the risks in logistics outsourcing and
the various risk reduction measures.
___________________
___________________
Keywords
___________________
Third-party Logistics Provider: A third-party logistics provider
is a firm that provides outsourced or ‘third party’ logistics services
to companies for part or sometimes all of their supply chain
management function.
Fourth Party Logistics: Fourth party logistics is an integrator
that assembles the resources, capabilities, and technology of its
)U
own organisation and other organisations to design build and run
comprehensive supply chain solutions.
Value-added Services: It represents an addition to basic
customer services by providing customisation with a view to build
customer solidarity and enhances established channel
relationships.
Benchmarking: The exercise that aims to affirm where the
company would like its exposures to reach.
Order Cycle Time: It refers to the time elapsed between receipt
and delivery of a customer’s order.

1. Describe LSCM alliances.
(c
2. What is the need and selection of logistics service providers?

3. Explain the logistics and supply chain alliances with the
service providers.
4. What are the ingredients of logistics partnership?
5. What are the LSCM related outsourced services?
Further Readings 359

Notes
S
Books ___________________
Physica-Verlag HD, Logistics Outsourcing Relationships, 1st ___________________

edition.
___________________
___________________
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___________________
Incorporated 1998. ___________________
___________________
Advantage for the New Millennium, Blackwell Publishing 2006. ___________________

Web Readings
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(c
Logistics Strategy
360
Notes
S
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 22: Logistics Organisational Design
Unit 22
361
Notes
S
Activity
Logistics Organisational Design

___________________
Study and prepare report on
the organisational design of
___________________
Pizza Hut.
___________________
Objectives
___________________
topics: ___________________
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\ Logistics as a Function in a Company ___________________
\ Centralized, Decentralized and Hybrid Organization ___________________
\ Logistics Design
___________________
___________________
Introduction
___________________
Logistics can be classified into various positions depending on how
it is viewed as a function in a company. If logistics plays a critical
role in a company’s success, it makes sense to position it in the
functional organization beside the basic functions of finance,
production or human resources. Another option could be further
centralization of logistics. But it is debatable whether this serves
)U
the cross-sectional function of logistics.
Logistics as a Function in a Company

With the help of following aspects, we can examine logistics as a
function in a company.
Logistics as an Operational Function

The functional organization is based on the classification criterion
of operations, and is frequently used in small and mid-sized
companies. Logistics can be included centrally or decentrally in the
current organizational structure as an additional operation. As a
result, it is put on the same level as other fundamental operational
functions such as production, sales and procurement. The basic
(c
condition for this is that logistics is considered an operational

function.
Logistics Strategy
362
Notes
S
___________________
___________________
___________________
___________________
___________________
Figure 22.1: Logistics operational Function
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___________________
Logistics in a Functional Organization
___________________
Broad centralization can be achieved if logistics is placed directly
___________________
under the managerial level. However, the functional organization
___________________
opens up wide design possibilities as there are various types of this
___________________ organizational form - this depends on the degree of centralization,
the hierarchical classification and the functional place of logistics
tasks in the present organizational units. Despite the possibility of
creating a comprehensive centralization, it must be stressed that a
functional classification does not reflect the cross-sectional
character of logistics. For this reason, this classification is termed
sceptically as the “functional-silo approach”.
)U
Logistics as a Central Division and Unit
When a company is organized by business divisions such as regions
or products, there are several ways to integrate logistics. A critical
consideration is to classify logistics in terms of its importance to
commercial success. This extends from a central organization
outside all divisions to a logistics unit in every division. If the
approach is carried out well, competitive edges can be achieved.
Centralized, Decentralized and Hybrid Organization

Large companies frequently are matrix organizations. Such
companies employ organizational units based on operational
function such as production, human resources and finance as well
as organizational units based on divisions such as business
(c
segments A, B and C. A matrix organization has three ways of

grouping logistics - centralized, decentralized or hybrid.
1. Logistics as a Central Unit: In a divisional organizational
structure, operational activities on the top level of a company’s
management are structured by object - e.g., by product groups
or regions. This base model also has various ways of
integrating logistics. To achieve synergies among the divisions, 363

logistics tasks are taken from the divisions and placed in a Notes
S
central unit. ___________________
2. Logistics as a Central Unit and Function in Each ___________________
Division: In a decentralized approach, tasks can also be
___________________
carried out in the division. This frequently leads to a division
of labour with the central level’s carrying out tasks that have a ___________________
super ordinate character in terms of phase. An example is the ___________________
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setting of guidelines that govern logistics services. In this case, ___________________
the central unit of logistics has absolute policy-making
___________________
authority. Operational tasks, in particular, are carried out on
the basis of these guidelines. This is an efficient solution when ___________________
the divisions offer a broad line of different products and the ___________________
potential for consolidating logistics tasks is small. If such
___________________
potential exists, operational tasks can be performed centrally.
This also applies to outsourced logistics services.
)U
Figure 22.2: Logistics in a Divisional Organization
3. Logistics as a Separate Division: Another option is to
create a separate division of logistics. This division can be
operated as a profit centre and can offer services in the
marketplace to other companies. It can even be spun off as a
separate company, creating a formal type of outsourcing for
logistics.
Particularly in a divisional organization, the difference
between a company organization and a group organization is
(c
fluid.
In the real business world, a two-tier centralization problem
frequently exists because a distinction must be drawn between
central organization units on the company and group level.
This aspect is significant for one reason: If central group
Logistics Strategy
364 logistics units are employed, a shift of central tasks from the
Notes company to the group level can occur.
S
___________________
4. Operational and Support Functions: Many different tasks
___________________ have to be performed in relative harmony for a logistics
___________________ operation to work.
___________________ Director/senior management.
___________________ Central support functions: financial control, personnel
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services, overall security management, strategic planning,
___________________
communications and information management and
___________________
external relations.
___________________
Procurement: purchasing the items needed; calling
___________________ forward supplies.
___________________ Port clearance: moving goods through customs, often with
the help of clearance agents.
Operation of warehousing/storage: warehousing near
ports and regional stores, with warehouse staff, porters,
accounting staff.
Transport and transport operations support: fuel and
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spares management; maintenance and repair; driver
management; equipment maintenance.
Scheduling and operations planning and management:

relating demand to supply, ensuring that consignments of
food or other items reach those in need in the right
sequence; working out inputs (fuel, spares, etc.) needed to
keep the operation on the road.
Commodity control: keeping track of what is where, from
the Centre; following the movement of supplies from one
segment to the next; ensuring that consignments are
properly documented, and that commodity accounting
procedures are followed.
Control of terminal distribution to beneficiaries (in fully
(c
integrated operations).
365
Check Your Progress
Notes
S
Activity
Fill in the blanks: Prepare a chart to show the
___________________
Unitary Logistics Organization.
1. The …………… organization is based on the ___________________
classification criterion of operations, and is frequently
___________________
used in small and mid-sized companies.
___________________
2. …………… companies employ organizational units
based on operational function such as production, ___________________
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human resources and finance as well as ___________________
organizational units based on divisions such as
___________________
business segments A, B and C.
___________________
___________________
Logistics Design
___________________
Companies are built from the inside out. No matter what their
roots are, from manufacturing to sales to R&D to whatever, they
build internally in an attempt to satisfy an external customer
market. The company wants to sell its product or service, yet
designs itself by its own needs rather than the needs of the
customers it is trying to satisfy. To compound it, they build their
corporate structure in very traditional and very function-focused
)U
ways. Companies do not build “backwards”, from their customers
inward to how they should satisfy these customers. Instead, they
build internally and then reach outward toward customers.
Horizontal versus Vertical

Logistics is a process that crosses many functional responsibilities.
Logistics is not the purview of one department amid a mass of
other company departments aligned in a vertical organization
structure. As a process, logistics is a horizontal activity that
involves many departments. It is a flat structure in a vertical
organization.
Company structures are the first challenge to an effective logistics
process. A multi-function activity is trying to succeed in a series of
(c
vertical tower of responsibilities. Each tower can be a fiefdom and

has its own set of responsibilities and its own goals and objectives.
And many of the responsibilities and goals are internal; they are
not focused on bettering the total product and service for the
company’s customers.
Logistics Strategy
366
Corporate Culture
Notes
S
Companies develop, from the top down, a focus, a culture. Often
___________________
there is a functional mind-set, not a process view. A company may
___________________ be sales focused or stress manufacturing. They may be cost-
___________________ conscious. The mind-set also identifies where power resides within
the organization, either real or perceived.
___________________
The culture can effect on management views logistics. A cost-
___________________
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centre view emphasizes reducing costs for transportation and other
___________________
logistics activities. Or it must get customer orders shipped within
___________________ 24 hours of receipt. Or whatever the culture translates the logistics
___________________ activity to be.
___________________
Identifying Logistics Costs
___________________
An argument can be made that, with all the internal challenges,
the accounting for logistics costs may be the biggest hurdle.
Companies are competing in a global world with international
sourcing, customers and competitors. Companies are competing
and operating now in non-traditional ways with the e-commerce
and the internet. Supply chain management has evolved from a
paradigm to a way of doing business for many industries. And yet,
)U
companies are still using an accounting process that dates back to
the Model A.
Logistics costs’, even from a functional, non-process view, are not
truly defined and captured in an easy way for executives to
understand and use. Certain costs, such as freight, appear on the
profit and loss statement. Other costs, such as inventory, appear
on the balance sheet. Now, the purpose of logistics, which is a
service, to deliver each customer’s order on time, accurate and
complete, is not measured in the financial activity at all. Add in
the multi-departmental involvement in logistics, and the result is
that the total cost of logistics to a company is not measured. Nor is
the competitive advantage, revenue-enhancing benefits of a
leading-edge logistics process identified and captured. Trade-offs of
(c
inventory and transit time is missed. Improvement in the cycle

time for customer orders, from his issuing to delivering, is not
tracked in the accounting system.
Supply Chain Complexity

No other group has as broad a geographic scope and diversity to
manage as does logistics. From Hong Kong to Hoboken, from Paris,
KY to Paris, France and more is the breadth and scope of the 367
supply chain. It involves moving finished products or parts from Notes
S
suppliers throughout the world into company facilities located ___________________
throughout the U.S. and the world, all done to meet the needs of
___________________
customers throughout North America and the globe.
___________________
What to Do ___________________
After recognizing the internal issues, you must then work on ___________________
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dealing with them. Consider these actions to improve the logistics
___________________
position within the company and develop positive support:
___________________
1. Take responsibility: Take ownership of the logistics process.
___________________
Note we say the process, not just the logistics function. Those
are your customers to service and to tailor individual solutions ___________________
to giving them a service that provides a competitive advantage ___________________
for your company. Know what each customer expects from
your company. Understand what other company functions are
critical to this success and work with them. Use formal or
informal teamwork, whatever works. But make it happen. Be
the leader, not a follower. Be proactive, not reactive.
2. Pitch what you do: Never pass up a chance to explain what
)U
logistics is. Be ready, have presentations available, to explain
what logistics is and how important it is to the company
success. Use words the rest of the company knows and uses.
Cost per hundredweight, for example, may mean nothing to
others in the firm. Then talk about cost per SKU and product
category or other ways that reflect how your company may be
organized and its culture.
3. Break the organization mind-set: Work to show logistics as
a cross-functional process. Talk about logistics beyond the
organizational boundaries that exist in the company. Show
how it goes beyond functional mind-sets. It is more than the
sum of its parts. And show that to each part, to purchasing,
sales, manufacturing, accounting and others. Show it to top
management. Better yet, prove it to top management.
(c
4. Have both the strategic and tactical views: Make sure

what logistics does is consistent with and supports the
company’s strategy and mission. Make sure that can be
demonstrated with the way logistics operates. Where there are
strengths, show that. Make them even stronger. Where they
are weaknesses, correct them. Support the dual customers you
Logistics Strategy
368 have, external and internal. Show management you are

Notes positioning logistics, both for the “today” and for where the
S
___________________ company wants to go. Think outside the box. Think outside
just the logistics function.
___________________
___________________ 5. Use systems: Information is necessary for logistics success.

This is true within the logistics function and for the logistics
___________________
process. Use information to manage the logistics process. Set
___________________ standards and use exceptions so you focus on the key needs for
PE
___________________ success. Remember, though, systems are a means to an end,
not the end itself.
___________________
___________________
6. Measure: Identify key factors in the logistics process, both for
logistics success and what top management wants. Then
___________________
measure them. Track them. Report them.
___________________
7. Collaborate: Supply chain success, across multi-functions,
requires collaboration. That, in turn, means taking that
internal collaboration, and making it external. Work with
Sales so that you have a real and mutual working relationship
with customers. Work with Sourcing so that you have a good
relationship with suppliers. This recognizes the complexity of
what you are doing and the scope.
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8. Get buy-in from the top management: Logistics success
means that the company has a competitive advantage. It
means that customers like to do business with you and want to
do business with you. This then takes the customer
relationship beyond the traditional price-volume discussion. As
you get successes, make sure top management understands
what you are doing and want to do. Get their attention and
support as early into the effort as you can-and keep it.
Logistics Organizational Structures

In many large operations, it usually takes a considerable time to
gather these functions into a tightly coordinated system. Initially,
a very loose form of organization may be improvised, followed by a
(c
gradual progression to more centralized control.
Loose Structures
Following most sudden disasters, loose and multi-organizational
structures can quickly develop. It may use warehouses supplied by
a government body, with check point security and communications
provided by the military, and with terminal storage and 369

distribution carried out by a local religious group. Notes
S
___________________
Unitary Structures
___________________
For major programs, it is now widely recognized that the logistics
___________________
operation will be more reliable if procurement, clearance,
warehousing, commodity control and scheduling are controlled by a ___________________
single commodity management unit, with a single individual ___________________
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ultimately responsible. The unit must be able to enforce
___________________
accountability, to impose a single, integrated management control
system, to independently select honest, capable staff, and to ___________________
remove staff that does not perform to expected standards. ___________________
Whether to extend beyond this set of core functions to a fully ___________________

“unitary” organization depends on local conditions. ___________________
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Figure 22.3: A Unitary Logistics Organization
Governmental Structures
Transport and warehouse services may also be provided by
government owned organizations. Generally, from a coordinating
agency’s perspective, control is more difficult and problems with
accountability are more likely.
Government-owned implementing partners may have to be
supplied with additional vehicles and equipment, fuel, spares, and
(c
other items. Those responsible for relief logistics will tend to have
little authority over the care of equipment, the costs incurred, or
the performance of staff. Where the government-owned agency is
in a monopoly position, logistics managers often face a long and
frustrating task in negotiating improvements in operations.
Logistics Strategy
370 Distribution
Notes
S
Distribution of commodities to individuals and families at the field
___________________
level is generally regarded as distinct from transport and handling
___________________ of bulk consignments of commodities. The task of distribution is
___________________ commonly devolved to a separate agency. The effectiveness of
distribution systems depends largely on how recipients are selected
___________________
and identified in the first place. Often this is a complex and highly
___________________ political activity, over which external implementing agencies have
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___________________ only limited influences. Some of the most serious problems with
___________________
diversion of relief aid occur at this stage. Extensive experience and
political independence are essential requirements for agencies
___________________
assigned the task of beneficiary selection and managing
___________________ subsequent large-scale distributions.
___________________
Check Your Progress
Fill in the blanks:
1. A ..................... view emphasizes reducing costs for
transportation and other logistics activities.
2. ..................... means that customers like to do business
with you and want to do business with you.
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Summary
Logistics can be classified into various positions depending on how
it is viewed as a function in a company. If logistics plays a critical
role in a company’s success, it makes sense to position it in the
functional organization beside the basic functions of finance,
production or human resources. Another option could be further
centralization of logistics. But it is debatable whether this serves
the cross-sectional function of logistics.
The functional organization is based on the classification criterion
of operations, and is frequently used in small and mid-sized
companies. Logistics can be included centrally or decentrally in the
(c
current organizational structure as an additional operation.

Large companies frequently are matrix organizations. Such
companies employ organizational units based on operational
function such as production, human resources and finance as well
as organizational units based on divisions such as business
segments A, B and C. A matrix organization has three ways of 371

grouping logistics - centralized, decentralized or hybrid. Notes
S
In a decentralized approach, tasks can also be carried out in the ___________________
division. This frequently leads to a division of labour with the ___________________
central level’s carrying out tasks that have a super ordinate
___________________
character in terms of phase. An example is the setting of guidelines
that govern logistics services. ___________________
___________________
PE
Prepare a chart to show distinction in centralised, decentralised ___________________
and matrix organization with relevant examples. ___________________
___________________
Keywords ___________________
Logistic: Logistics can be classified into various positions
depending on how it is viewed as a function in a company.
Functional Organization: The functional organization is based
on the classification criterion of operations, and is frequently used
in small and mid-sized companies.
)U
Decentralized approach: In a decentralized approach, tasks can
also be carried out in the division.
Distribution: Distribution of commodities to individuals and
families at the field level is generally regarded as distinct from
transport and handling of bulk consignments of commodities.

1. Explain the Logistics as a function in a company.
2. Discuss the Logistics as an operational function.
3. Explain the Logistics as a central unit and function in each
division.
4. Describe logistics Operational and support functions.
(c
5. Discuss the Logistics Design.

Logistics Strategy
372
Further Readings
Notes
S
___________________ Books
___________________ Physica-Verlag HD, Logistics Outsourcing Relationships, 1st
___________________ edition.
___________________ Douglas Long, International Logistics: Global Supply Chain

___________________
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___________________ Philippe-Pierre Dornier, Panos Kouvelis, Michel Fender, Global
___________________
Incorporated 1998.
___________________
___________________ Ganeshan (Editor) Quantitative Models for Supply Chain
___________________ Management, Kluwer Academic Publishers 1998.
Web Readings
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(c
UNIT 23: International Logistics
Unit 23
373
Notes
S
Activity
International Logistics
___________________
Research on the impact of
technology in international
___________________
logistics.
___________________
Objectives
___________________
topics: ___________________
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\ Logistics in an International Economy ___________________
\ Forces Driving the Borderless World ___________________
\ Barriers to International Logistics
___________________
___________________
Introduction
___________________
The operating challenges faced by international logistics systems
vary significantly within operating regions. The North American
logistics vision is one of open geography with extensive demand for
land-based transportation and relatively limited need for cross-
border documentation. The European logistician, on the other
hand, views operations from a perspective characterized by
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relatively compact geography involving numerous political,
cultural, regulatory, and language barriers. The Pacific Rim
logistician has an island perspective that requires extensive water
or air shipment to transcend vast distances. These different
perspectives require logistics managers who operate
internationally to develop a wide variety of capabilities and
expertise.
Logistics in an International Economy

In the past, an enterprise could survive with a unique North
American, European, or Pacific Rim logistics perspective.
Specifically, an enterprise could achieve substantial success
through regional logistics capability. While this is still true for
(c
some firms, those that desire to grow and prosper are finding a
regional business strategy is no longer adequate. In order to allow
manufacturing and marketing scale economies to support market
growth, enterprises are developing international logistics
expertise. The extended international capabilities must include
international transportation, cultural diversity, Multilanguage
capability, and extended supply chain operations.
Logistics Strategy
374 This chapter discusses the rationale for international operations

Notes and elaborates on the requirements that make them unique in
S
___________________ comparison to domestic logistics. The overall purpose of the
chapter is to compare international and domestic logistical
___________________
operations. The initial sections focus on forces, barriers, and
___________________
challenges involved in international logistics. Five major forces
___________________ that are influencing international logistics are initially reviewed.
___________________ Attention is then directed to a discussion of perceptions and
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practices that are barriers to international expansion.
___________________
International operations increase logistics cost and complexity. In
___________________
regards to cost, estimated 1991 logistics expense for industrialized
___________________
nations exceeds $2 trillion, or 11.7% of combined Gross Domestic
___________________ Product (GDP).
___________________ In terms of complexity, international operations increase
uncertainty and decrease capability to control. Uncertainty results
from greater distances, longer lead times, and decreased market
knowledge. Control problems result from the extensive use of
intermediaries coupled with government intervention in such
areas as customs requirements and trade restrictions.
Forces Driving the Borderless World

)U
There are many forces driving firms to enter the international
arena. These forces serve as both motivators and facilitators.
Enterprises are motivated to expand international operations to
grow and survive. International operations are also facilitated
through developing technologies and capabilities. The five forces
driving international operations are economic growth, supply chain
perspective, regionalization, technology, and deregulation.
Economic Growth
Since World War II, firms in many industrialized economies have
enjoyed annual double-digit percentage increases in revenue and
profit. This growth trend resulted from a combination of improved
market penetration, and increased market size resulting from high
(c
birth rates. Since the population of major industrial countries has

stabilized or even declined, most of these traditional strategies no
longer support sustained revenue and earnings growth.
The decline in economic growth in industrialized countries
occurred at about the same time manufacturing and logistics
productivity began to increase as a result of new technology
deployment. The result was excess capacity. Given this 375

environment, the most direct means for an enterprise to increase Notes
S
revenue and profit is through international expansion into other ___________________
developed regions and into developing nations. Such expansion
___________________
requires the integration of international manufacturing with
marketing capabilities and the initiation of logistics support for ___________________
new business locations. Thus, the search for growth and profit is a ___________________
fundamental force driving enterprises to serve international
___________________
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markets.
___________________
Supply Chain Perspectives ___________________
The second force driving international logistics is widespread ___________________

adoption of a total supply chain perspective by manufacturers and ___________________
large-scale distributors. Historically, managers have focused on
___________________
reducing procurement cost and manufacturing expense within
their own enterprise. Expenses incurred by other channel members
typically were not viewed as important when making logistics or
product sourcing decisions.
Firms traditionally sought logistical control by performing as many
essential activities as possible internally. Internal performance
)U
typically resulted in private warehouses, transportation, and
information processing.
While such privatization maximized control, it also increased the
assets required to support logistics operations. Commitment of
assets to logistics is not critical from the viewpoint of profitability.
However, in terms of “return on assets” (ROA), it is desirable to
reduce the capital deployed to support any business activity.
Logistics managers found that they could reduce capital deployed
by outsourcing the performance of a wide range of logistics
activities. As a result, the use of service specialists became
common practice during the 1980s.
This experience with outsourcing proved critical in terms of
financial international expansion. While attempting to develop
cost-effective operations to support international expansion, firms
(c
capitalized on their earlier learning experience. They were willing

to develop alliances with international suppliers that could provide
expertise and quality logistics service at a reasonable cost for
activities such as international freight consolidating and
forwarding, international transportation, documentation, and
facility operations.
Logistics Strategy
376 Regionalization
Notes
S
As indicated above, the need to develop new markets to sustain
___________________
growth was a primary force that encouraged firms to seek
___________________ customers outside their “home” country. The typical initial choices
___________________ of expansion-minded firms were countries in nearby geographic
regions. To promote regional trade and protect trading partners
___________________
from outside competition, countries began to formalize
___________________ partnerships through treaties. Examples of such agreements are
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___________________ the European Community (EC 92) and the North American Free
___________________
Trade Agreement (NAFTA). The Dean Foods sidebar illustrates
such a regional strategy. Ohmae’s triad view suggests that the
___________________
world is evolving into three major trading regions: Europe, North
___________________ America, and the Pacific Rim. While each region does not restrict
___________________ trade with other regions, the agreement strongly promotes and
facilitates intraregional trade.
Such regionalization is resulting in an industrialized triad with
each part having relatively equal population and economic
strength. Intra-regional trading is facilitated by reducing tariffs,
minimizing customs requirements, developing common shipping
documentation, and supporting common transportation and
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handling systems. The ultimate goal is to treat intraregional
movements as if they had the same country origin and destination.
Technology
Communication and information technology represents a fourth
force stimulating international operations. Mass-market
communications exposed international consumers to foreign
products, thus stimulating a convergence of international needs
and preferences. “Whatever their nationality, consumers in the
triad increasingly are exposed to similar motivations seek the
same kind of life-style, and desire similar products. They all desire
the best products available, at the lowest price possible”. The
demand for blue jeans in Asian and Eastern European countries,
and athletic shoes throughout the world, has increased as a result
(c
of widespread media exposure. Cable News Network (CNN), USA

Today, and other satellite communications promote a variety of
products and stimulate demand on an international basis.
A second expansion force resulting from technological development
is an in-creased capability to exchange information facilitated by
widespread availability of computers and communication
networks. Historically, international commercial documentation 377

such as orders, delivery requirements, and customs forms were Notes
S
typically hard-copy paper that required extensive time to transfer ___________________
and often contained many errors. Prior to advanced communication
___________________
technologies, the performance cycle from order commitment to
order receipt was nine months to replenish Adidas shoes in the ___________________
United States from the Orient. The total performance cycle has ___________________
been reduced to three months through the use of enhanced
___________________
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information technology that speeds order requirements
___________________
communication, production scheduling, shipment scheduling, and
customs clearance. ___________________
As the world becomes more real-time oriented, demand for world- ___________________
class products and services will increase. Although politicians ___________________
regularly stress the importance of “home-grown” products, the
___________________
average consumer neither knows nor cares where the product is
actually produced as long as it offers the best-perceived value. For
example, while the Honda Accord is typically viewed as a foreign
automobile by United States consumers, it has one of the highest
percentages of domestic content of any car assembled or sold in
that country. Honda has been among the top five selling
automobiles in the United States over the past five years. The
)U
preferences of well-travelled and knowledgeable citizens are
influencing governments to rethink import restrictions and the
consequences of political border barriers.
Deregulation
Deregulation of a number of key industries is a fifth driving force
toward a borderless world. The two primary deregulated industries
are finance and transportation.
Financial Deregulation
International finance and foreign exchange are facilitated through
a number of changes in regulations and procedures. Government,
in the form of institutions such as the United States Export-Import
(c
Bank, and multigovernment-sponsored credit institutions, such as

the International Monetary Market, serve to extend and guarantee
long-term export and import credits above and beyond individual
bank capabilities. This not only increases the availability of funds,
but also reduces individual bank risk and increases trade
potential.
Logistics Strategy
378 The International Monetary Market (IMM) also provides the

Notes mechanism to exchange currencies and trade futures at market
S
___________________ rates. Although the IMM originated in 1972, its impact increased
significantly in 1987 with the establishment of an international
___________________
electronic automated transaction system. International financial
___________________
information standards are a key factor in the international trade
___________________ increase.
___________________ Another factor is the elimination of the gold standard as support
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___________________ for individual currencies. The United States dropped the gold
standard in the early 1970s, which allowed other major currencies
___________________
to float against the dollar through the IMM agreement. Fixed
___________________
monetary rates had previously restricted trade by setting
___________________ artificially high levels for major currencies of industrialized
___________________ nations. High exchange rates made international trade expensive
because of the artificially high cost of goods. Floating rates
facilitate free currency movement and tend to synchronize
international booms and recessions. In addition, interest rates,
capital markets, and the overall investment climate are more
interlinked and interdependent given international monetary
systems.
)U
The free flow of currency exchange is particularly evident in
contemporary financial markets. The United States dollar, for
example, facilitates the international flow of goods while being
only minimally affected by differences in individual country wage
rates. In fact, these markets support an annual volume of foreign
currency exchange in equity and capital transactions that is 300
times larger than the annual goods exchange between triad
members. The difference in magnitude between currency and
goods exchange explains why directional shifts in goods exchange
have only a minor impact on exchange rates.
Transportation Deregulation
The United States initiative to deregulate transportation during
the early 1980s has gradually spread throughout the globe. Despite
(c
the fact that overall international deregulation has advanced at a

slower rate than in the United States, three international changes
concerning intermodal ownership and operation, privatization, and
cabotage and bilateral agreements have occurred. The
international trade impact of each is discussed.
Historically, there have been regulatory restrictions concerning 379

international transportation ownership and operating rights. Notes
S
Carriers have traditionally been limited to operating within a ___________________
single transportation mode with few joint pricing and operating
___________________
agreements. Specifically, steamship lines could not own or manage
land based operations such as motor or rail carriers. Without joint ___________________
ownership, operations, and pricing agreements, international ___________________

shipping was complicated as a result of the number of parties
___________________
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involved. International shipments typically required multiple
___________________
carriers to perform and manage the freight flow. In addition,
carrier operations were typically limited. For example, foreign- ___________________
owned carriers could not operate in many nations located between ___________________
domestic origins and destinations. There were also limitations for
___________________
carriers when they made pickups or deliveries in foreign countries.
Specifically, government rather than market forces determined the ___________________
extent of services foreign-owned carriers could perform. Although

some ownership and operating restrictions remain, marketing and
alliance arrangements among countries have substantially
improved transportation flexibility. Similar restrictions were
removed in most other industrialized nations. An example of the
increased flexibility is United Parcel Service’s (UPS) current
)U
capability to serve over 190 countries in a seamless manner via
ownership, joint marketing, and operating agreements. Internally,
UPS may provide service by carrying a package with a combination
of rail, motor, air, and water transportation. Such agreements
facilitate international shipment efficiency and trade, as well as
increase the possibility of one-stop logistics services.
A second transportation stimulant to internationalization has been
increased carrier privatization. Historically, many international
carriers were owned and operated by “home country” governments
to promote trade and provide strategic reserves in case of war.
In an effort to improve service, many governments have privatized
major carriers, while others are considering it. For example, the
United Kingdom and Canada are in the process of privatizing air,
(c
motor, and rail carriers. The European Community is completing

other large-scale privatization and infrastructure projects to meet
increased business demands resulting from EC 92 initiatives.
Forced to operate in the competitive marketplace, privatized
carriers must improve service and be more consistent and
competitively priced. The result is facilitated international trade.
Logistics Strategy
380 Changes in cabotage and bilateral service agreements are the third
Notes regulatory factor influencing international trade. Cabotage laws
S
___________________ require passengers or goods moving between two domestic ports to
utilize only domestic carriers. For example, water shipments from
___________________
Los Angeles to New York must use a United States carrier. The
___________________
same cabotage laws restrict a Canadian driver from transporting a
___________________ back-haul load to Detroit once a shipment originating in Canada is
___________________ unloaded in Texas. Cabotage laws protect domestic transportation
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industries, even though they reduce overall transportation
___________________
equipment utilization.
___________________
The European Community is relaxing cabotage restrictions to
___________________ increase trade efficiency. It is projected that reduced cabotage
___________________ restrictions will save United States corporations 10 to 15 percent
___________________
in intra-European shipping costs. European Transport Ministers
have reached agreement to open Europe as a single transport
market by 1998. Several prominent United States trucking
companies, such as Yellow Freight and Carolina Freight, have
opened offices and entered into operating agreements with
European carriers. Although NATA does not allow motor carrier
cabotage, American trucking firms will be able to carry
international cargo into Mexican border states by the end of 1995
)U
and throughout Mexico by the end of 1999. Mexican trucking firms
will be allowed reciprocal treatment in the United States on the
same timetable.
Bilateral service agreements require that a balanced number of
carriers registered in each country be authorized to operate
between origin and destination points. Such agreements serve to
limit the total number of international carriers that serve key
specific gateways. In addition, bilateral agreements may result in
duplicate service and excess capacity in low-volume gateways. The
consensus is that traditional bilateral agreements are shifting
toward multilateral arrangements with separate considerations for
passenger and freight transport. This inter-governmental
arrangement and cooperation will yield improved transport service
(c
while simultaneously reducing transportation rates. The net result

should favour international trade.
Barriers to International Logistics

While many forces facilitate borderless operations, some
significant barriers continue to impede international logistics.
Three barriers are significant: markets and competition, financial
barriers, and distribution channels. International logistics 381

management must balance the cost of overcoming these barriers Notes
S
with the potential benefits of international trade to achieve the ___________________
actual benefits of successful international operations. Each barrier
___________________
is described.
___________________
Markets and Competition ___________________
Perceived and real market and competitive barriers include entry ___________________
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restrictions, information availability, pricing, and competition.
___________________
Entry restrictions limit market access by placing legal or physical
barriers on importing. An example of a physical barrier is the ___________________
European practice of local presence, which requires that market- ___________________

based manufacturing or distribution facilities be established prior
___________________
to market access. An example of a legal entry barrier is the
___________________
Japanese practice of allowing local retailers to “vote” on acceptance
of new retailers, particularly foreign ones, into the market.
Poor information availability is another international logistics
barrier. In addition to limited information availability regarding
market size, demographics, and competition, little coordinated
information is available defining import and documentation
)U
requirements. Typical requirements differ by government and even
by specific case. Most governments require that documentation be
completed and processed prior to shipment. In many cases, if the
documentation is not flawless, the shipment is delayed or
impounded. While correct documentation is important for all
shipments, it is critical for international transportation.
Pricing and the related topic of tariffs are other marketing-related
barriers. International pricing is strongly influenced by exchange
rates. The situation confronted by United States distributors of
German automotive parts illustrates how exchange rates affect
logistical requirements. The common practice is to delay ordering
replenishment parts until as late as possible to reduce risk and
investment. However, when the German mark rises compared to
the United States dollar, as it did in the early 1990s, a more cost-
(c
effective strategy may be to stock up on parts and take advantage

of the favourable exchange rate.
Tariffs represent another traditional barrier. Tariffs were
originally designed to protect domestic industries by increasing
prices on imported goods. Tariffs complicate international trade in
two ways. First, tariffs are an additional cost element that must be
Logistics Strategy
382 considered when evaluating foreign sources of supply. Second,

Notes tariffs are political; subject to quick change as government policy
S
___________________ alters.
___________________ Tariffs serve as a barrier to logistics planning since trade flow
___________________ direction and volume can change overnight. While the NAFTA and
EC 92 eliminate many tariffs within North America and Europe,
___________________
substantial tariffs remain between regions.
___________________
PE
GATT (General Agreement on Tariffs and Trade) is a multilateral
___________________ trade mechanism for improving trade relations among signatory
___________________ trading partners. It is designed to increase trade consistency,
___________________
improve trade relations, and reduce bilateral agreements. A
fundamental GATT principle requires that tariff reductions
___________________
negotiated between any two members be extended to all members.
___________________ Since GATT was founded in 1948, there have been eight “rounds”
of negotiations resulting in an increase in tariff consistency.
However, despite this effort, tariff differentials still exist and
remain effective barriers for international logistics.
While most international firms have experience in highly
competitive environments, different rules concerning competitive
governance also serve as international logistics barriers. For
)U
example, the United States government fosters private enterprise,
and, as such, it maintains an arm’s-length relationship with
business and prohibits price collusion. However, these economic
policies are not an international standard. International
competitors, such as United States-based Boeing, must contend
with firms such as Airbus Industries that have a home field
advantage in Europe because of the French government’s majority,
ownership. The competitive barrier is a combination of a lack of
awareness regarding international rules and the necessity to
conform to the norms of particular geographic regions.
Financial Barriers
The financial barriers to international logistics result from
forecasting and the institutional infrastructures. While it is not
(c
easy to forecast in any situation, it is particularly difficult in

international environments. The domestic forecasting challenge is
to predict unit or dollar sales based on customer trends,
competitive actions, and seasonality. In an international
environment, these challenges are compounded by exchange rates,
customs actions, and government policy complexities.
Institutional infrastructure barriers result from major differences 383

in how facilitating intermediaries such as banks, insurance firms, Notes
S
legal counsellors, and transportation carriers operate. Services and ___________________
capabilities that are taken for granted in the United States are
___________________
often not available or are administered differently in foreign
countries. The banking, insurance, and legal systems as well as the ___________________
omnipresent transportation systems common in the United States ___________________

are in their infancy in most less developed countries. To illustrate
___________________
PE
this point, interviews with managers in Eastern Europe indicate
___________________
that payment receipt and processing can take two or three weeks,
even within a single city! These long processing times often occur ___________________
in economies where monthly inflation exceeds 5 percent. Such ___________________
delays significantly complicate order processing and increase
___________________
financial and inventory risk.
___________________
The combination of financial and institutional uncertainty makes
it difficult to plan product and financial requirements. As a result,
logistics managers must allow for additional inventory,
transportation lead time, and financial resources to operate
internationally.
International Distribution Channels

)U
International Distribution channel differences such as
infrastructure standardization and trade agreements are a third
barrier confronting logistics managers. Infrastructure
standardization refers to differences in transportation and
material-handling equipment, warehouse and port facilities, and
communication systems. While there have been recent efforts to
improve standardization with respect to containerization, there are
still major differences in international transportation equipment
such as vehicle dimensions, capacity, weight, and rail gauge. It is
not even necessary to go beyond United States boundaries to find
differences in permissible transportation equipment length and
weight restrictions on a state-by-state basis.
When infrastructure is not standardised, it is necessary for
(c
products to be unloaded and reloaded into different vehicles or

containers as they cross national boundaries, resulting in
increased cost and time. Infrastructure problems are common
within the United States when ocean carriers require ocean
containers to be unloaded prior to domestic shipment.
Logistics Strategy
384 Trade restriction barriers can influence channel decisions, such as

Notes the rules that restrict the volume of imports or increase duties
S
___________________ once a specified volume has been reached. There are, for example,
trade agreements for all tuna imports from American Samoa into
___________________
the United States. The agreement levies a 15 percent tariff when
___________________
total annual imports exceed a specified level. When the specified
___________________ level is reached, tuna importers build inventories in bonded
___________________ warehouses for shipment release following the beginning of the
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next year. The use of bonded warehouses on the United States
___________________
mainland means that the tariffs are not assessed until the product
___________________ is shipped to local warehouses. While the tactic of using bonded
___________________ warehouses reduces tariff expense, it increases logistics complexity
___________________
and cost, since it requires inventory build up and temporary
warehousing. Not only is this a problem when individual
___________________
enterprises use this tactic, but it is further compounded since
competitors also vie to get their product imported under the same
import restrictions while minimizing their duty and storage
expense. This example illustrates how trade agreements that limit
quantities or require special conditions increase international
logistics complexity.
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The International Challenge
Firms desiring to expand internationally need to assess the
balance of forces that en-courage such activity and the barriers
they must overcome. Increasing international trade requires
logistics managers to develop both an international awareness and
an international perspective. Managers must be aware of the
aforementioned logistics barriers, consider alternative solutions,
and have the insight to apply them in non-traditional
environments.
While logistics principles are the same domestically and
internationally, operating environments are more complex and
costly. Cost and complexity are represented by the four D’s –
distance, documents, diversity in culture, and demands of
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customers. Distances are longer. Documentation is more extensive.

Customers demand variation in products and services to satisfy
cultural differences, within both countries and regions. Developing
strategies and tactics to respond to the “four D” environment is the
international challenge for logistics management.
International logistics development requires creation of an 385

international operating philosophy and vision. The vision must Notes
S
result in operating strategies, performance expectations, ___________________
measurement, and decision alternatives.
___________________
Fill in the blanks: ___________________
1. ................. operations increase logistics cost and ___________________
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complexity. ___________________
2. The ................. provides the mechanism to exchange ___________________

currencies and trade futures at market rates. ___________________
___________________
Summary
___________________
Expenses incurred by other channel members typically were not
viewed as important when making logistics or product sourcing
decisions. While such privatization maximized control, it also
increased the assets required to support logistics operations.
Commitment of assets to logistics is not critical from the viewpoint
of profitability. However, in terms of “return on assets” (ROA), it is
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desirable to reduce the capital deployed to support any business
activity. Logistics managers found that they could reduce capital
deployed by outsourcing the performance of a wide range of
logistics activities. As a result, the use of service specialists became
common practice during the 1980s.
Such regionalization is resulting in an industrialized triad with
each part having relatively equal population and economic
strength. Intra-regional trading is facilitated by reducing tariffs,
minimizing customs requirements, developing common shipping
documentation, and supporting common transportation and
handling systems. The ultimate goal is to treat intraregional
movements as if they had the same country origin and destination.
Communication and information technology represents a fourth
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force stimulating international operations. Mass market

communications exposed international consumers to foreign
products, thus stimulating a convergence of international needs
and preferences. Deregulation of a number of key industries is a
fifth driving force toward a borderless world. The two primary
deregulated industries are finance and transportation.
Logistics Strategy
386
Lesson End Activity
Notes
S
Prepare a project on the growth and the latest trends in
___________________
international logistics.
___________________
___________________
Keywords
___________________
Expenses: Expenses incurred by other channel members typically
___________________ were not viewed as important when making logistics or product
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___________________ sourcing decisions.
___________________ Regionalization: Regionalization is resulting in an industrialized
___________________ triad with each part having relatively equal population and
economic strength.
___________________
Deregulation: Deregulation of a number of key industries is a
___________________
fifth driving force toward a borderless world. The two primary
deregulated industries are finance and transportation.

1. Discuss Logistics in an international Economy.
2. What do you mean by international Logistics?
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Further Readings
Books
edition.
Incorporated 1998.
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Web Readings 387

Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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Logistics Strategy
388
Notes
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___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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UNIT 24: Views of International Logistics
Unit 24
389
Notes
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Activity
List ___________________
down the trends and
Views of International Logistics changes in the Regional and
Country Specific Logistics
___________________
Conditions.
___________________
Objectives
___________________
topics: ___________________
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\ Importing and Exporting: A National Perspective ___________________
\ International Operating Levels ___________________
___________________
Introduction ___________________
The continuum of international trade perspectives ranges from an ___________________

importing and exporting orientation to the concept of a stateless
enterprise. While there are certainly intermediate positions, the
different perspectives are highlighted by reviewing extremes. The
following section compares conceptual and managerial implications
of enterprise focus, process orientation, and structural
relationships associated with each extreme perspective. The
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section concludes with an examination of the logistical differences
between national and stateless enterprise perspectives.
Importing and Exporting: A National Perspective

The national perspective considers all international activity as
importing and exporting. The enterprise’s organization within each
country is focused on internal operations and views each
transaction from a national perspective of what it will do for the
local operation. Typically, when Finns are guided by this
philosophy, their operation in each country is managed as an
autonomous unit with performance measurement focused on its
own profit and loss statement, including self-generation of assets.
A national perspective influences logistical decisions in three ways.
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First, sourcing and resource choices are based on artificial

constraints. The constraints may be in the form of use restrictions
or price surcharges. A use restriction is a limitation, usually
government-imposed, that restricts import sales or use. For
example, the enterprise may require that internal divisions be
used for material sources even though prices or quality are not
competitive. Price surcharges are artificial price increases on
Logistics Strategy
390 foreign-sourced products imposed by governments or home country

Notes operations to maintain the viability of local suppliers. In
S
___________________ combination, use restrictions and pricing surcharges limit
management’s ability to select what otherwise would be the
___________________
preferred supplier.
___________________
Second, confronting logistics with a nation-by-nation perspective
___________________
increases planning complexity. A fundamental logistics objective is
___________________ smooth product flow in a manner that facilitates efficient capacity
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___________________ utilization. Barriers resulting from government intervention make
it difficult to achieve this objective. The tuna example, cited
___________________
earlier, demonstrates how government policies cause artificial
___________________
diversions of product flow.
___________________
Third, a national perspective attempts to extend domestic logistics
___________________ systems and operating practices around the globe. While this
philosophy simplifies matters at a policy level, it increases
operational complexity since exceptions are typically numerous.
Local managers must handle such exceptions while remaining
within corporate policies and procedures. As a result, local logistics
management must accommodate cultural, language, employment,
and political environments without full support and understanding
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of corporate headquarters.
The national perspective both decreases and increases decision
complexity for logistics managers. Decision complexity is decreased
since the enterprise limits alternatives under consideration by
eliminating international sourcing and dictating suppliers. On the
other hand, logistics decision complexity is increased by the
addition of noneconomic constraints such as political policy or
subsidiary ownership that can change overnight. This combination
often results in less-than-competitive product quality and price.
Perhaps the most visible example of a national perspective, both
politically and socially, is found in Japan’s distribution system.
Japan has more than 1.5 million small (less than 3,200 square feet
of floor space) neighbourhood shops that account for more than 50
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percent of retail sales-compared with 3 percent in the United

States and 5 percent in Europe. Since World War II, one of Japan’s
top economic priorities has been to maintain this network of small
shops for cultural reasons. A vast, multi-tiered network of
wholesalers evolved to supply the shops, often providing daily
delivery on cash-and-carry service. These wholesalers are linked to
manufacturers and/or to Japan’s huge trading companies via
another tier of large distributors. As a result, 20 percent of all 391

Japanese workers are employed in distribution. Notes
S
Protection of this distribution system takes many forms. In ___________________
particular, distribution legislation, such as the 1974 Large Retail ___________________
Stores Law, regulates the opening of new stores larger than 5,400
___________________
square feet. The approval involves an extended negotiation that
often exceeds eight or more years with local officials and retailers. ___________________
As one might expect, the law has severely limited the entry of ___________________
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western-style retailing in Japan. Socio-cultural forces also ___________________
contribute to distribution inefficiencies. Traditional Japanese
___________________
society involves a rigid code of interpersonal obligations that serve
to maintain social harmony, group welfare, and hierarchical ___________________
relationships. These societal characteristics promote close ties ___________________
between wholesalers, as well as between wholesalers and retailers.
___________________
Foreign manufacturers, especially American, find it difficult to
penetrate these complex social-business linkages. American
manufacturers have attempted several strategies to improve access
to Japanese markets. One approach involved building brand
awareness in the highly brand conscious Japanese consumer and
relying on a “pull” method of acquiring distribution. While this
strategy has worked for some highly visible international brands,
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manufacturers with weaker brand identities are forced to rely on
the huge Japanese trading companies for market access. In recent
years, most, if not all, firms emphasized quality as the key
determinant of consumer product offerings. Another strategy,
utilized by large firms such as Toys “R” Us, attempted to establish
direct distribution and bypass the numerous tiers of wholesalers
between typical United States manufacturers and Japanese
consumers. Except for firms with the ability to utilize direct
distribution, most foreign companies have found little or limited
success penetrating the Japanese distribution system.
Today, however, the traditional Japanese distribution system is
beginning to break down because of a variety of internal and
external economic pressures. First, the consumer has become
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increasingly price-conscious as a result of a three-year recession.

The drop in value of the dollar against the yen, to record post
World War II levels, has lowered the effective price of imports. In
fact, a recent poll in Japan discovered that price, not quality, now
determines most purchases. 14 Second, brand loyalty is eroding as
giant retailers offer more low-priced private house brands of
diverse products such as televisions and soft drinks. Third,
Logistics Strategy
392 innovative small firms are avoiding traditional supply and

Notes distribution channels and are selling goods at cut-rate prices.
S
___________________ Finally, foreign retailers such as Toys “R” Us have brought mass
merchandising practices to Japan – and have benefited from
___________________
relaxations in the Large Store Retail Law that increase store hours
___________________
and the number of allowable business days per week. These
___________________ changes in the structure of Japanese distribution suggest that over
___________________ time, international economic conditions have the potential to
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drastically alter a traditional, national trading perspective.
___________________
___________________ The Stateless Enterprise

___________________ The stateless enterprise perspective, which is also known as
___________________ “company’s,” contrasts sharply to operations under a national
perspective. The stateless concept was popularized in a Business
___________________
Week article describing enterprises that are effectively making
decisions with little regard to national boundaries. These
enterprises have the capacity to juggle multiple identities and
loyalties and resemble insiders in whatever area they operate. For
example, even though the stateless enterprise may have its
historical foundations in Germany, Japan, or the United States, a
high percentage of its sales, ownership, and assets are outside the
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country of origin. The stateless enterprise is also likely to have
senior management and boards of directors representing a broad
range of nationalities and international experiences. Examples of
firms that fit these specifications are ABB (Switzerland), Dow
Chemical (United States), ICI (Britain), Hoechst (Germany),
Nestle (Switzerland), and Philips (Netherlands).
Examples of international firms operating as stateless enterprises
can be seen in China. Although China is estimated to be the
world’s third largest economy, it very much remains a third-world
country in many respects—particularly concerning logistics and
channel infrastructure. China has poor communications, no
intermodal systems or boxcar availability or container tracer
capability, no cargo airlines, and virtually non-existent roads
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outside major cities. Firms preparing to invest in Vietnam face

similar conditions. For these reasons, several of the largest United
States firms currently operating in China are relying heavily on
local managers to run logistics operations. Both AT&T and Procter
& Gamble believe that their Chinese operations cannot be run by
managers from the United States because of such underdeveloped
business systems, the rapid rate of change, and exploding trade
volume. Questions of supply chain distribution for Procter & 393

Gamble are handled by its general manager in Guangzhou. In fact, Notes
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the general manager has almost complete freedom regarding ___________________
product-line sourcing, regardless of the country of origin. Similarly,
___________________
AT&T’s logistics person in Shanghai determines operating policy
for the company’s network systems division. This division has ___________________
responsibility for providing the foundation for a modern phone ___________________

system in China. A recent informal survey of logistics managers
___________________
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indicates that business in China has never been better but that the
___________________
country is one of the most challenging experiences in business
today. Given these conditions, the logistics of operating in China ___________________
and other developing regions of the world are indeed quite ___________________
challenging.
___________________
What are the logistics implications of a stateless enterprise? The
___________________
first implication is that managers are able to identify and evaluate
alternative strategies and have the authority for implementation.
In the case of logistics management, this requires investments of
time and effort to identify and evaluate alternatives for materials,
logistics service suppliers, manufacturing and warehousing
locations, and customer alliances. These requirements particularly
affect the stateless enterprise because of the geographic scope and
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cost of its operations, as well as the attendant risk involved in
decisions of such magnitude and complexity.
A second logistics implication is the need to develop and implement
flexible systems and procedures. While basic logistic principles
suggest that substantial scale economies are preferable to support
international development and implementation, the stateless
enterprise is sensitive to local market requirements. For example,
business elements other than a country’s language must be
adapted in order to support the concept of international
localization or customization. The system must also adapt to
differences in documentation, packaging, pricing, and operations.
To provide this flexibility, firms are adopting a data-warehousing
concept. The data warehouse is a database general enough to
(c
accommodate the information needs of the international enterprise

with a flexible user interface that can be customized to individual
market needs and procedural differences. Each market receives its
own door to the warehouse so that each country can meet its
specific needs.
Logistics Strategy
394 The experience of Dow Chemical illustrates typical problems

Notes associated with poorly integrated international systems. In the
S
___________________ past, Dow systems and procedures differed by business unit and
international location. The lack of integration increased operating
___________________
complexity while it decreased capability to respond to customers on
___________________
an international basis. To resolve this problem, Dow management
___________________ has initiated a long-range plan to implement an integrated system
___________________ capable of providing customers with whatever information they
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may want about a product they have ordered or consider ordering,
___________________
regardless of their international location. This localized integration
___________________ requires sensitivity to local market needs while providing
___________________ information structures to support a common knowledge base.
___________________
International Operating Levels
___________________
The previous discussion contrasted two extreme perspectives of
internationalization. This section traces the levels of enterprise
evolution from domestic logistics operations to becoming an
international competitor. The duration of each level is a reflection
of managerial philosophy rather than elapsed time. The five levels
are arm’s-length relationship, internal export, internal operations,
insider business, and denationalized operations.
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Regional and Country Specific Logistics Conditions
As discussed throughout this chapter, international economies are
increasingly interlinked by material suppliers, logistical systems,
manufacturing capacity, and markets. It is natural that this
interconnectedness takes the form of regional alliances that
leverage geographic proximity and scale economies. The major
triad regions developing are North America, Europe, and the
Pacific Rim. It is likely that Eastern Europe will join with the
Western European countries and that South America will
ultimately link up with North America. Although there is
considerable speculation, the ultimate resolution involving the
former Soviet Union states and African countries is not clear. As
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regional alliances emerge, they evolve through four stages of

integration. This section introduces these stages and reviews each
region’s development status.
Stages of Regional Integration

The four stages of economic integration are free trade agreement,
customs union, common market, and economic union. The first
stage, a free trade agreement, eliminates tariffs on trade between 395

countries in a region. Specifically, a free trade agreement is Notes
S
defined when each participant in the free-trade area expects to ___________________
gain by specializing in the production of goods and services in
___________________
which it possesses comparative advantages and by importing from
other countries in the group products and services in which it faces ___________________
comparative disadvantages. Thus, trade should be created among ___________________

member countries, giving them less expensive access to more
___________________
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goods.
___________________
A free trade agreement may either stimulate or reduce
___________________
interregional trade. Such agreements can also reduce access of the
firms to more efficient producers or markets outside their region. ___________________
The second stage, a customs union, eliminates tariffs between ___________________
member countries and establishes a common external tariff ___________________

structure toward other regions and non-member countries. Under
this and the remaining two stages, member countries are required
to give some control over economic policies to the group. The
advantage of a customs union is that none of the member nations
in the union can position themselves to gain a tariff advantage at
the expense of other countries.
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The third integration stage, a common market, is characterized by
the same tariff policy as the customs union. In addition, a common
market allows factors of production such as labour and capital, as
well as goods and people, to move freely between member countries
as dictated by market conditions.
The economic union is the fourth and most advanced stage of
development because it implies harmonization of economic policies
beyond a common market. Economic union standardizes monetary
and fiscal policy among member countries. While not absolutely
required, an economic union likely includes common currency and
harmonized tax structures. The economic union implies that all
goods and production factors can move freely according to market
conditions and that no major fluctuations in monetary exchange
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and interest rates will occur.
Integration Status
This section reviews the current status of each major international
region, including a summary of current and proposed trade acts. It
also discusses the logistics implications of each trade act and the
Logistics Strategy
396 strategies reported by enterprises to accommodate and take

Notes advantage of regional changes.
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___________________
North America
___________________
North America took the first step toward economic integration
___________________ when the Canada-United States Free Trade Agreement (FTA) was
___________________ implemented on January I, 1989. This act has produced promising
trends in trade, investment, and commercial cooperation. Both
___________________
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countries have realized significant expansion of exports. The most
___________________ important provision of the agreement is the elimination of all
___________________ tariffs on goods traded between the United States and Canada by
___________________
1998, particularly since Canadian tariffs were among the highest
in the industrialized world.
___________________
The FTA greatly expands the potential for United States and
___________________
Canadian businesses to sell their products to each other’s federal
government, especially for smaller contract awards. The FTA also
reinforces relatively liberal service industry and investment
regulations between the two countries: potentially, over 150 service
industries across many sectors are affected by the agreement
regulations. Finally, both nations must make publicly available all
proposed laws and regulations that relate to any service trade
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issue, in order to allow participation by affected parties in the
regulatory process.
The second step in economic integration, the North American Free
Trade Agreement (NAFTA), was concluded in August 1992
between the United States, Canada, and Mexico. The NAFTA
agreement, which took effect January 1, 1994, eliminates all tariffs
among the three countries over a fifteen-year period and creates a
free trade zone that extends from the Yukon to the Yucatan.
The goals of both agreements, particularly NAFTA, are to enhance
North American competitiveness relative to Europe and Asia by (1)
improving the climate for cross-border investment and trade, and
(2) reducing administrative costs and delays associated with trade.
The drive to accomplish these goals is generating new
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transportation routes and strategic alternatives and is forging

many new partnerships to facilitate cargo movement.
The NAFTA impact on logistics integration efforts will be different
in Canada than in Mexico. In the past, United States
manufacturers established local operations in Canada primarily to
maintain a marketing presence. However, logistics support of
manufacturing operations was constrained because of four 397

conditions: Canada’s manufacturing base is centred almost entirely Notes
S
in Ontario and Quebec, Canadian manufacturing labour costs are ___________________
generally higher than those in the United States, the Canadian
___________________
warehousing industry lags behind United States efficiency and
technology, and East-West transportation movement across ___________________
Canada’s vast hinterland markets is expensive. For these reasons, ___________________

NAFTA stimulated trade and transportation in Canada are
___________________
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projected to develop in a North-South direction. It is anticipated
___________________
that this North-South development will allow more markets to be
effectively serviced by fewer distribution facilities, which will ___________________
provide increased scale economies. ___________________
Although the logic of North-South movement increases access to ___________________
populous markets on both side of the Canada-United States
___________________
border, most Canadian restructuring has been targeted toward
manufacturing efficiencies rather than improved logistics
operations. While sufficient time has not transpired since the
NAFTA agreement to make generalizations regarding enterprise
logistics strategy, initial research indicates that some changes
have occurred in strategies of production and distribution service
areas. Increased competition resulting from NAFTA will pressure
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Canadian firms to innovate and adopt best United States logistics
practice and should steadily improve United States-Canadian
integration.
Several Canadian carriers have anticipated an increasingly
competitive market and have made strategic efforts to shift away
from traditional East-West movements to a more North-South
orientation. The Canadian National Railway has integrated its
three United States subsidiaries to create a significant marketing
and operational presence in the Midwest and eastern United
States. It has also created strategic alliances with Burlington
Northern and Norfolk Southern railroads. Canadian Pacific Ltd.’s
CP Rail System has also expanded by purchasing several United
States railroads. Canadian Pacific is now the seventh largest
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North American railroad, operating from coast to coast in Canada

and offering a major United States presence. Contract agreements
between several United States and Canadian carriers have also
been established to provide wider geographic motor carrier service
throughout Canada. The small package segment will become more
competitive with expanded Canadian coverage by United Parcel
Service and Roadway Package System.
Logistics Strategy
398 Currently, United States companies are establishing Mexican

Notes operations to take advantage of low-cost labour and to gain access
S
___________________ to a major consumer market in which half of the population will be
under the age of twenty. Although most manufacturing in Mexico
___________________
is located near the United States-Mexico border, most of the
___________________
buying power is concentrated in the central portion of the country.
___________________ Therefore, the majority of retail growth as well as distribution and
___________________ warehousing development will occur in this central region. Current
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Mexican transportation infrastructure is incapable of supporting
___________________
major cross trade between the United States and central Mexico.
___________________
For the foreseeable future, these restrictions will force most
___________________
Canadian and United States enterprises that set up
___________________ manufacturing plants in Mexico to accommodate a particular
___________________ supply-chain management design. Specifically, parts vendors are
and will be primarily located in the United States, with
maquiladora assembly plants located along the United States-
Mexico border. Final distribution will be handled through facilities
in the southwestern and Midwestern United States. A
maquiladora is a facility that manufactures, assembles, or
produces raw materials and components that have been
temporarily imported to Mexico. Products are then shipped back to
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the originating country or to a third country for final assembly and
distribution. No duties are charged by the Mexican government on
the imported inventory and equipment moving into the
maquiladoras. Duties are paid only on the value added in Mexico
when the finished goods are re-exported to the country of origin.
United States motor carriers are now permitted to transport
international cargo into Mexican border states and will be
permitted to carry shipments throughout Mexico by 1999.25
Mexican motor carriers will receive reciprocal treatment. The pact
also phases out barriers to bus service and cross-border investment
in transportation companies and expands opportunities for United
States railroads in Mexico.
There has been a tremendous amount of carrier preparation with
(c
respect to increased trade between the United States and Mexico.

Improved rail services include (1) an increased number of stack
trains between the mid-western United States and Mexico,
(2) nonstop integrated rail-barge connections, and (3) either rail or
motor shipment options to the Mexican border from the United
States. Trucking improvements include (1) door-to-door service
movement on a single freight bill, (2) expedited and more frequent 399
less-than-truckload service, (3) improved tracing, and (4) wider Notes
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geographic service. Streamlined brokerage services and procedures ___________________
are now available through several specialized service providers.
___________________
Major distribution facilities are being constructed in Mexico.
___________________
With the passage of the FTA and the approval of NAFTA, North
American governments have established the entire continent as a ___________________
relevant logistic landscape. While it is clear that the logistics ___________________
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infrastructure could not support such continental operations in the ___________________
past, the necessary partnerships are developing through alliances.
___________________
With the expanded possibilities resulting from free trade
agreements, North American logistics managers must particularly ___________________
refine their strategies regarding material sources, manufacturing ___________________
locations, distribution sites, and service providers.
___________________
Europe
European economic integration discussions began shortly after
World War II and eventually culminated with the formation of the
European Economic Community (EEC) in 1957. The original
members (Belgium, France, Germany, Italy, Luxembourg, and the
Netherlands) were joined by Denmark, Ireland, and the United
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Kingdom (1973); Greece (1981); and Portugal and Spain (1985).
The EEC established a plan to eliminate intercountry tariffs,
create common external tariffs, and guide economic policy
regarding tax structures, exchange rates and controls, immigration
among member countries, and agricultural support programmes.
A second trade association, the European Free Trade Association
(EFTA), was formed in 1960 and included Liechtenstein,
Switzerland, Sweden, Finland, Norway, Iceland, and Austria.
EFTA signed trade pacts with Czechoslovakia, Poland, Hungary,
Turkey, and Israel in 1991 and 1992. The European Community,
or EC (formerly the EEC), eliminated trade barriers with EFTA in
late 1991.
In 1985, the EC Commission outlined the necessary steps to
(c
achieve a single common market allowing free movement of labour,

capital, and goods by the end of 1992. This process was termed EC
92 (European Community Integration by 1992). Formal
implementation efforts have been in process since 1987.
Another aspect of European integration is monetary union. The
Maastricht Treaty, which requires legislative approval by all
Logistics Strategy
400 twelve EC states, mandated a central European bank and currency

Notes by 1999. The treaty met with some resistance in several EC
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___________________ countries in 1992. Although single-market integration will not fail
without monetary union, it is considered a critical business and
___________________
political signal to the rest of the world.
___________________
EC administrative reforms are already providing benefits to
___________________
European transportation and trade. Shipment spot checks within
___________________ nations have replaced systematic customs formalities, thus
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___________________ speeding traffic flows and preventing long border delays.
Transportation and trade are also facilitated by development of a
___________________
Single Administrative Document (SAD). The SAD eliminates
___________________
duplicate customs documents for goods shipped between countries
___________________ and replaces approximately twelve forms for each participating
___________________ country. The SAD also facilitates EDI transmission and statistical
information collection at border crossings. The SAD itself was
eliminated in 1993 since border checks occur only to monitor
criminal activities and to report value and origin of cargo at the
point of destination. Except for trade with countries outside the
EC, all customs documentation has vanished. EC efforts to
standardize customs procedures and clearance through
introduction of EDI are also in progress.
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EC 92 significantly affects enterprises that view their European
operations as international. For large multinational companies,
the creation of a single market permits production and distribution
system rationalization, or streamlining, as barriers to cross-
national shipments are eliminated. EC 92 improvements in intra-
European distribution, warehousing, and infrastructure can save
millions of dollars of companies. Many firms are consolidating
extensive European facility networks to become pan-European
both strategically and operationally.
A report of the Council of Logistics Management has summarized
the perceptions and strategies of enterprises as they reconfigure
European logistics systems. The key findings of the study are
summarized in five major categories: business and logistics
(c
environment in Europe today, European logistics strategy

responses, critical management issues, achieving and sustaining
logistics excellence, and European logistics: future challenges.
A specific consideration in reconfiguring European logistics is
transportation strategy, which is significantly influenced by
demographics and geography. The European population density is
three times that of the United States, making business centres 401
more easily serviced by motor carriage. Over-the-road hauling Notes
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provides 70 percent of all EC freight movements and is projected to ___________________
increase by 60 percent before the year 2000.
___________________
As remaining cabotage restrictions are eliminated, national
___________________
carriers that service the entire region will be allowed to pick up
and back haul cargo throughout the EC. Reduced cabotage ___________________
restrictions are a key requirement for resolving European road ___________________
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congestion and environmental issues. However, new entrants face ___________________
stiff opposition from many of the small “family-size” trucking
___________________
companies that constitute a significant proportion of European
operators. European road infrastructure is also a considerable ___________________
problem. A recent EC Commission proposal suggested a $450 ___________________
billion plan for comprehensive European transportation
___________________
improvements over the next decade.
Rail offers a viable solution to numerous European transportation
problems, although it faces several formidable hurdles. National
protectionist politics have contributed to the financial, technical,
and physical barriers of European rail integration.
Check Your Progress

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Fill in the blanks:
1. A ................ agreement, eliminates tariffs on trade
between countries in a region.
2. ................ section reviews the current status of each
major international region, including a summary of
current and proposed trade acts.
Summary
International finance and foreign exchange are facilitated through
a number of changes in regulations and procedures. Government,
in the form of institutions such as the United States Export-Import
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Bank, and multigovernment-sponsored credit institutions, such as

the International Monetary Market, serve to extend and guarantee
long-term export and import credits above and beyond individual
bank capabilities.
International Distribution channel differences such as
infrastructure standardization and trade agreements are a
third barrier confronting logistics managers. Infrastructure
Logistics Strategy
402 standardization refers to differences in transportation and

Notes material-handling equipment, warehouse and port facilities, and
S
___________________ communication systems. The stateless enterprise perspective,
which is also known as “companies,” contrasts sharply to
___________________
operations under a national perspective. A free trade agreement
___________________
may either stimulate or reduce interregional trade. Such
___________________ agreements can also reduce access of the firms to more efficient
___________________ producers or markets outside their region.
PE
___________________
Lesson End Activity
___________________
___________________ Research on the infrastructure standardization and trade

agreements as a barrier confronting logistics managers.
___________________
___________________
Keywords
International Distribution Channel: International Distribution
Channel differences such as infrastructure standardization and
trade agreements are a third barrier confronting logistics
managers.
Logistics Activities: Logistics managers found that they could
)U
reduce capital deployed by outsourcing the performance of a wide
range of logistics activities.

1. Describe the international Operating Levels and explain this
with the help of examples.
2. Explain the regional and Country specific logistics conditions.
Further Readings
Books
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edition.
Incorporated 1998.
Kent N. Gourdin, Global Logistics Management: A Competitive 403

Advantage for the New Millennium, Blackwell Publishing 2006. Notes
S
Ganeshan (Editor) Quantitative Models for Supply Chain ___________________
___________________
Web Readings ___________________
www.quickmba.com/strategy/value-chain ___________________
PE
___________________
___________________
___________________
___________________
___________________
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Logistics Strategy
404
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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UNIT 25: Case Study
Unit 25
405
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Future Starts Third-party Logistics with Hitachi,
Nestle ___________________
___________________
Plan for 50% revenue from outside Future Group in three years.
Future Logistics Solutions, an arm of Kishore Biyani’s Future ___________________
Group, has forayed into third-party logistics (3 PL) operations by
signing leading electronic and fast moving consumer goods ___________________
(FMCG) players such as Hitachi and Nestle.
Future Logistics was hitherto catering to the logistics needs of
more than 1,100 outlets of the group in the country. However,
over three years, the company is expected to earn half its
revenues from outside the group, as it is in talks with over 15
companies, said sources.
The company is expected to post revenues of ` 300 crore in the
)U
current financial year and plans to triple its income in the next
three years with multi-model transportation, international
logistics, reverse logistics and brand distribution services, the
sources said.
A third-party logistics provider helps manufacturers with part or
all of their operations such as transportation, distribution and
warehousing. The 3 PL space in the country grew from a ` 4,500
crore industry in 2005 to around ` 10,000 crore in 2009. The
entire Indian logistics market is now expected to be around
` 5 lakh crore, with the share of organised players around 6 per
cent. This organised segment is expected to grow at 25-30 per cent
yearly in the next couple of years.
When asked, Anshuman Singh, chief executive officer of Future
Logistics, confirmed the company has started 3 PL but declined to
comment on the clients. “There is a huge opportunity in the space,
as there are no end-to-end third party logistics players here. We
want to build an entire consumption-led logistics company to take
care of all segments of consumption,’’ he said.
(c
Recently, Fung Capital, the private equity arm of the Hong Kong-
based Li & Fung Group, bought a 25 per cent stake in Future
Logistics for ` 150 crore ($30 million), valuing the company at
` 600 crore.
According to sources, Future Logistics also plans to start brand
distribution services in the country in the next six to eight
months, where it will buy merchandise from international and
domestic brands and supply it to retailers. The company is
Contd…
Logistics Strategy
406 expected to manage the logistics needs of the Future Group when
Notes the latter starts supplying its private labels in fashion, food and
S
apparel products to other retailers and stores in the country.
___________________
Future Logistics has a fleet of 600 vehicles, with warehousing
___________________ space of over three million sq ft. It plans to have total
warehousing space of 7.5 million sq ft. by 2010-11.
___________________
Question:
___________________ Analyse the case and write short note on what you infer from it.
___________________ Source: www.business-standard.com
PE
___________________
___________________
___________________
___________________
___________________
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(c
Glossary
Glossary
407
Notes
S
___________________
Agility: Agility is a business-wide capability that embraces ___________________
organisational structures, information systems, logistics processes and, in
___________________
particular, mindsets.
___________________
Average inventory: It is defined as half the batch size plus safety stock.
___________________
PE
Balanced scorecard: It introduces the concept of balancing four
different dimensions of performance, and also uses cause-and-effect ___________________
relationships to describe how the four dimensions of performance are
___________________
connected.
___________________
Benchmarking: It is comparing your business to others to understand
your current position and learn from it. ___________________
Capability: It refers to the carrier’s ability to provide the equipment and ___________________
facilities that is required for the movement of particular commodity.
Carbon footprint: is a method of accounting for the total amount of

carbon dioxide and other greenhouse gas (GHG) emissions for which an
individual and/or organisation is responsible.
Decentralized approach: In a decentralized approach, tasks can also be

carried out in the division.
)U
Deregulation: Deregulation of a number of key industries is a fifth
driving force toward a borderless world. The two primary deregulated
industries are finance and transportation.
Distribution: Distribution of commodities to individuals and families at

the field level is generally regarded as distinct from transport and
handling of bulk consignments of commodities.
Distribution Centre: Warehouses where product storage is considered a

very temporary activity.
Economic Benefits: Economic benefits of warehousing materialise when

overall logistical costs are directly reduced by utilizing one or more
facilities. It is not difficult to quantify the return on investment of an
economic benefit because it is reflected in a direct cost-to-cost trade-off.
Excess inventory: It is a cost burden to industry in terms of capital tied

(c
up, the cost of obsolescence and the cost of servicing product in the supply
chain.
Expenses: Expenses incurred by other channel members typically were

not viewed as important when making logistics or product sourcing
decisions.
Fill rate: The proportion of orders that can be immediately met by

available inventory.
Logistics Strategy
408 Finance department: It looks into the revenues and expenditures

Notes concerned.
S
___________________ Financial benchmarking: This involves a financial analysis of the
operations that are assessed. For example, a company can compare the
___________________
cost of storing a component in each of its warehouses.
___________________
Fourth Party Logistics: Fourth party logistics is an integrator that
___________________ assembles the resources, capabilities, and technology of its own
organisation and other organisations to design build and run
___________________
PE
comprehensive supply chain solutions.
___________________
Functional Organization: The functional organization is based on the
___________________ classification criterion of operations, and is frequently used in small and
mid-sized companies.
___________________
Gap Analysis: A technique for determining the steps to be taken in
___________________
moving from a current state to a desired future-state.
___________________
Global Supply Chain Forum: Global supply chain forum - supply chain
management is the integration of key business processes across the
supply chain for the purpose of creating value for customers and
stakeholders.
Green purchasing: is adding environmental aspects to price and
performance criteria when making purchasing decisions.
Husbandry: It is department, which keeps the ships seaworthy.
)U
Inbound logistics: It means the movement of materials received from
suppliers.
Information flow: It identifies specific locations within a logistical
system that have requirements. Information also integrates the three
operating areas.
Insurance Cost: Goods in transit insurance cover property against loss
or damage while it is in transit from one place to another or being stored
during a journey.
Insurance department: It keeps track of fulfilment of all insurance
formalities and settlement of legal claims.
Internal benchmarking: This process allows a company with a number
of facilities that operate the same supply chain processes to compare and
contrast the ways in which the process is performed in those facilities.
(c
International Distribution Channel: International Distribution

channel differences such as infrastructure standardization and trade
agreements are a third barrier confronting logistics managers.
Inventory Costs: Costs associated with the maintenance of inventory.
Inventory Ordering Costs: These are those costs that are incurred in
the purchase cycle are called procurement costs or inventory ordering
costs.
Glossary
Inventory period: It is the number of days of inventory currently on 409

hand. Notes
S
Leagile: “Leagile” is a hybrid of lean and agile systems. ___________________
Lean Manufacturing: Lean Manufacturing, also called Lean ___________________
Production, is a set of tools and methodologies that aims for the
___________________
continuous elimination of all waste in the production process.
___________________
Logistics: Logistics is the process of planning, implementing and
controlling the efficient, effective flow and storage of goods, services and ___________________
PE
related information from the point of origin to the point of consumption
___________________
for the purpose of conforming the customer requirement.
___________________
Logistics Activities: Logistics managers found that they could reduce
capital deployed by outsourcing the performance of a wide range of ___________________
logistics activities.
___________________
Make-or-buy decision: is the act of making a strategic choice between
___________________
producing an item internally (in-house) or buying it externally.
Maquiladora: This concept is often referred to as an operation that

involves manufacturing in a country that is not the client’s and as such
has an interesting duty or tariff treatment.
Market information gap: The firm’s incomplete or inaccurate

knowledge of customers’ service expectations.
)U
MTS System: In an MTS system, firms need to be able to estimate
demand to determine how much to produce and stock, and so these
accurate.
Obsolescence: It is the deterioration of product in storage and is not

covered by insurance. The cost calculations are based on past experience
in terms of the amount of product that must be marked down, given
away, or destroyed.
Obsolescence and deterioration costs: There are certain categories of

products, which are perishable and delicate in nature, whose physical
attributes deteriorate over a period of time, gradually resulting into
devaluation of the product.
Order Cycle Time: It refers to the time elapsed between receipt and
delivery of a customer’s order.
(c
Order Management: Order management is the entry point for customer

orders and inquiries. It allows entry and maintenance of customer orders
using communication technologies such as mail, phone, fax, or EDI.
Order Processing: Order processing assigns or allocates available

inventory to open customer and replenishment orders.
Ordering costs: These are incurred in the purchase cycle, while set-up
costs are incurred in the manufacturing cycle.
Logistics Strategy
410 Performance benchmarking: This can compare the efficiency of

Notes performing a task in one company location to another, or to a
S
competitor’s.
___________________
Performance Prism (PPR): It is organized around five distinct but
___________________
linked perspectives of performance: stakeholder satisfaction, strategies,
___________________ processes, capabilities, and stakeholder contributions.
___________________ Period Order Quantity: The period order quantity (POQ) technique
___________________ builds on the EOQ logic. Here, three steps are performed to accomplish
PE
component procurement. First, the standard EOQ is calculated. Second,
___________________
the EOQ quantity is divided into forecasted annual usage to determine
___________________ order frequency.
___________________ Physical Distribution: Physical distribution is the set of activities

concerned with efficient movement of finished goods from the end of the
___________________
production operation to the consumer.
___________________
Private Warehouse: A private warehouse is operated by the firm owning
the product. The actual facility, however, may be owned or leased. The
decision as to which strategy best fits an individual firm is essentially.
Procurement: is concerned with purchasing and arranging in-bound

movement of materials, parts, and/or finished inventory from suppliers to
manufacturing or assembly plants, warehouses, or retail stores.
Productivity Measurement and Enhancement System (ProMES): It

)U
is a formal, step-by-step process that identifies organizational objectives,
develops a measurement system to assess how well the unit is meeting
those objectives, and develops a feedback system that gives management
information on how well the unit is performing.
Protective Packaging Costs: For many products, there may be

requirements of special packaging. This cost is also a part of the total
transport cost. For instance, if a product is shipped using a container, it
may require less protective packaging for safe shipment in comparison
being shipped in a truck.
Public Warehouse: The space that can be leased to solve short-term

distribution needs.
Purchasing: It is concerned with availability of the desired material

assortments where and when needed.
(c
Rapid Response: Rapid response is concerned with a firm’s ability to

satisfy customer service requirements in a timely manner.
Regionalization: Regionalization is resulting in an industrialized triad

with each part having relatively equal population and economic strength.
Reliability: It refers the consistency of the transit time a carrier

provides.
Glossary
Safety Stock: The safety stock or buffer stock function concerns short- 411
range variation in either demand or replenishment. Notes
S
Seamless supply chain: It is an idealized concept of perfect information ___________________
flow and perfect material flow, facilitated by all supply chain players
___________________
thinking and acting as one.
___________________
Service performance gap: Lack of appropriate internal support systems
(e.g. standards, training, technology, flexibility) that enable employees to ___________________
deliver to service standards.
___________________
PE
Service standards gap: The firm’s failure to accurately translate
___________________
customers’ service expectations into specifications or guidelines for
employees. ___________________
Supply Chain Management: Supply chain management is the ___________________

systematic, strategic coordination of the traditional business functions ___________________
and the tactics across these business functions within a particular
___________________
company and across businesses within the supply chain, for the purposes
of improving the long-term performance.
Third-party Logistics Provider: A third-party logistics provider is a

firm that provides outsourced or ‘third party’ logistics services to
companies for part or sometimes all of their supply chain management
function.
Time Series Lot Sizing: The fundamental objective of time-series lot

)U
sizing is to combine requirements over several periods to arrive at
procurement logic. The time-series approach is dynamic because the order
quantity is adjusted to meet current requirement estimates.
Transit Time: It is the total time that elapses from the time the
consigner makes the goods available for dispatch until the carrier delivers
them to the consignee.
Transportation: It is the operational area of logistics that

geographically moves and positions inventory.
Transportation Cost: This includes rates, minimum weight, loading

and unloading charges.
Value-added Services: It represents an addition to basic customer

services by providing customisation with a view to build customer
solidarity and enhances established channel relationships.
(c
Variance: Variance is an unexpected event that disrupts performance of

the system.
Logistics Strategy
412
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
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(c

MDSL833D Logistic Startegy

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MDSL833D Logistic Startegy

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Logistics Strategy

Dr S R Das Dr Sanjay Mittal Prof V K Nangia

SLM Development Team

Mr Kapil Mehra Mr A N Sinha

Course Code: MDSL-833D

Course Name: Logistics Strategy

Version: July 2013

© MPower Applied Learning Enterprise

Unit 1 The Evolution of Logistics .............................................................................................. 3

Unit 6 Logistics Modelling....................................................................................................... 65

Unit 11 Packaging Strategy..................................................................................................... 157

Unit 16 Logistics Information System .................................................................................... 241

Unit 22 Logistics Organisational Design ................................................................................ 361

Unit 23 International Logistics ............................................................................................... 373

Unit 24 Views of International Logistics ................................................................................ 389

Unit 25 Case Study .................................................................................................................. 405

___________________ z Logistics Productivity Measures

The Evolution of Logistics Name___________________

Logistics involves getting, in the right way, the right product, in

4 and services to end users. The place utility is achieved by

are four major decision areas in supply chain management:

In addition, there are both strategic and operational elements in 5

For example: In case of global logistics companies, it is required ___________________

One should know that your freight broker or forwarder is the

worth of US $ 14 billion. It is also estimated that the logistics

6 discuss about the various logistics companies that are major

regulatory clearances that are often introduced in the field of real 7

Check Your Progress

with a purpose to explore the rampant Indian economy.

productivity of the complete value chain in several dimensions of 9

logistical service to grow itself as an emerging marketplace. The ___________________

Logistics by the Numbers: Key Performance Indicators in

z On time order accuracy

10 Imagine the problems in asking your current logistics provider

Check Your Progress

over the globe.

From a firm’s point of view, the logistics activities are represented 11

and retailing. In India, it accounts for 13% of GDP according to a ___________________

Lesson End Activity ___________________

in reducing price structure.

Questions for Discussion

___________________ Ballou, Business Logistics/Supply Chain Management, Pearson

___________________ Web Readings

Concept of Logistics Blueprint

developing and analyzing a number of potential models before

Six Steps to Success

“Most companies want to jump straight to Phases 3 and 5,” Vitasek 15

Logistics Master Planning ___________________

cost options for your business.

z Consolidation of existing distribution depots

Components to Examine when Developing a Logistics

z Transportation: Does the current transportation strategies 17

z Information: Is the information that drives the logistics ___________________

organization real-time and accurate? If the data is inaccurate ___________________

Logistics, a company’s key function, influences the

location and surfaces.

18 Logistics Finance provides the following working capital financing

Check Your Progress

procurement to product delivery. Companies everywhere are under 19

Lesson End Activity ___________________

Information Flow: It identifies specific locations within a ___________________

Bowersox, D. J., Logistics Management, Tata McGraw Hill, 2002.

Logistics Performance Analysis

Logistics Activity Profiling